As a Healthcare Investors You Need To Know About Criteria for Hospitals Projects Merger and Acquisition. Drive Your Way To Success

Hospitals considering a merger or affiliation can increase their chances of achieving outcome targets and leveraging organizational synergies when thoughtful consideration is given to the broad and complex topics involved — from vision and culture to physician and clinical impacts to financial benefits and organizational and operational concerns.

Independent hospitals, in particular, have been caught up in a sweeping national trend of consolidation, a trend that shows little sign of abating. The forces driving change are varied, as are the approaches hospitals are taking to adapt. One of the clearest consequences of change is the recent surge in merger and acquisition activity. Hospital M&A is booming.

Healthcare Organizations may be tempted to dive into discussions about what the new organization might look like without a clear understanding of what each party would like to achieve from an affiliation. This can result in a corporate structure and organizational design that do not support the desired ends of the affiliation and produce less than optimal performance for the combined organization.

1.Criteria to Assess

1.        Company Overview – No of years of existence, Location, Beds, Milestones achieved,

2.        Details of Promoter Group

3.        Details of Management Team (including doctor professionals) and number of staff

4.        Annual Reports for past three years

5.        Company presentation if available

6.        Shareholding pattern

7.        Amount of Funds to be raised and End Use Utilization (relevant for a fund raise)

8.        Reason for selling or lease (relevant purpose)

9.        Speciality Treatments offered

10.      Existing Infrastructure – Beds (types of beds including ICU beds), Operation rooms and other equipments; Other Asset details

11.      Financial Details (for last five years)

a.        Sales, EBITDA, PAT

b.        Occupancy Rate (Number of Patients Treated)

c.        In Patient Revenue (including Surgical Revenue for various specialities) and Out Patient Revenue

d.        Average Length of Stay

e.        Average Revenue per bed

12.      Growth Plans – Locations and no of beds planned over the next five years

2.Key Factors To Consider before M&A

Access to Capital

At the same time that independent hospitals need more access to capital to address aging infrastructure, equipment and information technology, cash flow is stagnating and the ability to tap outside financing is diminishing. With margins razor thin, hospitals are increasingly looking to transactions to achieve economies of scale and boost profitability.

Regulatory Requirements

Hospitals are operating in an increasingly burdensome and expensive regulatory environment, and are looking to M&A to better - and more affordably - overcome regulatory challenges. The healthcare regulatory framework is complex and far reaching. The Health care organization registered with countries registering authorities requires implementation of particular countries healthcare Acts. While regulatory requirements are leading to more consolidation in the industry, in some instances regulators are standing in the way of transactions. The surge in mergers has led to greater scrutiny from the state government, which has challenged a number of transactions on antitrust grounds.

Buyers in a healthcare transaction should be aware that most, if not all, deals carry some compliance risks. If an organization has sound strategic and or financial reasons to pursue a transaction, it should not necessarily be deterred by compliance risks alone. Rather, buyers should evaluate compliance risks in the context of the entire transaction, and be prepared to mitigate them through compliance remediation plans, and require representations and warranties that address the other party’s compliance with relevant laws and regulations.

3.Action Plan

Step 1:Credit worthiness Assessment(Ratings)

This new thinking is reflected in a 10-step method that examines the hospital's operating margin and cash from operations; its Medicare and Medicaid receivables; occupancy and admission levels; security provisions of the bond; and other important factors. Healthcare financial managers can use the analysis as a guide to self-assessment. Consultancy available for Enterprise ratings

Step 2: Find funding pattern

Healthcare organization has consider the options for capital financing like PE funding, debt or Institutional loan and venture Capital and Validation of project reports for financial institutions, Tariff, Revenue-Sharing, Costing, Valuation & modelling, Restructuring services, Capital raising and Due diligence .

Step 3: Steering Personnel Appointment:

Hospitals have varying types of leadership structures, depending on their size and whether they are private, for-profit entities or nonprofit hospitals. In general, hospital care is changing from volume-based care to value-based care, which means that boards of directors need to make major changes in their HR Strategy. In spite of all of the changes, boards must continue to focus their top priorities on financial sustainability for the hospital and quality of care for their patients

•          CEO

•          Medical Director

•          Nursing Director

Step 4:Operational planning and implementation

Managing a hospital is the most difficult component in the success of the massive investment that the client makes to conceive a projectAs a part of the hospital operations management / hospital operator role, BOD  deputes a senior management team to plan its operating systems.

