60% of investors anticipate more healthcare M&A deals in 2023. To make them successful, companies must conduct professional medical due diligence.
This time, you will discover what the due diligence process means for healthcare entities and what benefit it brings based on illustrative case studies.
You can also learn what happens to companies when investigations go wrong. Finally, you will discover how to secure this process and get a healthcare due diligence checklist.
What is the due diligence process in the context of healthcare?
Due diligence in healthcare is an extensive evaluation of a target healthcare organization before a business transaction, including a merger, acquisition, or fundraising.
It comprises financial audits, technology assessments, compliance investigations, service quality assessments, and many other evaluations.
What does healthcare due diligence mean for medical organizations?
Bain & Company’s recent M&A report has revealed that correct business evaluation stands among the top three factors of a successful acquisition. It ensures that companies achieve their transaction goals and offers the following benefits to clinics and patients.
Value to clinics:
Better risk assessment
Thoughtful deal evaluation
Helpful integration insights
Value to patients:
Better care quality in deals by private equity firms
Lower service costs
Value to clinics
Better risk assessment
In many health care deals, complex risk assessment is of critical importance. During the investigation phase, a buyer evaluates the legal background of the target company, its financial operations, market position, asset and employee knowledge potential, and many other aspects.
Upon the comprehensive analysis, a buyer identifies possible risks, including legal pitfalls, hidden liabilities, law compliance issues, and other problems.
It can be illustrated in Pfizer’s acquisition of Allergan. Pfizer planned to acquire Allergan for $150 billion by the end of 2016 but eventually exited the agreement due to regulatory concerns.
Pfizer’s acquisition wouldn’t pay off under the Treasury Department’s new inversion regulations enacted on 8 April 2016. So this company made a wise and timely decision to cancel the deal.
Thoughtful deal evaluation
Due diligence investigations on healthcare companies provides buyers with a better visibility over deal progress and growth potential post-acquisition. It also helps a selling company establish a higher deal value.
Thus, professional investigation helped Aetna, a health insurance provider, increase its selling value for CVS Health, a large network of medical clinics.
Aetna demonstrated its high medical data analytics potential in the 2018 acquisition, making CVS evaluate the deal at $69 billion. Indeed, this merger proved successful as CVS Health surpassed all growth projections and made a few voluminous transactions in the following years.
Helpful integration insights
Post-merger integration in the healthcare industry means hospitals unify their systems, integrate clinical protocols, and standardize management practices.
Healthcare due diligence allows companies to determine key synergy opportunities, discard unprofitable or redundant systems, and minimize discrepancies.
It also helps assess IT systems for operational improvements and ensures the buying company doesn’t spend resources on needless integrations.
Value to patients
Better care quality in deals by private equity firms
The Deloitte survey on over 750 M&A deals between 2008 and 2014 suggests that patients may receive better quality in acquired hospitals. For instance, 23% of survey respondents reduced readmissions, while 17% decreased appointment wait times for their clients.
Lower service costs
Professionally conducted due diligence when buying a healthcare business provides a better strategic fit and helps merged hospitals reduce operational costs. The American Hospital Association emphasizes that acquired hospitals have 3.5% lower revenues per admission than non-merging ones due to reduced health plan costs.
How can healthcare organizations ensure they meet due diligence requirements in healthcare acquisitions?
Statistically, up to 90% of all M&A deals fail due to inadequate planning and poor due diligence.
Therefore, both parties should prepare for assessment to close a successful transaction. A selling company should meet the examination requirements before the investigation begins. For this, it should initiate sell-side due diligence and apply the following measures:
- Assemble M&A expertise. You should involve a dedicated M&A team to review the main aspects of your business, find weaknesses, and prepare a healthcare compliance due diligence checklist.
- Evaluate your financial systems. Ensure your balance sheets, cash flows, income statements, and other aspects comply with existing regulations and are structured and easily accessible.
- Identify your weaknesses. A selling hospital should determine operational redundancies, compliance issues, debts and liabilities, competition risks, information systems vulnerabilities, and other issues.
