The Corner Series Representation and Warranty Policies for Private Equity-Backed Healthcare Deals
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.
Featured Guest
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
Notes From the Professor’s Corner
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.
Episode Insights
[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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