Healthcare M&A

  1. What are the fed and state regulatory concerns for Health Care M&A

According to the U.S Department of Health Services[1], the five most important Federal regulations applicable to physicians are the False Claims Act (FCA), the Anti-Kickback Statute (AKS), The physicians Self-Referral Law (Stark Law), the Exclusion Authorities and the Civil Monetary Penalties Law (CMPL).  These laws and their state counterparts were enacted to prevent healthcare providers from obtaining an undue benefit at the expense of the government or their patients. Violation of these laws can result in hefty fines and civil and criminal charges. 

  • The Civil Monetary Penalty Laws and The False Claims Act makes it illegal for healthcare practitioners from submitting fraudulent claims of payments to Medicare and Medicaid.[2]
  • The Anti-Kickback Statute makes it illegal to pay referral fees when involving reimbursement from a Federal Healthcare program.[3] 
  • Physicians Self-Referral Law Stark Laws prohibit physicians from making referrals of Medicare “designated health services” to any entity in which a physician or family member has a financial interest[4].
  • The Exclusion Statutes prohibits individuals who were convicted of healthcare crimes and fraud from participating in Federal Healthcare programs.[5]

Healthcare M&A transaction requires an extensive amount of due diligence to ensure compliance.  To ensure compliance with the various laws state above, a proper due diligence for Healthcare M&A transactions should consist of a review all physician’s contracts and financial relationships, an evaluation of claims processes and procedures and billing and collections processes for accuracy and compliance with Federal regulations.

At the state level, healthcare M&A transaction must determine whether the state has restrictions on who can employ physicians.  State Corporate Practice of Medicine (CPOM) restrict the employment of physicians by non-physicians.      Plainly speaking these laws are design to prevent corporations from influencing healthcare practices by only allowing physicians or those designated by the state, to hire physicians.[6]

Other regulatory concerns which directly affect Healthcare M&A transaction are anti-trust laws, privacy and data security laws, and licensing and certification requirements.

The Federal Trade Commission (FTC) and the Department of Justice (DOJ) have extensive scrutiny on healthcare M&A transactions that involve consolidation or affiliation. In 2017 the JOD denied the merger between Aetna Inc. and Humana Inc two of the biggest health insurance providers. The court ruled that the merger would “substantially . . . lessen competition” of the sale of Medicare Advantage plans and individual commercial health insurance[7]. In the current marketplace, the DOJ looks favorable on vertical merges when the parties are willing to divest themselves of potential antitrust risks. A recent DOJ ruling approved a merger of CVS Health and Aetna to proceed provided that Aetna divested itself of its Medicare prescription drug business.[8] Although this acquisition involved the exact same party (Aetna) as the 2015 case, the DOJ approved the merger because at the core CVS and Aetna provide different services. By divesting the deal of its directly competing market, the risk that the merger would substantially lessen competition in that market space was removed.

  • What post-transaction integration changes must be made in Healthcare M&A

In Healthcare M&A many changes occur after the transaction as a consequence to the integration of the facilities. Changes are necessary to facilitate the integration of the companies and create long-term synergy. 

One of the most necessary changes come with licensing and compliance. In a healthcare transaction, two or more entities join together and operate under the same licensing. There are a great many licensing and regulations in the healthcare space. The new entity must comply with all the laws and regulations as to when they were separate. To remain in compliance or become compliant they must make changes in their system to manage the new licensing requirements and maintain compliance.

The Health Insurance Portability and Accountability Act (HIPAA) mandates the protection and security of patient information.[9] Hefty fines are imposed on violators. The post-transaction phase of a healthcare transaction presents a high risk of exposure of patient information. Each entity involved in the transaction have their own systems and procedures to secure private information. These procedures and systems may not be equal or may not sync when put together and create a hole which private information may be leaked. The newly formed healthcare entity must make the changes in its systems, processes, and trainings to maintain compliance and protect patient information.

Effective post-transaction integration plans are designed to create long-term value. To be effective an integration plan should be developed early on in the process which focuses on creating positive synergies.

  • What employment considerations must be made in Healthcare M&A

The Workers Adjustment and Retraining Notification Act (WARN), provides that employers must give advance notice to its employees prior to any closing or mass layoffs.[10] An employer who violates this act are liable to each employee affected by the violation.[11] Penalties for violating the WARN Act include the average highest wages earned by the employee for the past 3 years, the payout of medical benefits, and civil penalties.  With exception of medical benefits, all of these penalties accrue each day of the violation period, with wage payouts to all the employees affected by the violation.[12]  

The health care industry is massive but not untouched by layoffs and branch closings. Due Diligence must be done to expose any WARN triggering event prior to closing and if so, were all the WARN requirements filed promptly and accurately. As one of the biggest industries in the country, the healthcare industry employs a great number of employees. Thus, Healthcare organizations can incur massive amounts of accumulated penalties which affect the bottom line and put the deal in jeopardy.

