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Navigating merger and acquisition opportunities - EY - United States

New Horizons: 2011 health care provider report

Navigating merger and acquisition opportunities

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Due diligence considerations for providers in M&A evaluation

Areas of considerationAction steps
Quality of informationAssess and validate the critical information your prospective partner has provided, as wellas the integrity of the systems, people and processes through which the information was developed.

Quality of revenueAssess the methodology behind any allowances and adjustments, trends in operating revenue by service line, and comparison of cash collections by net revenue.

Costs and expensesAnalyze cost and expense stability, including comparisons of historical budget to actual operating expenses.

Quality of earningsCarefully consider any nonrecurring or unusual items and their impact on forecasts.

Accounts receivable and third-party accountsAnalyze aged accounts receivable balances, as well as the methodology for determining allowances for bad debts and contractual allowances. Assess charity care policies and practices.

Working capitalValuate all current assets and liabilities of your potential merger partner to identify any need for post-transaction working capital loans, and any potential compliance and operational transition issues period.

Tax mattersUnderstand your prospective partner’s corporate legal structure and all its legal entities as well as its tax-exempt or public charity status, if applicable. Review all federal tax returns or Form 990s, and identify all actual and potential federal, state and local tax exposure items.

Operations, technology and integrationUnderstand your prospective partner’s software and hardware platforms, including quality, scalability and reliability, as well as associated capital and operating expenditures. Consider upcoming demands, such as the need for quality-of-care reporting, conversion to ICD-10, and ability to demonstrate meaningful use and the challenges these requirements may impose (see Chapter 5).

Payer contract analysisAnalyze payer contracts and consider the antitrust implications of the merger on commercial managed care contracts, considering combined utilization.

Insurance coverageConduct an actuarial-based analysis of insurance for general and professional liabilities, workers' compensation, property and casualty losses or directors' and officers' liability losses.

Contracts and other legal reviewCarefully consider all purchasing contracts, loan agreements, management contracts, lease agreements, employment contracts, and joint ventures and what impact a merger or change in control could have on existing relationships and contractual obligations.

Investment performance and managementAnalyze investment income and contributions used to support operations. Understand the underlying causes of poor investment results and implications for future funding requirements. Assess the relationships with any affiliated, but not controlled, foundations.

Corporate complianceReview the functioning and design of your prospective partner’s corporate compliance program and assess their ability to educate employees, identify fraud and reduce the risks of regulatory noncompliance.

Human resources and benefit plansCompare pay rates, employee health benefits, pension plans and other benefit programs between the organizations, and quantify the potential costs and opportunities for consolidating plans.

Purchase price allocationUnderstand how assets, tangible and intangible, will be valued and the related depreciation and amortizations in the financial forecast.

Source: Ernst & young. 2011

Is you organization equipped to transform delivery systems and handle new payment models?

Fostered by healthcare reform and financial market conditions, opportunities to consolidate, divest, partner and align are emerging throughout the industry.

As health care providers, payers, and ancillary and support service businesses seek new pathways to grow and adapt, evaluating strategic merger and acquisition activities will escalate to a high governance priority.

Due diligence considerations
forproviders in M&A evaluation

Due diligence considerations for providers in M&A evaluation (cont.)

Ares of consideration
Action step

Considerations for your board and executive leaders

Strategy: Is you organization equipped to play a significant role in what most experts believe will be a relatively near-term need to transform delivery systems and handle new payment models?

Opportunity evaluation: Have you entrusted an executive with overall responsibility for coordinating any overtures from potential merger partners to ensure information is kept confidential, responses are promptly made and the board is kept informed of all potential merger activity?

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