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3 Coverage Gaps That Can Derail a Healthcare Merger — and How to Close Them
Healthcare mergers and acquisitions continue at a blistering pace. According to Price Waterhouse Cooper’s 2024 Health Services report, deal volume in the healthcare sector remains elevated even amid broader economic uncertainty, driven by factors ranging from physician shortages and regulatory pressures to the push for value-based care models. But for every promising transaction, there is a tangle of risks that can erode deal value, trigger unexpected liabilities, or leave both parties financially exposed long after closing.
Healthcare mergers and acquisitions (M&A) carry a distinctive set of hazards rooted in the sector’s regulatory complexity, its reliance on professional services, and the long-tail nature of medical liability claims. Understanding those risks — and the insurance coverage gaps they can create — is critical for any buyer, seller, or advisor involved in a deal. It’s also what led Liberty Mutual to develop its Healthcare M&A Protector, a purpose-built insurance product designed specifically to address the coverage gaps most likely to arise in healthcare transactions.
“Healthcare M&A is more complex at times because you’re caring for residents or patients,” said Kathryn Wagner, Executive Underwriting Officer, North America Specialty Healthcare at Liberty Mutual, “which makes the risk more heightened and critical.”
Regulatory scrutiny around the healthcare space has also increased, she continued. “Reimbursement laws have tightened. And coming out of COVID, workforce instability and the challenge of proper staffing have also emerged.”
Why Healthcare Deals Carry Elevated Risk
Kathryn Wagner, Executive Underwriting Officer, North America Specialty Healthcare, Liberty Mutual
Hospitals, physician groups, behavioral health providers, and other healthcare entities are subject to an extensive array of federal and state regulations. A single compliance violation discovered after closing can result in significant fines.
Beyond regulatory exposure, healthcare deals carry medical malpractice and professional liability risks that have no parallel in most other industries. Claims arising from patient care can take years to surface, meaning a buyer could acquire an organization today and face lawsuits stemming from incidents that occurred long before the transaction closed. This so-called “long-tail” liability is particularly acute in specialties such as obstetrics, surgery, and behavioral health.
Workforce-related risks also loom large. Healthcare organizations depend on licensed professionals whose credentials, employment agreements, and scope-of-practice arrangements must be carefully evaluated. Failure to properly vet physician contracts, non-compete clauses, or credentialing histories can lead to post-closing disputes and operational disruptions.
Data privacy adds another layer of complexity. Healthcare entities hold vast quantities of protected health information, and any lapse in data security — past or present — can generate significant liability under HIPAA and state privacy laws. A data breach that occurred before the acquisition may not become known until months or years after closing, leaving the new owner to manage the fallout.
“When a business is facing potential sale or acquisition, executives and leadership are often consumed by that process. A solid infrastructure must already be in place — administrators, executive directors, people that are keeping their eye on the care while the transaction is occurring,” Wagner said.
“That creates liability risk — particularly in the few weeks prior to and after a sale where, if your eye is not focused on the care and other considerations, absolute missteps can occur.”
Insurance Coverage Gaps That Catch Dealmakers Off Guard
Given the magnitude of these risks, insurance plays a crucial role in healthcare M&A. Yet standard insurance products often leave significant gaps that neither the buyer nor the seller fully appreciates until it is too late.
One of the most common gaps involves representations and warranties. In any acquisition, the seller makes certain representations about the state of the business, including its compliance history, its financial condition, and the accuracy of its records. If those representations turn out to be inaccurate, the buyer may suffer financial losses. Representations and warranties (R&W) insurance has become a standard tool for addressing this risk in M&A.
Professional liability tail coverage is another critical gap. When a healthcare organization is acquired, its existing malpractice insurance may be written on a claims-made basis, meaning it only covers claims reported during the active policy period. If the policy is not renewed or if tail coverage is not properly secured, claims arising from pre-closing patient care may go uninsured. Negotiating who is responsible for purchasing tail coverage — and ensuring that coverage is adequate — is a frequent source of friction in healthcare transactions.
Coverage for pre-closing regulatory investigations presents yet another challenge. If a government investigation commences after closing but relates to conduct that occurred before the deal, determining which insurance policy applies — and whether any policy applies — can become a complicated and contentious process. Many general liability and professional liability policies were not designed to address this scenario cleanly.
Finally, cyber and privacy liability coverage can be inconsistent across healthcare transactions. The acquiring entity may have robust cyber insurance, but if a data breach occurred on the target’s systems prior to closing, the buyer’s policy may not respond to that pre-acquisition event. What’s more, the seller’s policy may have already lapsed or been cancelled as part of the transaction.
Closing the Gaps With a Purpose-Built Solution
Designed to work alongside — or in place of — traditional representations and warranties insurance, Liberty Mutual’s Healthcare M&A Protector provides tailored coverage for the exposures that standard R&W policies typically exclude.
“The product derived from our senior care book of business where many of our facilities and clients were regularly buying and selling entities. In the last 10 years, we’ve seen an increase in M&A across healthcare, including hospitals. We see these transactions increasing in the miscellaneous medical space with surgery centers and home health, as examples. The trend of purchasing and aggregating individual companies into larger groups continues,” Wagner said.
“We were regularly faced with situations where, say, client A was selling four of their 12 entities to client B, and we were also insuring client B. We realized that by being transparent while working on both sides of the transaction and offering our Healthcare M&A Protector product, we could help clear up any uncertainty around coverage gaps and who would carry the insurance risk,” she added.
Healthcare M&A Protector can also address professional liability gaps, including situations where tail coverage is inadequate or unavailable, as well as certain pre-closing cyber and data privacy exposures that fall outside the scope of the buyer’s existing policies. By consolidating these coverages into a single, transaction-specific product, Healthcare M&A Protector is intended to simplify the insurance workstream and reduce the likelihood that a critical exposure slips through unaddressed.
Wagner said the product has performed well.
“It has been well received by clients because it’s done away with ambiguity. It’s not a standalone product that would perform individually; it’s a piece of the prior insurance policy and a piece of the go-forward insurance policy, granting clarity for both sides,” she said. “It is provided via endorsement form to the prior and the go-forward policies.”
Looking ahead, the continued consolidation of the healthcare industry shows no sign of slowing. As private equity activity in healthcare grows and health systems pursue strategic partnerships to manage costs and expand access, the demand for insurance solutions tailored to healthcare transactions will only intensify. For buyers, sellers, and their advisors, understanding the unique risk landscape — and ensuring that coverage keeps pace — can mean the difference between a successful transaction and a costly misstep.
To learn more, visit https://business.libertymutual.com/commercial-solutions/healthcare-liability/.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.
