November 9, 2022

Hospitals at a Crossroads Part 2 with Ponder & Co.

Point by Point

This episode of Point By Point was produced prior to the combination of Waller and Holland & Knight.

In our second episode of our Hospitals at a Crossroads mini-series, Morgan and Waller partners Jesse Neil and Tyler Layne are joined by special guests Jake Aygun and Eb LeMaster from Ponder & Co, a healthcare finance and strategic advisory firm focused exclusively on providing leading capital advisory, mergers & acquisitions, strategic advisory and management consulting services to not-for-profit hospitals and healthcare systems, to discuss what hospitals should be considering from a financial perspective and how expanding outside of the realm of in-patient care could benefit a hospital system's profitability. 




Morgan: [00:00:00] Welcome to PointByPoint. This is Morgan Ribeiro, the firm's Chief Business, Development Officer, and the host of the podcast. On today's episode, we are continuing our hospitals at a crossroad series where we are talking to experts across the hospital and health system sector, and discussing the current challenges and opportunities for those organizations.

On today's episode, Jesse Neal, a partner in Waller's Healthcare Operations Group. Tyler Layne, a partner in the firm's Finance and restructuring group, and I are joined by Eb LeMasterand Jake Aygun from Ponder. Ponder is the leading financial and strategic advisory firm focused exclusively on the healthcare industry. Their firm has been providing advisory services to not-for-profit hospitals and healthcare systems for more than 45 years.

We are excited to hear from Eb and Jake, given their vast experiences advising clients on the most suitable and prudent ways to access capital, execute transformative relationship and integration strategies, and ultimately drive financial and operational performance for their organization. So with that brief introduction, want to welcome everyone [00:01:00] to the show.

Eb: Great, thank you.

Jesse: Thank you, Morgan.

Morgan: So 2022 has certainly brought a lot of uncertainty, you could say for probably almost any industry, and I think that's very similar to what we saw in 2021 and even 2020. But this uncertainty right now that's looming over hospitals and in particular the hospital, M&A market are really a result of a number of factors that are at play.

 Of course Covid continues to be unpredictable. Contract labor costs are skyrocketing. And we're continuing to see a lot of that with the labor shortages as well. Inflation pressures, supply chains, disruptions, interest rates rising dramatically and continuing to rise. Which of course is impacting hospitals and health systems and their ability to borrow money.

And then lastly, I would say just the prospects of new major government influxes, which I know, Jesse and Tyler, we talked about on our last episode with Dr. Schatzlein, and really how that's impacting the hospital and their bottom lines is they're having to repay a lot of this and are not expecting to get any sort of influx of government stimulus, as they were seeing over the last [00:02:00] couple years.

So all of these conditions are making it incredibly challenging for health systems to really get a sense of what the outlook, through the end of this year and into next year. And this uncertainty is making decision making really hard when it comes to what are our strategic options, what does alignment look like?

So I'd love to just start off the conversation at a high level with you, Eb. What advice do you have for hospitals and health system leaders who are challenged to assess their outlook and their budgets for this year and into the near future?

Eb: Thanks, Morgan. As you said, there are a number of factors that are creating kind of unprecedented times. S&P called Q1 of 2022, the worst on record for US hospitals and health systems. You hate to lead with that point, but it shows you the challenge that lies ahead.

All of our clients are struggling with what is a reasonable outlook for next year and what does that mean for us? We have clients also on a wide spectrum of conservatism in those numbers. We have one of the top Catholic systems in the country, typically running 3.5, 4% operating [00:03:00] margin, who's budging basically break even or negative even with some improvements next year.

We have in the latest HCA earnings call last week, hCA took what was very atypical for them and postponed guidance. They have a good handle on volume and acuity and payer mix, but they basically said the unprecedented inflation makes it impossible for them to give guidance now. So even the gold standard on the for-profit side, unable to provide that kind of guidance. What does that mean?

I think first off, scenario planning for our clients is paramount, looking at different possibilities of how things may change next year, hopefully improve, but the degree of improvement is very difficult to guess. So, I think that scenario planning and revisiting budgets on a much more frequent basis is critical.

I think we've really have seen a major uptake in the last 90 days or 120 days, is assessing their strategic options at the same time. So continuing to be grounded in what is your own outlook. What is that outlook and what is the degree of change? But at the same time, being very in tune with strategic options. Whether or not you [00:04:00] act on them but having your board and governance up to speed and management. So we've seen that kind of request for work and our work on that side pick up dramatically.

