“Health Care ‘Prime’” framework employed to examine the process programmatic acquirers use in buying and consolidating middle market health care businesses – a growing trend that will accelerate the health care industry’s focus on innovation and enhanced patient care
Am Law 100 firm Polsinelli, widely recognized as one of the nation’s preeminent firms for health care law, today issued a white paper titled “Health Care ‘Prime’: The Strategic Role of Systematic Health Care M+A in Remaking the Future of Health Care.” The report, issued by Polsinelli’s Health Care M+A Practice, provides an in-depth analysis of the growing number of middle market health care business mergers and acquisitions, through which programmatic acquirers establish a valuable, consistent and repeatable approach for managing their deal activity at each stage of the transactional process – a trend that will accelerate redefining the future of U.S. health care by encouraging innovation and ultimately enhancing patient care.
The Health Care M+A Practice’s first Health Care “Prime” white paper, published in October 2018, focused on mega-deals to illustrate six key themes and outcomes being implemented through mergers and acquisitions and innovation activities, serving as change agents to remake the nation’s health care industry. Its second Health Care “Prime” white paper, published in July 2019, evaluated the proliferation of large combinations of health care providers to form “supergroup” structures that will play an increasingly important role in the health care delivery ecosystem.
“Now, with this third white paper, we are using our four-part, patient-care-centric conceptual framework of health care organization, ownership, delivery and payment to explore how the programmatic approach to middle market health care mergers and acquisitions will more quickly, more powerfully reshape the industry,” said co-author Jon Henderson, a Dallas-based shareholder, chair of the firm’s national Corporate and Transactional Practice Group and co-lead of the firm’s Health Care M+A Practice. “With the number of general health care mergers and acquisitions reaching a record high in 2018, and the rise of programmatic merger and acquisition deals in various health care subsectors and niches of the health care industry in 2019, we expect to see increasing utilization of Systematic Health Care M+A.”
“The fact that we are writing in the midst of the ‘frozen’ state of deal making caused by the COVID-19 pandemic while we wait on the ‘thaw’ is not lost on us,” continued Henderson. “However, as we look ahead, we anticipate a period when there are more mid-cap than large-cap transactions by both strategic and financial buyers, because acquirers will be more risk-averse when first resuming M&A activity post-pandemic, and risk aversion usually results in smaller-sized deals.”
“Evidence shows that programmatic acquirers consistently outperform their peers in terms of overall growth and value generation when compared to occasional, high-profile mega-deals,” said co-author Cullin Hughes, a Kansas City-based shareholder and member of the firm’s Health Care Alignment and Organizations Practice Group and the Health Care M+A Practice. “Programmatic mergers and acquisitions provide a sustainable growth path even when businesses are rocked by recessions and general societal and economic downturns.”
The full white paper is available for download here. White paper co-authors also include Polsinelli associates Madeleine Rosuck, Tanner Weigel and Jake Krysiak.
The white paper’s analysis focuses on how programmatic acquirers tend to employ strategic, specific practices at all three stages of the Systematic Health Care M+A process, applying this repeatable process across virtually all subsectors and niches of the health care industry, and across various deal sizes within the middle market.
The key points of the analysis include the following:
Stage One: Strategy and Sourcing
The first stage of the Systematic Health Care M+A process involves developing a strategy for identifying deals and sourcing them appropriately and efficiently. Decision-making at this stage is driven by investment thesis and corporate strategy, and governed by a defined set of criteria with a clear link to strategic objectives.
- Organization: At this stage, programmatic acquirers identify an organizational model that complies with applicable regulatory restrictions and is repeatable for scale while also being adaptable to the specific circumstances that a given acquisition and overall growth plans might present. Programmatic acquirers’ goal is to streamline organizational structures for efficiencies, control and predictability of operational results in scaling their businesses.
- Ownership: Here, programmatic acquirers take time to identify the best source of funding or ownership for an acquisition. Increasingly, programmatic acquirers look to private equity funds to pursue their strategy of aligning the care, scale, engagement and capital investment of a patient-centric integrated care continuum.
- Delivery: Programmatic acquirers also consider how the target company, and the offered products and services, align with the care deliverable the acquirer provides to patients – including consideration of how the target company’s services fit within the care continuum of the acquirer’s other health care services offerings. More so than ever, the target deliverables include next-generational platform medical technologies for which acquirers are willing to pay a premium price such as wearables, telemedicine and other electronics that give consumers greater access to health care.
