In the wake of the COVID-19 pandemic, the global healthcare services sector has unsurprisingly been thrust into the limelight as it has been tackling an ongoing backlog. Following a decline in activity during the first, and most damaging, months of the pandemic, the United Kingdom has seen a marked uptick in the level of healthcare mergers and acquisitions (M&A) activity commencing towards the end of 2020 and continuing throughout 2021. This LawFlash discusses some of the trends contributing to the changing healthcare services M&A market in the United Kingdom, as well as essential considerations for conducting M&A in this sector.
With the healthcare sector—which includes health services, healthcare technology, pharma, and biotech—accounting for one-third of M&A activity in early 2021, it is clear that the industry has remained resilient and continued to attract interest from investors.
In order to see these M&A deals cross the line, creative structures are commonly seen, including:
- consideration made up of equity only, eliminating the need for any third-party financing;
- the seller-side electing to finance transactions, by electing to defer part of the purchase price as a receivable which can be refinanced at a later date; and
- other deferred payment structures which link models tracking the healthcare businesses’ return to pre-COVID-19 pandemic levels.
PRIVATE HEALTHCARE
In contrast to the largely private US healthcare market, all UK citizens are entitled to the National Health Service (NHS) which is free at the point of use. As the NHS grapples with a record treatment backlog—which stands at approximately 5.8 million patients—private healthcare providers offering elective procedures are in demand and are likely to become more attractive as acquisition targets.
The growing demand for private healthcare in the United Kingdom is being driven by increased NHS outsourcing demands alongside a notable rise in the number of self-pay or privately insured patients. The collaboration between the NHS and private healthcare providers is expected to strengthen as the NHS works through the backlog of patients. In March 2021, over 90 private sector healthcare providers signed up to a 10 billion pound ($13 billion) four-year-long procurement framework agreement with the NHS to relieve the backlog. Alongside this, an increasing number of individuals are electing to undergo treatments and procedures privately as waiting lists continue to increase. Spire Healthcare, the only UK-listed private hospital group, reported an 81% surge in self-pay revenues in the second quarter of 2021 compared with the second quarter of 2019. International players, such as two of the United States’ biggest hospital chains—Mayo Clinic and Cleveland Clinic—are already entering the UK market.
GP SUPER-PARTNERSHIPS
The first point of the contact for most patients in the United Kingdom is their general practitioner (GP). The responsibility of a GP in the United Kingdom is broad and is most akin to “primary care” in the United States. GP practices are struggling in much the same way as the NHS more broadly, and an increasing number are seeking to pool their resources and merge into what are becoming known as “super-partnerships”. For example, the Modality Partnership is one of the largest GP super-partnerships in the United Kingdom, which currently supports more than 450,000 people across 48 practices. As the demands placed on GP practices continue to grow, it is likely we will see an increasing number of mergers and related transactions taking place as practices seek to streamline their costs.
AUTOMATION AND DIGITALISATION
The COVID-19 pandemic forced the healthcare service sector to accelerate the ongoing digitalisation and automation of their business models in order to reduce in-person contact. This shift in the healthcare’s business model can be seen across the public and private health service sectors through developments such as telemarketing, online symptom reporting, and healthcare apps. As health service companies continue to jostle within an increasingly competitive market, they will seek a technological edge, something that will accelerate deal flow and increasingly result in partnering with or acquiring tech companies.
For considerations of telehealth trends, with a focus on providers and particularly the NHS, see our prior Lawflash on the topic: Telehealth in the United Kingdom: Considerations for Providers.
SPECIFIC CONSIDERATIONS
Intellectual Property (IP)
IP is a key value driver in the UK healthcare industry, particularly given the high volume of research and development work associated with healthcare businesses, products, and services. In an M&A transaction, the relevant IP searches should be conducted to assess the freedom to operate and shed light on any IP transfer concerns, in case third-party consent is required, for example.
Data Protection
As with any M&A work, data protection is always a key consideration for a transaction. Healthcare businesses, which are unsurprisingly exposed to a high level of patient personal data, must ensure rigorous compliance with the UK General Data Protection Regulation. A buyer in an M&A transaction should conduct thorough due diligence to evaluate the adequacy of the data privacy and data protection policies and processes of the target.
Employment
Employment arrangements are a key element to the due diligence of any target business and the healthcare sector is no exception. Key focuses in this market can include (1) the prevalence (particularly in the private healthcare sector) of zero-hour contracts, pursuant to which the business does not guarantee a specified number of hours’ work; (2) the calculation of holiday pay and overtime to ensure compliance with relevant legislation, and any associated holiday pay liabilities; (3) sleep-in shifts, for which workers are only entitled to the national minimum wage for the hours they are awake and working, rather than sleeping on shift; and (4) the employees’ right to work in the United Kingdom and the granting of the correct work permits.
Competition and Merger Control
Healthcare businesses may require a UK merger control assessment. The competition and markets authority (CMA) has the responsibility to review business combinations, which include public sector entities engaging in economic activities, whether by merger, acquisition, joint venture or through long-term management contracts. Similarly, private sector transactions where a private hospital operator is operating or managing privately funded healthcare services at NHS facilities will be reviewable by the UK merger control regulators and the possibility of making any formal or informal notifications to the CMA should be considered in advance of any transaction, as part of a thorough due diligence exercise.
Regulatory
The Care Quality Commission (CQC) regulates all health and social care services in England. The CQC have wide-ranging powers and must be notified before any change of control in any relevant service pursuant to Regulation 15 of the CQC (Registration) Regulations 2009. The CQC is statutorily obliged to safeguard the quality and safety standards codified in the Care Act 2014; any entity in breach of these standards is liable to face enforcement action by the CQC, including under criminal law.
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