Morgan: That's really interesting. Jesse or Tyler? I know, Jesse, you've had some conversations recently with hospital leaders and I'm I'm curious how this is reflected in your practice.

Jesse: Sure. And I agree with everything that Eb said, especially the scenario planning. From a regulatory and operational perspective, I spend a lot of my time talking to hospital and hospital boards about ways to align their operations, clinical, financial, just operational with other providers and other systems.

It's really a spectrum of transactions. It's not all or nothing, and it can range from a simple. Almost transfer agreement, collaboration, Agree to agree on types of topics. That keeps the conversations going. At the very least, it gets conversations started. It enables them to brainstorm, at least a bit. And that may seem like a small step at first, but you don't know when it's going to grow into something [00:05:00] more substantial or you'll need it to grow into something more substantial. And so, if you do need something, in next quarter or two that's going to substantially change a service line or referral pattern, or is going to need some additional capital. If you've already got those relationships, if you've already got those experiences, you've got a good running start.

And so I spend good bit of my time in those kind of discussions. And then a little bit further down the spectrum, whether you're looking at a lease or a services agreement or a management agreement, keeping the conversations going and collaborating with other systems, not just in your market, but in neighboring markets it can pay dividends that you don't necessarily think about, but it's something that you keep your tools in your tool belt ready to go in those conversations and, collaboration helps you do that

Morgan: for sure. I know Ponder regularly releases reports on the state of hospital M&A and your most recent report was noting the hospital M&A continues at low levels like we saw in 2021, and we're seeing the same this year.

And there are a number of [00:06:00] factors that are contributing to that trajectory for hospital consolidation. But even more broadly, it's really signaling how providers are expected to meet the challenges of all that we mentioned earlier and delivering care in this evolving environment.

And Jake, maybe look to you first just to give us a few highlights of the factors that were noted in that report that you all published recently.

Jake: Great. Thanks Morgan.

 Through Q3 of this year, trailing 12 month announced transactions stand at 53 compared to 71 in 2021, and well below the 10 year running annual average of nearly a hundred.

Despite this very low level, we are seeing several interesting underlying dynamics, which illustrates the point that while the volume of deal flow is low, the actual level of activity in terms of hospitals and systems studying their strategic options and engaging in informal and formal discussions with strategic partners, both in and out of the acute care realm, remains very robust.

After an uncertain to negative outlook during the initial phases of pandemic, many of our stronger independent [00:07:00] hospital and midsize client systems in that 350 million to 2.5 billion revenue range are now in that sole searching mode as they consider what a path forward as an independent organization would look like as compared to joining a larger system.

Another factor at play, are the national systems shifting their M&A appetite from acquiring hospitals to acquiring outpatient and other non-acute care providers. With the continuing pressure on controlling healthcare costs, a large focus of healthcare M&A has shifted to the outpatient care setting. And this is a trend that's poised to continue as it offers an intrinsically lower cost care setting compared to inpatient care.

A few examples include Ascension's recent partnership with Regent Surgical Health to develop and operate a nationwide network of ambulatory surgical care centers and Lifepoint's merger with Kindred Health, which combine LifePoint traditional inpatient footprint with kindred's rehab and long-term care, home health and hospice care services.

Morgan: Thanks, Jake. I know we'll dive into some of those factors in more detail here in [00:08:00] just a bit, but I do think it's interesting, just the for-profits, that are typically buyers of hospitals, whether or not those are small systems or standalone and we're seeing some shifts in that area in particular.

And as you mentioned, really, looking deeper into how do they diversify their assets, right? It's not just the inpatient hospitals, It's really the outpatient care or postacute Care the really sophisticated organizations are looking at that. We'll love to come back to that in just a minute.

But we'd love to take a look at, discussing really the typical health system M&A transaction and what that looks like right now and how that could possibly change over the next 18 months. Eb, I'll look to you for that.

Eb: Sure, thanks. I'd say number one, in terms of the hospital M&A process, I'd say there've been a lot more fits and starts.

There always is a windy road. But it's been even more dramatic in recent months in the past few years because we've already talked about this, trying to predict what run rate is for a potential acquisition, for example, is not a simple task. We also had buyers, very well capitalized, [00:09:00] very high credit rating, not-for-profit systems putting off decisions in the first half a year is they looked internally. And then finally we'll talk more about this on the regulatory front, the headwind there is greater than it's been many years.

