Contributors: Dudley Baker, Managing Director, Holihan Lokey | Luiz Greca, Managing Director, Holihan Lokey | Chris Schickling, Managing Director, Gallagher
The digital health industry is complex and highly regulated, presenting unique challenges for investment in this space – especially for investors new to the healthcare industry. Healthcare companies have business lines and regulators that do not exist in other sectors of the economy, making it crucial to work with advisors that understand the value proposition of a healthcare business, where value resides amongst potential targets, and how valuations may vary. These complexities, coupled with current market trends, amplify the need for comprehensive diligence strategies to stratify risk and maximize value from advisors that understand the nuances of the healthcare sector.
In this article, we discuss the top three trends we’re seeing in digital health investment and how Gallagher, Houlihan Lokey, and McDermott Will & Emery can position your organization for success from pre-acquisition diligence to post-close operations.
Heightened Scrutiny on Healthcare Transactions and Physician Practice Management Structures
Healthcare transactions and physician practice management structures (sometimes referred to as the “friendly PC model”) are facing heightened scrutiny at both the state and federal levels. Regulators are imposing new requirements on parties and applying stricter transaction review standards, creating hurdles for healthcare investors and companies that may impact their ability to execute transactions and management relationships, and upend standard transaction timelines. For example, state laws like the recently passed and subsequently vetoed California’s AB 3129 seek to implement transaction notification and approval requirements that could present new obstacles to closing transactions and may extend pre-closing timelines. This bill would have also changed in the ways in which management companies and physician groups arrange for support services. Although Governor Newsom vetoed AB 3129, there is a newfound wave of support at both the state and federal levels to further regulate private investment in, and control of, healthcare organizations that continues to gain momentum. Oregon and Massachusetts are examples of other states that have considered similar legislation.
McDermott’s specialized focus on healthcare dealmaking and our scrutiny of the federal and state regulatory landscape helps investors and health companies stay ahead of legal developments, understand implications of proposed regulations, ensure compliance with federal and state agencies, and chart a course to move transactions through the review process efficiently.
Strengthening Cybersecurity
The healthcare sector is particularly vulnerable to cybersecurity issues and continues to be highly targeted for cybercrime. The health sector has historically under-invested in cybersecurity personnel and technology and is increasingly being targeted by sophisticated ransomware and other malicious threat actors.
In recent years, attacks on healthcare providers, insurers, and health technology vendors have resulted in catastrophic cyberattacks that have compromised patient data, resulted in a wave of class action litigation, and resulted in regulatory scrutiny and new regulations of the healthcare industry. These incidents are also incredibly expensive to contain, investigate, and remediate. In fact, according to the 2024 IBM-Ponemon Cost of a Data Breach Report, the average cost of a data breach in the healthcare sector is $9.77 million, leading all other industry sectors. Recent data breaches have emphasized the need to strengthen cybersecurity infrastructure and practices across the industry to minimize the risk of attacks.
As part of conducting pre-acquisition diligence, Gallagher has experience conducting risk analysis related to cybersecurity. Their team assesses cyber requirements and compliance and advises on pre-close and post-close placements of cyber insurance coverage to ensure that the appropriate insurance coverages are in place to support the transaction. To assist clients in improving their cybersecurity posture and to be viewed in the most positive light when applying for cyber insurance, Gallagher has developed the Cybersecurity Controls Checklist: Cyber Security Controls Checklist | AJG United States. This document highlights the top cybersecurity controls that cyber insurance underwriters tend to prioritize when assessing an applicant’s cyber risk exposure.
McDermott can support healthcare companies on proactively preventing breaches and responding to breaches if one does occur. McDermott conducts “tabletop” exercises with clients to simulate data breaches and test response capabilities, and designs comprehensive privacy and cybersecurity compliance programs for healthcare and health-adjacent organizations. When organizations are the unfortunate victims of a cyberattack, McDermott is on the front lines, side-by-side with clients to assist them through the entire lifecycle of a cybersecurity incident.
New Investors Entering Healthcare Via Tech
The high cost of healthcare is shifting investors’ focus towards healthcare technology that drives revenue or reduces or controls expenses. Hospitals, other providers, and payors are driving an uptick in activity in the health technology market, particularly revenue cycle management (RCM) and payment integrity offerings, as well as solutions that can reduce waste and unnecessary utilization and drive and support staff productivity.
The need for pre-M&A positioning and preparation is critical in this market. Houlihan Lokey can advise companies coming to market with how best to position themselves in the healthcare industry. From targeting the ideal investor to understanding the different types of buyers and their varying approaches to how they may value the company, Houlihan’s team helps structure transactions for success.
With the ever-evolving regulatory landscape in healthcare, McDermott’s team leads investors through the unique—and often unanticipated—transactional, regulatory and compliance challenges they face. Uniting its depth of experience and its ability to anticipate change, McDermott helps investors develop creative solutions for transactional success and to overcome the obstacles that slow growth of their investment in an ever-changing industry.
INDUSTRY EXPERIENCE TO LOOK BEYOND THE TRANSACTION
Gallagher, Houlihan Lokey, and McDermott Will & Emery develop creative solutions to the most pressing challenges facing healthcare companies so that they can focus on improving quality of care, access to care, and positively impacting health for the community at large.
With specialized experience on the buy and sell sides of digital health and health tech deals throughout the healthcare transaction lifecycle, Gallagher, McDermott, and Houlihan Lokey are the partners that investors, digital health, and tech companies can depend on to maximize their business outcomes.
