Practice Acquisition: Due Diligence Checklist for MSOs

Over the past decade, private equity groups have invested close to $1 trillion across nearly 8,000 healthcare transactions, with a particular focus on specialty physician groups. 

M&A consultants from PWC found that health services deals declined by 9% year over year. But there is hope that health services categories such as MSOs will see increased deal activity next year. This optimism is informed by the high levels of dry powder held by both private equity funds and corporates as well as the prospect of further interest rate cuts.

MSOs provide practices and physician groups with a manageable on-ramp to healthcare’s inescapable digital transformation. By participating in economies of scale, they win better prices from suppliers, along with higher rates and better contract terms from insurers. Of course, these partnerships help MSOs grow their revenue and market share. 

As Sourabh Hajela of CIO Index explains, a new practice or group acquisition is exciting because it’s, “the start of a new era of growth and opportunity…” And yet, Hajela concludes, “up to 70-90% of mergers and acquisitions fail to achieve their intended goals…” 

Land in the 10% to 30% that achieves envisioned revenue and operational efficiency when you:

• conduct pre-acquisition due diligence,
• implement a change management plan and
• commit to stabilizing the practice before pushing for growth.

When applied early, these three powerful tactics build a lucrative, positive foundation for your partnership. 

Pre-Acquisition Due Diligence

When MSOs are eager to embark on inorganic growth initiatives, their peers may warn:

“You don’t want to buy a lawsuit.” 

The great minds at the University of California, San Francisco, and Stanford University bought lawsuits when they decided to join forces. After finding they weren’t a match after all, it took hundreds of millions of dollars in legal fees to end the relationship. 

If both sides had done sharper pre-acquisition due diligence, they could have avoided this waste of time and capital.

Recently Becker’s Hospital Review listed 27 healthcare system mergers, acquisitions, joint ventures, affiliations, and partnerships that were unwound or called off over the past 24 months. The article doesn’t name the reasons behind these breakdowns, but given deal complexities as well as the governmental anti-trust legislation constraining them, it’s surprising more don’t disintegrate. 

As healthcare consolidates, management services organizations battle each other for the groups with the most profit and growth potential. Pulling the trigger too quickly, however, can lead to frustration and disruption on both sides. 

Performing a thorough pre-acquisition due diligence process when evaluating potential acquisitions may take additional time, but completing it ensures your portfolio is filled with ideal partners that fuel your growth rather than weaken it. 

What is pre-acquisition due diligence in the healthcare industry? 

During pre-acquisition due diligence, the MSO reviews the target's goals and plans for growth to determine compatibility and potential. It also examines the target's legal, operational, and market positions. This diligence ensures that the MSO understands all facets of the transaction, mitigating risks and aligning expectations before finalizing the deal.

Pre-acquisition due diligence steps

It takes thorough diligence to find the extent of a practice or physician group’s strengths and weaknesses. Execute each of the following steps with care: 

Initial review

Review the target's market position, business model, and strategic fit within your portfolio. Many MSOs look to gain a dominant position in one specialty, possibly but not necessarily in one geographic market. Establishing a significant presence in a certain geographic footprint, however, can bolster revenue.

Review essential documents such as the certificate of incorporation, operating agreement, and minutes of board meetings to understand the target’s governance and operational framework. In your initial review:

• Look for: potential synergies that can be achieved through the acquisition, such as cost savings, revenue growth opportunities, or market expansion. Evaluate how the two companies can create value greater than their individual contributions.
• Address by: documenting culture, market, specialty, and financial alignments between your MSO and the provider group. Share your perceptions with the physician group to get their insights. Be candid. 

Goal alignment

Determine whether your entity shares goals, such as market expansion, synergy realization, or diversification, with the provider’s owners. Read more about physician group versus investor goals in our recent blog post on optimizing provider group performance after acquisition. 

• Look for: hesitation regarding your growth plans. Most MSOs look to grow quickly through both organic and inorganic initiatives before transacting to the next sponsor. If that’s your plan, share it.
• Address by: being fully candid about your goals. Ask them to provide the same consideration. 

