During this session, this roundtable focused on steps that investors can take to promote compliance. Among other topics, there was discussion regarding the roles, responsibilities and best practices for those serving in board roles, including strategies to mitigate risk, both for sponsors and portfolio companies.
In an environment where scrutiny of private equity investors in healthcare has increased, it is imperative to focus on compliance from the top-down. What may seem like minor regulatory violations at the portfolio company level can become the basis for enforcement activity against both the company and the sponsor.
The compliance mindset starts with the diligence process. If regulatory issues are revealed, it is crucial that they either be addressed pre-closing or there is a plan in place to address them post-closing. There are many ways to structure deals to account for compliance issues that need attention, but the key point is that if issues do arise, they cannot be ignored.
After closing, compliance oversight starts with the Board of Directors. Deal team members who sit on boards should understand their responsibilities as board members, which are not the same as their responsibilities as employees of the sponsor. The board should ensure that the portfolio company has a good compliance program in place (and not one that is perfunctory or just “on paper”), that the portfolio company is receiving routine compliance reports from management/the compliance officer, and that any issues raised are swiftly and effectively addressed.
While board members are not expected to become regulatory experts, they should have a general familiarity with the major types of legal and regulatory issues the portfolio company may face. These may include, among other issues, billing and coding issues, privacy and cybersecurity issues, US Food & Drug Administration issues and licensing and credentialing issues.
The 100 days post-closing are a crucial time to tackle the low-hanging fruit that was highlighted in pre-closing diligence. Dealing with issues proactively and quickly materially enhances the value of a private equity sponsor’s investment, while failing to address them can materially detract from that value. In short, good compliance hygiene in healthcare investing allows sponsors to effectively protect their assets and reduces the risk that the sponsor will become the subject of enforcement scrutiny.