The healthcare industry is facing labor shortage issues, professional liability claims, and an increase in workplace violence, leading many organizations to explore mergers and acquisitions (M&A) options to help expand staff-to-patient ratios and improve technology and security. In fact, by the end of 2021, the healthcare industry saw nearly 3,000 M&A deals, a 25 percent increase compared to 2020. “M&A has been a constant over the last several years, and we’re going to continue to see this desire for organizations to align and grow as healthcare looks for ways to improve financial viability and improve access to care,” said Monica DiCesare, Chief Underwriting Officer, Liability Products, Liberty Mutual Healthcare.
Mergers and acquisition can increase risks, if proper steps aren’t taken to identify and mitigate them. With patient outcomes and enterprise success hanging in the balance, it’s critical to approach healthcare M&A with clear eyes. What can healthcare leaders do to help manage the impact of mergers and acquisitions — the good, the bad, and the unexpected? This article explores private equity’s impact on the healthcare industry and offers solutions to common M&A challenges.
Multiple factors are driving the surge in healthcare private equity.
When compared to private equity (PE) across all industries, healthcare private equity (HCPE) tends to perform better during and after economic upheaval. “The healthcare industry has proven to be somewhat immune to any private equity industry or acquisition trend downturns or headwinds due to being a recession-resistant industry,” said Robert Langtry, Global Private Equity Director, Liberty Mutual. This has made healthcare an attractive investment for PE firms in recent years and resulted in an increase in M&A over the past decade. Efforts to increase safety and security for patients and staff, improve return on investment for PE firms, and remain competitive amidst changing technologies drive the increase in healthcare M&A deals.
In 2021, investors injected $151 billion into healthcare, and global deals increased by 36 percent, according to a recent report. Though the COVID-19 pandemic briefly stunted growth, M&A spending reached a record $5 trillion in 2021. Experts expect PE’s heightened interest in healthcare to reshape the industry. That’s why a thorough understanding of the risks associated with M&A can help healthcare leaders identify and mitigate them. Potential exposures related to M&A include employee attrition, cybersecurity vulnerability, and data integration challenges.
Enterprise healthcare organization management is a new territory for PE firms.
At every stage of a healthcare merger, healthcare leaders may seek insight into ensuring success related to patient outcomes, staff job satisfaction, and organizational growth. The motivations and goals of PE stakeholders may overlap with the motivations and goals of healthcare organizations’ stakeholders in many ways, but they are not identical. PE firms tend to acquire companies from diverse industries, which may make it difficult to specialize in any field. Let’s look at three tactics that could help mitigate risk when an acquisition is in the healthcare field.
1. Due diligence leads to informed decisionmaking
A system is only as strong as its weakest link. Developing plans to address potential challenges sets up organizations to be on the offense rather than in reactive mode. Key steps of an informed, conscientious healthcare M&A include due diligence, thorough risk assessment, and a strategic communications plan. Risks associated with M&A can range from changes to the delivery of care and staff retention to regulatory compliance, incompatible IT systems, and business interruptions.
IT integration problems can expose your organization to lost, delayed, or compromised data, potential HIPAA and regulatory violations, and cybersecurity gaps. “When organizations come together, they are not always using the same technology. There needs to be an immediate integration of those technology and IT systems, and if it’s not done right, the consequences could be fatal,” said Katie Wagner, Senior Vice President, Healthcare Liability Underwriting, Liberty Mutual Healthcare.
A best practice is to assess risk throughout the process and outline plans to address possible pitfalls. Considerations that sometimes fall through the cracks during periods of transition include insurance schedules, policy transfers, tail/extended reporting endorsements, premium funds, tail premium invoicing and payment, and the management of open litigation.
2. Clear communication reduces uncertainty.
Communicating with staff about a merger can prove complicated. Unveiling major company news to staff can result in anxiety over fear of layoffs and changes in the workplace, and unclear communication can result in confusion and stress. Unaligned expectations, protocols, knowledge, and values likely increase communication challenges. When planning a communications strategy, consider prioritizing these three key values: trust, patience, and open-mindedness. Promoting a culture of trust encourages team members to voice concerns over potential risks without fear of punishment (as in a blame culture). Hearing from both seasoned and new team members offers a chance to gain a fresh perspective on the company’s norms and can lead to innovative solutions and positive change. Of course, change inevitably gives rise to the unexpected. You can lead by example by expecting the unexpected and exercising flexibility and patience in the face of change.
3. Prepare for attrition during and after M&A.
Even with the most carefully planned communication strategy, an M&A deal can likely result in higher-than-usual attrition. Studies show that it costs an organization approximately six to nine months of an employee’s salary to replace them. In the face of an M&A deal, some staff may proactively look for new employment outside the organization while others may find changes to their job function disagreeable and depart after the fact.
A higher ratio of new staff to seasoned staff, and the nature of the transitional period during which staff gets trained on new equipment, practices, and protocols, can expose organizations to increased liabilities. Staff may be undertrained and overworked, leading to treatment delays, misdiagnosis, and other medical errors. This can expose organizations to medical malpractice suits and workers compensation requests. Preparing for this possibility can help minimize these problems.
Enterprise risk management (ERM) helps monitor M&A effectiveness.
It’s important for healthcare organizations to consider the risks and benefits of M&A carefully before deciding to merge or acquire another organization. Once due diligence is complete and leaders have a plan in place, staying flexible and informed as part of the process ensures the adaptability necessary for continued success. Business decisions typically arrive with a slew of consequences, some negative and some positive.
While no business leader can predict the future, experience tells us that working defensively and proactively instead of reactively is good for business and supports the notion of ERM as a continuous process. Insurance providers and brokers can provide resources and support to companies during the tension and uncertainty that is par for the M&A course.
This website is general in nature, and is provided as a courtesy to you. Information is accurate to the best of Liberty Mutual’s knowledge, but companies and individuals should not rely on it to prevent and mitigate all risks as an explanation of coverage or benefits under an insurance policy. Consult your professional advisor regarding your particular facts and circumstance. By citing external authorities or linking to other websites, Liberty Mutual is not endorsing them.