Artificial intelligence is rapidly becoming an essential part of healthcare operations. Hospitals, pharmacies, and physician practices are incorporating AI into everything from clinical decision support and medical documentation to scheduling and patient engagement. However, while these tools can improve efficiency and care, they also introduce new legal and compliance risks, especially in mergers, acquisitions, and other transactions where technology use becomes part of the deal.

Many healthcare organizations have adopted AI tools without fully developing governance or compliance frameworks around them. This lack of oversight can create uncertainty for potential buyers. Buyers in today’s market must take a close look at how AI is being used within a target organization, especially when those systems handle or analyze protected health information (PHI) subject to Health Insurance Portability and Accountability Act (HIPAA) requirements.

Why AI Due Diligence Matters

An important part of any healthcare acquisition now is understanding the target’s current and planned use of AI. Sellers may not have complete visibility into how their teams or vendors are implementing AI, and they may not be aware of how these systems intersect with regulatory and data privacy obligations.

Buyers should evaluate not only what AI tools are being used, but also whether they are compliant with privacy, security, and disclosure standards. Such compliance includes reviewing vendor contracts, identifying who owns the data generated or processed by AI systems, and determining how risks such as bias, data leaks, or patient misidentification are being managed.

Buyers need to ensure that their due diligence process specifically covers the seller’s compliance with acceptable AI standards and internal protocols. Partnering with a law firm experienced in healthcare regulation and technology due diligence is essential to identifying potential liabilities and ensuring that the transaction does not expose the buyer to regulatory or litigation risk.

Navigating the Evolving Framework of State AI Regulations

Since there is no unified federal law regulating use of AI in healthcare, compliance analysis often requires a state-by-state review. Many states are introducing laws aimed at preventing misuse of AI in patient interactions and protecting consumer data.

For example, California now restricts chatbots and AI systems from implying that their advice comes from licensed medical professionals, while Illinois limits the use of AI in making decisions about mental health treatment. These state laws signal a growing focus on transparency, consent, and accountability in AI-driven healthcare practices. Similar initiatives are likely to appear in New York as the state responds to such trends.

For providers operating in multiple states, understanding these evolving requirements is crucial. Buyers should ensure that the entities they acquire are aligned with state laws governing patient communications, consent, and the use of automated systems in healthcare delivery.

What a Thoughtful AI Diligence Process Should Include

• A comprehensive AI diligence review goes beyond checking whether AI tools exist. It involves a detailed assessment of how those systems are integrated into the organization’s operations, whether oversight mechanisms exist, and how data flows between the organization and its vendors. Buyers should consider:

• ·Whether the target has formal AI governance structures or designated personnel responsible for compliance (e.g., Chief Information Officer or AI governance committee).

• The scope of AI tools currently in use, including clinical and administrative applications.

• How data privacy and security obligations are managed in connection with AI systems.

• Vendor and third-party agreements addressing ownership, confidentiality, indemnity, and service levels.

• Any pending or potential claims involving AI performance, patient impact, or data misuse.

By identifying areas where controls are weak or incomplete, buyers can make informed decisions about risk allocation, negotiation terms, and resolving compliance gaps after closing.

Coordinating Legal, Technical, and Clinical Review

Effective diligence requires collaboration between legal counsel and internal teams that understand the technical and clinical aspects of AI. Legal advisors with expertise in healthcare data privacy and regulatory compliance can assess risk exposure and identify potential noncompliance. IT and clinical staff can provide context on how AI tools are implemented in practice, helping to evaluate operational integrity and patient safety implications.

This collaborative approach helps buyers to gain a full picture of both the legal and operational implications of purchasing AI-driven assets or businesses.

Building Strong Governance After Closing

Once the transaction closes, the buyer should not stop at identifying risks, but should act on them. Establishing a structured AI governance program helps align compliance practices, manage vendor relationships, and create consistent oversight across the organization. A governance plan might include policies for responsible AI use, regular audits of AI applications, and clear procedures for monitoring compliance with privacy and security obligations.

Organizations that take the time to build these systems early are better positioned to prevent regulatory issues, protect patient trust, and integrate new AI capabilities safely.

Final Thoughts

AI is transforming healthcare, but it is also creating complex compliance challenges. In any acquisition, understanding the legal, technical, and ethical dimensions of AI use is now as critical as assessing financial or operational risks. Buyers that engage in thorough AI due diligence and rely on counsel familiar with healthcare and technology law can reduce exposure, protect patient data, and ensure a smooth transition post-closing.

Our firm advises buyers, investors, and healthcare organizations on legal and compliance risks related to AI use in acquisitions and integrations. We help clients conduct thorough due diligence to identify potential liabilities, evaluate data privacy and regulatory exposure, and ensure compliance with evolving AI and healthcare standards. If you are considering purchasing or investing in a healthcare entity that uses AI technology, contact our healthcare attorneys at (212) 668-0200 or info@mdrxlaw.com.