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 [...]

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