Let’s Make A Health-Care Deal! But First, What About IT?

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By Mary Anne Pazanowski

Health-care dealmakers should review the parties’ information technology systems when contemplating and negotiating a merger or acquisition to avoid getting stuck with unforeseen costs or liabilities.

Hospitals, health systems, and physician practices depend on everything from electronic health records to billing and staffing software. The last thing they want out of a transaction is an unmanageable system. Having the IT ducks in a row should help smooth the pathway to closing.

Four attorneys with extensive experience in advising health-care dealmakers, with special emphasis on IT matters, shared with Bloomberg Law the factors they think should be at the top of the list for every health-care entity contemplating a deal to expand its existing footprint or to gain traction in a new space.

All four attorneys told Bloomberg Law they have never seen a party walk away from a deal because it didn’t like the IT the other side brought to the table. Dissatisfaction in this area, however, could lead to a lower purchase price or an extension of the period of time for which the targeted entity will be responsible for maintaining its system after the acquirer takes over, they said.

Retaining Existing Systems

Many acquiring entities previously went into deals with the understanding that they would have to make a significant investment to improve the target’s IT. That isn’t always the case today, as state and federal regulations kicked in several years ago that require EHR systems meet “meaningful use” standards, Amy S. Leopard, of Bradley Arant Boult Cummings LLP in Nashville, Tenn., told Bloomberg Law. Leopard advises businesses in corporate matters involving health-care and information technology law.

Federal payment programs, like Medicare, drove most providers to update their IT systems if they wanted to get paid, she said. As a result, hospitals made “extensive and long-term” IT investments. So long as the professionals at the target hospital are happy with its systems, an acquirer may want to keep them in place, at least for a defined term, Leopard said.

A good IT system, well-supported by a software vendor and IT team, may be a factor that makes the target an attractive one for potential acquirers, Jeffrey T. Ganiban, of Drinker Biddle & Reath LLP’s Washington office, told Bloomberg Law. Ganiban represents clients in technology, information system, and capital equipment procurement and contracting.

An acquirer also should consider whether it will jettison one of the systems or maintain both, at least for a defined period of time. If it decides to maintain both systems, the acquirer should determine if the two are compatible, C. Timothy Gary, of counsel at Nashville’s Dickinson Wright and CEO of Crux Strategies, told Bloomberg Law. Interoperability is a big concern when maintaining multiple systems. As part of its role in facilitating health-care deals, Crux Strategies helps hospitals acquire, implement, and maintain IT systems.

Compatibility goes further than simply asking whether the systems can communicate with each other. For example, Gary said, it is important to know if the systems can merge patient data, so that it is accessible at all facilities. Ganiban noted that nurses and doctors who move among the resulting entity’s facilities will need to be able to access both IT systems easily, so the acquiring entity must determine if the professionals will have to be trained on both systems and how having two different IT systems will affect work flow.

Incompatible IT systems “can create great difficulties for management,” David S. Szabo, a partner at Locke Lord in Boston, said. Szabo has helped hospitals implement IT and shared EHR systems. Maintaining two systems that aren’t compatible can be expensive and cause headaches, Gary said. Obtaining a single new replacement system, however, may not be a realistic option, especially if one of the parties already has a long-term maintenance contract in place with an IT vendor, Leopard added.

Replacement Costs

Replacing or updating a system can be very expensive, Gary said. Acquirers will want assurance that the target’s system is up to date and user-friendly, he said. An out-of-date system, or one in need of substantial repair, probably won’t tank a deal, but it may lower the amount the acquirer is willing to pay, he added.

A chance to update an obsolete system, however, may be a motivating factor for a physician practice or small hospital that just doesn’t have the resources to do it on its own. Doctors who own these practices or work in the hospitals most likely will be employees or on the medical staff of the resulting entity, so the new system must work for them.

There are also hidden costs to replacing or updating a system, such as the expense of training the staff on the new system and the productivity lost while doctors and nurses become familiar with it, Szabo said. A hospital may have to hire a new IT staff or retrain the existing IT professionals to ensure the system runs smoothly, Ganiban said. There also might be penalties associated with ending old IT contracts, he said.

The time it takes to implement a new system also is a consideration as it could take two to three years to have everything operating smoothly, Szabo said. “Very carefully estimate” the implementation costs, then double them, and “that will be half of what you need,” he said.

Benefits of Updating, Replacing

Updating or replacing an old system can help the resulting entity achieve some of the goals it hopes to accomplish through a transaction, Gary said. Hospitals look at acquisitions and mergers as ways to help them achieve economies of scale, better analyze population health data that will enable them to predict trends and develop treatment models, and maximize revenue under a value-based payment system, Szabo said.

Szabo advised that acquirers examine the IT requirements for their markets. For example, a health-care provider that is in a highly competitive market, where it is moving toward a risk-based or value-based payment system, has different IT needs than one in a market where fee-for-service still is the most used payment model, he said. Advanced analytical abilities are very important for an IT system in a value-based environment, he said.

A target’s system also must be compliant with existing regulations, including the Health Insurance Portability and Accountability Act’s privacy and security rules, Leopard said. Due diligence is required to determine whether the target’s system has been breached in the past or has vulnerabilities that will lead to a future breach or regulatory fine.

Acquirers don’t want to inherit problems or be hit with surprises down the road, Gary said. The acquisition agreement can adjust for this by requiring the target to continue to take responsibility for any pre-deal problems or to indemnify the acquirer if it runs into a legal or regulatory issue attributable to the target’s IT.

HIPAA-covered entities must conduct security risk assessments, and any significant change in operations requires them to update their security plans, Leopard added. She suggested acquirers take a look at the target’s assessments. That could affect the transaction, and the acquirer’s decision to keep the target’s IT or leave it behind, she said.

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