- Organize documents. Prepare secure and accessible document storage and organize your documents for quick navigation and easy access.
- Fix issues. Reduce issues found during the investigation to meet buyer deal requirements.
Potential consequences of not conducting healthcare due diligence
Potential consequences of insufficient business investigation may involve reputation risk, litigations, compliance issues, market cap losses, and many others. Let us demonstrate how the lack of due diligence affects businesses based on the following case studies.
Integration issues and reputation risks: CHS — HMA acquisition
Community Health Systems, one of the largest healthcare providers, acquired Health Management Associates in 2014 for $7.6 billion.
A seemingly prospective acquisition resulted in years of investigation and millions of losses for both buyer and seller post-deal. CHS overlooked HMA’s government investigations on its artificially increased patient admissions and misleading diagnostics.
As a result, CHS lost $112 million on initial integration with HMA. As for HMA, it paid over $260 million to settle false billing allegations.
Litigation risk and market cap losses: Aetna — Humana acquisition
Improper healthcare financial due diligence and market investigations can result in shocking losses. It happened to Aetna, a medical insurance provider, attempting to acquire Humana, another medical insurance company.
The merger was unsuccessful, and the companies decided to exit the deal as the United States Department of Justice sued them for violating antitrust laws.
The merger would result in competition loss risks and a significant increase in medical care costs. As a result, Aetna paid a $1 billion fee to Humana for the deal termination.
Additionally, the court revealed that Aetna attempted to justify its merger with ACA exchanges’ exit as they were allegedly unprofitable. However, misleading statements resulted in Aetna losing over $1.17 billion of its market cap.
Criminal investigation and losses: Allscripts — Practice Fusion acquisition
A vendor of electronic health records (EHR), Allscripts acquired Practice Fusion, another EHR provider, for $100 million in 2018.
However, it failed to conduct proper legal review and overlooked several kickback schemes revolving around opioid prescriptions at Practice Fusion.
One year post-acquisition, Allscripts paid a $145 million settlement regarding Practice Fusion’s fraudulent activities.
Due diligence checklist for healthcare acquisition
Buy-side and sell-side parties should pay extra attention to corporate records, billing info, regulatory, product, taxation, and human resources. The following medical due diligence checklist encompasses the main areas for healthcare analysis.
| Business areas for analysis | Scope of documents |
| Corporate records | Organizational chart Articles of incorporation Certificate of good standing List of shareholders Corporate history review List of authorized jurisdictions List of subsidiaries, partnerships, and co-venture agreements Board meeting minutes Annual reports over the last five years |
| Financial | Market capitalization documents Financial statements over the last three years Annual budgets Financial projections Equity transaction documents Debt agreements List of internal control procedures Accounts receivable and accounts payable Auditor communications General ledger Business plans Financial audits |
| Legal | Confidentiality policies Business licenses Pharmaceutical benefits schemes approvals Health insurance provisions Accreditation and compliance certificates Compliance with healthcare regulations and sustainability reports Medicare payments List of litigations |
| Contracts | Supplier, partner, and customer contracts Agreements with medical practitioners Service, distribution, and production agreements Joint venture, asset management, and framework agreements |
| Human resources | Employment and HR policies Compensation agreements Employee registers Employee claims and disputes Healthcare professionals training records Employee education and expertise checks |
| Assets and facilities | Inventory summary Equipment reports Infrastructure assessments Hazard site risk assessments Insurance reports Asset valuation reports Environmental risk assessments Facility licenses Facility regulatory compliance reports |
| Products and services | Overview of products and services Pricing structures Customer assessment, including patient admission and readmission rates, mortality rates Records of patient claims |
| IT technology | IT hardware technology inventory IT vendor lists IT vendor and partner agreements Software licenses Cybersecurity risk assessment Cybersecurity certifications HIPAA and ISO compliance |
| Intellectual property | Intellectual property registers Trademarks and patents Domain name registrations |
| Taxation | Tax returns Tax agreements Correspondence with tax authorities Tax calculations |
The future of M&A healthcare due diligence
More and more dealmakers and private equity firms focus on the following strategies shaping mergers and acquisitions due diligence in the healthcare space in 2023.
