Healthcare spending accounts for nearly 18% of the U.S. GDP, so it’s not surprising that the industry continues to attract billions of dollars in annual investment from private equity firms. Private equity interest in healthcare remains strong despite industry transformative pressures, reduced reimbursement and the uncertain impact of our evolving national health policy. Change creates opportunities (and risks), and investors now need to focus even more closely on determining the validity of assertions and the inherent value of a target company’s differentiators.
Most healthcare IT target companies being evaluated by private equity investors today are involved in the exchanging, analyzing and processing of clinical, administrative or financial data. Often, the infrastructures and methods developed by these targets are presented as vehicles capable of delivering compelling, long-term EBITDA. Now more than ever, it is essential that these infrastructures and methods receive special focus during the due diligence process to confirm investment theses. Key factors that require careful pre-transaction analysis include:
- Connectivity Does the target company’s IT system have the capability to easily exchange electronic information with other systems? Will the system’s current interoperability/integration functionality lower transaction costs over the long term?
- Security Is patient health and/or financial information being exchanged securely and in compliance with HIPAA, PCI DSS, and other regulatory mandates? What are the risks and how should they be mitigated?
- Scalability Does the target’s business model and platform have the ability to grow in a manner consistent with business projections? Where are the points of weakness in the target’s infrastructure and how can they be addressed?
Obtaining accurate and complete answers to these and other questions will help lead to an informed investment.