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Representation and Warranty Insurance (RWI) in healthcare provider deals: what you need to know for year-end 2021

Representation and warranty insurance (RWI) has boomed in popularity in the highly-regulated world of healthcare provider deals, and many dealmakers assume it will continue to be available as we ride the current wave of deals seeking to close by year-end 2021.  That assumption may be wrong. 

In recent weeks, a number of insurance brokers have been sounding the alarm that severe capacity challenges in the RWI market could make healthcare provider deals the first on the chopping block as underwriters prioritize easier deals without the unique risks associated with healthcare provider transactions. 

Dealmakers with a mandate to close by year-end should plan ahead and fast-track due diligence processes, in recognition that the headrush of coverage in 2019 and 2020 will not be available for many deals in the year-end surge of 2021. 

History of RWI in Healthcare Provider Deals

RWI provides insurance as an alternative source of recovery for breach of a seller’s representations and warranties in an acquisition agreement.  This allows the parties to substantially reduce — if not eliminate — indemnification escrows and protracted negotiations over an indemnity package. 

To understand the anticipated changes in RWI coverage for healthcare provider deals, one must first look backwards and see how that coverage emerged in the first place.

Originally offered in the late 1990s, RWI slumbered for over a decade until it suddenly gained dominance in the late 2010s.  According to one study, RWI grew from only 40 deals in 2008, to 1500+ deals in 2018.

RWI for healthcare deals, however, lagged the adoption rate seen in almost every other industry.  In these transactions — and in particular, in healthcare provider transactions, as opposed to adjacent industries such as healthcare technology and life sciences — representations and warranties concerning billing and coding and compliance with the Stark law, anti-kickback laws and HIPAA are critical.  Until three or four years ago, carriers would categorically exclude these representations from coverage, making RWI of little value for most deals in the sector.   

Around 2017, underwriters began to expand underwriting for healthcare provider deals and to eliminate these exclusions as they sought to capture market share in what had been to that point an untapped RWI market.  By the end of 2020, RWI was a baseline expectation for any healthcare provider deal over $100 million in value.  What was particularly surprising was that policies were being written on deals for companies with enterprise value as low as $30 million, and some underwriters were as recently as six months ago exploring options to offer insurance for “roll-up” buyers to obtain coverage by combining multiple smaller deals together in a single insurance package.

What Has Changed: Capacity

By almost any measure, 2021 will likely be a record-breaking year for M&A deals.  As a practical matter, this has pushed the top service providers to the edge of their capacity — from law firms to accounting firms and RWI underwriters, M&A advisors are straining to bear the load.

The nature of the RWI process makes capacity issues particularly challenging:

  • Law Firm Capacity — RWI deals require greater legal resources, both for the buyer, which must produce and defend a detailed legal due diligence memo, and for the underwriter, which must hire its own law firm to advise as to the scope of any coverage exclusions based on the due diligence results.  The 2021 surge has pushed many of the RWI underwriters’ law firms to the brink of capacity, causing them to default to broad exclusions for healthcare compliance rather than do the additional regulatory analysis that, in past years, would convince them to remove or narrow exclusions. 
  • Chart Auditors — RWI coverage for billing and coding has always required a quality chart audit by a reputable firm.  In specialty areas with more complex billing, such as in dermatology, ENT or ophthalmology, a top-tier chart auditor can be an advocate for coverage and explain directly to the underwriter how the issues that were identified can be quantified or mitigated.  In recent weeks, though, several of the more reputable auditors have informed us that their capacity to take on more deals through year-end may be nearing a limit.  While some lesser-known auditors have been able to take on the work and successfully obtain coverage, we have also seen some fail to convince underwriters, whether due to inexperience or otherwise.
  • QoE Providers — Across all industries, the top quality of earnings firms are being pushed to their limit, with many stating privately that they will not take on more deals except for priority clients.  Healthcare provider deals, particularly for founder deals (as opposed to PE-to-PE deals), often involve messy or incomplete financial records.  Buyers who are unable to secure a high-quality QoE may be particularly disadvantaged in securing coverage if they also lack a sterling chart audit, as both reports are crucial to evaluating the reliability of a sellers’ reported revenue.

Our expectation is that as dealmaking continues to accelerate through the end of the year, RWI underwriters will — as a general trend — continue to cherry-pick the deals they want to underwrite rather than do the hard work to find a bespoke coverage solution for each deal. 

How to Manage the Year-End Challenge

While we know that securing coverage for healthcare provider deals in November and December 2021 will be difficult, the exact scope of what is feasible is still to be determined.  Despite that uncertainty, dealmakers can still act now to get ahead of the game. 

First, the parties should take the time to package the deal for the underwriter in a manner that will expedite coverage — as opposed to treating it as just another healthcare deal.  According to David Barnes of CAC Specialty, designing a tailored pitch before submitting the deal to underwriters can be the key difference maker:

To stay ahead of the historic flood of deals into the market, we’re tailoring our marketing approach to obtain the best terms on each deal. If a broker just sends the deal into the market blindly and makes no efforts to distinguish it from the stack of other deals on the underwriters’ desks, that broker is likely to get “off the shelf” results – whether that comes in the form of declinations for “appetite” or even “bandwidth,” or just in getting a disproportionate swath of non-starter terms. -- David Barnes, CAC Specialty

Second, sponsors should lean on relationships with underwriters to secure soft commitments to expedited or prioritized processes.  In recent months, we have seen deals secure coverage on reasonable terms — including on billing and coding and HIPAA, and even in the $40M enterprise value range — in large part because the private equity sponsor made a concerted effort to develop a long-term relationship with a particular underwriter.  Sellers who are conducting auction processes should, as part of their comparison of bids, ask potential buyers about the quality of their relationships with underwriters and their recent history of securing favorable coverage.

Third, buyers and sellers should fast-track the completion of financial, coding and legal due diligence on parallel tracks, so that the process can switch to underwriting as quickly as possible.  Unless a deal is expected (>50% chance) to bust at the financial due diligence phase, the ROI for getting in the door earlier with underwriters will likely outweigh the risk of incurring unnecessary deal expense due to busted deals. 

Fourth, as soon as they anticipate having a deal, buyers should seek to engage high-quality and reputable due diligence providers — and should not hesitate to ask for bona fides for securing RWI coverage in particular specialty areas.  If a diligence firm has more experience in a specific sector within the healthcare industry, they are more likely to accurately and efficiently issue spot.  When a buyer engages a reputable firm with experience in the relevant sector, it becomes easier for a carrier to more confidently rely on the diligence report provided and used in underwriting a policy.

Finally, buyers and sellers should both think ahead:  what will the deal look like in the face of broad exclusions for billing and coding, compliance and HIPAA?  Although it would be a distraction to try to negotiate a “Plan B” indemnity package before finding out if coverage will be available, it would be prudent for the parties to keep the possibility in mind throughout the process.  For instance, sellers should think carefully about whether to simply accept broad representations and warranties based on the assumption that RWI will be available; if the parties complete their purchase agreement only to find out that coverage is denied, it may be hard to go back in time and negotiate for carve-outs, look-back periods and other limitations that are more commonly found in indemnity deals than in RWI deals.


Morgan Ivey
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David Marks
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Mark Bell
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