M&A Healthcare Advisors: Looking Ahead to 2024

 Over the last several years, changes to the regulatory environment have had minimal effects on valuations.

 We are now in uncharted waters with government insolvency and record levels of debt.

   In healthcare, audits are on the rise; in the M&A world, transaction compliance is more costly.

   It is vital to bring in specialists to assess healthcare billing and adherence to regulatory laws.

  2024 will be a great year for M&A, but sellers must be prepared for an arduous due diligence process.

As a firm that is solely focused on healthcare M&A, we exist in two highly regulated industries: Healthcare and Finance. When assessing anticipated market value for our clients, we have historically minimized the impact of the changing regulatory landscape.  For example, in 2019 we experienced the transition to a new “value-based” modeling system (PDGM) for home health agencies.  There were concerns that this would reduce valuations across the board.  To the contrary, a few years later, we are seeing record multiples within Home Health. Last year, there were concerns about reduced reimbursement rates from CMS and though there was a nominal increase, much lower than the inflationary impact on an agency, it had little to no impact on value consideration from buyers.

In both situations, we navigated through regulatory uncertainty and the prospect of a negative fiscal impact to the seller.  However, valuations remained consistent and, in some cases, rose significantly. Regulatory and billing changes, like the ones described above, exist in all healthcare services segments. We advise our clients to acknowledge the potential risks of regulatory and reimbursement changes as they relate to their specific operation and place little focus on how it could affect their value in the market.  BUT there are some concerns and uncertainties worth noting in 2024.

The economy, at the federal and most of the state(s) level, is constrained by unmaintainable debt with prolonged public debt to GDP levels over 120%. Moreover, government spending is growing and outpacing tax revenues.     When inflation is considered at the consumer level, it becomes extremely challenging for the US to get out of its debt spiral.  We are simply calling balls and strikes here, our view is not politically motivated, which is why we are keeping the 2024 “election year” out of our analysis.  In our objective view, the government’s need for cash (to service debt and bloating) could result in increased regulations, approvals, audits, and penalties which could have an adverse impact on healthcare businesses across the nation.  Here are some items which could potentially impact valuations and M&A deal flow in 2024:

• Hart Scott Rodino and Baby HSR filings. Significantly lower thresholds to trigger transaction review and government oversight. Along with the FTC and DOJ, State anti-trust agencies may play a role in challenging consolidation. For instance, California law requires the AG office to consider criteria such as the general public’s interest and the effect of a merger on access to care.
• Auditing has become more prevalent in states that are looking to recoup CMS dollars.
• Medicare Advantage and, even traditional Medicare Reimbursements are not keeping up with inflation rates, resulting in profit declines from large to small providers.
• No margin of error for buyers in the payer, provider, and healthcare services segments, according to sources like Becker’s Hospital Review.

What does this mean for your healthcare business?

Most importantly, you must maintain compliance with healthcare laws that could materially affect your company.  We recommend bringing in a clinical (healthcare) consultant to review where you may have deficiencies in your charts or other areas where compliance is vital. There is a difference between passing an audit or being recertified through an accrediting body versus how an operator/owner may determine “adequate” charting procedures.

We also believe that proper accrual accounting and cost reporting has become mandatory in maintaining a market comparable valuation and efficiently running an M&A process. Ensuring your company maintains clean financial standards or bringing in a third-party financial firm to assist with this effort is vital.

Oversight continues to heat-up and you need support to stay current on what could truly hurt your operations.  We encourage all our clients to stay informed and meet with third-party vendors to prevent issues from arising in the future. Feel free to contact us for a list of recommended QofE, Financial, or Clinical resources.

Opportunities remain in the market for record valuations.  There is an abundance of healthcare buyers backed by investors who expect high returns on their invested capital.  However, buyers will not step into the unknown.  They will spend significant time and money on due diligence to assess their target acquisition.  As a seller, you need to know everything about your company and maintain the highest standards with your financials and compliance.  If not, you run the risk of facing significant costs to your company and, ultimately, lowering your valuation in the M&A market.

Our team at M&A Healthcare Advisors has numerous resources available to assist with what we have identified as potential risk factors in the year ahead. For more information on our services and how we can be a benefit to your long-term strategy and exit plan, contact us today.