So I would say first and foremost more fits and starts. I think in terms of what we're seeing out there. Number one we're seeing a good number of sold negotiated deals.

So we're still continue to see RFP processes, but more and more we have not-for-profit healthcare systems that say, Hey, I. Partnered in lighter ways, , with a number of different health systems,. as Jesse talked about earlier I know the landscape and I know who I want to partner with. So sole negotiate transaction between healthy systems has definitely been a significant trend.

I think the range of structures has widened also in light of a difficult environment. But then also as some healthy systems look for partners., They may not want to go the full stretch, as Jesse talked about, to membership substitution. So minority equity transactions, we've seen more of those and more exploration of those.

I think the range of transactions, the sole [00:10:00] negotiated transactions, and then just the fits and starts. That's more of what we've seen in the last few years.

Jesse: I was just going to add that in addition to, finding collaborators like that, I see hospital systems who are reshaping themselves to be more appealing to others who would want to collaborate with them. And I think particularly of a public hospital who realizes that alignment clinically is probably the name of the game in today's value-based reimbursement growth.

How do you convince either clinicians in the market, providers in the market, other hospitals in the market or large national, maybe publicly traded companies to joint venture and bring expertise and resources to bear and share some of that risk? Depending on your structure, you're going to be more or less appealing to these collaborators. And starting there I see something that the proactive boards, the successful boards, are keeping on that radar as well.

Morgan: absolutely. One of the things that we're also seeing is that mergers between healthy systems, those are the ones that are really forward looking. They're aiming to better position the combined entity [00:11:00] for population health. So we talked about this sort of diversification of your portfolio making investments in clinical and digital innovation. And so certain elements. Yes, they've got complimentary geographic footprints. And that still can be important, but really it's the cultural alignment of the two merging organizations that's really becoming paramount.

So I'd be curious, Jake to get your thoughts on that. Any recent deals that really illustrate that point?

Jake: So Morgan, You know, it's interesting when financially strong and well positioned health systems are considering strategic partnerships. There really isn't that burning platform or near term capital need or operational issue to solve.

And while benefits of scale are always part of the merger equation, health systems are looking to selectively partner with organizations with common cultures that are truly sharing governance. Particularly in where organizations have a meaningful way to shape their future together.

So two recent mergers in the Midwest in many ways I think encapsulate this growing trend. In Michigan, after several failed partnership pursuits, Beaumont [00:12:00] Health merged with Spectrum help on the opposite end of the state. The trademark phrase for Michigan by Michigan, I think speaks to the importance of preserving their regional identity. And despite Spectrum being twice the size of Beaumont, there's equal legacy representation on the new system board.

Similarly , in Wisconsin, two very strong a-rated health systems, Bellon Health and Gunnerson health system, again, on opposite ends of the state, saw in one another a priority focused on population health and the need to make significant investments in clinical and digital innovation. And a recognition that tackling this together would serve their respective committees better than going it alone.

So this common goal, the desire to retain a certain level of autonomy over their respective regions created the optimal platform to merge in many ways. The two house systems announced a definitive agreement in July of this year, and pending the regulatory review process, the merger would maintain the system's current headquarters in both Green Bay and Lacrosse, and they would have a balanced leadership structure where the top [00:13:00] positions the CEO and board chair would be from different regions.

This would ensure decision making and equal representation as well.

Eb: One thing I would add, it's. Jake mentioned, I believe Atman advocate Aurora. And if you look even at their press release and you see what themes they're stressing, and it's digital population health equity, medical research, it's forward looking things. It's not about solving the past or solving the balance sheet.

It is those kind of forward looking things that Jake mentioned that are the focus.

Morgan: Yeah, I think that's an excellent point and these forward looking transactions. Are also focused on meaningful governance participation by both parties and, leveraging the best of both systems. And like you said, it's just very proactive versus reactive.

And really looking at significantly accelerating their competitive position and their ability to invest moving forward. And of course, continuing to be able to respond to those sort of emergent situations.

 Jesse, I know oftentimes in your role in working with hospitals and health systems, it is [00:14:00] that engaging with the board and probably everyone on this call, but I'd love to hear your insights on governance issues that really need to be considered as hospitals and health systems are looking at their options.

Jesse: Sure. From a fiduciary perspective, they really not only should be looking at their operations and their returns and their strategic plans and their execution, they really have to be. They're obligated to as fiduciaries of the hospital. And what does that mean? I'd say there's two elements to it, and they're somewhat contrary. You need to know what your core strengths are and find ways to invest and collaborate on those strengths and determine what your lane is in your market.

