May 4, 2023

Podcast - Increasing Hospital Profitability Through Transformative Integrations

Hospitals at a Crossroads, a Counsel That Cares Podcast Mini-Series

This Counsel That Cares episode was previously recorded and released by Waller on November 7, 2022, and has been rebranded and relaunched now that Waller is a part of Holland & Knight. 

In our second episode of our "Hospitals at a Crossroads" mini-series, Holland & Knight healthcare attorney Jesse Neil and finance and restructuring attorney 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 and acquisitions, strategic advisory and management consulting services to not-for-profit hospitals and healthcare systems. They 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. 

More Episodes in This Series

Part 1: Hospital Restructuring and Strategic Partnerships 

Part 2: Increasing Hospital Profitability Through Transformative Integrations (You are currently viewing Part 2)

Part 3: Critical Access to Care in Rural Communities

Part 4: Rising Chapter 11 Bankruptcies in Healthcare



Morgan Ribeiro: On today's episode, we are continuing our Hospitals at a Crossroads 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 Neil, a partner in the firm's Healthcare Operations Group, Tyler Layne, a partner in the firm's Finance and Restructuring Group, and I are joined by Eb LeMaster and 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 to the show.

Jake Aygun: Great, thank you.

Eb LeMaster: Thank you.

Morgan Ribeiro: 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 costs are skyrocketing, and we're continuing to see 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 hospitals. The bottom line is they're having to repay a lot of this and expecting to get any sort of influx of government stimulus as they were seeing over the last couple years.

So all of these conditions are making it incredibly challenging for health systems to really get a sense of what the outlook is 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.

And 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 LeMaster: 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 U.S. 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 percent operating margin, who's budgeting basically break even or 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 really have seen a major uptick in the last 90 days, or 120 days, ins 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 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 Ribeiro: That's really interesting.

Jesse or Tyler? I know Jesse, you've had some conversations recently with hospital leaders, and I'm curious how this is reflected in your practice

Jesse Neil: Sure, and I agree with everything that Eb said, especially the scenario planning From a regulatory and operational perspective, I spent 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. It keeps the conversations going. At the very least, it gets conversations started and 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 more substantial or you'll need it to grow into something more substantial.

And so if you do need something in the next quarter or two, that's going to substantially change a service line or a referral pattern, or it's going to need some additional capital. If you've already got those relationships, you've already got those experiences, you've got a good running start.

And so I spend a 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. Those conversations and collaboration helps you do that for sure.

Morgan Ribeiro: I know Ponder regularly releases reports on 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 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 in delivering care in this evolving environment.

And Jake, maybe I'll 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 Aygun: 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 100. 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 the pandemic.

Many of our stronger independent hospital and mid-size client systems in that $350 million to $2.5 billion revenue range are now in that soul 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. 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 Region Surgical Health to develop and operate a nationwide network of ambulatory surgical care centers and LifePoint's merger with Kindred Health, which combines LifePoint's traditional inpatient footprint with Kindred's rehab and long-term care, home health and hospice care services.

Morgan Ribeiro: Thanks, Jake.

And I know we'll dive into some of those factors in more detail here in 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 post-acute care, the really sophisticated organizations are looking at that. We'll love to come back to that in just a minute, but would 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 one.

Eb LeMaster: 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, very high credit rating, not-for-profit systems putting off decisions in the first half of the year as 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 in 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 sole negotiated deals. So we're still continuing to see RFP processes, but more and more we have not-for-profit healthcare systems that say, 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, negotiated 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 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 negotiated transactions and then just fits and starts. That's more of what we've seen in the last few years.

Jesse Neil: 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 join 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 is something that the proactive boards, the successful boards, are keeping on their radar as well.

Morgan Ribeiro: 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 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 complementary geographic footprints. I mean, 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 any recent deals that really illustrate that point.

Jake Aygun: 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 Health merged with Spectrum Health 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, Bellin Health and Gunderson Health System, again, on opposite ends of the state, saw in one another a priority focus 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 communities 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 emerge in many ways. The two health 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 La Crosse, and they would have a balanced leadership structure where the top positions — the CEO and board chair — would be from different regions. This would ensure decision making and equal representation as well.

Eb LeMaster: One thing I would add, as Jake mentioned, I believe Atrium and Advocate Aurora, 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 kinds of forward-looking things that Jake mentioned that are the focus.

Morgan Ribeiro: 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 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 Neil: 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.

Two, the evolution of delivery models is increasingly just so fast that you have to almost stay 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 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 to capitalize on the 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 percent 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, 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 in the form of 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.

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 Aygun: 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 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 in governance, both at the board level as well as in the senior management C-suite.

Morgan Ribeiro: 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. 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 during the initial phases of the pandemic, many strong independent hospitals, mid-sized 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. Midsize systems are pretty favorably positioned to withstand what may happen over the next year to 24 months. So I, 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 boards and management teams should make at this moment.