Financial due diligence

A thorough examination of the target’s financial statements, tax compliance, and financial projections is critical. To assess the financial health and sustainability of the business, check:

• all financial statements 
• key revenue cycle metrics
• financial projections

Analyze financial metrics like:

• revenue per provider 
• gross margin 
• debt-to-equity ratio
• accounts receivable days outstanding 

Evaluate management financial projections with a skeptical eye. 

• Look for: evidence of poor financial management like excessive debt-to-equity ratio, concentrated payer mix, and irregularities in financial reporting
• Address by: renegotiating financial terms or planning on cost-saving measures 

Legal due diligence

Identify any legal risks that might not be visible through financial analysis alone. This step covers the review of legal documents, including:

• vendor contracts 
• employment agreements 
• intellectual property rights 
• compliance with relevant laws 
• licenses
• clinician credentials
• permits 
• certifications

Review the group’s history of compliance with laws and industry standards. 

• Look for: pending lawsuits, regulatory violations, or claims against the group.
• Address by: working closely with your legal experts. Consider indemnification clauses or corrective action plans in cases of legal issues. 

Operational due diligence

Assess the group’s operational efficiency (read about revenue cycle efficiency in depth). Production capacity, supply chain management, and human resources policies could all be sources of potential issues that could impact business performance post-acquisition. 

• Look for: prior authorization and claims backlogs, high denials rates, patient data security measures, HIPAA compliance measures
• Address by: proposing new technology, addition or elimination of staff roles

Examine technology infrastructure and integration challenges

Scrutinize the IT systems, software, data management protocols, and cybersecurity defenses. Pinpoint any technological discrepancies, compatibility concerns, or hurdles that might complicate your integration phase. Assess the necessary effort and resources needed to merge the group’s tech systems with your existing setup. Involve technology specialists to conduct a detailed assessment and devise a strategic plan for smooth integration.

• Look for: EMR mismatch, ways to harmonize data to achieve a unified view of their key performance metrics
• Address by: evaluating willingness to change EMR

Market and commercial due diligence

Analyzing the group’s market dynamics, competitive landscape, and customer base helps in understanding its market position and potential growth opportunities. Review marketing strategies, patient retention statistics, and market research reports. Evaluate its portfolio of services and the pricing of each. Look for growth opportunities and potential market risks. Identify key competitors, market trends, and potential threats.

• Look for: declining or increasing market share, entrenched competitors, and new market entrants
• Address by: proposing market expansion initiatives or service differentiation strategies 

Human resources due diligence

Examine employee contracts, benefits, corporate culture, and any potential labor issues. This step helps in planning the integration process post-acquisition and assesses any cultural or operational changes needed.

• Look for: staff attrition, wrongful termination lawsuits, insufficient staffing
• Address by: proposing technology or hiring/separations to balance staff

Due diligence limits MSO Risk

Dive into every one of these due diligence steps to ensure that you’re making the right practice acquisition decisions. Understand not only the financial valuation but also the strategic and operational alignment of the target. Your thorough due diligence process helps you understand all the weak and strong points of an acquisition target. The diligence process typically concludes with a final evaluation where all findings are reviewed to form the negotiation stance or adjust the deal dynamics. 

With the acquisition on board, you'll move to optimizing your revenue cycle.

Two ways to improve revenue are sweeping in the extent of your earned revenue via underpayment recovery and increasing upfront collections using accurate patient payment estimates. Underpayment recovery and patient payment estimates and eligibility are MD Clarity’s specialty. Our contract management and underpayments tool — RevFind – ingests, digitizes, and analyzes payer contracts. It compares every payment to payer contract terms and alerts staff to any discrepancies. Pursuing underpayments can result in millions of dollars in cash recovered and improved margins.

Patient payment estimate tool Clarity Flow automates eligibility verifications, generates accurate patient estimates, and sends a text or email to patients delineating their financial responsibility. It details deductibles, copays, and coinsurance. Patients appreciate knowing what they’ll owe providers and how much the insurance company will pay. The convenience of making a deposit right from the estimate also cuts down on confusion. The less confusion surrounding the payment experience, the more satisfied your patients will be and the more likely they will pay on time and in full.

Schedule a demo to see how RevFind empowers your underpayment recovery and/or Clarity Flow automates your upfront collections and builds estimates. Keep patients aware and connected to your organization. Keep payers honest in their reimbursements.

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