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AHLA's Speaking of Health Law
Rural Hospital Partnerships: Addressing Distress and Strategic Drift
Jeff Sommer, Managing Director, Stroudwater Associates, speaks with Tom Waldrep, former United States Bankruptcy Judge with the United States Bankruptcy Court for the Middle District of North Carolina, about how financial and operational distress affects rural hospital partnerships and why strategic drift destroys value and jeopardizes strategic options. They discuss the early warning signs of distress that could lead to bankruptcy or sale, strategic options for mitigating distress and entering into a partnership or restructure, and the unique challenges and opportunities facing rural hospitals today. Sponsored by Stroudwater.
Watch this episode: https://www.youtube.com/watch?v=-45iawb8CBw
Learn more about Stroudwater: https://www.stroudwater.com/
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SPEAKER_01:Well, hello. Pleased to be here today. My name is Jeff Sommer, and I'm joined today by Tom Waldrop. I'll do a brief introduction of Tom and myself, and then we'll have a conversation around really partnerships for rural hospitals and the role that financial and operational distress plays in that and the nexus between. of financial operational distress and partnerships for rural hospitals. So briefly, my colleague on today's podcast is Tom Waldrop. Tom was a United States bankruptcy judge with the United States Bankruptcy Court for the Middle District of North Carolina. He represents debtors, unsecured creditors committees, and trustees in business cases throughout the country. He has noteworthy experience in cases involving healthcare debtors, especially hospitals. And that's how I came to know of Tom several years ago when our work intersected. Tom has been practicing law for more than 40 years. He's a member of the National Association of Federal Equity Receivers, the National Association of Bankruptcy Trustees, the Turnaround Management Association, and the American Bankruptcy Institute. And among his notable achievements qualities as an attorney. He's listed in Best Lawyers in America, as well as other notable credits. Tom received his BA from Purdue University and his JD from the Indiana University School of Law, where he served as managing editor of the Indiana Law Journal. Tom, is there anything I missed? Anything you'd like to add to that intro?
SPEAKER_03:No, and I thank you for it. And I thank you for the opportunity to chat with you today about a subject that you and I both hold dear.
SPEAKER_01:Yeah, absolutely. And what I'll do is just very briefly about my background. I'm Jeff Sommer. I'm the managing director at Stradwater Associates. And so in addition to wearing that hat, I'm also head of our partnerships practice. I've been working as an advisor, strategic advisor, and operational performance improvement advisor for 30 years, the last 20 of which are at Stradwater. And my focus has been on partnerships, affiliations, and the nexus of operational performance improvement and partnerships. for the bulk of that time. So I've advised on a lot of partnerships. I've seen a lot of healthy, stressed, and distressed community and rural hospitals around the country, as have you, Tom, in your work.
SPEAKER_03:Yeah, a few. I've probably helped clients purchase or sell 15 hospitals and am currently a bankruptcy trustee for seven hospitals. So, yes, I have seen the distressed hospital space quite a bit.
SPEAKER_01:And I'm curious, given that experience. What do you see as some of the early warning signs or markers of an organization that may be, if it doesn't course correct, may be on a pathway for a stressed or distressed situation, potentially leading to bankruptcy or a distressed sale?
SPEAKER_03:Well, so probably the most obvious one is day's cash on hand. You've got to be able to operate. You've got to have money to operate. But if that is dwindling or that is a concern, then that is a sign, Jeff, of something far more dangerous. wrong and fundamentally wrong with the hospital. How did you get in that situation? What are the trends? How are you going to reverse those trends? You know, those are those that ought to bring, you know, that concern to your mind if you're a board member or if you're an officer of a hospital and of course declining patient volumes there can be lots of reasons for that but there can be some bad ones uh so
SPEAKER_01:I completely agree. Both of those are spot on from my perspective. I think building off of your declining patient volumes, one of the things that we see as an early, and it's usually quite early, is flat top line revenue for not just a two-year period, but really an extended period. And what... What triggers our concern there is organizations will take appropriate steps to try to reduce losses, maybe try to get back to breakeven. But that usually means they're not investing, they're cutting and trying to balance their income statement to get somewhere back to equilibrium. And as that progresses over a number of years, the organization is at best, treading water. At worst, there's more and more deferred maintenance, erosion of cash on hand, absolutely, days cash on hand, all of that. But that tends to be one of those... items that you see a lot of organizations that drift for years. And we call it kind of strategic purgatory. They're not in a sustainable path and they're trying to do things to maintain some semblance of normalcy, but basically are not doing the things they need to do to be long-term successful. And it can take years. for that to kind of play out. And that's really one of the tragedies I think that you and I have both seen is boards and management teams that are in that strategic purgatory mode for too long and let things kind of drift without a course correction or some some fix and i'm curious your your thoughts and observations on timing um as it relates to to some of the those those items you've seen
SPEAKER_03:so it's a little like the old uh analogy of boiling how do you boil a frog you do it slowly and the frog doesn't jump out and before the frog knows it it's cooked well uh there's i see uh some similarities between the way boards of boards of hospitals, independent hospitals, are wonderful people. They are the pillars of the community. They are great at what they do, and they are honored to be serving on a hospital board. They are the fire chief and the superintendent of schools and lawyers and accountants and just all kinds of people that are just wonderful people and want to help. They don't know much, however, about operating hospitals and especially distressed hospitals. And so they get put on boards and in my opinion, they don't ask enough questions and don't ask enough tough questions. And those questions involve getting themselves informed so that they can make decisions as a board. Part of that is getting perspective from someone like you. So you mentioned, you know, get one or two, no, beyond one or two years of information, get five years, get 10 years if you have it. See the trends. You know, I'm thinking, see the trends, but once you see those trends, Get a consultant to give you a perspective. Is that what everybody's doing? Are you off the track somehow? Get that information so that you can make decisions.
