The Importance of Due Diligence in Healthcare Mergers and Acquisitions

Post PreviewDue diligence is a necessary step in any M&A transaction, but only some industries call for as much meticulous attention to detail as healthcare. Professionals with in-depth knowledge of the intricate medical sector are needed for due diligence in medical audits. Professionally conducted due diligence investigations help a buyer establish a higher purchase value for a deal. Here are the key areas to evaluate:

Risk Assessment

Healthcare M&A activity has dropped from previous record highs, but it is still strong enough to drive the industry. New technology, increasing demand, and growing competitiveness drive interest in the sector. A thorough risk assessment is crucial to the success of a healthcare mergers and acquisitions deal. It includes assessing the potential for synergies and evaluating IT systems to ensure compatibility. It also involves assessing the compatibility of organizational cultures and management styles to prevent resistance to change and other potential problems. Ignorance of the consequences can result in expensive errors. For example, UnitedHealth recently settled a lawsuit with the Department of Justice after failing to investigate its acquisition of Change Healthcare thoroughly. This software company had multiple violations of federal anti-kickback and Stark laws.

Financial Analysis

Due diligence in healthcare is becoming more critical than ever. The COVID-19 pandemic has battered the industry, and many experts believe healthcare acquisitions, healthcare mergers, hospital mergers and acquisitions will be essential in transforming the industry. Cross-market healthcare deals are commonplace as hospitals seek to maximize their reach and increase access to technology and talent. Due diligence helps companies evaluate these deals, determine key synergy opportunities, and ensure that the deal makes sense for both parties.


Additionally, as providers move from fee-for-service arrangements to bundled payments and capitation, actuarial expertise becomes increasingly critical in the M&A space. Actuaries help set payment rates for insurers and evaluation reserving methodologies. This type of evaluation can prevent unexpected liabilities from arising after the transaction closes. It can also identify additional financial upside from risk assumption.

Operational Analysis

Many healthcare M&A deals involve proprietary technology. The agreement for data integration must be thoroughly planned as part of the due diligence process. Getting this right helps maximize the value of the M&A and ensures that the business goals of both parties are met. With comprehensive healthcare due diligence, businesses may notice issues that can negatively impact the deal. Modern healthcare’s scope, complexity, and innovation make it more critical than ever for companies to conduct professional medical due diligence when considering M&A. It is imperative to expressly incorporate healthcare considerations in your due diligence request list, regardless of whether you are on the buy-side or sell-side.

Business Evaluation

Due diligence is one of the most essential parts of a merger or acquisition deal. It involves thoroughly investigating the target business to identify potential issues and liabilities. Given the industry’s heavy regulation and unique risk areas, it is essential in healthcare. In the case of a hospital merger or physician practice acquisition, it’s necessary to fully evaluate data assets in addition to finance, operations, and culture. It will ensure that any problems that could cause an integration to go smoothly are dealt with during the pre-acquisition due diligence phase instead of delaying their resolution until after the acquisition.


Shrinking valuations can make certain healthcare companies more attractive targets for acquisition, especially for investors previously deterred by the sky-high prices typically associated with specific segments of the healthcare sector. It may also be a sign that we are beginning to enter the next consolidation phase in the healthcare sector.

Regulatory Compliance

More than any other business sector, healthcare companies operate within an intricate regulatory framework. As such, a company’s compliance with such regulations can be crucial to the success of a healthcare transaction. Acquiring companies must evaluate a target’s federal and state licenses and permits to ensure they meet the regulatory requirements for conducting operations. Failure to comply with healthcare industry regulations can result in crushing financial penalties and operational restrictions. Due diligence teams should also consider whether a target has undocumented arrangements, such as physician referrals, with hospitals or other entities. Identifying and addressing these arrangements can create debilitating lags in revenue post-closing. Due diligence should include a evaluation of contracts to determine if consent or assignment is required to transfer them.