The healthcare private equity market continues to see high transaction
multiples and unprecedented competition for transactions. These trends,
along with continued growth in False Claims Act or qui tam cases, create
interesting dynamics for investors performing diligence and documenting
transactions, as discussed during a panel presentation at McGuireWoods’ 6th
Annual Healthcare Litigation and Compliance Conference on May 21.
Panel members included McGuireWoods healthcare lawyers Tim Fry and
Holly Buckley; John Brock, managing director for Berkeley Research Group LLC; and
Matthew Logan, general counsel for Experity. Brock provided expertise on
the financial aspects of the diligence review of target companies, while
Logan shared real-world experiences from his company’s recent merger and
his past transactional legal practice. Fry and Buckley addressed the legal
aspects of transaction diligence and drew examples from numerous recent
private equity healthcare transactions.
Here are five key points drawn from that panel discussion.
- Organizational culture and workforce behavior constitute the most
important factor determining whether a company can operate in a
— both in understanding historic liabilities and in go-forward post-closing
operations. While the most important factor, it can also be one of the most
difficult to evaluate from a diligence perspective. If an organization
doesn’t have a top-down approach to compliance, open lines of
communication, and a culture that rewards and incentivizes reporting of
potential issues, maintaining compliance and defending allegations of
noncompliance will be more difficult. Panel members discussed how they
evaluate an acquisition target by interviewing key constituents and
studying the compliance plan elements.
- With high transaction multiples stemming from private equity deal
competition, buyers face more pressure on their investment thesis.
This can create longer and more involved financial due diligence review,
with more emphasis on understanding if the target’s operations need to
change. Any such change can affect the purchase price or the investor’s
ability to obtain a return on investment. In other words, if a buyer
identifies a billing and coding issue, there will be discussion around
refunding the overpayment from a compliance perspective and a question on
whether the difference impacts the purchase price. Buyers also may need to
support a more robust financial and back-office operation post-closing,
which often must be factored into the price.
- Buyers are not necessarily turned off by targets who are in the midst
of a False Claims Act case, government investigation or corporate
This is a change from a few years ago, when such status could make a deal
difficult to complete. However, buyers will conduct extra diligence on the
target and may retain experts to investigate alongside the government to
gain confidence in the target’s historic operations. While such
legal/compliance issues may create more work for buyers, they also may
reduce the purchase price, creating more upside opportunities.
- Buyers frequently require or mutually agree with sellers that a
self-disclosure is necessary as a condition to closing or as a
. These self-disclosures are most commonly to the Office of Inspector
General for Anti-Kickback issues or Centers for Medicare & Medicaid
Services for Stark Law issues. The panelists noted that such
self-disclosures have become common in the marketplace and are easier to
navigate when both parties have sophisticated legal counsel. Parties may
also consider refunds to third party payors for billing issues without such
- There are opportunities for health systems and private equity funds to
. However, it is important for both parties to recognize their own
priorities as well as the priorities of the other party. For example,
health systems generally will not relinquish control over decisions related
to tax-exempt status, clinical quality and reputation in the community,
while private equity funds will need to ensure they have the ability to
exit, to create return on investment and to scale. Expect more exploration
in this space in the next few years.