SPEAKER_01:Yeah, I couldn't agree more. And I know you and I have had prior conversations around this. All too often, what the information that boards will see is a comparison to prior year to date or a comparison to budget. And so it's exceedingly hard, impossible, right? You can't tell anything from that. You're right. The longer-term trend is just not there. And one of the board responsibilities that I think, and there's a lot of information out there on the fiduciary roles of board members, but I do think it's to be reasonably well-informed and periodically educated around the strategic risk profile of the organization. and how that's changing and evolving. And when we say strategic risk, there's how it's positioned in the market. It's balance sheet strength. What are some of those key trends that really are gonna impact how successful the organization is and whether it's able to fulfill its mission long-term. And so, I do think for a board, at least once a year, looking at a five-year, seven-year, 10-year trend on some of those key metrics, both financial operating and market metrics, incredibly important. And, you know, certainly, you know, we do, and I know you do as well, a lot of board education around, you know, what are the options available to the board? What are their fiduciary responsibilities? And, you know, frankly, It behooves a board. We often say this, you know, we'll get asked the question, when is the right time to think about partnering? And our kind of glib answer, but it has a lot of truth to it is, well, when you don't have to partner, right? The right time to
SPEAKER_03:think about partnering. Yes, they never come to us. Too soon, Jeff, do they?
SPEAKER_01:Right. No. And, you know, if you wait till everybody around the board table has come to agreement that, yes, we really do have elevated strategic risk here. Forgetting about partnership, just focusing on strategic risk and we need to do something about it. You've waited too long. I mean, the earlier you can intervene. in improving operational performance. That's gonna give you more runway because it'll stem the erosion of day's cash on hand. It'll allow you to make maybe some key investments And that buys you time. It doesn't make the risk go away necessarily, unless you really hit your objectives and understanding what that gap, that performance gap is between a sustainable level of performance and your current run rate is really critical. But the sooner you get to that point and you start making some of those adjustments, the less drastic those performance improvement steps need to be. And the more options you frankly have. Yes. One key message. That's
SPEAKER_03:right. Yeah. I want to pick up on that. The more options you have, a hospital that comes to you or me that's got 100 days cash on hand is quite different than the hospital with five days cash on hand.
SPEAKER_02:Without
SPEAKER_03:five days, you're in emergency mode. You know, you're taking the patient to the ER because that's, you know, you don't have time to do any preventative medicine at all.
SPEAKER_01:Right. So go. No, I couldn't agree. I couldn't agree more. And that gets back to, you know, we were actually doing some work. It's probably going back 10 years. And I remember when we started working with this organization, they had a board member who was a delightful, very opinionated person. gentleman from the community. And he started out when we interviewed him kind of pounding his fist on the table and says, we will not partner. We will be independent. And In that case, they had had several years of really distressed operating results, really depleted their balance sheet. And by the end of kind of our strategic risk analysis and board education, you know, his comment to us was, I wish we'd had this conversation two years ago. And that's one of those things. I will say, getting back to, you know, a comment I made as an aside, the earlier you understand that you're at risk, the more options you have. So you do have an option potentially at that point, if independence is near and dear to your heart to say, okay, here are the things we need to do to be sustainable and viable. Let's try to make those happen. But you have to be accountable to how you perform. So if you're not able to hit those marks as you move forward, then at some point, you do have to call the question. And to your point, Tom, not wait till you have five days cash on hand to call that question.
