Global Healthcare Transactions Series: Healthcare Services in the United Kingdom | Morgan Lewis

Unsurprisingly, in the wake of the COVID-19 pandemic, the global health services sector has come to the fore as it continues to lag behind. After a decline in activity during the first and most damaging months of the pandemic, the UK is seeing a sharp spike in health care merger and acquisition (M&A) activity, starting towards the end of 2020 and continuing through 2021. LawFlash discusses some of the trends leading to the changing healthcare M&A market in the UK, as well as essential considerations for conducting M&A in the sector.

With the healthcare sector – which includes healthcare services, healthcare technology, pharmaceuticals, and biotechnology – accounting for a third of M&A activity in early 2021, it is clear that the industry has remained resilient and continues to attract investor interest.

To see these M&A deals cross the line, creative structures are often seen including:

• only consideration consisting of equity, which makes external financing superfluous;
• the seller, who opts to finance transactions by posting a portion of the purchase price as a claim that can be refinanced at a later date; and
• other deferred payment structures that link models that track healthcare companies’ return to pre-COVID-19 levels.

PRIVATE HEALTH CARE

In contrast to the largely private US healthcare market, all UK citizens are entitled to the National Health Service (NHS), which is free on site. With the NHS grappling with a record treatment backlog of approximately 5.8 million patients, private healthcare providers offering elective procedures are in demand and likely to become more attractive acquisition targets.

The growing demand for private healthcare in the UK is being driven by an increased need for NHS outsourcing and a significant increase in the number of self-paying or privately insured patients. Cooperation between the NHS and private healthcare providers is expected to be strengthened as the NHS works on the backlog of patients. In March 2021, over 90 private healthcare providers signed a four-year framework procurement contract for £ 10 billion ($ 13 billion) with the NHS to help reduce the backlog. Additionally, more and more people are choosing to undergo treatments and procedures privately as waiting lists keep growing. Spire Healthcare, the only UK-listed private hospital group, posted an 81% increase in self-pay revenues in the second quarter of 2021 compared to the second quarter of 2019. International players such as two of the US’s largest hospital chains — Mayo Clinic and Cleveland Clinic — are already entering the UK Market.

GP SUPER PARTNERSHIPS

The first port of call for most patients in the UK is their GP. The responsibilities of a family doctor in the UK are broad and most closely resemble “primary care” in the United States. General Practices have problems similar to those of the NHS in general, and an increasing number are trying to pool their resources and form what are known as “super-partnerships”. For example, the Modality Partnership is one of the largest GP super-partnerships in the UK, currently serving more than 450,000 people across 48 practices. As the demands on primary care practices continue to increase, more mergers and related transactions are likely to occur as practices seek to streamline their costs.

AUTOMATION AND DIGITIZATION

The COVID-19 pandemic forced the health services sector to accelerate the ongoing digitization and automation of its business models in order to reduce personal contact. This change in the business model of the health care system is visible in the public and private health service through developments such as telephone marketing, online symptom reporting and health apps. As healthcare services companies continue to throng an increasingly competitive marketplace, they will look for a technological edge that accelerates deal flow and increasingly leads to partnerships with or acquisitions of technology companies.

For reflections on telemedicine trends with a focus on providers, and the NHS in particular, see our previous lawflash on Telemedicine in the UK: Considerations for Providers.

SPECIAL CONSIDERATIONS

Intellectual property (IP)

IP is a major value driver in the UK healthcare industry, especially given the high volume of research and development related to healthcare companies, products and services. In the case of an M&A transaction, the relevant IP research should be carried out in order to assess the freedom of action and to shed light on any concerns about an IP transfer, for example if the consent of third parties is required.

privacy

As with any M&A work, data protection is always a central issue in a transaction. Healthcare companies that are exposed to high levels of personal patient data must ensure strict compliance with the UK General Data Protection Regulation. A buyer in an M&A transaction should conduct thorough due diligence to assess the adequacy of the target company’s privacy and privacy policies and processes.

occupation

Employment agreements are a key element of the due diligence of any target company and the healthcare sector is no exception. Focal points in this market can be: (1) the spread (especially in the private health sector) of zero-hour contracts, according to which the company does not guarantee a certain number of working hours; (2) the calculation of vacation pay and overtime to ensure compliance with the relevant legal provisions and all related vacation pay liabilities; (3) Sleep shifts where workers are entitled to the national minimum wage only for the hours they are awake and working, instead of sleeping in shifts; and (4) the right of workers to work in the UK and to obtain proper work permits.

Competition and merger control

Healthcare companies may need a UK merger control assessment. The Competition and Markets Authority (CMA) is responsible for examining business combinations that also include public sector companies engaged in economic activities, whether through mergers, acquisitions, joint ventures or long-term management contracts. Similarly, private sector transactions in which a private hospital operator operates or manages privately funded health services in NHS facilities will be reviewed by UK merger control authorities and the possibility of making formal or informal notifications to the CMA should be considered in advance Transaction as part of a thorough due diligence review.

Regulatory

The Care Quality Commission (CQC) regulates all health and social services in England. The CQC has extensive powers and must be notified of any change of control in a relevant service in accordance with Regulation 15 of the CQC (Registration) Regulations 2009. The CQC is legally obliged to guarantee the quality and safety standards codified in the Nursing Act 2014; any legal entity that violates these standards must face enforcement actions by the CQC, including under criminal law.

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