When preparing a private equity-backed investment, it’s likely that something called a “representation and warranty” insurance policy, or “reps and warranty,” will be discussed. These policies help to minimize exposure in corporate transactions.

In healthcare deals, two types of exclusions can be requested by the reps and warranty insurer: general exclusions and specific exclusions. General exclusions arise before the due diligence process, while specific exclusions are a result of things uncovered in the due diligence process. 

The end of 2021 showed a significant increase in general exclusions for coding and billing, which left companies exposed to risk from the False Claims Act. This trend started shifting around in early 2022, but is still something that should be examined by counsel. 

When specific exclusions are proposed by an insurer, it’s important for counsel to narrow the scope of the exclusion so that the deal can have the most comprehensive reps and warranty coverage possible. 

In this episode of The Professor’s Corner, host Geoff Cockrell brings on a fellow McGuireWoods partner, Trey Andrews, to discuss how to navigate both general and specific exclusions when purchasing a reps and warranty policy. 

With experienced attorneys like Geoff and Trey, it’s much easier to have the leverage needed with reps and warranty insurers, establishing rapport and developing trust in their extensive private equity experience. 

Name: Trey Andrews

What he does: As a Partner at McGuireWoods, Trey is a member of the healthcare transactions team. He focuses on private equity-backed healthcare acquisitions. 

Organization: McGuireWoods

Words of wisdom: “At McGuireWoods, we do a substantial amount of these healthcare private equity-backed transactions, where quite a few [of those deals] have reps and warranty policies put in place. I think that gives us the benefit of having colleagues to go to who really understand how this issue has been dealt with by others.”

Connect: LinkedIn 

Top takeaways from this episode

★ General exclusions for billing and coding can have a far reach. Billing and coding are how healthcare organizations generate income. When that function is excluded in a reps and warranty policy, it can be very risky. For example, exposing the client to litigation from a False Claims Act. It’s more common to see these exclusions in home health and hospice providers who generate a large volume of claims. 

★ Specific exclusions are born out of the due diligence process. An insurer might discover something too risky for them to cover while reviewing a company’s due diligence. Healthcare organizations often operate in gray-area decision-making, so it’s important for counsel to explain how something that seems risky on the surface is part of the nature of the industry. 

★ There are 3 steps to negotiate exclusions in a reps and warranty policy. Trey recommends communicating openly with the carrier regarding gray areas, working to minimize the scope of exclusions by demonstrating an understanding of the industry, and giving the carrier a sense of how other players in the market have viewed the same risk.

[00:47] General vs. specific exclusions: Geoff runs down the basics of general and specific exclusions in reps and warranty policies.

[02:00] Billing and coding exclusions: Trey explains how the False Claims Act potentially exposes companies with billing and coding exclusions in their policies. 

[04:44] Q4 2021 to Q1 2022: Geoff and Trey go over some of the trends that have been quickly changing in the reps and warranty market. 

[07:26] Know your stuff on billing and coding: Be thorough in examining the client’s billing and coding through chart audits. 

[11:10] What to disclose to the insurance carrier: There are times when a company is operating in a gray area within healthcare law and while it’s not necessarily a deal-breaker, it’s important to disclose that in the diligence memorandum and discuss it with the carrier.

[14:36] 3 steps for fewer exclusions: Trey breaks down exactly how he negotiates with insurance carriers to minimize exclusions.

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

In the premiere episode of The Professor’s Corner, David Pivnick, Partner at McGuireWoods, shared best board practices to mitigate risk when making challenging decisions. In this follow-up episode, David expands on a larger trend in healthcare litigation: private equity funds are finding themselves legally responsible for the activity of the companies in their portfolio.

David believes these claims are driven primarily from the whistleblower bar and not the Department of Justice. By leaning on Qui Tam laws, litigators can cast a wide net in who they name in their court filings.

Despite these cases being relatively easy to defend, they still require significant investments in time and money.

To minimize a private equity fund’s risk spectrum, investors should think proactively about board practices, ensuring that relationships are appropriately vetted, and that specific concerns are addressed and corrected. In addition, especially when making decisions that involve substantial gray areas, owners need to seek counsel to ensure the legality of their choices.

Name: Geoffrey Cockrell

What he does: Geoff is the Chair of McGuireWood's private equity group and serves on the firm's Board of Partners; he has extensive experience in mergers and acquisitions, especially in the healthcare space.

Organization: McGuireWoods

Connect: LinkedIn

Name: David Pivnick

What he does: As a partner at McGuireWoods, David co-chairs the Healthcare and Life Sciences Industry Team. David primarily practices complex commercial litigation in healthcare.

Organization: McGuireWoods

Words of wisdom: “The darker the shade of the gray, the more likely that conduct ends up coming under scrutiny generally, which means it's more likely that as an owner, you could get swept up in an investigation.”

Connect: LinkedIn

Top takeaways from this episode

★ Qui tam rules make it easier for litigators to include private equity funds in their claims. The growing trend of litigating against PE funds is driven primarily from the whistleblower bar, not the Department of Justice. While these claims rarely carry much legal weight, they can lead to significant financial strain for investors who must hire a legal defense team.

