No transaction is without its challenges. Deal makers expect some discomfort – and are often poised to “grin and bear it” in the hopes of executing a successful deal. In 2013, M&A activity was down – making successful execution of fewer deals critical. But, ignoring “tolerable” pain points in the hopes that they will get better can ultimately kill a deal in the 11th hour.
You know how to identify “red flags” but take notice of subtler warning signs
Financial and strategic buyers have learned over the past several years how to avoid blatant deal killers – failure to comply with HIPAA, data security issues with cloud based systems, reimbursement risks and more. Given the hefty fines and reputational ruin associated with these issues, it’s no wonder they are top of mind. However, there are several latent deal killers that are often overlooked, ignored or underestimated. Not knowing how to spot them can cost a great deal of time, money, operational pain or, ultimately, deal failure.
For most healthcare M&A transactions, all parties are acutely aware of the big ticket IT items such as merging multiple claims platforms, migrating to a new practice management solution or EMR, customizing the accounting system to account for billing nuances, etc. It is common to identify and manage these risks early on as they are the most complicated, time-consuming and costly. As a result, it is common to ignore the small, yet potentially deadly, pain points. Many deals move forward regardless of these pain points but, as the deal progresses, or even worse, post-close, the pain points that were once tolerable can rear their ugly heads.
The Top Five Most Common Silent Deal Killers
Let’s review the top five most common silent deal killers so you can address them before it’s too late.
- Reporting Systems: Almost every healthcare company faces reporting challenges – be it financial, clinical or claims-related. Deal makers expect this as the normal state of operations. Most of the time, some unknown and invisible manual work around exists to mitigate these challenges, either by the IT department or business operations team. But, post-close, both the IT department and the operations team becomes overwhelmed by post-merger integration responsibilities and can no longer conduct the day to day manual work around.
For example, in a recent divestiture, the parent company had a legacy reporting system that was the smallest application among all applications being transitioned to the new entity. As a result, it was ignored. Then, one month before the transition services agreement was set to expire, this small, seemingly insignificant issue made its presence known. The IT team learned quickly that there was no easy way to migrate the application. So, during the last month, the IT team spent half of their time trying to transition this application, which only served a few reports to a few of the key sales folks, taking attention away from other key initiatives. It became a critical “all hands on deck” situation posing significant risk that should have been addressed much earlier on during the deal.
- Data Cleansing: Data migration from one system to another is a common task during post-close integration. A lot of time is spent mapping the data, creating business rules and even testing the migration of the data. However, most Health IT firms do not have sophisticated data governance processes. As a result, most Health IT data, especially from legacy systems, require a great deal of clean up and reconciliation. Legacy systems usually adopt an alternate, temporary solution to deal with data quality issues. But when data is migrated to a new system, even though the new system is not “broken,” poor data quality makes it such that normal business operations cannot be conducted.
Recently, I worked on a deal merging two provider systems. The locations and patient encounter records of the legacy system needed cleaning because the new migrated system, which had stricter data rules, did not allow for such data discrepancies. As a result, the data was not migrated. Instead, the IT department created two instances of the new system, increasing both maintenance costs and operating expense – reducing enterprise value of the combined firm.
- System Scalability: Often times when two businesses are merged, one of the core IT systems is adopted as the combined IT platform. For example, in the case of a payer-payer merger, one of the claims processing systems might be selected as the future platform. Health IT organizations tend to under test when it comes to any application. Especially when it comes to performance testing, hardly ever is a formal testing plan put into place. The tools for performance testing are sophisticated, not easy to use and require specialized skills that most Health IT departments do not have. Even though users may complain about system slowness, this complaint hardly ever becomes large enough to warrant any real attention. As a result, the issue is ignored and, when the final migration does occur, the system is brought to a halt due to system overload. If the system is running slow for one organization, it likely cannot process all of the data needed to support the larger volume of the combined business.
In a recent dental payer merger, the business did not think performance testing was a top priority despite our recommendations on several occasions. Ultimately, when we were just a few months away from go live, the test system displayed severe slowness and the business finally approved the performance testing project. The project uncovered many software architecture related challenges and revealed many operational challenges the IT department would face in maintaining the system. Fortunately, the IT department was able to develop solutions to address these challenges prior to go-live – but not without a few headaches along the way.
- EDI Connections: Many healthcare organizations process claims and payments through electronic data interchange (EDI) connections. Several vendors offer such services to process claims and payments. During an acquisition, IT departments often do not plan ample time to manage the nuances of migrating EDI connections. They assume that EDI connections are standards and easy to migrate from one company or system to another. However, EDI connections have two critical elements: 1) connectivity and 2) content. Connectivity refers to the actual technology connection between an IT system inside the organization with an IT system outside the organization – whether it be a payer or a clearing house. Content refers to the actual content of the EDI transaction, which can be vastly different for healthcare EDI transactions from payer to payer and even clearing house to clearing house. As such, a great deal of time needs to be planned for doing business analysis and testing for any new EDI connection stream. Additionally, if the technology system and supporting IT staff is not properly sized to handle the volume of EDI, post-merger operations could be in danger. More often than not, EDI considerations are ignored or understated, causing the post-close execution to go over time or over budget.
- Back Office Accounting: The key system used to collect payments, post cash and manage accounts receivable is the accounting system. Typically, the accounting system for a healthcare organization does not support the complexity of claims billing. As such, these systems are ignored or dealt with late in the process. However, if not properly tested, these systems may not function properly or obtain correct data in the correct format. They may require elements of patient data not addressed during post-close initiatives. If the goal of the merger is a single lockbox, test to make sure that payments from a different source to that lockbox are accepted, processed and eventually posted without any issues. During many mergers, all other systems are integrated and risk adjusted, but the accounting system is ignored until a problem arises in the live environment. By then, it’s too late to avoid a negative impact to accounts receivable, which in turn affects the financial health of the business.
Almost every healthcare M&A deal will face some of the challenges outlined above. Deal makers may be aware of these challenges, but rarely do they give them proper attention. As a result, they fester and cause the deal to exceed budgets for both time and expense. At best, it impacts synergy value. At worst, it can ruin the entire deal itself. It is critical to pay attention to these tolerable pain points before they become intolerable. Even though there may be bigger issues at hand, deal makers must not lose sight of these underlying and latent threats.