Another employment concern which requires due diligence is immigration and the immigration status of those employed in the healthcare industry. According to the U.S. Bureau of Labor Statistics foreign-born workers comprised 5.2% of the healthcare labor force.[13]  That amount rises even higher when you include immigration employment in healthcare supportive roles such as hospital maintenance (8.4%) and Personal care (4.3%).

 Employment concerns include documented and undocumented immigrants. Immigrant doctors, nurses and other employees presumably require specific work Visas as a condition to their employment eligibility.  Visa requirements need to be maintained to prevent the risk of penalties and loss of talent. Undocumented immigrants working in the healthcare sector are cause for concern and can be a violation of laws in and outside of immigration. Proper employment classification is necessary for a healthcare transaction because it directly affects tax liabilities. Presumptively undocumented workers are likely to be classified as independent contractors instead of employees even when they work long hours and for less pay. Employee misclassification can result in higher tax burdens or penalties, as well as, legal liabilities with respect to potential wage and hour laws. Therefore, healthcare M&A transaction involve extensive employment due diligence to prevent these unwanted penalties.

  • How to evaluate HC companies in a HC M&A transaction?  

The Healthcare space is heavily involved in M&A transactions. Valuation of these types of transactions is mainly focused on EBITDA (earnings before interests, taxes, depreciation, and amortization) multiples. EBITDA multiples are derived from dividing the Enterprise Value by EBITDA.  The higher the multiple the higher the Value. The Healthcare space consistently sees multiples of 13x EBITDA and up[14].

Two other main factors used to evaluate healthcare transactions are Risks and Growth. Plain and simple, low risk and high growth potential are desired when evaluating a healthcare transaction.  The main risk associated with healthcare transaction is the level of reliance on federal reimbursements. Healthcare organizations which rely mostly on federal reimbursements are considered to be a high risk. Those that have a good diversity of federal reimbursement and private payments are considered to be less risky.

Growth and the ability for future growth are highly desired when entering into an M&A transaction.  Growth can occur either organically or through acquisitions. Healthcare organizations which have an established platform for growth are considered more valuable. Growth through acquisitions is the dominant growth strategy in the healthcare industry. Larger healthcare organizations are able to develop and hire talent to facilitate growth.

  • What is the Pros and Cons for a Vertical Acquisition vs. Horizontal Acquisitions in a HC M&A?

M&A activity is the main source for growth in the healthcare industry. The two types of acquisitions which facilitate growth are Horizontal Acquisitions when a hospital acquires another hospital and Vertical Acquisitions when a hospital acquires an ambulance company or other company which provides a service to the hospital.[15] Horizontal and Vertical Acquisitions are not mutually exclusive.  Healthcare organizations routinely enter into both types of transaction to facilitate growth.

Horizontal acquisitions in the healthcare space involve the acquisition of another healthcare organization which is in the same market, i.e. Hospital acquires it’s competing hospital and a pharmaceutical company acquiring another pharmaceutical company. The main benefits of this form of acquisition are that it eliminates market competition and increases your market reach automatically.[16] The newly combined power and reach give the company a competitive edge over other competitors. However, a downside is that you also acquire the risk associated with the acquired healthcare organization which may decrease its value. Vertical acquisitions in the healthcare space involve the acquisition of a healthcare organization in a different market. As a larger healthcare enterprise, the acquiring company has access to multiple markets to diversify its portfolio and increase revenue streams. Also, by joining entities across the healthcare market, this allows improvements in quality and cost efficiency of care, which in turn are bestowed upon the patients/customers. Quality of care and cost of care are the major concern in the healthcare industry. Vertical acquisitions allow for the development of consolidated payment plans and streamlined treatment which benefits the customer.


[2] False Claims Act [31 U.S.C. § § 3729-3733]

[3] Anti-Kickback Statute [42 U.S.C. § 1320a-7b(b)]

[4] Physician Self-Referral Law [42 U.S.C. § 1395nn]

[5] Exclusion Statute [42 U.S.C. § 1320a-7]

[6] Painless Parker v. Board of Dental Examiners, 216 Cal. 285, 14 P.2d 67 (1932

[7] U.S v Aetna Inc,



[10] 29 U.S. Code § 2102 – Notice required before plant closings and mass layoffs

[11] 29 U.S. Code § 2104(a)

[12] 29 U.S. Code § 2102(a)3


[14] Duff & Phelps, Healthcare Services Sector Update Dec. 2017



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