★ The darker the gray, the greater the risk. Most claims against PE funds from the Department of Justice include clear misconduct by investors who serve on their portfolio company’s board. David warns that making decisions that involve a lot of gray area opens everyone involved up to a greater risk spectrum. Seeking counsel in these situations is recommended.

★ Investors have a responsibility to ensure proper conduct. Because most boards in private equity-funded healthcare companies are decision-making boards, investors would be wise to ensure that companies in their portfolio are following regulatory compliance standards.

[01:33] A growing trend: David sees increasing instances of the government pursuing claims and investigating the potential for claims against private equity funds.

[02:06] Improper conduct: David outlines past examples of how PE funds have gone to court for allegedly engaging in improper activity for financial gain.

[03:39] Identify problematic areas: David presents a spectrum of activity for private equity funds to pursue to bolster best practices and mitigate risk.

[06:21] In pursuit of deeper pockets: The Department of Justice and the whistleblower bar have differing mindsets about when and why to pursue private equity funds in litigation.

[07:24] Qui tam’s wide net: David and Geoff discuss how whistleblowers can leverage qui tam rules to target a broad range of defendants.

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Subscribe to The Professor’s Corner in your preferred podcast app so that you never miss an episode.

This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

A recent whistleblower case in Massachusetts has rocked the widely accepted notion that private equity investors are insulated from risk beyond the scope of their financial investment.

In the case, the Massachusetts Attorney General pursued claims for purportedly improper and fraudulent billing against the underlying healthcare provider but also pursued the private equity fund that invested in the entity and had board members involved at the management level.

While the case ended in a settlement for the private equity fund, it’s important to remember that the fund neither accepted nor denied guilt in the situation.

However, regardless of guilt, the fund was viewed as a potential area of pursuit in litigation. This fact alone is noteworthy and warrants further discussion.

David Pivnick, Partner at McGuireWoods and expert in complex corporate healthcare litigation, weighs in on the scenario and draws an important distinction between the role of investor as owner and the role of investor as decision-maker.

On the premiere episode of The Professor’s Corner, David tells McGuireWoods’ Geoff Cockrell how funds can limit risk and lead with a compliance-driven mindset. Seeking counsel, documenting deliberations, and providing regular compliance training sessions for board members are worthwhile investments.

Name: Geoffrey Cockrell

What he does: Geoff is the Chair of McGuireWood's private equity group and serves on the firm's Board of Partners; he has extensive experience in mergers and acquisitions, especially in the healthcare space.

Organization: McGuireWoods

Connect: LinkedIn

Name: David Pivnick

What he does: As a Partner at McGuireWoods, David co-chairs the Healthcare and Life Sciences Industry Team. David primarily practices complex commercial litigation in healthcare.

Organization: McGuireWoods

Words of wisdom: “If you’re not comfortable putting in writing how you landed at a decision and how factors were ultimately weighed, to me, the bigger sign is not, Don’t put this in writing at the board level. It’s: Don’t make that decision, and go on a different pathway.”

Connect: LinkedIn

Top takeaways from this episode

★ Having the best intentions makes a difference. According to David, there’s an important distinction to be made between a board that seeks counsel and makes an educated (but ultimately bad) decision and a board that is directly informed of misconduct and looks the other way or proceeds despite the warnings.

★ In difficult situations, document deliberations to clarify the rationale. Boards should not be afraid of documentation. Often, legal issues arise months to years after a decision is made. When a minimal paper trail exists, it is hard to demonstrate the debate and reasoning behind past choices.

★ Ensuring best practices in compliance should extend to the board level. For example, forming a compliance committee or identifying a compliance officer who can speak candidly with private equity investors allows the board to minimize risk.

[00:38] A jarring settlement: Geoff and David discuss a recent court case that has potential implications for private equity funds — risk extends beyond financial investment.

[02:51] Ownership vs. board involvement: David differentiates between a private equity investor’s role as owner and as decision-maker.

[04:52] The gray area: David discusses how board leadership can make nuanced decisions when there isn’t a clear black and white answer.

[06:48] Documenting deliberation: David explains the importance of record-keeping and compliance for board-level leadership.

[12:41] ‘Don’t put it in writing’: David raises a red flag in scenarios where individuals or groups are hesitant to document conversations.

[16:15] The ‘one purpose’ rule: Geoff and David talk about the Anti-Kickback Statute and the importance for private equity funds to operate with a compliance-focused mindset.

Connect with us on Facebook, Twitter, Instagram, YouTube.

Subscribe to The Professor’s Corner in your preferred podcast app so that you never miss an episode.

This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

The Professor’s Corner is a McGuireWoods series exploring business and legal issues prevalent in today’s private equity industry. Tune in with McGuireWoods partner, Geoff Cockrell as he and specialists share real-world insight to help enhance your knowledge.

McGuireWoods is a full-service firm providing legal and public affairs solutions to corporate, individual, and nonprofit clients worldwide for more than 200 years collectively. Our commitment to excellence in everything we do gives our clients a competitive edge in everything they do. Our law firm, over its 186-year history, has earned the loyalty of our many long-standing clients with a deep understanding of their businesses, and broad skills in corporate transactions, high-stakes disputes, and complex regulatory and compliance matters.

To learn more about our discussions, please email host Geoff Cockrell at [email protected] or visit our website at mcguirewoods.com.

This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.