But two, the evolution of delivery models is increasingly just so fast that you have to almost say ahead of the curve.

Are people creating pediatric care at home as part of their strategic plan? Are they doing other kind of consumer-oriented access points? Is [00:15:00] that where they see the marginal growth? The days of just focusing on surgical volume-- those might still be your focus in the near term, but you really have to find a way to, if not pivot away from that, to build that out and to have other ways capitalize on value based reimbursement.

Nobody's found a way for hospitals to make money by keeping people out of their doors. But ultimately you need to find ways to manage the population that is coming into your hospital and play a role in your community, in making sure the access points are for the right patients to get them in the right place at the right time.

And, capital obviously is precious, but there's got to be some type of vision about what they're going to be in their community in terms of hub of care. Are they going to see 99.9% of patients who need care in their community or is it more of a service line or two and an outpatient presence?

How do they see themselves being sustainable over the long term and deciding how they can do it. There's not really a playbook. It depends on your community, [00:16:00] your strengths. There have been more rural hospitals in Tennessee recently who developed over time a good relationship with an out-of-state not-for-profit.

And the collaboration, the clinical expertise, the exchange, it grew over time. And ultimately resulted in a transaction form of long-term lease and the out-of-state system committed to making substantial commitments and investments in the community. And it's going to be great for that community and that region for years to come.

And then there are other more urban systems who have a totally different playbook, but their community has its own strengths. And finding ways to tie that into your mission and available capital. It's a little bit hard to say there's one size fits all. It's not that, but it is a process that from a fiduciary perspective really has to be ongoing.

And it never really stops.

Jake: Yeah. Jesse, I would just, add to that, that it's so critical to get governance right when considering a merger of equals on the front end. Typically, in transactions, in situations where there's not necessarily a merger of equals governance is really [00:17:00] an afterthought. But here in the cases of our experience when we're really Looking at mergers of two organizations coming together. It truly tests the cultural compatibility when at the forefront of those negotiations, you have to truly abide by the spirit of coming together and sharing and, governance, both at the board level as well as in the senior management C-suite.

Morgan: We were just talking about the sort of reactive versus proactive, and of course the pandemic definitely put everyone in a kind of reactive stance pretty suddenly and the rapid onset of the pandemic and the resulting effects on the overall healthcare system led many to press pause on major strategic decisions as they really just had to hunker down and focus on fighting COVID, juggling staffing challenges and really maximizing the effectiveness of their operations. And of course, grant funding and advanced payment programs significantly bolstered their balance sheets and mitigated, what could have been some major lost revenue given that elective procedures were halted. And then after an uncertain to negative outlook [00:18:00] during the initial phases of the pandemic, many strong independent hospitals, midsize systems, they improved their operating performance and are now in that kind of soul searching mode as we're, hopefully, exiting the pandemic. And they're able to shift gears again and refocus back to where they may have been two and a half, three years ago.

So operations are stabilizing and repayment of the advanced funding is happening. Mid-size systems are pretty favorably positioned to withstand what may happen over the next year to 24 months. So I'm curious now that they're shifting focus, what is it that they really need to be considering at this point?

And Jake, I'll start with you. And I know from our end too, Tyler and Jesse, there's likely some considerations both boards and management team should make at this.

Jake: Thanks, Morgan. This is really just echoing what Eb and Jesse mentioned earlier. While we've been strong proponents of senior management and boards keeping an eye on their strategic options, both from a defensive and offensive standpoint, especially in today's increasingly uncertain and fluid environment, organizations should [00:19:00] regularly reexamine their strategic position and keep their boards just as importantly, actively engaged in that process.

So to keep informed of how you compare to the status quo of continuing to operate independently we really believe organizations should consider dual tracking their focus by beginning to evaluate their potential strategic options while still remaining inwardly attentive to shoring up their organizations' healthcare functions and operations. Especially for those stronger organizations where there's a wider range of structures being considered. As Jesse mentioned earlier without that burning platform or a clear preferred partner, it could take longer for these systems to fully evaluate their strategic options.

We've seen in the last year systems like Genesis Health in Iowa, singing River Health System in Mississippi and Flagler in Florida among others, all announced formally pursuing their strategic options inclusive of consideration of a more integrated alignment structure. So with that said, it's still important to [00:20:00] closely track what surrounding house systems are doing and proactively consider how their strategic alignments may impact your organization's situation. We tend to see often a ripple effect from these announced alignments and things evolve quickly.