SPEAKER_03:That's exactly right. They boarded gets on the board. People get on these boards. Some have been there a long time, but there can be very small incremental changes, negative changes that don't seem alarming at first, but the failure to sort of address them means that that trend has continued, will continue until you don't have a lot of options and where your independence as a hospital is no longer in question because you simply have to have the clout that one gets from a larger system to deal with provider agreements and, you know, getting higher reimbursement rates and the buying power of a larger organization. All these things at, you know, at some point There is no choice. Now, whether you do that inside of bankruptcy or outside of bankruptcy, it's still you're searching for a partner.
SPEAKER_01:Right. And to drill into that point a little bit more from your perspective, Tom, you know, if an organization is distressed and either needs to find a partner, a white knight, if you will, or perhaps look at a restructuring.
SPEAKER_03:Or a management agreement. I've seen that work.
SPEAKER_01:Sure, sure. Some type of partnership. Absolutely. How, you know, how far in advance of, you know, for instance, five days cash on hand, you know, looking at the run rate or the burn rate of cash. I mean, we're talking... you need months and months to execute any of those strategies. We often say it's at least a year to do, maybe not a management agreement, but a full affiliation requires at least a year's time. What would be, from the restructuring perspective, the minimal amount of time in terms of when an organization is going to deplete their cash that's required from your perspective?
SPEAKER_03:Well, I would say the more the better, obviously, that I have had. I have followed. Hospitals in bankruptcy with one day cash on hand and immediately got post-petition financing in order to keep the doors open in order to run an affiliation process and try to find a partner. Because again, that was the only option in that situation. That is a fire drill. That is not something you want to do. That is expensive and it need not be expensive. It need not be chaos. It could be so much more smoother. if we were a year in the past, having recognized the problem, when we can be a lot more in a planning mode than we are at this time, because I mean, it's just the earlier in the process, the more optionality you have. And any business that can cash flow, and I'm talking about current expenses versus current revenue, can be reorganized. In bankruptcy, you can do a lot of things to push off debt, re-amortize debt, discharge debt in order to make the balance sheet look better. So bankruptcy may not be necessary if you're early enough in the process. Well, and to that point- They need Stroudwater and a consultant to come in and explain how to right the ship, because then you have time to right the ship. Now, there are sometimes strategic reasons you do it inside of bankruptcy anyway, and we'll get to that. But I mean, really, time gives you optionality. That's the way to think about it.
SPEAKER_01:Yeah, I couldn't agree more. That proactive- imperative is so critical. And what I would say in my practice, where we're dealing with, you know, often organizations that are, you know, somewhere in that strategic purgatory to, you know, significantly stressed, it's a very different conversation with a prospective partner. Yeah. they have a plan, a performance improvement plan that they're working. Doesn't mean they have to be at a sustainable run rate, but that they've demonstrated as an organization, they understand the magnitude of the problem, they're addressing the problem, and they're making some progress. Because from a prospective partner's perspective, if you're fortunate enough to not be fully distressed you know, looking at insolvency from a prospective partner perspective, that's a very different profile in terms of resource commitment. And it's increasingly not just the financial resources that prospective partners are focused on, it's the managerial resources. These organizations are also lean. They don't have the bodies and the expertise to throw at a turnaround that hasn't been crafted yet. So it's a very different, again, that proactive component, you know, having a plan and working the plan is a very different conversation with a prospective partner than throwing up your hands and saying, we really don't know how to fix this. We just need somebody to bail us out. Very different conversation, very different set of options and terms that are going to result from that.
SPEAKER_03:When you're in a crisis mode and you're, whatever you're forced to do, you know, you're facing a receivership maybe, or you're facing a bankruptcy, any purchaser, any prospective purchaser or affiliate, they have all the bargaining power, all of it. You have none. You will accept what is being dictated to you. And I've explained to quite a few hospital boards over the years that you don't care who owns the hospital. You don't care how much it sells for. What you care about is having an operating hospital that will serve the healthcare needs of your community for decades and generations to come. And that's what you care about. So your ability to request, maybe even extract those kind of assurances from a partner depends greatly on the financial strength of your hospital. Right,
SPEAKER_01:right. And, you know, emphasizing that point about, okay, so what are the key mitigating strategies that we've been talking about? Just don't want to, you know, underline this if I can. What I think we've been discussing is, first of all, imperative to enable the board to have the right context to make informed decisions and ask informed questions. And that gets back to, at least once a year, looking at those longer-term trends. For financial operating market, we often include a fourth category called value, which is cost position and quality. All of those things impact how the, you know, you're looking at the organization's trend. That's one. I think the other thing, Tom, that both you and I are very much in agreement is, you know, time is of the essence, right? Being proactive, doing it before it's a crisis, before, you know, you're in the verge of running out of cash, you can actually then have time to affect change and pursue alternative options, I think is key. And one of the things we haven't talked about, we've talked about a little bit, but is just the absolute imperative of focusing on operational performance. And if you're an organization that's in that strategic purgatory and you know you're not sustainable, yes, you've still got some cash on the balance sheet. The only way you're gonna make that situation better is if you take a hard look at operational results and dig in and have an improvement plan that's going to change that trajectory. And I think that's true whether you ultimately think you might need to partner or you're really committed to remaining independent. Operational performance is the absolutely essential ingredient to any strategic option.
