Often in the healthcare marketplace, purchasers assume that being granted new accreditation and billing numbers by the provincial regulator and third-party payors will serve as a "clean slate" regarding certain regulatory liabilities. This assumption was recently rejected by the Ontario Court of Appeal in Neighbour's Drug Mart Ltd. v. Ontario (Ministry of Health and Long-Term Care), 2024 ONCA 378. The Court's holding emphasizes that (i) purchasers of health care businesses must be vigilant in conducting due diligence since they may be acquiring exposure to the predecessor operator's prior bad acts and (ii) corrective steps of any offside billing practices must be implemented immediately. The Court's decision further demonstrates the need for strong and specific indemnities to be negotiated as part of any such agreement of purchase and sale to ensure there is an adequate recovery mechanism for claw-backs for any pre-acquisition issues.
Additionally, this case highlights the extensive disciplinary measures possible under the Ontario Drug Benefit Act ("ODBA") when dealing with illegitimate claims. This decision also specifically stresses the liability that will be implied to consolidators and the corporation's duty of oversight of its management team.
Key Facts:
- August 2020: Sina Salehi purchased Neighbour's Drug Mart Ltd. from Galina Pivovarov.
- August 2021: The Executive Officer of the Ontario Public Drugs Programs conducted a claims inspection after being notified of the ownership change.
- The Inspection Report revealed significant overbillings and unsubstantiated billings, which occurred during Ms. Pivovarov's ownership and continued after the sale. These issues persisted even after Ms. Pivovarov stopped managing the pharmacy.
- As a result, the Executive Officer terminated Neighbour's Health Network System Agreement, revoked its billing privileges under the ODBA, and suspended its entitlement to payments under the ODBA.
- March 2023: The Divisional Court dismissed Neighbour's application for judicial review, finding that the disciplinary decision of the Executive Officer was reasonable.
Issue: The primary issue was determining regulatory liability for actions occurring before and after the pharmacy's sale.
Neighbour's contended that:
- The Executive Officer and Divisional Court misunderstood the record, which showed most billing issues were due to the previous owner.
- Revocation was imposed in circumstances not permitted by the ODBA or the Health Network System Agreement.
- The decision created a form of absolute liability for pharmacy owners.
Court of Appeal Decision: The Court of Appeal focused on two overarching factors to inform its decision:
- The regulatory scheme relies on operators to ensure claims are not false, inaccurate, or misleading.
- Owners and directors must ensure compliance with regulatory requirements by their managers and employees.
Conclusions:
- Illegitimate Billings Post-Sale:
i) The Court noted the Executive Officer's decision considered the ownership change and the sale timeline, emphasizing that billing issues occurred both before and after the sale.
ii) The Court highlighted the oversight responsibility of pharmacy owners. Despite Ms. Pivovarov's continued involvement post-sale, Mr. Salehi, as the new owner, was responsible for ensuring compliance, and the billing issues persisted even after Ms. Pivovarov left.
- Revocation and Regulatory Compliance:
i)The revocation decision was supported by Mr. Salehi's failure to prevent false, inaccurate, or misleading claims during his ownership.
ii) Most notably, the Health Network System Agreement states that the new owner assumes all rights and liabilities of the previous owner, including financial and regulatory liabilities from unsubstantiated claims.
Key Takeaways:
- Owner Responsibility: Pharmacy owners and directors are responsible for ensuring that their managers and employees do not submit false, inaccurate, or misleading claims.
- Purchaser Protections: Thorough due diligence and strong indemnities are crucial in purchase agreements. New owners must verify the legitimacy of historical claims to avoid disciplinary actions under the ODBA.
This case underscores the necessity for meticulous pre-closing due diligence and an in-depth review of the billing practices of the previous ownership to ensure accurate financial reporting and compliance, thereby preventing significant disciplinary actions, such as the revocation of billing privileges, which may result in substantial economic harm to not only the operation in question but any other entity for which there is common ownership or interest. Further, this case emphasizes that purchasers should negotiate comprehensive indemnities to ensure there is a recovery mechanism for claw-backs for the period prior to the acquisition or change of control.
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