Navigating Healthcare Mergers: Implications, Drivers, and Legal Framework

The healthcare industry is undergoing a significant transformation worldwide, and India is no exception. In the first quarter of 2023, healthcare mergers and acquisitions (M&A) activity remained steady, albeit slightly lower than the previous quarter, with 15 transactions amounting to $12.4 billion in total transacted revenue, according to a report by hospital consultancy Kaufman Hall. According to the Grant Thornton Bharat Report, the healthcare and life sciences industry showed an 85% growth in overall deal values in the first half of 2023, totaling more than $4.4 billion, compared to the first half of 2022. These developments signal a shifting landscape in the Indian healthcare sector, with notable players like Apollo Hospitals, Sterling Hospitals, and Max Healthcare making headlines with strategic acquisitions.

Driving Forces behind Healthcare Mergers

Healthcare mergers are driven by a complex interplay of factors that include economic, strategic, and regulatory considerations. The following key drivers shed light on why healthcare organizations opt for mergers:

Economies of Scale and Cost Efficiency: Larger healthcare systems can achieve economies of scale, leading to cost reduction through centralized functions and bulk purchasing. Merging allows organizations to operate more efficiently and allocate resources wisely.

Enhanced Geographic Reach: Expanding geographical coverage is a common motivation for mergers. It enables healthcare providers to reach a broader patient population and improve accessibility to care, particularly in underserved regions. An exemplary case is Apollo Hospitals’ acquisition of a hospital on the Golf Course Road in Gurugram from Nayati Healthcare and Research Center for ₹450 crore. This move allows Apollo to expand its presence in the Haryana and NCR region while leveraging its digital platform, Apollo 24×7, to tap into both the local NCR market and the burgeoning medical tourism sector.

Market Share and Competitive Advantage: Mergers help healthcare providers gain a larger market share, enhancing their competitive edge. This is particularly crucial in regions with robust competition among healthcare facilities.

Access to Capital: Mergers provide access to capital, which is crucial for investing in infrastructure, technology, and expanding service offerings. This, in turn, can lead to improved patient care and services.

Strategic Alliances and Partnerships: Collaborative mergers can facilitate partnerships and alliances that drive research, clinical trials, and the development of innovative medical treatments and technologies.

Diversification of Services: Mergers enable providers to diversify their service offerings by incorporating specialized services or expanding into new healthcare domains.

Financial Stability: Struggling healthcare organizations may seek mergers to bolster their financial stability, especially when facing revenue challenges or financial difficulties.

Technological Advancements: The adoption of new healthcare technologies, such as electronic health records (EHRs) and telemedicine, can drive mergers as organizations aim to stay competitive and technologically advanced.

Government Initiatives: Government policies, such as integrated care models and efforts to reduce healthcare costs, can influence merger decisions in the healthcare sector.

Legal Framework of Merger and Acquisition

Successful healthcare mergers and acquisitions require a thorough understanding of the legal framework and prerequisites. Several critical steps are involved in the merger process:

A. Prerequisites of Merger and Acquisition

Due Diligence: Due diligence involves gathering all relevant facts and information that can influence a merger decision. It’s crucial to avoid legal hassles due to insufficient knowledge of important details.

Business Valuation: Assessing the market value of the target company is essential. This involves examining the company’s history, organizational structure, market share, and other critical factors to determine if it’s suitable for a merger.

Planning Exit: When a company decides to sell its operations, exit planning is vital. It involves evaluating financial and business issues, including full or partial sale and reinvestment options.

Structuring Business Deal: After finalizing merger and exit plans, structuring the business deal is crucial. This phase emphasizes marketing and creating innovative strategies to enhance business credibility.

Stage of Integration: This stage includes preparing documents, signing agreements, and negotiating deals. It also defines the parameters of the future relationship between the merging entities.

B. Steps Involved in Merger

The process of merger is explained in the given flowchart:

Image credit: Collidu

Several steps are typically involved in a merger:

1. Ensure the Memorandum of Association contains an enabling clause for mergers.
2. Seek in-principle approval from the Board of Directors.
3. Appoint valuers, merchant bankers, and advisors.
4. Obtain a valuation report by independent valuers.
5. Draft the merger scheme.
6. Convene Audit Committee/Board meetings for approvals.
7. Seek in-principle approval from stock exchanges.
8. Obtain a no-complaint report.
9. Obtain approvals from regulatory authorities.
10. Apply to the National Company Law Tribunal.
11. Conduct shareholder and creditor meetings.
12. Obtain NCLT sanction.
13. File the order with the Registrar of Companies.
14. Prepare financial statements and approve asset and liability transfers.
15. List shares on stock exchanges.
16. Begin post-merger integration.

Impacts of Healthcare Mergers on Patients

The impact of healthcare mergers on patients is multifaceted and depends on various factors.  Mergers may have both positive and negative effects on patients. These impacts can be summarized in the following points:

1. Access to Care: Mergers can enhance access to healthcare services, especially in underserved or rural areas, by consolidating resources and expanding the reach of facilities. But, in some cases, mergers may lead to the closure of smaller, local facilities, potentially limiting patient access to care.
2. Quality of Care: Merging healthcare entities can lead to improved care quality through the pooling of expertise, advanced technology, and specialized medical staff. But, if cost-cutting becomes the priority, quality may decline.

• Cost of Care: Mergers may lead to cost efficiencies, potentially reducing healthcare costs for patients. On the other hand, some mergers can result in monopolistic practices, leading to higher healthcare costs for patients.

1. Patient Experience: Streamlined processes and improved coordination can enhance the overall patient experience. Whereas poorly managed integration can disrupt patient-provider relationships and lead to dissatisfaction.
2. Innovation and Research: Mergers can foster innovation by combining research capabilities, potentially leading to the development of new treatments and therapies. However dominant market players created by mergers may discourage competition, stifling innovation.
3. Regulatory Oversight: Strong regulatory oversight can ensure mergers benefit patients by promoting competition and protecting the quality of care. However, inadequate oversight can lead to anti-competitive practices, impacting patient care and costs.