Becker Private Equity & Business Podcast
The Critical Role of Cybersecurity Due Diligence in Healthcare M&A 2-25-25
Tue, 25 Feb 2025
In this episode, Scott Becker is joined by Brian Wilson and Chad Zoretic, Managing Directors at VMG Health, to discuss the essential role of cybersecurity due diligence in healthcare mergers and acquisitions. This episode is sponsored by VMG Health.
Chapter 1: What is the critical role of cybersecurity in healthcare M&A?
This is Scott Becker with the Becker Private Equity and Business Podcast. We try each day to bring you brilliant people from the business and private equity world. Today, we're thrilled to be joined by two leaders from VMG Health. We're going to talk about cybersecurity due diligence in M&A transactions and its critical role.
We're joined today by Brian Wilson and Chad Zoratek, both managing directors at VMG Health. Brian, could I ask you to take a moment to introduce yourself and tell us a bit about what you do? And then, Chad, I'll ask you to do the same.
Happy to do so, and thank you again for having me. Very happy to be here. Just a little bit of background about me. I've been in the consulting business for about 30 years, and having been a partner at a couple of different big four firms was exciting. lucky enough to land with BMG Health. And today I lead their cybersecurity risk and AI division.
So I've got a lot of great context and insight on cybersecurity and why that's relevant in M&A transactions, particularly as it relates to healthcare entities. And really looking forward to the conversation.
Thank you very, very much. And Chad, can I ask you to do the same?
Similar to Brian, I have over 30 years of experience consulting primarily around the M&A space. I am a managing director with VMG Health and lead our transaction advisory service division from a financial due diligence perspective. And so I'm also interested in hearing and participating in today's discussion and talking more about the cybersecurity part of the equation.
Thank you very, very much. And talk about, Brian, why don't you lead us off? Talk to us about, you know, so much of deal and diligence is built around financial due diligence, legal due diligence, quality of earnings. Why is that not enough? Why is that not the core of diligence? And why are some of these other things so important too?
Well, that's a great question. And, you know, I kind of, I think back to the days before data breaches were commonplace and we were all getting emails about, you know, kind of monitoring services because our data has been exfiltrated and is available for sale on the dark web.
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Chapter 2: Why is financial due diligence alone not enough?
So I think you kind of got to go back a little bit in time and think about what traditionally the due diligence process was all about. And then when you kind of move forward through time and even just this year, there's some very good examples of recent data breaches that affecting millions and millions of individuals. And so what does that mean?
You know, if you're looking to acquire or sell a health care company on the buyer side, you know, certainly, you know, the risks that you may be assuming may not be apparent. And I think that's definitely worth exploring and understanding, really getting behind the firewall, if you will, around what kind of systems and infrastructure do they have? How is it operated? When was their last incident?
If they've had an incident, what's their playbook if they have one? And on the sales side of the equation, it's really you want to make sure that you're doing everything you can to support the value, right? And being a good potential partner to the acquiring entity, et cetera. And really a lot of what we would frame as cyber due diligence as part of an exercise today
It's really kind of basic block and tackling for cybersecurity, particularly in the healthcare space in terms of knowing what you have, having inventory and asset list and security and threat assessments and all sorts of other good stuff.
It's stuff that should be there already, but because of the way that healthcare operates and there's a lot of moving parts and there's a lot of buying and selling and everything in between, there's gaps. There's inevitably gaps in the M&A process that you know, really needs to be looked at holistically.
Fantastic. And Chad, you do so much work in the financial health care sector. Where are some of the places where you end up seeing sort of cybersecurity and some of these issues prop up as well?
I see it all the time, Scott. And it's really unbelievable how much of an impact it can have on the operations of a provider. even when the breach is actually not at the provider itself, but with the vendor. I think all diligence is much better run holistically as well. I think it's very important for the different specialty teams to be working together
so that I as a financial person can understand potential financial implications of a discovery that may have been come across by the cyber diligence team. I think it is in the transaction world, successful transactions revolve around trust and confidence. And so while my team can help provide some confidence in the numbers that are being analyzed.
Brian's team can help provide some confidence in the cybersecurity strength of the company.
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Chapter 3: What are the key cybersecurity risks in healthcare M&A?
So by side, really understanding what is the seller, what have they been doing? What has the experience been like? What is the in-house capability versus some of their service providers who might be filling gaps? I mean, on the seller side, again, like what Chad had said, I mean, it is really about trust and confidence.
And if you're looking to exit an organization, no, you really do want to be in a position to say, we have done recent assessments. Yeah, maybe we had an issue. And here's what that issue was. We report it out. We did a root cause analysis.
We strengthened and hardened our system so we're better today than we were before, which would be an interesting, I think, conversation to have as a seller to a buyer. It's not our first rodeo. We know that breaches happen. We have very sensitive information and we've been through this before. And here's how we dealt with that.
We learned from that and here's the enterprise value that came out of it in terms of system hardening, you know, really just next level threat assessment and really looking at, you know, pragmatically, where are the risks add to the organization?
Um, you know, in terms of, you know, kind of day-to-day risk, operational risk, and of course, you know, complying with rules, regulations, et cetera, like HIPAA, for example.