For example, in Wisconsin where there just in a matter of several months, consolidation is happening real time with announced mergers by Advocate Aurora and Atrium as I mentioned, Bellon and Gunderson and Marshville and Essentia. So in the game of musical chairs, you don't want be the last one standing.

Morgan: Nobody wants to be that last one for sure.

Tyler: Even pre pandemic and pre all the challenges that hospitals are facing, there's always been a tension as a decision maker at a hospital between managing for tomorrow, managing for five years, and managing for 10 years in the future.

And the dual tracking that Jake mentioned about you've gotta manage your day to day, but you also need to consider all your strategic options. Really, that's not optional. You have to do it. And there's just no way around the pressure [00:21:00] unfortunately that's going to put on hospital boards and on management to consider those strategic options while still managing a very challenging environment in their day to day operations and finances

Jesse: I think a great example that I see from some of the most successful hospital systems is that they have focused like a laser beam on their employees and their workforce for the last two years, recognizing the trend that was underway already but had been accelerating.

Employee satisfaction, employee recruitment recognizing what the contributions are for different caregivers, providers. And it's a topic at every single board meeting and at every single committee meeting to a degree and focusing on that. That might not have been the first topic conversation, five years ago.

 You're talking about other kind of growth service lines, but keeping your employees and bringing on new ones right now is the difference often time between making a margin and not. And some systems recognize that quite a while ago, and it's paid some dividends at the same time.

They're looking at [00:22:00] the horizon and seeing who they can collaborate with. And frankly, the fact that they've got a good workforce is not going to hurt their cause strategically. It'll help them

Morgan: so we touched on this earlier and Eb, we were talking about this recently on a call, and I'd love to get your thoughts on who the buyers are right now. For those systems that are looking to sell. Historically standalone facilities and even some of the smaller systems really would look to some of the larger players like an HCA or Life Point or CHS to be on their list of potential buyers. And right now that's really not necessarily happening. I'd like for you to maybe speak to that. Who are the buyers and how is that landscape changing?

Eb: I think the critical element here is the lens of regional relevance, and that's always been important, but it's gotten more important in recent years of where is my position in particular market

yes, scale's important, but scale only for scale's sake has been a challenge. So when you think about regional relevance, the likely buyers, what shifted in our practice over the past five or seven years really is doing a good bit more buy side work is our clients are [00:23:00] often the region in the region.

And a natural either adjacent or in-market player to make to bolt on regional relevance. And at the same time on the flip side, you've seen Ascension in the northern part of Wisconsin or HCA in Georgia, divest assets. And I think it's the reverse. They were unable to get the relevance and the position that they're looking for in those markets or grow.

So we've seen a good bit of divestitures. And acquisitions, but those that are , looking for adding to the regional relevance is really critical. 10 years ago in our practice, community health systems and HMA were two major buyers and they were buying assets across the country and some not necessarily contiguous.

I think , that model, we do not see that really being the model today. It's again more about regional relevance. It's amazing to us for the last 10 quarters in a row that none of the publicly traded or major private equity backed for-profit systems have done a conversion of a not-for-profit system.

They've traded assets. Among for-profits were [00:24:00] divested. But that's, there was one announce that fell through during those 10 quarters. But otherwise, that group's been quiet. Or as Jake mentioned, they had been focused on non-acute. As Jake pointed out, he talked about the musical chairs in Wisconsin. That shows you, those players all had footprints either adjacent or in the same state or in the same region in all those cases.

We do have a few exceptions. We talked about the advocate Aurora Atrium deal. There was no overlap and no contiguous nature. But that is a whole nother level of scale. So I think the buyers it's really about the regional relevance, but everybody does need growth.

And I think as we come out of the pandemic further and further out of that Period, people do need to get growth, especially in a high inflation period. So I do think people have to not just be defensive, but offensive with their corporate development strategies.

Tyler: Yeah, I think, from what I've seen talking to both investment bankers who I work with and hospital management, is the perception has always been that you'll have a for-profit acquirer [00:25:00] as an option. Whether that perception is reality or not, that's always been treated as the backstop, particularly for community hospitals and safety net hospitals, and that's certainly no longer the case.