Jake Aygun: 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 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 younger 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 and in Iowa and Singing River Health System in Mississippi and Flagler in Florida among others, all announced formerly pursuing their strategic options, inclusive of consideration of a more integrated alignment structure. So with that said, it's still important to closely track what surrounding health 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 in real time with announced mergers by Advocate Aurora and Atrium, as I mentioned, Bellin and Gundersen, and Marshfield and Essentia. So in the game of musical chairs, you don't want to be the last one standing.

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

Tyler Layne: 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 got to 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. Unfortunately, that's going to put pressure 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 Neil: 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 of conversation five years. You're talking about other kind of growth, the service lines, but keeping your employees and bringing on new ones right now is the difference oftentimes between making a margin and not. And some systems recognized that quite a while ago, and it's paid some dividends.

At the same time, they're looking at 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 there.

Morgan Ribeiro: 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 HDA or LifePoint or CHS to be on their list of potential buyers, and right now that's not necessarily happening. I'd like for you to maybe speak to that. Who are the buyers and how is that landscape changing?

Eb LeMaster: 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 a 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 as our clients are often the region in the region in 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.

But 10 years ago in our practice, Community Health Systems and HMA were two major buyers, and they're 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.

So 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 or divested. There was one announced that fell through during those 10 quarters, but otherwise, that group's been quiet. Or, as Jake mentioned, they've 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 adjacent or in the same state or in the same region in all those cases. So 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 other 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 Layne: 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 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 Ribeiro: 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 the continuing pressure on controlling costs, 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 the 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 till 2023 or later. And so that's really, again, boosting that outpatient setting and the 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 at that gold standard. OK. 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 Aygun: 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 in 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 EBITDA attributable to hospital operations declining from 60 percent to 39 percent while ambulatory and revenue cycle operations increasing from 40 percent to 61 percent. So this inversion in some ways makes sense considering Tenant's ambulatory and revenue cycle margins are 300 to 400 base points higher than hospital margins.

Eb LeMaster: To piggyback off 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, Tenant is targeting more, 60 percent 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 Ribeiro: There's a number of options out there. It's worth noting that a number of systems, and we talked about this earlier, are investing in clinical and digital innovation for a 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 and traditional revenue streams are stagnating. And again, they've got to diversify. Many surveys are out there, and you're oftentimes seeing that innovation is listed as a top strategic focus for health system CEOs, but what does that really mean? And maybe give us some examples of hospitals that are doing that.

Eb LeMaster: 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 in Peoria, they've launched a fund and have already done 30 or so investments, direct investments. But then we have others like Covenant 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 doing.

And I do think there was some fuel added from, 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 percent. Private equity volumes are lower in terms of investments. 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 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, Bon Secours Mercy Health, we helped them with an acquisition of revenue cycle business ensemble. That was a $60-100 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 then commercializing them, we're seeing health systems of all types trying different things with no set approach.

Jesse Neil: Now, 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 the market to maintain or grow a market share patient experience. There's a defined approach and response. Not that long ago, there wasn't, and it wasn't probably even tracked by a lot of the hospitals.

It was just keep 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 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 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 U.S. system has come up with innovations in technology to solve problems in a lot of different sectors, and you'd like to think that healthcare is one of those.

Morgan Ribeiro: Well, yeah, and I think you mentioned this earlier, just in terms of like a timeline of getting done for systems, whether you'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 that play there.

Eb LeMaster: 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, 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. 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 Ribeiro: 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 in, just in general, the regulatory review of transactions? Of course, state attorney general’s get involved in these deals as well. What are we hearing and seeing on that front?

Eb LeMaster: On our side, I think the headwind is the strongest as we've seen in a number of years. I think the current administration's tenure 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 bumped into each other more and more, that combination with the headwind on the regulatory front from current administration makes for a very challenging. 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, multiple states between the two. So it's clearly a scale issue. Maybe some payers, but really you have to plan in almost every situation that you could have resistance.

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

Jesse Neil: I'll say you mentioned the attorney general review. In a 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 because it informs so many aspects of a potential transaction. How you communicate around it.

And in my current position, 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 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 in cash that is, it's 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 in the community could gain in terms of a 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.

Morgan Ribeiro: 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 are 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 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 Layne: Yeah, I think I would just say that all hope is not lost if you're at the crossroads. I think that there are a lot of strategic options, and just, the playbook has changed. As we talked about on the 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 manage for 10 years from now.

Jake Aygun: 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 discreet 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 of 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 the challenged assets.

And we've seen this in a number of cases where organizations ultimately are getting comfortable moving forward because they're seeing what's best for the community and what's best for their systems in the long run.

Eb LeMaster: 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 comp degree of competition. There's how are we doing on quality metrics.

Part of it, not that you can totally make this an 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 Neil: 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. Starting with the premise that I think the vast majority of hospitals, you 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, community leaders, and if they're engaged with 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 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 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 Ribeiro: 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 LeMaster: Great. Thank you guys. We appreciate being a part of this.


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