The healthcare mergers and acquisitions (M&A) market continues to attract private capital, with investors making significant investments in standalone platforms and platform add-on transactions. Also prominent are strategic private equity investments in joint ventures with non-controlling strategic investors that add value to global joint venture platforms. This relatively new model is increasingly popular in an environment of value-based care initiatives and risk-based programs.
Over the past four years, the market has seen an increase in specialty platforms such as urology, dermatology, ophthalmology, gastroenterology, and orthopedics. As these standalone specialties mature, secondary transactions for these established platforms are on the rise. At the same time, new mono-specialty and multi-specialty platforms are emerging. Amid a growing specialty market characterized by physician/provider models, there is growing interest in the opportunities and development of home patient care and technology-enabled care solutions.
Economic impact on the healthcare contract market
From an M&A perspective, the market has not shown signs of slowing due to inflation, recession fears or various supply chain issues affecting other sectors. Although the market may be less active than in the fourth quarter of last year, activity remains high and very favorable to sellers. However, some sectors have seen an artificial acceleration in profits and revenues due to the impact of the COVID-19 pandemic, which has sometimes created a disconnect in expectations and negotiations between buyers and sellers. While these factors did not have a significant impact on trading volume, it is expected that there will be a further normalization of trading multiples due to rising interest rates and the cost capital.
Trends in Representation and Warranty Insurance
Rising policy prices and expanding coverage exclusions (including billing and coding, data privacy, etc.) have led to a decrease in the use of representation and warranty insurance. As a result of this trend, there is an increase in more fully negotiated indemnification provisions to address situations where representation and warranty assurance is deemed unavailable or favorable for a given transaction.
Advice and strategies in the current environment
Many of the pitfalls parties face in today’s market can be mitigated early in the life of a transaction. These three steps can minimize the risks:
- Work with sophisticated lawyers and advisors.
- Avoid rushing into the market.
- Begin due diligence on the sell side to address issues that may arise during traditional due diligence.
Cautionary tales abound, with recent examples of medical practices being marketed too aggressively with pro forma adjustments. This can lead buyers to question the sustainability of the acquisition. Another example: the targets do not address special tax planning and structural needs up front with respect to incoming or outgoing practice partners. Other common transaction errors include regulatory and legal issues that become blockers from a timing perspective (i.e. certificates of need, antitrust considerations, etc.). While truly breathtaking due diligence is rare, anticipating these potential pitfalls early on is key to the overall success of a transaction.