Protecting Medical Data: The Vital Role of Due Diligence in Healthcare

Updated: Aug 11 ‘23 Published: Mar 03 ‘23 18 min read

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 analysisScope of documents
Corporate recordsOrganizational 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
FinancialMarket capitalization documents
Operating model
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
LegalConfidentiality 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
ContractsSupplier, partner, and customer contracts
Agreements with medical practitioners
Service, distribution, and production agreements
Joint venture, asset management, and framework agreements
Human resourcesEmployment and HR policies
Compensation agreements
Employee registers
Employee claims and disputes
Healthcare professionals training records
Employee education and expertise checks
Assets and facilitiesInventory 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 servicesOverview of products and services
Pricing structures
Customer assessment, including patient admission and readmission rates, mortality rates
Records of patient claims
IT technologyIT hardware technology inventory
IT vendor lists
IT vendor and partner agreements
Software licenses
Cybersecurity risk assessment
Cybersecurity certifications
HIPAA and ISO compliance
Intellectual propertyIntellectual property registers
Trademarks and patents
Domain name registrations
TaxationTax returns
Tax agreements
Correspondence with tax authorities
Tax calculations

Click here to discover the full m&a due diligence checklist for sellers

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.

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.


Medical due diligence is a comprehensive assessment of a healthcare company that is a target for acquisitions, mergers, or investments.
Healthcare due diligence allows healthcare companies to find better opportunities, evaluate risks, assess deal value, and avoid compliance issues during an acquisition.
When due diligence isn’t done, healthcare M&A parties can lose millions of dollars in settlements, spoil their reputation, and open themselves to criminal investigations.


Marketing specialist at

Elisa is a marketing specialist with 15 years of experience. She worked for many VDR brands and gained insider knowledge of the industry.

At, Elisa conducts marketing research, develops content plans, supervises content teams, and develops VDR review methodology. She envisions her mission as distributing accurate knowledge of virtual data rooms.

“My mission is to deliver accurate and relevant knowledge of virtual data rooms to as many people as possible.”

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