How healthcare PE actually diligences a hospital today

Week 1: Sourcing the data

The first week is mostly logistics. The associate pulls what they can from existing subscriptions and starts the paperwork for what they can't.

By end of week one you have a Definitive profile, a PitchBook deal history, a pile of HCRIS text files, and a growing Google doc of “things to dig into.” What you don't have yet is a unit-level P&L, a real payer mix, or any independent read on quality, compliance, or litigation.

Most associates can tell you what Definitive says the hospital's net patient revenue is. Almost none can tell you what the HCRIS cost report says it is, because nobody reads the HCRIS cost report.

Week 2: Financial diligence

This is where the real time goes. EBITDA has to be reconstructed from two directions: bottom-up from the CIM financials (with adjustments challenged line by line) and top-down from HCRIS and claims-derived volume data.

A typical CIM has six to twelve EBITDA adjustments. Most are defensible. Some are aggressive: normalizing out-of-period settlements, grossing up for a “one-time” bad debt hit, adding back an executive comp number that is clearly recurring. The associate's job is to figure out which is which.

For most of this, the associate is in Excel pulling HCRIS worksheets, cross-checking against the VDR, and writing memos. For anything that requires real industry benchmarking (wage index, case mix, operating margin by peer), a specialist firm gets hired.

Kaufman Hall and VMG Health are the usual names. A full valuation and benchmarking engagement runs $75K-$200K and takes three to six weeks. On a four-week diligence that means you're committing before you know if you're going to bid. Most shops do a “light” engagement for IOI and the full workup for LOI.

Quality of earnings (QoE) is a separate workstream, almost always outsourced to an accounting firm. Another $150K-$400K. QoE doesn't start until after the LOI is accepted, but the IOI assumes it will validate the number.

Week 3: Compliance and legal

This is the week most deals uncover the thing the seller didn't disclose. It's also the week most deal teams do the shallowest work, because compliance diligence is tedious and the tools are terrible.

The baseline is:

• OIG LEIE, SAM.gov, and the state Medicaid exclusion lists, one NPI at a time, through web forms.
• State medical board lookups for the top 20-50 admitting physicians. Every state has its own portal. Some charge per lookup.
• PACER and state court searches for pending litigation against the entity, its subsidiaries, and any named executives. PACER charges per page. Most associates stop at the entity search.
• OFAC SDN for the entity and named investors. Usually a two-minute check that gets done.
• HIPAA / OCR enforcement actions, 340B audit findings, CMS Corrective Action Plans, Corporate Integrity Agreements.

Most of this gets delegated to the deal's outside counsel, billed at $500-$800/hour. A typical healthcare M&A legal engagement runs $300K-$600K for a mid-sized deal, and a meaningful chunk of that is associates running exclusion checks and pulling court dockets.

This is where post-close surprises come from. A deal closes, the acquirer onboards the medical staff, and discovers in month three that one of the top admitters has an active state board action in a neighboring state. Or that a subsidiary has three active qui tam cases nobody caught because the PACER search was only run against the parent entity.

Week 4: Provider & staff diligence

The hospital's value is its medical staff. The top 10-20 admitting physicians drive most of the inpatient revenue. If half of them are within five years of retirement and there's no succession plan, the projected EBITDA is fiction.

Real provider diligence requires:

• NPI registry lookups to confirm identity, specialty, enumeration dates.
• Medicare Part B utilization data to see actual volume, charges, and allowed amounts per provider.
• CMS Open Payments to identify industry financial relationships above disclosure thresholds.
• Malpractice history through NPDB (for acquirers who have legitimate query access) or court records.
• State-by-state license verification for any provider practicing across state lines (roughly 20% of physicians).

In practice, almost none of this happens at the IOI stage. The associate pulls the top 20 admitters from the Definitive profile, spot-checks two or three against the state board, and moves on. Everything else waits for post-LOI, which is where reps-and-warranties insurance does the heavy lifting, and even that depends on what was asked in the diligence questions.

If you're acquiring a physician group outright, this step cannot be skipped. Verifiable, Medallion, and specialized credentialing consultants get hired for the actual screening, typically $200-$500 per provider. For a 40-physician group that's $8K-$20K and two to three weeks of calendar time.

Weeks 5-6: Synthesis

The last two weeks are writing. The associate pulls the financial model, the market sizing, the quality and compliance summary, and the comp set into a single deal memo. The principal edits. The partner rewrites the thesis. The analyst chases down the three data points the partner decided at 9pm were essential.

The IC presentation is 30-50 slides. The appendix is another 100. Most of the work in those slides is not analysis. It's formatting the same data four different ways to match the partner's preferred narrative structure.

The IOI goes out at the end of week six. If it's accepted, a new four-to-eight-week sprint begins for the LOI, with deeper QoE, environmental, regulatory, and provider-level diligence. If it isn't, everything that was pulled together gets archived in a folder nobody will open again.

What it actually costs

Here's the honest accounting for a single mid-market hospital diligence, IOI stage only:

And for every deal that goes to IOI, two or three don't. That sunk cost gets spread across the ones that close. A shop that closes three deals a year is absorbing another $1M-$2M in diligence spend on passes.

The calendar cost is worse. Five to seven weeks per IOI means the associate can personally run three or four full diligences per year. The bottleneck on how many deals a mid-market shop can pursue is almost always the human capacity to diligence them.

What this looks like with Medistill

Medistill plugs into Claude as a data source. The deal team asks questions in plain English. Everything the subscriptions and the HCRIS parsers and the exclusion portals give you (2,000+ healthcare datasets in total), queryable from one conversation.

The same diligence, compressed:

The work the associate used to do across Definitive, PitchBook, HCRIS, Kaufman Hall's benchmark report, PACER, OIG LEIE, and 50 state medical board websites, all in one conversation. The work that took four weeks of calendar time comes back in an afternoon.

The follow-ups work the same way. “Drill into the radiology group: who are the top billers, what's the age distribution, any licensure risk?” “Pull the same scorecard for the next three targets on our list.” Context carries. The tool does the query.

What stays the same

Medistill doesn't replace the parts of diligence that depend on being in the room. Management presentations, site visits, QoE, payer contract review, real estate, environmental, technical EHR diligence, and the lawyers who actually draft the purchase agreement; none of those go away.

What changes is the ratio. Today, a deal team spends the first four weeks assembling and cleaning data and the last two synthesizing it. With Medistill, the data is assembled on day one. The four weeks come back to the work that actually drives outcomes: talking to the CEO, pressure-testing the thesis, meeting the service line leaders, walking the facility.

The other thing that changes is how many deals you can run. A shop that used to diligence four deals a year per associate can run twelve. That's the real lever. Not cost savings, pipeline expansion.

Side by side

The same hospital diligence, today versus with Medistill:

Run a live target through it

The best way to evaluate any diligence tool is to point it at a target you know well. Pick a hospital system you've recently diligenced, or one on your current pipeline, and ask Medistill to build the acquisition scorecard. Compare it to what you already have. See what it catches that the other tools missed.

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