Inherited Liability: Considerations for Mergers & Acquisitions

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Nov 16, 2017

Inherited Liability: Considerations for Mergers & Acquisitions

Written by Dan Golder

Category: M&A - Regulatory

One of the key concepts important to assess for any merger or acquisition is that of “Inherited Liability.” Originally coined within the regulatory realms of Meaningful Use, MIPS, MACRA and physician reimbursement, Inherited Liability is now seen as having broader implications for virtually all M&A initiatives.

In this blog post, we’ll discuss our concept of Inherited Liability, its implications, and how to help limit your organization’s exposure to this risk.

Inherited Liability – What is it?

Simply put, Inherited Liability results when a person or asset (for example a physician) incurs a penalty that will be assessed in the future, and in the interim that person becomes part of another organization. The new organization (often unaware of the future penalty) now “inherits” that penalty as a liability when it agrees to onboard the physician.

Let’s look at a typical example from MIPS to help illustrate the concept.

The graphic below illustrates the current MIPS categorization for “Performance Years” and “Payment Years”. “Eligible Clinicians” (e.g. physicians) are measured during a Performance Year against various CMS thresholds and measures. If they score poorly, they may be assessed a “Negative Payment Adjustment” — a penalty — two years later (this delay gives CMS the needed time to properly score each Eligible Clinician and determine an appropriate penalty amount).

Performance vs Payment Year

So for example if our clinician scores poorly in 2017, then his penalty would be assessed in 2019, by a reduction in his Medicare reimbursement rate (blue highlight). Similarly, if he should perform poorly in 2018, penalties would be assessed in 2020 (green highlight) and so on.

Continuing with our scenario, let’s say our physician indeed scored poorly in 2017, and was therefore assessed a 4% reduction in his Medicare reimbursement by CMS as a penalty, which will be assessed in 2019.

However, in 2018 he decides to join a different physician group.

In this case, his new physician group will now be subject to the 4% reduction in reimbursement for any Medicare services that physician provides. The new group has “inherited” this penalty–they were not responsible for the physician’s performance in 2017, but they are the ones that will be penalized simply because they hired this physician.

Scope: Reimbursement, Audits & Contracts

While our regulatory example helps illustrate the concept of Inherited Liability, there are many other scenarios where this theory applies.


Consider a physician who has not kept good supporting documentation when attesting to Meaningful Use or MIPS (for example, he has not maintained a file copy of the Security and Risk Assessments (SRAs) that were performed in previous years). Note that CMS requires supporting documentation to be maintained for a minimum of 6 years.

As above, he joins a new group in 2018, and later that year is audited by CMS for his performance in 2017, and is asked to provide documentation to support his MIPS attestation in 2017 (including an SRA).

Without the necessary supporting documentation, our provider may be required to return any earned incentive payments, may be assessed a penalty, or may even be excluded from participation in Medicare–all potential significant liabilities for his new physician group.

Contractual Implications

Continuing with our regulatory example above, providers leaving a practice group or organization should secure contractual terms that obligate their old employer to provide EHR support and data for at least the 6 years required by CMS. Specific terms for fees and services for audit support and audit documentation should be included.

Similarly, providers transitioning from one EHR to another should secure contractual terms with their old EHR vendor to ensure that all required audit and regulatory support is provided, along with any required documentation or reports.

Finally, information for all contracts that may be assumed by an acquiring organization should be carefully reviewed and examined. Terms and clauses may contain ongoing costs and obligations that may not be considered favorable to a new organization, and may need to be renegotiated or terminated.

Mitigation and Next Steps

Fortunately, the risks of Inherited Liability can be managed. Here are our top 5 recommendations to help mitigate your organization’s risk:

1) Inform: Educate your recruitment team on the concept and risk of Inherited Liability. Have them develop appropriate screening criteria and information gathering procedures to help document each provider’s potential risk.

2) Document: Clinicians joining an organization should provide a comprehensive regulatory performance portfolio, detailing their past performance for all regulatory programs (e.g. Meaningful Use, PQRS, MIPS / MACRA, etc.), including:

a) Performance Year and results
b) Incentives earned / penalties assessed
c) Audit requests and audit results

3) Prepare: Clinicians should secure copies of all documentation required to support any future regulatory audits. While this may vary for different regulatory programs, efforts should be made to procure and archive all required information.

4) Contracts: Copies of all contracts should be available for review, especially if any contracts will be transitioning to the new organization.

5) Data Access: Legacy EHR contracts should be amended to ensure access to reports and data necessary to support future audits, as well as to maintain appropriate historical medical record information for at least 6 years (to align with MIPS and CMS audit requirements).

Inherited Benefits

Lastly, it is important to note that this can also work in inverse, with high scores potentially benefiting an acquiring organization. If an incoming clinician performed well, she may be eligible to receive a “Positive Payment Adjustment” — a bonus — and that increased Medicare reimbursement would of course be revenue positive for her new organization.