Healthcare mergers are often a last resort for smaller private organizations that are in considerable financial hardship and can no longer operate independently. Whatever the reason the selling organization is in trouble, it is your job as an investor to uncover as much as possible as quickly as possible so you can make informed decisions
regarding the transaction. Is the facility profitable? How much is it worth? The answers to these questions are sometimes buried deep below the surface, but they can be revealed through the due diligence process. By conducting an extensive evaluation of the seller’s organization, you can gain valuable intel regarding their finances, operations, technology and reputation within the communities they serve. You can also identify challenges they are facing and decide whether these are risks you are comfortable inheriting.
 
Ideally, a due diligence investigation should begin as soon as a potential healthcare organization has been targeted by an investor. The due diligence process can be lengthy and cumbersome, however, and time is not always on your side—especially if the deal has not been locked in and other investors are competing for the opportunity. Investors may want to seek advice and support from qualified industry professionals such as Richter to help research, weigh options, and catch important transaction details that may be overlooked otherwise.

The costs of bypassing any part of the due diligence process can be steep, and one seemingly small mistake could cost you everything. Overpayment for the transaction, reputational risk, compliance issues and even litigation are just a few of the consequences investors can face if they do not fully understand the situation they are entering. Many big-ticket industry mergers and acquisitions have failed over the years because they lacked
industry insight, synergy and attention to detail. For example:

In 2018, EHR company Allscripts acquired Practice Fusion for $100 million, but failed to catch several kickback schemes regarding opioid prescriptions. The mistake cost Allscripts $145 million to settle for Practice Fusion’s fraudulent activities.¹

Iowa’s UnityPoint Health and South Dakota-based Sanford Health announced plans in 2019 to merge in a $11 billion deal, which would have created one of the largest nonprofit health systems in the U.S. Instead, the deal was called off because one party failed to “embrace the vision” of the merger—after executive teams tried for 18 months to make it work.²

To help you avoid similar mistakes, make it a priority to understand the business you will be inheriting, as complex as it might be. Include the following, at a minimum, in your transaction planning due diligence checklist:

Financial Projections
Request ad hoc financials from the seller to determine the viability of the company. Pay specific attention to projections for census and rates within the next two to three years. How do these compare to your growth plans?

Assign and Segregate Duties
A review of these numbers should tell you how likely the seller’s past-due accounts can be recovered. Revenue cycle clean-up teams who specialize in these types of accounts (such as Richter) can help increase collections and implement best practices moving forward.

Case Mix Values
These values help investors understand the types of patients being treated at the facility, and the costs associated with their care. Higher values indicate a larger number of complex, resource-intensive patients, which are reimbursed at a higher rate and therefore produce more revenue.

Payer Evaluations
Compile a list of payers the facility uses and evaluate whether each relationship is profitable. If they will be part of the equation moving forward, new contracts will need to be secured under the new company’s name. 

Insurance Credentialing
Before any healthcare provider can receive reimbursement from insurance payers they need to be credentialed, or claims can be flat-out rejected and revenue lost. The credentialing process is time-consuming as there are specific requirements that must be met by both the state and individual payers, so factor this into the transition timeline.

Vendor Management
Vendors provide solutions that are often critical to the organization, such as the Electronic Health Record (EHR) system. Any disruptions to these systems could be catastrophic, so do your homework to understand the terms of the contracts in play. Vendors should be notified of the change in ownership in a timely manner and once again, new contracts will need to be obtained.

Resident Referrals
Relationships with hospitals, physicians and other providers are critical to generating business. Reputation and trust play an important role, especially since quality of care and patient outcome has become top priority. What is the organization’s reputation with referring providers? Are they receiving quality referrals?

With so much at stake, investors cannot afford to sidestep the due diligence process, nor should they want to. The more information they can obtain upfront, before the deal is finalized, the more bargaining power they will have to address areas of concern—or back out of the deal before it is too late.

Navigating healthcare mergers and acquisitions demands meticulous due diligence to mitigate potential risks and maximize opportunities. By investing the time and resources upfront to thoroughly assess the financial, operational, and reputational aspects of a target organization, investors can make informed decisions that safeguard their investments and enhance their strategic objectives.

Enhancing Outcomes Long-Term Care Transaction Planning with Richter

Take charge of your investment strategy and ensure a prosperous future in healthcare mergers. Contact us today to explore how we can support your due diligence efforts and guide you toward confident, informed decisions.