In the following guest post, Sarah Abrams, Head of Professional Liability Claims at Bowhead Specialty Underwriters, takes a look at the implications for D&O insurers of the growing investment interest of private equity firms in the healthcare sector. I would like to thank Sarah for allowing me to publish her article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.
Several structural trends in 2022 continued to benefit healthcare companies’ profitability. An aging population, the rising incidence of chronic illness, rising income levels and healthcare access in emerging markets, as well as digital innovations in treatment and operational processes combined to boost underlying demand for an array of healthcare goods and services.[i] Thus, the healthcare sector remained an attractive target for private equity. In turn, the Director and Officer liability market is like to target burgeoning healthcare risks.
In the second year of Covid-19, healthcare private equity posted a record year for both deal volume and disclosed value. Bain & Company’s Global Healthcare Private Equity and M&A Report 2022 provided some interesting data points for D&O carriers to consider in underwriting, particularly future policy exposure pain points. Notably, PE involvement in healthcare has remained controversial.[ii] Optics aside, U.S. health care costs are increasing, making various assets even more attractive investment objectives for growth equity deal activity.[iii]
The number of private equity healthcare deals rose 36% to 515, up from 380 the prior year. Total disclosed value more than doubled to $151 billion from $66 billion. The average disclosed deal value soared 134%, mainly because of 5 buyouts greater than $5 billion (headlined by the $34 billion Medline deal and the $17 billion acquisition of Athenahealth). Moreover, returns for the healthcare sector have remained strong, and valuations reached record highs.[iv]
In looking at the potential D&O liability for executive teams and companies operating in healthcare, it is important to consider the depth of healthcare experience that the private equity investor can bring to acquisition. Returns can be strong with the right target and appropriate baselines set for growth. For example, life sciences tools and diagnostics, saw brisk M&A activity, with 145 deals accounting for $40 billion in value, as the Covid-19 pandemic spurred global demand for services and research consumables. Besides Covid-19 testing, diagnostics providers benefited from other tailwinds, including new payer coverage for genome sequencing, wider adoption of noninvasive prenatal testing, emphasis on earlier cancer diagnosis, and consumers shifting focus to whole health. Additionally, like biopharma, life sciences also drew investments in services, with the Danaher acquisition of Aldevron for $9.6 billion to further support clients in research, clinical, and commercial applications.[v]
Having well educated private equity and healthcare underwriting that can understand both the financial and healthcare vernacular is necessary for assessing risk profile of prospective insureds. Professional liability companies with open communications between the director and officer liability and medical liability claims leadership can also provide color to potential exposure that may arise from company representations that make securities class actions more likely.
In 2021, life sciences companies were, once again, popular targets for securities class action litigation.[vi] Plaintiffs filed a total of 59 securities class action lawsuits against life sciences companies in 2021; 6 of those cases were filed against companies with COVID-19 related products.[vii] A consistent trend surrounds misrepresentations made regarding product safety that may impact the likelihood of Food and Drug Administration (“FDA”) approval.[viii]
The legal issues alleged in the securities class action cases has remained consistent over the years, with deal litigation at the forefront of securities fraud complaints. As investment in life sciences and any healthcare product development that includes regulatory exposure, such as FDA approval or antikickback compliance, due diligence in the healthcare target by the private equity investment team also remains critical. D&O underwriters should look for long-term response plans to triggering events; i.e. public statement consistency and accurate disclosures in the press and to the SEC of positive and negative results.[ix]
With deal litigation certainly likely to be at the forefront of healthcare sector litigation in light of the massive number of private equity healthcare deals and deal value, investor materials that are transparent, including detailed explanations about the history of the transaction, alternatives to the transactions, fairness opinions and conflicts of interest disclosures should be sought by prospective D&O underwriters. Opinions from the D&O claims professionals on the front lines can also provide color to jurisdictions that have particularly active filings and which plaintiff law firms are most likely to file.
[ii] ‘some doctors say that the private equity playbook, which involves buying companies, drastically cutting costs, and then selling for a profit—the goal is generally to make an annualized return of 20% to 30% within three to five years—creates problems that are unique to health care. “I know private equity does this in other industries, but in medicine you’re dealing with people’s health and their lives,” says Michael Rains, a doctor who worked at U.S. Dermatology Partners, a big private equity-backed chain. “You can’t serve two masters. You can’t serve patients and investors.” How Private Equity Is Ruining American Health Care (1) (bloomberglaw.com)
[iii] Consultancy PwC’s Medical cost trend: Behind the Numbers 2022 report, based on information from health plan actuaries and health care executives, found that U.S. health care costs last year increased by 6 percent, while PwC projects 7 percent growth this year. The rate of increase could moderate slightly in 2022, “taking into account the pandemic-rooted inflators and deflators of cost. pwc-hri-behind-the-numbers-2022.pdf
[vi] Developments in Securities Fraud Class Actions Against U.S. Life Sciences Companies (harvard.edu)
[viii] About 40.7% of claims involved alleged misrepresentations regarding product efficacy and safety, with many of these cases involving alleged misrepresentations regarding negative side effects related to leading product candidates, which could at times impact the likelihood of Food and Drug Administration (“FDA”) approval. Id.