The Affordable Care Act has encouraged substantial consolidation within the health care industry, causing a frenzy of acquisitions. This is prevalent among private equity sponsors due to tremendous inefficiencies and opportunities for exponential growth and high returns.
To keep a pulse on this trend, Private Equity Fund investors may want to consider the following factors of health care acquisitions.
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1. What’s hot and what’s not
HOT: Health care technology and vendors not directly impacted by reduced reimbursement rates, but benefitting from providers/customers servicing more insured people.
HOT: Hospitals, physician practices (especially anesthesia) and outpatient services that can control or reduce health care costs.
NOT: Home health and other sectors dramatically impacted by reimbursement reductions and increased regulation.
2. Forecasting reimbursement changes
Plus reviewing the target’s current billing/claims practices. How will the shift from the traditional “fee for service” model to one that involves risk sharing by providers impact the target’s EBITDA?
3. Vetting financial relationships
Financial relationships between the target and its referral sources should be closely examined under Stark and anti-kickback laws to ensure compliance.
4. Impact of state practice
How will state corporate practice of medicine laws impact the transaction structure?
5. Validating fair market value
Validating fair market value, commercial reasonableness of the transaction and the target’s relationships with referral sources are increasingly invaluable best practices in health care compliance and ways to better assure future cash flow and return on investment.