I think you're going to see a lot more non-traditional buyers coming in. Both smaller private equity firms as well as just buyers who are making a real estate play in a lot of urban areas, especially.

Morgan: I think this is a good place to piggyback on some of what you were just mentioning but I know you mentioned this earlier, Jake. With a continuing pressure on controlling cost a large focus of just generally healthcare M&A for hospitals has really shifted to the outpatient care setting.

And I know Ponder was recently quoted in a Modern Healthcare article that was discussing health system interest in the outpatient sector as the hospital M&A continues to decline. And you'd noted that while hospital executives are still looking at potential deals, M&A volumes may not rebound until 2023 or later. And so that's really, again, boosting that outpatient setting and the [00:26:00] priority on that. So can you all elaborate on that and what this might mean for our listeners? We look at the HCAs of the world, right? That gold standard. Okay, They're looking at the outpatient setting, but really what does that mean for maybe the smaller systems that are looking at some sort of proactive strategy?

Jake: Sure, and there's clearly no doubt part of the multi-year slowdown in hospital M&A is attributable to providers, particularly those with meaningful scale and resources, shifting their strategic focus and priorities to investments and ventures in the outpatient sector. As mentioned earlier, Ascension's partnership with region and Lifepoint's merger with Kindred are good examples of how these systems are pursuing opportunities to diversify revenue streams across the care continuum in areas like behavioral, home health, hospice, and rehab. I think to help crystallize this in a recent investor presentation, one of the largest for-profit operators, tenant Healthcare illustrated their profitability mix shifting from 2017 to projected 2023 with EBIDA.

A charitable to hospital [00:27:00] operations declining from 60% to 39% while ambulatory and revenue cycle operations increasing from 40% to 61%. So this inversion, in some ways makes sense considering tenants ambulatory and revenue cycle margins are 300 to 400 basis points higher than hospital margins.

Eb: To piggyback what Jake was saying, it's interesting within a few years when we think about who are the publicly traded hospital companies to Jake's point tenants targeting more, 60% plus of their cash flow to come from non-acute setting, UHS, Universal Health is already north of 50% behavioral cash flow versus hospital.

Lifepoint's made a major move with their Kindred acquisition and Spring Stone more recently. So you see, where is the for profit money going? You can see it's clearly focused on those other sectors.


Morgan: a number of options out there. It's worth noting. A number of systems, and we talked about this earlier, are investing in clinical and digital innovation. For a [00:28:00] number of reasons, of course, to bend the cost curve, diversify revenue streams. It really depends on what we're talking about when we're looking at clinical innovation, but health systems are clearly concerned that growth in traditional revenue streams are stagnating. And again, they've gotta diversify. Many surveys are out there and you're oftentimes seeing that innovation is listed as a top strategic focus for health systems CEOs.

But what does that really mean? And maybe give us some examples of hospitals that are doing that.

Eb: Yeah, it definitely through the last five or so years, the focus on innovation has gone up dramatically. We've always had health systems who have some investment in alternative assets through private equity funds and the like, but now we've seen a much more active direct approach.

OSF and Peoria, they launched a fund and have already done. 30 or so investments, direct investments, Then we have others like Novant and others creating incubators. Just a whole range of different innovation strategy approaches. But it really is all over the place in terms of what people mean by innovation and what they're [00:29:00] doing.

And I do think there was some fuel added. Candidly, the equity market run and private equity run that we've seen over the past decade. It'll be interesting to see how innovation morphs as we've had, S&P down 20%. Private equity volumes are lower in terms of investment, so it'll be interesting to see how that morphs.

But on the non, financial return side of innovation, you've got to continue to figure out ways to do this business differently, to be more efficient, to improve quality, because you just, we've got to continue to figure out ways to bend the cost curve and dramatically improve quality.

So both from a financial return and not, we've worked with some clients. Bond score mercy help. We help them. Acquisition of revenue cycle business ensemble. That was a 60 to a hundred million dollar investment that turned into a $2 billion valuation over time. And so some see that and want to chase that kind of opportunity, but those are not easy to come by.

But at the end of the day, whether it's funds, whether it's direct investment, incubators, Building capabilities in house and [00:30:00] then commercializing them. We're seeing health systems of all types, trying different things with no set approach.

Jesse: Yeah, I see a lot of innovation investment around patient experience. It's explicitly tied to reimbursement for a lot of plans. It's increasingly a part of the strategic plan in a market to maintain or grow a market share.

