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)
|
Rating Consultancy available
|
Steering
personal appointment
|
Consultancy
available
|
Funding
Arrangement
|
Financial consultancy available
|
Project
Coordination
|
CEO
of the Projects
|
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