In the healthcare industry, the term “due diligence” is tossed around so often that it’s easy to become numb to it and see it as a checkbox or something to push until later. But it involves more than just ticking off a laundry list of procedural steps. If you’re considering a merger or acquisition as part of your business growth, due diligence can be a strategic superpower when you approach it holistically.
This means looking at every aspect of your organization that affects your daily operations, including areas you might not have considered, and creating a game plan to identify improvements. By expanding your due diligence perspective to include financial, legal, operational and cyber considerations, you can enhance patient care, simplify operations, gain an edge in a hypercompetitive market and position your organization for long-term success, whether you ultimately choose to sell or not.
Here’s a rundown of why holistic due diligence is crucial to preparing for healthcare M&A and the top areas to consider before a transaction.
Due Diligence Provides an Essential Diagnostic ‘X-ray’
In the medical field, a diagnosis is considered a gateway to understanding and addressing potential health issues. Now, apply that same principle to due diligence.
Due diligence functions as an essential diagnostic tool for your organization, akin to an X-ray, revealing underlying issues that may not be immediately apparent. If you’re looking to sell, any potential buyer would want to see the X-rays of your business before they invest in it.
Is the infrastructure sound? Are there fractures? Are you getting a clear picture of the problem? And wouldn’t you also want to know those things as an operator?
Conducting comprehensive due diligence assesses your organization’s true health. Much like overlooking a diagnosis can have severe implications, due diligence failure also comes with adverse consequences for M&A:
- Incomplete grasp of asset or liability value. If you don’t understand these key financial areas, you could face less favorable sales terms or a delay in the deal.
- Operational hiccups. Skipping due diligence might mean overlooking cultural fit or strategic alignment, creating challenges during implementation and leaving you vulnerable to reputational damage.
- Legal risks. Overlooking compliance issues or regulatory concerns could derail the sale altogether — or spark costly legal battles afterward.
3 Key Healthcare M&A Due Diligence Areas to Consider
A holistic approach to due diligence will give you the tools you need to navigate the tumultuous waters of a healthcare merger or acquisition. But don’t wait until a transaction is imminent. Start integrating three key areas of due diligence — financial, operational/quality of care and policies and procedures — into your daily operations and reap the benefits now.
Financial due diligence
Conducting thorough financial due diligence before an M&A allows you to showcase the overall health of your revenue and accounts receivables to your potential buyer. Key financial areas to assess include:
- Cash-on-hand management. Timely payments are essential for demonstrating financial stability. Ensuring a steady cash flow guarantees on-time supplier and staff payments and ultimately enhances stability and reliability across your patient care delivery.
- Cost containment (expense management). Cost containment due diligence can influence your viability and investment potential by identifying areas where your organization can cut costs without compromising quality. Effective cost-containment strategies highlight strong management practices and opportunities to mitigate financial risk.
- Payer contract analysis. Understanding payer contracts and reimbursement terms is important to evaluate post-transaction revenue stability and growth potential. This means carefully examining the agreements you have in place to make sure you’re operating under favorable conditions that support consistent revenue streams, and identifying any areas that need reassessment or renegotiation with the payer. Failing to analyze these contracts can raise buyer red flags about the sustainability of your revenue.
- Payer waterfall. Dependable revenue streams are critical for sustainability. A lack of favorable reimbursement terms and diversified payer mix (Medicare, Medicaid, private insurance and self-pay) may cause revenue fluctuations, making planning and investing in long-term strategic initiatives challenging.
- Revenue cycle. A well-managed revenue cycle demonstrates that a company is efficient and has a clear understanding of its financial position. If your organization has failed to address billing errors, improve coding processes or manage inventory efficiency, this can signal inefficiencies and financial risks, reduce buyer confidence and potentially weaken your negotiating position.
- Reimbursement issues. Regulatory compliance is paramount in healthcare reimbursement. Neglecting to review reimbursement rates and stay current on regulatory updates can lead to errors and revenue discrepancies, causing compliance issues. This can cast doubt on financial reporting accuracy and reliability, potentially jeopardizing the deal.
- Revenue recognition. Accurate revenue reporting is essential for demonstrating your organization’s financial viability and growth prospects. Clear policies and consistent practices for recognizing revenue are crucial. Without them, investors may question your organization’s financial integrity, leading to increased scrutiny and, potentially, a lower valuation.
Operational and quality-of-care due diligence
Achieving high-quality patient care is at the heart of clinical operations, so it should be a critical focus of due diligence. Here are some top areas of concern to guide your clinical due diligence priorities:
- No Surprises Act. Don’t risk noncompliance. If you haven’t updated your billing and collections processes per the No Surprises Act, it’s time to catch up. Educate staff on patient billing rights and responsibilities and implement transparent communication practices to inform patients up front about potential out-of-network costs. This will help mitigate legal and financial risks while maintaining patient trust.
- Staffing and labor issues. Review your staffing levels and skill mix to meet patient demand. Establish open communication and feedback mechanisms with employees and invest in professional development and retention initiatives to attract and keep top talent.
- Physician credentialing and licensure. Patient safety hinges on healthcare provider qualifications and competency. Without rigorous credentialing and ongoing staff licensure monitoring, you risk employing unqualified practitioners, exposing your organization to malpractice claims and your patients to potential harm.
Policies and procedures due diligence
Understanding and implementing proper policies and procedures is critical to holistic healthcare due diligence. These include:
- Healthcare industry rules and regulations. Staying compliant with healthcare laws and regulations is a baseline requirement for maintaining operational integrity and minimizing legal risks. This includes demonstrating compliance with rules like HIPAA, completing regulatory filings and addressing any pending litigation.
- Data management. Due diligence on data management practices involves evaluating data governance, including policies and stewardship roles, to ensure data accuracy, integrity and standardization.
- Cybersecurity. Prioritize cybersecurity due diligence. To build cyber resiliency, make sure you have updated business continuity and disaster recovery procedures in place and clearly indicate how you keep patient records safe. Also, be prepared to show how you have remediated any past data breaches.
Don’t Wait to Prioritize Due Diligence
If your healthcare organization is looking to pursue M&A, the sooner you start living due diligence, the better. Prioritizing it now will keep you from getting caught up in “transaction distraction” and allow you to focus on getting a quality deal.
By putting holistic due diligence into everyday practice, you can effectively equip your organization for the challenges and opportunities that come with a potential M&A. And you’ll set yourself up for success well before a transaction occurs.
Boost Confidence in Your Healthcare M&A
Potential buyers will want a clear picture of everything from your cybersecurity resilience to your cash flow. If you’re not ready for scrutiny of your organization’s financial, clinical and regulatory health, it’s time to focus on diagnosing and addressing any issues. Learn more about how our merger and acquisition consultants can help you deploy a holistic due diligence approach to set your organization up for a successful transaction.
