Originally Published in Corporate Counsel | By Paul Mandell | September 8, 2015
Over the last few years, the U.S. health care industry has received plenty of attention, thanks to the Affordable Care Act (ACA) and a steady flow of new research. However, as the economy has improved, one particular element has become more prominent in the industry—M&A. The legal departments of today’s hospitals, health care systems and insurers are under a great deal of pressure to pursue M&A opportunities, creating a host of new challenges for general counsel.
For better or worse, M&A is likely a long-term reality of the modern health care landscape. According to T. Charles Fry Jr., general counsel of the University of Alabama Health Services Foundation, “Hospitals and physician practices are trying to get their best hold, finding ways to survive in the new ACA era of higher quality demands and lower reimbursement.” Fry notes further that in an increasingly fierce competitive marketplace, “if you aren’t thinking outside the box and finding M&A opportunities, you almost certainly will fail. This even holds true for once thought untouchable academic medical centers.”
Although transactions offer a variety of opportunities for large health care organizations, acquisitions in the health care M&A context often bring unanticipated risks. Charles Key, general counsel of LifeLinc Corporation, cautions that this path to growth “raises unique issues in the areas of professional liability insurance, corporate practice of medicine and antitrust compliance that are sometimes overlooked.”
Below are four best practices for those who find themselves involved in or contemplating transactions in the health care context.
1. Lead the Charge
The GC has traditionally been considered responsible for negotiating and papering deals. However, the modern health care GC can and should be front and center in identifying M&A opportunities with an eye to boosting revenue, capturing efficiencies, minimizing risk and improving the bottom line. Fry suggests that today’s GCs “must be creative, open-minded and aggressive” in pursuing these objectives. By taking a lead role in identifying opportunities for the business through M&A, the GC can provide valuable strategic support that may make the difference between the success or failure of the enterprise.
2. Address Anticompetitive Concerns Early
Many of those exploring M&A in the health care context have little familiarity with antitrust issues. However, the reality is that regulators and consumers may take a skeptical view of your deal, presuming that it is a veiled effort to increase market power unfairly. For those contemplating a deal that could yield anticompetitive impacts, it is important to be proactive in gathering data to defend against such accusations—e.g., the existing market shares of each entity and the anticipated impact of a combination. Next, help the team build a clear message around the legitimate business case for bringing the entities together with an eye to satisfying inquiries of governmental entities. Moreover, it cannot hurt to stay abreast of investigations by the Federal Trade Commission and other regulatory authorities, as well as guidance that such entities provide that relates to transactions in the health care arena.
3. Conduct Comprehensive Due Diligence
As you engage in due diligence, it is important not to limit your work to an analysis of the counterparty. Rather, consider what is happening broadly in the market and what you may have uncovered in other deals. According to Deborah Gersh, cochair of the Healthcare Practice Group at Ropes & Gray, “Effective due diligence requires knowledge of industry trends and the ability to benchmark a transaction based on prior experience. This allows the team to focus more specifically and efficiently on understanding where to target diligence efforts to address the most significant issues early on in the diligence process.”
4. Prepare for System Integration Before the Deal is Closed
Waiting to explore the thorny task of merging data and processes until after a deal is closed is a dangerous game. There is certainly risk in spending a lot of time and money on post-close planning, given that a deal may fall apart along the way. But integrating different systems and processes is no trivial matter, and waiting to tackle these questions until after a deal is done can lead to an overwhelming post-close experience. This is particularly true in the health care arena, which is filled with countless complex rules about records management and reimbursements. As you work your way through deal documents, think critically about the elements that will require the greatest amount of post-close attention and consider where you can get a head start.
Consolidation is a reality of the health care industry for the foreseeable future. General counsel who operate in health care need to understand the opportunities for their organizations, as well as the critical roles they can play. And by following a few best practices, they can help ensure a high likelihood of success during and after future deals.