- Payment: Finally, in this first stage of the deal-making process, programmatic acquirers also take into account the shift in payment models from a fee-for-service model to a value-based care model, with an increasing focus on identifying and pursuing targets that have already been successful in implementing value-based payment models, or that have the appropriate infrastructure in place to succeed in a value-based reimbursement world.
Stage Two: Due Diligence and Deal Execution
At this stage of Systematic Health Care M+A, programmatic acquirers engage in a structured due diligence process to determine whether the company is an optimal acquisition. In screening potential targets, programmatic acquirers gather relevant information about revenue and cost synergies, consider how the target company will integrate into their existing organization (both functionally and culturally) and seek to understand vital due diligence matters related to both organization and ownership, and delivery and payment.
- Organization and Ownership: Programmatic acquirers focus a large portion of their diligence on understanding the organizational structure of the target company, and must also have a thorough understanding of the internal organization of the acquiring company in order to adequately assess the efficiencies (or lack thereof) and risks during the due diligence stage. An understanding of the target company’s current and historic ownership structure is also important to assess relevant regulatory considerations and potential post-acquisition compliance risks.
- Delivery and Payment: During due diligence, acquirers seek information about the services or products that the target company offers to better understand if the target will be an accretive acquisition and further their goals. As part of the due diligence process, acquirers also scrutinize the target company’s payor mix to identify trends that could negative impact revenue, particularly as health care reimbursement continues to shift to value-based care models.
If the results of the due diligence review are satisfactory and the target is deemed an optimal acquisition, programmatic acquirers next implement well-defined processes for deal execution. Such processes include careful review of initial pre-determined criteria for making both binding and nonbinding offers, and the subsequent utilization of well-developed standardized transaction documentation upon agreement of principal terms.
Stage Three: Integration
The integration stage of the Systematic Health Care M+A process is arguably the most important for programmatic acquirers. It is a core facet of a successful merger and acquisition strategy. At this stage, acquirers consider corporate culture and organizational health, and spend time on aligning people, securing buy-in and developing measurements for the new companies’ vision.
- Organization and Ownership: Successful programmatic acquirers have an internal integration team and a defined integration process and strategy. These acquirers develop their corporate departments in ways that prepare their employees for the continued growth of the company. A defined integration process lends itself to that preparation by providing a playbook so that employees know their role in the growth process and ensures that operations of both the target and the acquirer can continue without disruption.
- Delivery: Programmatic acquirers must consider integration from both a deliverable and a data standpoint. They integrate the target company in a way that maximizes the alignment of the target company’s service offerings with the acquirer’s overall care delivery model in a manner consistent with the goals and objectives identified in the first stage of the Systematic Health Care M+A model. Because these deliverables so often involve the data accumulated by the companies, acquirers at this stage also consider the best ways to integrate the target company’s technology with their existing IT platforms.
- Payment: At this stage, acquirers consider how to integrate the target company’s payor arrangements and revenue cycle functions with their own. As health care providers shift from a fee-for-service model to a value-based care payment model, acquirers seek to determine ways to receive payment for the outcomes produced, rather than for the services administered. In all cases, integration results are improved when orchestrated by the acquiring company’s finance functions, which are better equipped to recognize target synergies and identify cost efficiencies.
The conceptual framework for Polsinelli’s continued analysis of the health care ecosystem’s rapid evolution and predicted future state includes four key areas of focus: ownership, organization, delivery and payment. The potential implications for each of these focus areas were first profoundly noticeable to Polsinelli’s Health Care M+A team in the announced formation in 2018 of a new health care company by Amazon, JP Morgan and Berkshire Hathaway (the “Amazon Venture”) – thus the series of white papers with the moniker, “Health Care ‘Prime.’” The title also recognizes a double meaning of “prime,” because the future state of health care will be more optimized, in the view of the authors.
Recognized as a leader in health care law, Polsinelli was ranked as the 2018 "Law Firm of the Year" in Health Care by U.S. News & World Report's "Best Law Firms" for the second time in four years, and continues to hold the publication’s national Tier One ranking in Health Care Law. The practice is currently ranked by the American Health Lawyers Association as among the five largest health care practices in the nation (AHLA Connections, 2019), was nationally ranked in Health Care – Service Providers by Legal 500 in 2019 and has earned repeated national rankings from Chambers USA.
Polsinelli is an Am Law 100 firm with 900 attorneys in 21 offices nationwide. Recognized by legal research firm BTI Consulting as one of the top firms for excellent client service and client relationships, the firm’s attorneys provide value through practical legal counsel infused with business insight, and focus on health care, financial services, real estate, intellectual property, middle-market corporate, labor and employment and business litigation. Polsinelli PC, Polsinelli LLP in California.