The recent focus on the anticipated regulatory reform of health care has stimulated an unprecedented level of business activities in the nature of mergers, acquisitions, consolidations, strategic affiliations and other opportunities to create synergies in the delivery of health care services. Notwithstanding the desire to seize opportunities before they are lost to potential competitors, prudent health care administrators and managers understand the need to avoid embracing seemingly attractive opportunities which may have skeletons in the closet. Potential environmental liabilities in the health care field generally do not pose the same degree of risk when compared to transactions in the industrial sector. Nonetheless, an apparent "good deal" in a health care transaction which does not include an evaluation of environmental liabilities will lose its luster after the discovery of leaking underground storage tanks (or some similar environmental problem) and the attendant cost of investigating and remedying the issue. David M. Hileman, Director of Facilities for Pittsburgh Mercy Health System, believes that "a thorough investigation and analysis of environmental issues in a health care facility transaction is an absolute necessity." This article discusses potential environmental concerns which should be evaluated before participating in a health care transaction.
The types of environmental concerns to evaluate and extent of the evaluation or the "due diligence" will depend upon the nature of the contemplated transaction. For example, the purchase by one hospital or health system of other facilities (an asset purchase) should include a thorough assessment of the assets acquired. Since the surviving corporation in the case of a true corporate merger, however, will likely be assuming the liabilities of the other(s), the due diligence should include not only an evaluation of the assets and operations to be acquired, but also potential off-site liabilities associated with historic operations. For an affiliation agreement or other joint venture-like endeavor, the due diligence should include an evaluation of the assets or operations that would be contributed or involved, as well as the primary operating assets such as the main hospital(s) of the participants. In such a case, a party should determine whether the other party is facing serious environmental liabilities and expenditures which could result in a financial strain on the new joint venture. Thus, while the appropriate level of diligence will be "deal" specific, a party contemplating a strategic opportunity should attempt to identify environmental liabilities which could financially jeopardize the transaction or the contemplated operation, or should otherwise negotiate specific limitations on the environmental liabilities.
In nearly every commercial transaction there are common environmental concern which should be investigated including:
- Review of historic uses of the subject property including the use of storage tanks, on-site septic systems, floor drains, lagoons, impoundments or wells;
- Evaluation of the current condition of the real property and improvements to identify the presence and condition of storage tanks, asbestos, polychlorinated biphenyls (PCBs) in electrical equipment, on-site septic systems, and any evidence of disposal areas, oil staining or stressed vegetation;
- Evaluation of compliance with regulatory requirements which may be applicable to the business such as storage tank registrations and closures; air and wastewater discharges subject to permits; waste management and disposal; review of agency inspection reports and any enforcement actions; and review of record keeping and reporting requirements;
- Review of current and historic uses of adjacent properties, particularly the operation of gas stations, manufacturing facilities, dry cleaners and other activities which could adversely impact the subject property.
While health care facilities generally pose fewer environmental concerns than industrial facilities, it is unusual for a thorough environmental due diligence investigation in a health care facility transaction not to identify any potential concerns. The following examples illustrate a few of the problems which may be encountered.
Hospitals frequently have emergency generators fueled by gasoline or diesel fuel stored in USTs. Prior to the mid 1980s, USTs generally were subject to regulation, if at all, by state fire marshals, state police or municipal authorities. Because most such USTs were constructed of steel and lacked leak detection/monitoring controls, many USTs in use for extended time periods developed leaks. Because the extent of this problem was so widespread, Congress enacted legislation in 1984 which subjected USTs to regulation under the federal solid and hazardous waste management program. Besides establishing performance standards, certain regulations impose registration, leak detection, release reporting, and corrective action requirements. Many businesses which had USTs on their property when the new regulations became effective removed the old USTs and installed newer ones to comply with the regulations. However, many properties still contain USTs which were abandoned prior to 1984 but were never removed. Therefore, it is wise to determine the presence of USTs (or confirm the removal or closure of former USTs) and the subsurface conditions for the subject property and adjacent properties.
Similarly, on-site septic systems are not unusual, particularly in rural areas, and are designed to process sanitary wastes without serious residual contamination. A recent transaction involved a hospital which formerly used an on-site septic system. Unfortunately, X-ray developer liquids containing silver had been poured into floor or sink drains, resulting in elevated concentrations of silver in soils in the vicinity of the septic system. (The hospital had not installed a silver filtration/recovery system which would have prevented or minimized the problem.) The hospital was required to conduct an investigation to determine the extent of contamination, excavate the contaminated soils and dispose of the soils at an approved disposal facility. Total project costs amounted to nearly $50,000. Fortunately, groundwater treatment which would have increased the costs significantly was not required.
Other issues which frequently arise in health care transactions include the presence and condition of asbestos (particularly in buildings constructed before 1980); lead paint; management and off-site disposal of hazardous, radioactive, and biomedical wastes; and compliance with regulations governing the use of incinerators.
Although each potential deal is different, every one warrants some level of environmental due diligence and assessment of potential liabilities. The pervasive nature of environmental regulation and the often significant cost of investigating and remedying environmental problems provide strong incentives for prudent managers to conduct an appropriate level of environmental due diligence before committing financial resources to a health care affiliation.
Stephen C. Smith is an environmental attorney with the Law Offices of Harry F. Klodowski.
The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.