•          Equipment planning

•          Manpower planning and recruitment

•          Comply New Operational system

4.Frame Project Acquiring team

Initial assessment(Ratings)

Steering personal appointment

Funding Arrangement

Project Coordination

5. Tools to Ensure a Successful Transaction

Choosing the Right Deal Model

Hospital transactions come in many varieties. An asset purchase involves a purchaser acquiring the assets of a seller. In an asset deal, the risk of successor liability is low, because a buyer typically only assumes certain liabilities that are identified in the purchase agreement. However, in the context of a hospital transaction, there is a risk – one that should be analyzed during due diligence – that a buyer will assume Medicare liabilities of the seller.

Other alternative models – which fall short of a merger, asset purchase or joint venture – are also used to realize the benefits of a transaction without a change in ownership or corporate structure. An example is a management services agreement pursuant to which a health system manages an independently owned hospital for a fee.

Choosing the right structure, which is dependent on the facts and circumstances of a particular situation, can significantly impact the success of a hospital transaction.

Thorough Due Diligence to Uncover Risks and Unlock Synergies

Regardless of the nature of the deal or the buyer, thorough financial and operational due diligence is critical to identify obstacles as well as opportunities that may impact the success of a healthcare transaction. Indeed, due diligence is key to either confirm or rule out the business and economic rationale for a transaction.

It is through due diligence that buyers – whether strategic or financial – can uncover the cost savings and synergies that can be achieved through consolidation. For example, back-office administrative functions can be combined and redundant positions eliminated. Purchasing and negotiating power with vendors (including GPOs) and suppliers can be increased. Economies of scale can be achieved, and duplications of effort can be identified, related to the costs of compliance with federal regulations related to electronic health records and IT protocols. Assumptions about these and other benefits are often made by parties when entering into a transaction, but due diligence gives the parties the opportunity to test these assumptions.

Due diligence is also the tool that allows parties to test assumptions and representations related to revenue. Integrity of revenue is a key issue in every hospital transaction, as different entities have different processes for documentation, coding and billing for private insurance, Medicare and Medicaid claims. Due diligence helps uncover issues with coding and billing that affect revenue integrity, including upcoding, unbundling, duplicate billing and lack of documentation.

Finally, hospitals have myriad agreements in place – many of them complex – with third party entities that should subject to careful review in a thorough due diligence process. For example, physician agreements may be undocumented or not properly documented, and could give rise to Stark and Anti-Kickback issues for the hospital. These potential landmines need to be identified so they can be addressed as part of the transaction.

Contractual Protections and Insurance

Because of the healthcare industry’s complex regulatory framework, the potential for fines and penalties related to regulatory violations, and active governmental enforcement divisions giving special scrutiny to healthcare transactions, representations, warranties and indemnification clauses related to regulatory compliance are important. For example requiring thorough representations and warranties related to regulatory compliance often forces a seller to conduct its own internal due diligence, which may unearth problems that a buyer may not have found on its own. And if problems do arise, indemnification obligations can help mitigate financial risks.

But as important as these contractual provisions are from a legal and financial standpoint, the protection they provide is limited, particularly if the seller is distressed and thus unable to fulfill its indemnification obligations to the buyer.

More parties in hospital transactions are turning to M&A insurance to transfer risk to insurers related to regulatory compliance, as well as other contingent liabilities, such as tax, litigation, and environmental risks. Insurance can provide an important protection against inaccurate financial statement representations as well.

These policies are also useful in determining pricing strategy, as hospital buyers can quantify the dollar value of the risks they face once the fixed fee of the policy is determined. Buyers, therefore, can offer a seller smaller indemnity caps and/or escrows while shifting the cost of the insurance during transaction price negotiations.

Integration Strategy

Once the financial rationale deal is confirmed, due diligence is performed, and negotiations and documentation are complete, the success or failure of a transaction hinges upon the parties’ ability to implement an integration strategy – ideally one that was developed from the outset of merger discussions – that leads to success over the long-term. A successful integration plan will help to merge the cultures and future goals and visions of the entities.

Furthermore, organizations should consider mergers or acquisitions in a proactive manner as part of the strategic planning process — before finances, local market dynamics or regulatory influences force the issue. Preparing for and considering partnerships or other types of affiliation as a lever for the organization to continue thriving will "result in better decisions and provide more options for hospital leaders and the communities they serve than if they wait and respond to the market influences,"

Credit:Sivakumar Murugesan, Consultant -Healthcare Project ,Medpoint Healthcare