Patient experience-- there's a defined approach and response. Not that long ago. It wasn't and it wasn't probably even tracked by a lot of the hospitals. It was just kept the door open and that's where they ended up. And there wasn't a lot of infrastructure or data around tracking where they came and why and what happened afterwards.

But now the innovation around tracking a patient's experience documenting it, following up with the patient, keeping touches after leaving the hospital. The patient leaves the hospital and there's still work to be done. Even if you don't have an affiliated clinical setting if they show back up at your emergency department in a day or a week, it can impact not just your reputation, but your reimbursement. It has a [00:31:00] direct impact.

And then related to that, the consumerism technology, using telemedicine, those types of innovations are ones that I see a lot of boards getting excited about and finding some traction on. And the market's really bloomed, not just in Nashville., I think the trend is beyond that. They're finding solutions that are just beyond the traditional inpatient volume based solutions. So it's interesting to see, and that's where I see a lot of the innovation that's being rolled out and considered. And it's just, it's a lot of small, medium and large investors. And it is probably an interesting, exciting part of the business. There's a lot of doom and gloom out there.

Not to be dramatic, but if the American healthcare system is designed to do anything, it's the innovation piece. It may not be best at a lot of aspects of it. You'll read about it plenty of places, but the US system has come up with innovations and technology to solve problems in a lot of different sectors. And you'd like to think that healthcare is one of those.

Morgan: Yeah, and I think, you mentioned this earlier Eb just in terms of the timeline of getting things done [00:32:00] for systems, whether they're looking at signing a deal where they're acquiring a surgery center or it's something larger scale, I would think we're really talking about the larger scale deals, but what's the timeline looking like right now? Is it slower to get things done?

Are deals failing? Because you mentioned those numbers, Jake earlier, that are significantly lower. And why is that? Is it people just aren't going to market at all right now? Or, I'd imagine there's a number of factors at play there.

Eb: I really think Morgan some of the same factors we talked about earlier, that when you have the combination of very uncertain operating and financial results. Volumes still not fully recovered. And then you layer on regulatory obstacles that really means a slowdown. And we've been working with a 300 million net revenue hospital in the southeast, ready to close, ready to sign definitive agreements and their partner signed a major separate deal that was going under regulatory review. We are waiting now for it to close before we can close. So [00:33:00] nothing related to us, another transaction and here we have to wait. And as I mentioned before, we had double a credit boards. In the first half of this year, not willing to move forward with strategic acquisitions because their focus in the boardroom was, What are you going to do about our own operating results before we take on another turnaround or another opportunity, we've got to focus on our work. I do think there are though some acquisitions that are strategic that are moving quickly and so it's a mixed bag, but I would say our rate of getting from initial engagement to close has definitely been challenging in the last two to three years.

Morgan: So that then leads to my next question, which is on the FTC.

There's a lot of ambiguity in the regulatory approval process, and of course there's challenges that come with that, and there's expenses that come with that as well. And so what are we seeing on the FTC and just in general, the regulatory review of transactions? Of course, state attorney generals get involved in these deals as well.

What are we hearing and [00:34:00] seeing on that front?

Eb: On our side, I think the headwind is strong, as we've seen in a number of years. I think the current administration's tenor is more aggressive than it's even been in recent years, and I think we have the added complication though if you look at consolidation of the last few decades, systems have drawn closer and closer together.

And so as we think about market share and overlap and the like, that is further complicated as systems have grown and bump into each other more and more. That combination with the headwind on the regulatory front from current administration makes for a very challenging and a number of very high profile deals have been stopped.

And it is front and center in everything that we do right now. And in some, we almost scratch our heads on why there's opposition. You look at an atrium advocate, Aurora, there's multiple states between the. So it's clearly a scale issue, maybe some payers, but really you have to plan in almost every [00:35:00] situation that you could have resistance.

Morgan: Jesse or Tyler, anything on the regulatory review front?

Jesse: I'll say , you mentioned the Attorney General Review. In former life, I was on the government side of those reviews, and it was a long checklist that you looked at and there wasn't a box reserved for politics, but it was always in the background.

And it was always something that had to be if not considered, just monitored. Cuz it informs so many aspects of a potential transaction, how you communicate around it. And in my current post as board counsel to hospital systems both before and during a transaction, My experience is that the rationale that you bring to the state attorney general's office, particularly in the Southeast, they've been receptive to arguments that don't deal directly with exchange of dollars.

