Healthcare deals don’t look like other deals. From regulatory exposure to reimbursement risk, compliance pitfalls, and cybersecurity threats, the healthcare industry presents a unique set of challenges for investors and operators. Consequently, successful healthcare investors push their due diligence models beyond validating the past. They proactively attempt to anticipate the future in a highly regulated environment that changes constantly.
Rising Regulatory Oversight
Healthcare is one of the most heavily regulated environments in the U.S. Federal and state oversight—from CMS, DOH and OIG to HIPAA and commercial payer policies—makes compliance far more challenging than in most industries. Coding and billing add another layer of complexity: Accuracy directly impacts reimbursement, and errors can trigger denials, delays in payment, and even reduced payments. External audits can trigger repayment demands, penalties, and even legal exposure.
Adding to the headwinds is the pace of change. Annual updates to CPT® and ICD codes, regulatory updates, and changes in payer policy mean rules are never static and require diligence to update policy and remain compliant. The shifting emphasis on HCC coding, and the impact of RADV audits add new focus for providers. Compliance due diligence requires more than looking backward. It demands the specialized expertise to assess compliance risks and anticipate what’s next.
The Past Doesn’t Predict the Future
Demand for healthcare is one of few constants. The other constant is change. While everything else (reimbursement models, regulatory frameworks, technology adoption, and shifting care models) is in flux, the demand for healthcare services will always be present. While continuous demand makes healthcare more resilient compared to other industries, revenue is subject to dictated price changes (Medicare/Medicaid) and changes in the regulatory and compliance environment. Additionally, healthcare providers are challenged with navigating changes in compensation and competing for staffing in a labor-shortage environment for many. Consequently, historical performance isn’t always a reliable indicator of future results.
Instead, investors must use due diligence to both understand historical performance and form a thorough, risk-mitigated, forward-looking thesis:
- How is reimbursement changing?
- How can technology be used to increase efficiency and better measure patient outcomes?
- How will policy and payment changes reshape its revenue model?
- How can the RCM process be optimized and shorten the cash cycle, while preventing revenue leakage and bolstering compliance?
- Is the target’s compliance function capable of adapting to new challenges on the horizon?
- What risk may be present from the past and what opportunities may lie ahead?
Beyond Checking the Box
Too often, healthcare transaction due diligence is treated like a box-checking exercise focused only on identifying red flags or validating historical earnings. Using due diligence as the foundation for post-close optimization is a stronger approach that sets the stage for sustainable success.
For example, identifying coding errors during diligence isn’t just about compliance; it might signal potential revenue leakage. Addressing those gaps gives teams the opportunity to recoup lost revenue, strengthen financial performance and improve provider workflows and coding accuracy. Similarly, diligence findings can help management teams prepare for day-one readiness, update policies and procedures, and design more sustainable compliance practices.
Breaking Down Silos
Historically, financial and coding due diligence reviews have been handled separately. When these functions operate in silos, investors miss the full picture. Taking a collaborative approach brings a 360-degree view of risks, opportunities, and operational realities.
Collaboration between finance and coding teams allows different experts to tackle problems from multiple angles. A coding team may uncover the root cause of denied claims and the path to resolution, while the finance and valuation teams can quantify and translate those fixes into projected revenue improvements and working capital benefits. Together, they deliver actionable insights that are more powerful than isolated findings.
The Role of Analytics & Technology
As technology has advanced, due diligence is now enhanced by advanced analytics and technology more often than not. Tools like VMG Health’s Compliance Risk Analyzer® are already changing the game with high-precision targeted sampling and more reliable audit insights. By harnessing the power of technology coupling it with best-in-class human expertise in valuation and revenue cycle management, comprehensive predictive analytics tools offer investors a sharper, more comprehensive view of both risk and opportunity while providing greater insight and protection for the healthcare organization.
Realizing Your Investment Thesis
To increase your confidence index on your healthcare investments, your due diligence approach should be comprehensive, collaborative, and strategic—not just a safeguard. The combination of regulatory complexity, coding risk, and constant change forces investors to go beyond surface-level validation. Integrating financial, compliance, and valuation perspectives provides investors with the clarity and confidence to make informed decisions, manage risk, and discover hidden opportunities.
Interested in taking your knowledge further? Register now for our upcoming webinar, “Investing in Healthcare with Confidence: From QoE to Compliance,” to gain real-world guidance from VMG Health’s specialists and engage directly with industry-leading experts.
