Now that the Imperial Valley Healthcare District (IVHD) Board has been sworn in (minus 1), it is now time for them to roll up their sleeves and tackle the beast that lies before them. As my team and I previously wrote, the board has an extreme number of tasks that have to be accomplished on nearly impossible timetable. This IVHD board will have to address multiple tasks simultaneously. One of the most important of these tasks is the compilation of the financial data and preparation for the acquisition of ECRMC. I am going to focus on a few of the more critical elements needed to accomplish this task.
As stated in A Comprehensive Guide To Due Diligence Issues In Mergers And Acquisitions, Richard D. Harroch, David A. Lipkin, Richard V. Smith, and John Cook, Forbes, March 27, 2019:
“Mergers and acquisitions typically involve a significant amount of due diligence by the buyer. Before committing to the transaction, the buyer will want to ensure that it knows what it is buying, what obligations it is assuming, the nature and extent of the seller’s contingent liabilities, problematic contracts, litigation risks, intellectual property issues, and much more. Recent M&A activity and litigation have highlighted the need for a buyer to conduct careful due diligence as to potential risks, especially investigating financial statements, data breach and cybersecurity issues, intellectual property issues, and potential employment law and sexual harassment liability.”
Previously published articles refer with who will be at the table in any potential negotiations. These include IVHD interim board, ECRMC Board, City of El Centro, and potential the UCSD Health Care Systems, and Preston Hollow. It could be further include PMHD Board and their bond holder. Most important, however, is the content of due diligence. Here is only some of what is needed when negotiating for the acquisition of ECRMC.
Financial Matters-IVHD must be concerned with all of the ECRMC’s historical financial statements and related financial metrics as well as the reasonableness of the target’s projections of its future performance.
Technology/Intellectual Property-IVHD will be very interested in the extent and quality of the ECRMC’s technology and intellectual property, as well as those from PMHD and the mutual compatibility.
Patients/Consumers-IVHD will want to fully understand the ECRMC’s patient demographics, including the level of concentration of the largest number of patients, with the same for PMHD to determine strengths, weaknesses, and opportunities for savings and growth.
Fit with Strategic IVHD-A strategically focused IVHD must be concerned not only with the likely future performance of the ECRMC as a stand-alone business; it will also want to understand the extent to which the ECRMC will fit strategically within the new IVHD organization.
Material Contracts-One of the most time-consuming and critical components of a due diligence inquiry is IVHD’s review of all material contracts and commitments of the ECRMC, and those of PMHD and Heffernan.
Employee/Management Issues-IVHD will want to review a number of matters in order to understand the quality of the ECRMC’s management and employee base.
Litigation-An overview of any litigation (pending, threatened, or settled) or arbitration involving the ECRMC should be completed.
Cybersecurity and Data Privacy-It has become increasingly imperative that IVHD fully investigate and identify cybersecurity and data privacy risks and liabilities posed by the transaction. It is equally important that the ECRMC anticipate cybersecurity and data privacy issues.
This cybersecurity and data privacy is particularly important when transferring healthcare entities who are responsible to comply with Federal and State Regulations regarding privacy of protected healthcare information (HIPAA and HITECH). I wish to expand on this critical component.
- Review of Selling Company Policies and Contracts-IVHD will need to request and review copies of various policies, contracts, and other documents of the ECRMC,
- Review of Procedures to Protect Data-IVHD may also inquire of the procedures the ECRMC has put in place to protect its and its employees’, customers’, and business partners’ data and information as well as its networks and systems.
- Review of Past Data Breaches and Claims against the ECRMC-IVHD may also inquire about possible past data breaches against the ECRMC or intrusions into its computer network, especially in light of the 2015 outsourced IT issue.
Tax Matters
Antitrust and Regulatory Issues-Antitrust and regulatory scrutiny of acquisitions has been increasing in recent years. IVHD must ensure this area is reviewed.
Insurance-In any acquisition, IVHD will want to undertake a review of key insurance policies of the ECRMC’s business and the ECRMC’s compliance with, and claims history under, such policies.
General Corporate Matters- The new yet to be appointed Counsel for IVHD will invariably undertake a careful review of the organizational documents and general corporate records, including financial capitalization of ECRMC.
Environmental Issues
Related Party Transactions-IVHD will be interested in understanding the extent of any “related party” transactions, such as agreements or arrangements between the ECRMC and any current or former officer, director, stockholder, or employee.
Governmental Regulations, Filings, and Compliance with Laws-IVHD will be interested in understanding the extent to which the ECRMC is subject to and has complied with regulatory requirements.
Property-A review of all property owned or leased by the ECRMC, or otherwise used in the business is required to include current value, conditions and possible duplication.
Production-Related Matters-Depending on the nature of ECRMC’s business, IVHD will often undertake a review of the ECRMC’s production-related matters, including subcontractors, vendors, suppliers, inventories.
One of the areas that will need to be reviewed is the determination the applicability of Title 11, Division 1, Chapter 15, Section 999.5 Attorney General Review of Proposals to Transfer Health Facilities under Corporations Code Section 5914 et. Seq. and 5920 et. Seq. To date, this area has been avoided in the course of crafting legislation. Communication with the Attorney General’s office has resulted in a declination to comment regarding applicability to AB918 or outlining the process to take in order to comply with this State Regulation.
This list is not an exhaustive list of areas that needs to be covered and each category has multiple areas that need to be addressed. I am sure that the IVHD board members are not acquainted with mergers and acquisitions. My heart goes out to them as they face this daunting task. Accordingly, I recommend that the board engage outside legal counsel to guide them through this path to ensure they avoid the pitfalls that lay ahead. This will require funding, which AB918 did not provide. Should they request that funding from the State or the Board of Supervisors Community Benefit funds to pay for this? The new board must not incur further debt at the expense of a state mandate.
In order to have a quality single healthcare system without an interruption of services, we must get this right.
Finally, I call upon Assemblyman Eduardo Garcia to amend AB918 to remove these artificial deadlines to allow the board he has so proudly created the time to accomplish the task of forming a single healthcare district. Currently, these deadlines are a setup to fail and create further healthcare chaos.