With M&A in Healthcare, the Price Isn’t Always Right


Market dynamics are ripe for M&A activity. But before being enticed by a mirage, leaders must revisit old lessons.

Rahul Ekbote, Akshay Jindal, Howard Lapsley, and Minoo Javanmardian

8 min read

Editor’s Note: The following article is part of an ongoing series offering our strategic advice and expertise on what healthcare industry stakeholders should do immediately in response to the rapidly evolving novel coronavirus (COVID-19) pandemic.

COVID-19’s adverse financial impact has resulted in liquidity challenges for providers, especially for smaller primary care and specialty practices. Providers are exploring multiple cash infusion avenues, including investments from payers and other parties like private equity funds to sustain their ongoing operations. In the meantime, valuations for these distressed assets have become quite attractive for potential investors.

During the past decade, this interest was steadily simmering. Between 2013 and 2016, for example, private equity firms acquired 355 physician practices, with the number increasing each of these three years.  

Conditions for Buy-Outs are Ripe

As primary care provider practices grapple with liquidity challenges, running out of money is a stark possibility. Nearly eight in ten primary care clinicians, for example, say their practice is under “severe” or “close to severe” strain due to COVID-19.

As the current pandemic presses on, payers are experiencing a temporary dip in medical expenses as members delay elective procedures. Moreover, some payers like Health Care Service Corporation and United Health are also expecting potential cash influxes, courtesy of the Supreme Court’s decision to grant payers about $12 billion in unpaid Affordable Care Act risk corridor payments.

This apparent dichotomy between payers and providers from a cash and a credit vantage point has precipitated market dynamics ripe for merger & acquisition (M&A) activity. But before being enticed by the mirage of lower prices, payers and their leaders must revisit lessons from prior deals to understand what factors beyond price translate into success – especially since between 70 and 90 percent of M&A deals fail.

Why Do M&A’s Typically Fail? The Devil’s in the Details

Here’s a likely scenario illustrating M&A failure: First, a team identifies distressed assets. Second, they recognize emerging market trends spurred by COVID-19’s lock-down restrictions such as the exponential uptick in telehealth adoption. Third, they acquire providers with perceived virtual health capabilities. Then, they struggle with what to do next.

M&A alone is not a strategy. Be clear from the start about why you’re pursuing a deal instead of aligning with opportunities. Avoid letting the desire to close a deal blind you to obvious tell-tale signs of potential challenges. M&A does not lend itself to transparency into the ongoing financial and operational performance of the business. For example, such as when regulatory approvals present a big hurdle, or organizations’ strategic objectives don’t coalesce.

Potential distraction from the core business can hinder transaction execution, especially on the provider side where management is dealing with planning for potential COVID-19 resurgences and safely rebooting elective procedures.

To address this issue, carve out a separate task force of cross-functional leaders who focus on day-to-day activities and decision making and bubble up critical recommendations and issues to executive leadership. Regardless of deal size, much time and effort is required to execute the deal. The question to continue asking is always, “Is this still worth my time, energy, and money?”

Achieving value requires meticulous planning and discipline. Executive leadership gets excited. There's much enthusiasm and fanfare in the beginning. And, there’s lots to do and think about. At some point, however, momentum and follow-through wane as practical integration challenges emerge. 

Want to Go Down the M&A Path? 

Some questions to ask early on include the following:

How will the deal enable enterprise strategy? For example, if the strategic objective is to develop tighter integration between payers and providers, an investment into a health system would bode well for both payers and providers. It provides an influx of cash for providers and allows greater influence for payers to help providers manage risk.  

How does the deal provide accretive capabilities that enable strategic objectives? Payers striving for risk-based arrangements to manage the total cost of care would be well served by acquiring a primary care provider practice to holistically manage and coordinate care through the primary care provider.

Is the timing right? Amid uncertainty – like the long-term financial and utilization impact of COVID-19 and its evolving regulations – precious financial and organizational resources may not be available to invest in an asset acquisition or merger.

What’s the potential impact on competitive positioning? For instance, payers acquiring primary care practices may adversely impact relationships with other providers in the market who would view them as competitors instead of partners during negotiations.   

Do you have a well-defined integration structure and approach? Develop a playbook that aligns integration efforts with strategic objectives and tangible targets (such as cost synergies) to enforce a deliberate approach during integration. Such a playbook might have a master transition plan (such as milestones, dependencies, and a timeline), synergies of a realization schedule, and detailed integration plans at a functional level that monitor integration activities, risks, and issues.

Is the price right? Ensure you’ve accounted for intangible expenses (such as management bandwidth) and unforeseen delays (such as regulatory approvals) during integration, and that all involved stakeholders including regulators, employees, and investors have transparency into the deal’s evolving status and outcome.

Be clear about a deal’s purpose, its strategic value, and how to deploy sufficient integration and monitoring asset resources to ultimately capitalize on M&A opportunities during these unprecedented times.

  • Rahul Ekbote,
  • Akshay Jindal,
  • Howard Lapsley, and
  • Minoo Javanmardian