After doing 600 deals, we have encountered our fair share of surprises. If you work with enough businesses you are bound to see and hear some odd things. Here are examples of sixteen (16) very real red flags that could be found during due diligence. These are things you do not want to miss.
1) An ambulatory surgery center that washes endoscopes in a bucket. A bucket!
2) Expired medical malpractice insurance certificates.
3) Imaging equipment so old the manufacturers refuse to sell the owners a maintenance plan or provide any service. These businesses would have to close their doors if the MRI or CT breaks down.
4) Certain physicians making staff maintain paper charts for patients, in addition to the electronic medical records, so the physicians don’t have to learn how to use the practices’ EMR.
5) Orthopedic surgeons that still do all outpatient surgeons “open”. In other words, they don’t use arthroscopes…at all.
6) Surgery centers “borrowing” whatever equipment they need from other ASCs and hospitals.
7) A hundred thousand dollars of surgery equipment discounts buried in surcharges to disposable and implantable supplies purchased from the same vendor. This is a common off-balance sheet liability. Surprise!
8) Surgery centers that did not require their physician investors to enter into non-compete agreements. The vast majority of these physician investors have equity interests in competing centers.
9) Surgery centers that hold physician buy-in price at a fixed dollar amount. So regardless of how successful and profitable the centers became over many years, new investors buy in at the same price as the original investors.
10) Businesses for sale for which the owners owe the businesses hundreds of thousands of dollars of loans. Difficult conversations with the tax accountants will ensue.
11) Surgery centers for which the true ownership of the leasehold improvements is questionable. Some or all of the leasehold improvements may be owned by other parties.
12) Inconsistencies related to incident-to billing.
13) Upcoding. Enough said.
14) Inter-office romance. Enough said.
15) Out-of-network surgery centers that set their charge masters at over 20 times Medicare rates.
16) Physician-owned ancillaries operating under the in-office Stark exception that accept referrals from outside their own practice.
Don’t be caught off guard at the closing table. Identify these and other red flags that will affect your deal with expert due diligence services.
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HCTA provides healthcare-focused M&A consulting services and provider alignment programs that foster collaboration between physicians, hospitals, health systems, and other healthcare organizations.