Market liquidity is beginning to open back up now that investors and banks are starting to rationalize the impact of COVID-19 on different business sectors, which means deal activity is also picking up again after a noticeable dip in the second quarter of the year.
There are many reasons why now, more than ever, larger physician practices, hospital systems and private equity funds may want to acquire or merge with other healthcare companies. Several trends are currently driving healthcare M&A, including the business impact on hospitals and physician practices, which may be seen by opportunistic investors as distressed assets; and the evolution of digital healthcare and the opportunities it presents for startups and investors alike.
However, in healthcare, it is sometimes more challenging than in other industries to ascertain whether an M&A transaction will be a net positive, as increasing earnings in healthcare is rarely as straightforward as simply increasing patient volume and/or decreasing costs. Acquiring an entity often includes considerations around areas such as insurance contract reimbursement rates, billing and coding practices, and realization of other potential operational synergies through company integration and change management.
As a result, due diligence and strategic planning initiatives for transactions are particularly important when considering acquiring a healthcare practice. Private equity firms, physician practices or healthcare organizations considering acquiring a healthcare organization should pay close attention to key areas during due diligence efforts, especially considering heightened risks resulting from impacts of the COVID-19 pandemic. This article outlines several critical areas that any potential buyer should evaluate to mitigate risks, including:
Accounting methods It’s imperative to perform thorough financial due diligence for any potential healthcare transaction. As part of that process, it’s important to consider whether the target uses a cash-basis or accrual-basis method of accounting and what this might mean as you assess their financials, as there can be significant lag time between when medical services are performed and when an insurer reimburses the claim.
Financial statements calculated on a cash-basis may not give an accurate picture of whether a practice’s revenues and profits are growing or shrinking. Smaller practice groups – often the targets for acquisition – tend to use the cash-basis method of accounting. For buyers considering acquiring such a practice, it’s critical to understand the significance of the impact between cash-basis and accrual-basis income levels. As an example, this can be extremely problematic during the pandemic where accrual revenue may have begun to decrease in March, however cash-basis revenue may not have begun to trend downward until May, June or even later.
