Part of the due diligence process in M&A is to conduct a legal and insurance due diligence. The legal due diligence will uncover the target’s history of malpractice lawsuits and current or potential future litigation. According to the National Practitioner Data Bank medical malpractice payouts amounted to $3.9BN in 2017. All states require healthcare facilities to carry adequate malpractice insurance. The standard amount of coverage varies by state and may be up to $3M per year. Insurance due diligence is designed to analyze the targets current insurance to verify adequate coverage. High litigation payout will increase the hospital’s insurance premiums, which may significantly devalue the target and put the deal in jeopardy.
Malpractice lawsuits can have a substantial effect on a hospital’s bottom line regardless of the outcome. The doctor-patient relationship is the cornerstone of the healthcare market. News of news negligence or other suites may make patients reluctant to seek medical help from that facility. Malpractice may also drive the overall cost of healthcare up. Malpractice suits commonly result in million-dollar settlements. The cost of which is transferred on to the consumer. Liability insurance premiums can skyrocket after a lawsuit which may result in a doctor seeking new jurisdictions of which they can work. Also, defensive medicine will be a concern of doctors prescribing unneeded medical test to protect themselves from malpractice claims.  All of these factors are considerations made during the due diligence process in an M&A transaction.