Thank you. And Chad, when you're dealing with healthcare M&A today, how focused are buyers and sellers around the cyber diligence? I take it a million times more than they were 10 years ago, but what do you hear from buyers and sellers when we talk about cyber diligence?
just because of the bad news, unfortunately, that has been exposed with the various breaches. And they've had such huge ramifications on the providers themselves, especially from a working capital flow in terms of, as an example, the change healthcare really hindered a lot of payments to a lot of providers. So it is very visible and in the forefront of the sight line.
I think both from a buy side, too, is not only assessing the cyber strength of the target, but if you're going to be relying on that target's technology platform in any way, shape, or form on a go-forward perspective, It is assessing it, but also the financial implications of potentially strengthening it. How much will it take to get it up to where it needs to be if it is at a deficit?
And what will it be to kind of maintain that from a strong cybersecurity perspective? On the sell side or in a cap raise perspective, you want to shed very good light that you've put a lot of thought into the cyber element and have done your best to protect the systems accordingly so that you are aggressively and proactively addressing and mitigating issues.
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Chapter 4: How can buyers assess cybersecurity strength when acquiring healthcare companies?
I think from a cyber due diligence perspective, you really need to look at it from where is my biggest risk coming from? So if you're an organization that has a significant reliance on third parties and third parties are very much being targeted by threat actors,
That is 100% a place where you should spend some time understanding what those third parties programs are, what your contracts are in terms of if you get breached through a third party, what is the liability there and the indemnifications and kind of third party risk associated with the entity. I think that's top of mind.
I think as threat actors have evolved over the last several, we'll say decade and now with AI, Threat actors are using AI just like everybody else and they're doing it well to the point where some of the big providers of AI services are actively looking to kick them out of their offerings so that they can't continue to improve their malware and attack approaches with the use of AI.
So, and the thing that I think most organizations need to keep in mind is, you know, a cyber criminal, a threat actor only really needs to be right, wants to get into the organization versus your in-house cybersecurity team. They got to be right all the time, right? You got to be constantly defending, looking at the risk profile and understanding where that threat may be coming from.
Again, whether it be through third parties, just touching on the AI, but again, there's, there's been an uptick in zero day attacks, which means that a off the shelf software has a vulnerability that these threat actors now have been able to identify using AI in a much shorter timeframe than they could, you know, in years gone past, they had to decompile the code and do a lot more work.
Now AI can do it for them. So there's a couple of really key takeaways here. Again, third parties is one, I think in terms of understanding the data you have and really the sensitivity and the regulatory requirements around it. Healthcare, obviously lots of PHI and PII and really sensitive information and other sectors, right?
There's all sorts of IP and bits and pieces, but I think that's probably the second biggest thing that if I was sitting in a a CISO's chair or CIO's chair right now, I'd really want to make sure I know where that data that is super sensitive and subject to regulation, that I've got that really being monitored heavily and locked down as best as I can.
Thank you. And it seems like a nonstop sort of fight back and forth, especially as the bad actors, the threat actors, get more and more sophisticated. Brian, I'm going to ask you to take a lead on the next question, and I'll ask, or Chad, I'll ask you to take a lead on the next question and ask Brian to jump back in.
Chad, where does cyber insurance play in mitigating risks associated with healthcare M&A? And Chad, maybe you could take the lead on that, and Brian, you could speak up on that as well. Any thoughts there about cyber insurance?
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Chapter 5: What are leading practices for cybersecurity due diligence?
Chapter 6: How have perceptions of cyber diligence changed in healthcare M&A?
And we're going to do something better than what we're doing today with our backups to have an offline version as well as an online. Things like that, block and tackling, those help to negotiate that kind of longer term cost of insurance. And really, I think puts everybody in a better position from a deal perspective.
Thank you. And take a moment, Brian, third-party risks. How do third-party vendors factor into cyber due diligence, cybersecurity? I mean, so many of the big breaches came out of not somebody doing something directly, but through one of their third parties that they worked with. Talk about that a little bit, third-party risk.
Yeah, it is a prevalent one. You know, if you're looking at some of the larger organizations have been making significant investments, they're hardening their systems, they're, you know, upskilling their teams and using high quality third parties to fill in gaps. And so your, your larger organizations have fairly robust
one kind of approaches and monitoring, endpoint monitoring, network monitoring. So if a threat actor tries to undertake a phishing campaign, those things can be identified and stopped quickly. Same thing with ransomware. I've had multiple cases in the last 12 months where,
Ransomware started because somebody did something they shouldn't and the ransomware was locking up an asset, but it got stopped in its tracks because the organization had segmented its network appropriately, had the right internal safeguards to really contain it quickly.
The problem is if you're looking at downstream your third parties who don't have the same size, scope, and scale, or they haven't made that same investment, a good example is they're not maintaining the most current operating system on their assets. So there's some vulnerabilities that potentially haven't been patched on their assets.
And if those third parties are connected to an organization through EDI, APIs, other information exchange protocols, now you have a potential path into the organization that's stemming from your third parties. And I think this becomes even more relevant to your point, Scott. HIPAA has a new proposed security rule
which does extend to BAAs, so business associate agreements from healthcare entities, which will put a bit more teeth around if you're a BAA and you're dealing with healthcare data, there's even additional requirements now that might, you know, if they finalize the rule, because
But the way things are going currently, it's a proposed rule through Health and Human Services, the Office of Civil Rights. But when it actually gets finalized, we'll see. But if it gets there, it'll have real teeth.
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