They seem to recognize, maybe I'm being optimistic, but they seem to recognize that there are so many complicated headwinds, so much change in the air, so much overhead. So much scale that needs to be had such an [00:36:00] importance around culture. If you find the right partner and collaborator that you don't have to come with a fair market value report showing that you're getting the full economic value and cash that is going to be put into a foundation in a community.

You can show that you look at where the hospital system is today and where the status quo will have it in 10 years or 20 years and 30 years. And then you can compare that to what potentially the parties could gain and the community could gain in terms of collaboration in state or out of state.

And I've found that they've been receptive to that and I haven't seen, at least on the state level, the issues that I seem to see so much on the federal level.

Morgan: All right guys, there's A lot to this and I feel like we've covered some recommendations that you have for boards, but any sort of Positive things to look towards? Particularly for those that are at a crossroads, and are looking at or unsure what the future looks like for them. And it can be a challenge whether or not it's their board just doesn't have [00:37:00] experience in this and they're having as a management team to educate their board. What, one or two pieces of advice do you have for systems that may be tuning into this and thinking, All right, where do I even get started?

Tyler: Yeah, I think I would just say that all hope is not lost if you're at a crossroads.

I think that there are a lot of strategic options and just the, the playbook has changed. We've talked about on podcast today. There's a lot of innovation that can happen and while I think a hospital executive's job is a lot harder and a hospital board's job is a lot harder than it may have been in the past. There's a lot of opportunity to change the way that care is delivered and really make sure that communities maintain the level of care that they really need.

And so it's not an easy job. It's not easy to get past the crossroads, but I think there's a lot of opportunity that comes with being in a challenging position where you're basically forced to, as I said, manage for tomorrow, but also [00:38:00] manage for 10 years from now.

Jake: I would also just add that, in today's environment in many ways everyone is really talking to everyone in some form or fashion. And obviously it would have to be done in an appropriate and discrete manner, but weighing your options doesn't commit yourself to doing something. And I think allowing organizations to continue.

To dual track their options while maintaining an independent mindset is something that they should continue to pursue as well. The other thing I would also just say is that the resiliency of strategic imperatives to proceed with transactions in the face. Really significant headwinds I think is really coming to bear.

And I think it's illuminating the importance of really testing buyers and sellers to think forward looking and not be put off by. Some significant near term, but very real challenges to take on challenged assets. And we've seen this in a number of cases where organizations ultimately are getting comfortable moving forward because they're seeing [00:39:00] what's best for the community and what's best for their systems in the long run.

Eb: I think one thing we also try to stress to our clients is to really develop criteria. This is a very emotional topic. In terms of board members and leadership, they're very important, a critical part of the community. So we try to impart our clients to build a scorecard or build criteria to revisit on a regular basis where do we stand?

And part of that's financial and access to capital, but there's also the degree of competition. There's, how are we doing on quality metrics? Part of it. Not that you can totally make this a objective exercise, but how do we ground ourselves, especially as performance is concerning, or if there's a competitor move, how do we stand on some critical metrics, revisiting those and being disciplined about it so that the emotional part doesn't take over.

Jesse: I'll piggyback on Eb's comments. Having a process in place that is more about evaluating changes in the market and your progress within it.[00:40:00] Starting with the premise that I think the vast majority of hospitals believe they have a sacred mission, and I think most would say the biggest risk to that mission is the status quo, and the first time the community hears about a potential transaction or collaboration shouldn't be 90 days before it's set to close.

I think Eb's exactly right that these health system leaders are more than just the leaders of a company. They're public leaders, they're community leaders, and if they're engaged, the Chamber of Commerce and other stakeholders in the community and reiterating publicly regularly that there's a lot of challenges out here. There's a lot of opportunities. Our mission is sacred and it's important that we have a process to consider ways to protect. to the extent that is part of the community conversation it just goes a lot more smoothly when something gets a little more momentum and you have to talk at the rubber meets the road, what are you going to give up historically you've had as a community that you may not have in the future? And that really is the crossroads I [00:41:00] think, that a lot of hospitals and communities find themselves. And if there's already been some discussion around it strong leadership, it pays dividends in more ways than you can count.

And so having a process and talking about it sounds simple. But I really think it is a key component as you're trying to maneuver yourself forward,

Morgan: I think that is an excellent place for us to end the show. So thank you all for your time and your insights on this topic and look forward to further discussion.

Eb: Great. Thank you guys. We appreciate being a part of this.

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