Fraud and abuse-centered due diligence
M&A transactions have recently involved increasing non-compliance litigations among acquired companies. It requires M&A professionals to pay extra attention to compliance with complex government regulations.
Dealmakers should carefully inspect the target company’s operations for kickbacks, malpractice, and unprofessional physician practices.
ESG due diligence
CMS, an international law firm, has found that 2023 M&A deals will underline environment, social, and governance practices in due diligence efforts.
Over 90% of survey respondents confirm ESG issues to rise in the next three years. Hospitals have also started adapting to environmental practices as more healthcare investors show interest in ESG while assessing risks and opportunities.
Cybersecurity due diligence
Only 10% of companies conducted cybersecurity M&A due diligence up until 2022. However, this trend is on the rise now as more businesses prioritize cybersecurity investigations in early M&A phases.
A Gartner report has found that 60% of deals highlight cybersecurity as a critical step in their investigations. Experts say healthcare entities should be more vigilant in cybersecurity audits to mitigate data breaches and following settlements.
| “Be very aggressive with integration after an acquisition. Eliminate duplicate systems, streamline and coordinate security processes. Don’t leave your orgs vulnerable during this important time.” — Troy Ament, Chief Information Security Officer at Fortinet |
How do VDRs facilitate due diligence in healthcare acquisitions?
The FBI report has found that M&A deals put healthcare organizations at significant risk as cyber attackers deploy ransomware during big financial events.
Virtual data rooms (VDR) are the way to tackle security challenges and have improved visibility over the deal progress. VDRs are cloud platforms designed for M&A transactions. A due diligence data room improves investigation in the following ways:
- Provides information security. VDR capabilities minimize data breaches with multi-factor authentication, role-based document access, IP restrictions, audit trails, and other security features.
- Enables convenient file sharing technology. VDR services feature synchronized file repositories available to authorized parties 24/7. M&A parties can approve a due diligence data room checklist, access critical files, and share them in one system.
- Streamlines team collaboration. VDR tools like Q&A workflows, in-app chats, task dashboards, and deal engagement reports help M&A parties approve critical decisions remotely in real time.
- Reduces process costs. Efficient communications, centralized workflows, and industry-specific tools allow diligence experts to streamline the complex analysis process while increasing its quality.
However, a virtual data room alone cannot ensure 100% protection without correct security education among training since 82% of data breaches involve human error. Choosing reliable and cost-efficient data room providers also significantly increases successful outcomes.
Ideals
- Access controls
- Built-in viewer
- Full-text search
- Auto-indexing
- Customizable branding
- Advanced Q&A
- In-app live chat support 24/7
- 30-second chat response time
Intralinks
- Access controls
- Built-in viewer
- Full-text search
- Auto-indexing
- Customizable branding
- Advanced Q&A
- In-app live chat support 24/7
- 30-second chat response time
SmartRoom
- Access controls
- Built-in viewer
- Full-text search
- Auto-indexing
- Customizable branding
- Advanced Q&A
- In-app live chat support 24/7
- 30-second chat response time
Box
- Access controls
- Built-in viewer
- Full-text search
- Auto-indexing
- Customizable branding
- Advanced Q&A
- In-app live chat support 24/7
- 30-second chat response time
Citrix
- Access controls
- Built-in viewer
- Full-text search
- Auto-indexing
- Customizable branding
- Advanced Q&A
- In-app live chat support 24/7
- 30-second chat response time
Key takeaways
M&A healthcare due diligence strategies help companies identify risks, evaluate deal prices more precisely, and ensure successful transactions. Clinics’ success also improves patient care and reduces admission costs.
It’s crucial to prepare for the assessment in advance as companies may open themselves to litigation, reputation loss among clients, and other problems emerging from failed investigations. Both parties can use the healthcare M&A due diligence checklist and conduct investigations in virtual data rooms for better outcomes.
