Point Solution Fatigue, Meet M&A: How Strategic Transactions Can Transform Digital Health
In the rapidly evolving landscape of US healthcare, digital health solutions are proliferating at an unprecedented rate. While these innovations offer remarkable benefits for patient outcomes and reduced costs, they have also introduced the challenge of “point solution fatigue.” This term refers to the overwhelming number of single-function “pure-play” digital health tools, each designed to solve a specific problem. While these tools may be individually effective, their sheer volume can lead to administrative burdens for healthcare systems, providers, and insurers juggling multiple platforms that don’t communicate with each other or integrate data. Point solutions can also result in fragmented patient care, making coordination among providers more difficult.
This article explores how strategic mergers and acquisitions (M&A) can reduce or even eliminate point solution fatigue by creating more comprehensive and integrated platforms that will improve patient care and reduce administrative burden.
Is M&A the answer to Point Solution Fatigue?
The term “Mergers and Acquisitions” or “M&A” refers to a strategic process where two or more companies combine their assets, operations, and market presence through either merging into a single entity or one company acquiring another. In the context of digital health and healthcare, this strategy may be deployed to consolidate resources, streamline operations, and enhance competitive positioning.
Acquiring a synergistic company can increase an existing digital health company’s customer base, facilitate expansion into new market segments, enhance technological capabilities, and provide a competitive edge. Similarly, a digital health company may actively seek to be acquired in order to access greater resources, accelerate growth, and enhance market presence. For example, a mature remote patient monitoring company focusing on chronic diseases might acquire an early-stage company that focuses on an entirely new way of monitoring and managing high blood pressure as a way of entering a new market and expanding its current offerings. In short, smart M&A transactions can reduce the number of point solutions in the marketplace.
In addition to alleviating point solution fatigue, digital health M&A can also open up additional reimbursement pathways and revenue opportunities for both companies, incorporate new technologies (think AI, of course) into an integrated platform solution, and capitalize on synergies around talent, access to data, and clinical evidence.
Legal and Regulatory Considerations in M&A Deals
Most digital health M&A transactions require both corporate and healthcare regulatory due diligence prior to closing a deal. As anyone familiar with the US healthcare industry knows, the complexities of healthcare laws and regulations often implicate corporate entity structures, commercial contracts, and both state and federal laws. When considering a digital health M&A deal, it is critical to engage legal counsel well-versed in both corporate and healthcare law.
Corporate Due Diligence
A buyer needs to understand potential risks and liabilities that may be associated with the selling company. A comprehensive due diligence process includes:
Analyzing opportunities for synergies and strategic alignment
Assessing overall risks and legal compliance
Confirming the seller’s financial condition
Verifying ownership and value of intellectual property
Evaluating customer and supplier contracts and relationships
Specific corporate due diligence considerations include:
Transaction Structure. Both buyers and sellers will rightly focus on the overall purchase price that is agreed upon, but the structure of a transaction, whether as a sale of the target’s assets or its stock, will have significant tax implications. Here the interests of buyers and sellers diverge – buyers will have a strong bias toward asset deals, which offer them tax advantages (via a stepped-up basis in the acquired assets) and the ability to leave certain liabilities behind in the seller entity. In contrast, it is generally significantly more favorable from a tax perspective for a seller to pursue a stock deal.
Form of Consideration. A key question for both the buyer and the seller is the form of consideration for the deal. Will the buyer pay cash for the acquisition? Issue stock? Some combination of the two? Sellers seeking an exit will often look for cash, but an all-cash purchase may be challenging for some buyers. As a result, buyers may prefer a stock deal.
Ownership Implications. The leadership team for the selling entity will want to understand what their role will look like in the combined entity post-close. Shareholders of the seller may expect to have Board representation in the combined entity.
Healthcare Due Diligence
Just as important for a buyer is understanding whether the selling company is operating with a firm foundation of compliance – and if not, whether existing compliance issues can be readily addressed. Due diligence considerations specific to the digital health sector include:
Corporate Practice of Medicine (CPOM) doctrine. Many states follow this doctrine, which dictates that medical practices must not have non-practitioner ownership. CPOM is particularly relevant when healthcare services are being provided across multiple states.
Reimbursement and Revenue Model. Is fee-for-service reimbursement available for services provided? Is an at-risk, value-based model contemplated in the near future? Or is the company operating on a strictly cash-pay basis?
Fraud and Abuse considerations. Do existing commercial arrangements implicate the state for federal fraud and abuse laws? For example, is the Anti-Kickback Statute triggered? Does the arrangement violate state fee-splitting rules?
Privacy and Data Security. Is the seller bound by HIPAA? Have they gone through a Security Risk Assessment? A SOC-2 audit? HiTRUST certification? Do patient communications implicate TCPA?
Practitioner licensure and credentialling. If patient services are being provided by a practitioner or clinical staff, are individuals appropriately licensed? Is the practice entity appropriately enrolled/credentialed with Medicare, Medicaid, and/or commercial payers?
Deal Documents
After a buyer and seller have completed due diligence and agreed on a price and a structure, they will need to negotiate the Purchase Agreement. This agreement addresses items such as the scope of representations and warranties, the conditions for closing, indemnification and risk allocation, and post-closing covenants. Seller’s leadership team will likely negotiate new employment arrangements with the buyer’s leadership and employees, including roles, compensation, and equity incentives.
Key Takeaways and Strategic Next Steps
Point Solution Fatigue is the result of a fragmented ecosystem of single-function digital health solutions that increases administrative burden and hinders care coordination.
M&A transactions can address point solution challenges by reducing fragmentation, enhancing technological capabilities and product offerings, improving care coordination, and positioning participants to better align with industry trends and demands.
Digital Health M&A requires a nuanced understanding of the transaction's corporate and healthcare-specific components from a due diligence and deal-close perspective.
Nixon Law Group is uniquely positioned to guide healthcare innovators through an M&A transaction. Our attorneys help digital health companies of all shapes and sizes navigate some of the industry’s most complex legal and regulatory challenges.
Interested in learning more about our M&A services? Please contact us today!