SPEAKER_03:You're quite right. I've seen boards that... focused on like a financial statement okay and in the financial statement will show yeah we've got we've got a couple million dollars of cash however or however many 10 million dollars of cash however many days of operations that is and look our building it's worth 50 million dollars and there's uh you know we don't we don't have 10 million dollars of debt i'm making things up but you see what i'm saying it it's it looks like things are great Well, that building is not really worth$50 million. That's a book value. And that hospital is 75, 80 years old. I've seen them being over 100 years old. And so now, what does that look like as you go forward for the needs of modern medicine and the way healthcare is delivered these days by hospitals? They are looking at the wrong things. and they are not drawing the right conclusion. Operations is the key. As you said, you can't be led sort of astray by some of these other factors. Right.
SPEAKER_01:And so many of those levers available for operational performance improvement require time, right? So again, you've got to have time for those to be realized, to implement the change, And to experience the change, oftentimes you have to spend some money to benefit from the change in various areas. And one of the things we found in our own firm is working with smaller community rural hospitals is performance improvement plans can generate significant benefits. momentum and positive impact, but timing is essential. And so, you know, what we've seen across, I think, approximately 30 different performance improvement plans we've done in the last 30 months is, you know, the ability to impact margin by 9% over time. That doesn't happen instantaneously. Some of those opportunities may take several years to be realized, but some of them are measured in months. But there are opportunities available to change the trajectory. It's just the organization needs to take them. I'm curious, Tom, not being an expert in restructurings like you are, what would you want to share with, you know, listeners. I know we talked about timing and it requires time, but are there any other key factors or considerations around restructuring specifically in terms of what you've seen that, you know, is helpful or important for people to keep in mind?
SPEAKER_03:Well, we've touched on this before. The board has to be informed. The board has And that's got several steps in it, and I think it bears repeating. The board has to be looking at the right metrics and a long-term, you know, 10 years, look at this, and then ask the questions in addition to getting a consultant, an expert to give you that perspective are you is is is this a trend in this area that everybody is doing or is this out of the industry norms and you have to understand that and say okay what are we going to do to turn things around and ask and ask these hard questions uh there's i've seen so much kicking the metric kicking the can down the road your management of your hospital is key Those folks, it's their responsibility to bring these questions and these issues to the board. But sometimes they need help, and there's no problem with that. Hospitals are in distress and are failing all over this country. But there are solutions if you first recognize that you've got a problem that you've got to deal with. and two, are willing to spend some money on figuring out what those solutions are, you may stay independent if you can turn things around. I've seen situations where operations improvements avoided any kind of partnership, avoided any kind of management agreement and other things. That's certainly possible, not if you've got five days cash on hand though.
SPEAKER_01:Right. No, that's very true. I'll tell you one of the themes we see, and it's not true everywhere. I mean, you know, there are situations where it's clear the organization is not on a viable trajectory. But one of the things we see, both in terms of independent hospitals and how they evaluate specific programs, whether it be maybe labor and delivery, Maybe it's some other component. Or a rural affiliate is part of a larger system. And how that larger system is evaluating the performance of the rural affiliates is we often find that two things are present. the evaluation isn't holistic enough. It doesn't include some of the additional value that's created. So rural labor and delivery, maybe not including any of the ancillary spinoff, all of the labs, all of the ultrasounds that are associated with that program. Conversely, if that organization has a robust inpatient surgery program, then the cost for standby anesthesia can be spread between labor and delivery and inpatient surgery. And so how you allocate costs is really important. We've seen examples where folks, critical access hospitals have allocated costs incorrectly, and then arrived at conclusions that, oh my gosh, we're losing$3 million a year on this program when you fix the cost report, the loss is only$500,000 a year. So in an example of a system level, rural affiliate at the system level, we had a system client that brought us in and said, oh my God, these rural hospitals are bleeding us dry. Can you help us? And so they had this narrative that the rural hospitals were absolutely torpedoing system performance. And there were four of them, four critical access hospitals. We went in and looked at them. They're very small. They're only about 60 million in net patient revenue between the four. And we found about$6 million in incremental cashflow opportunities of those. and about another$9 million in kind of missed value or incorrectly assessed value. So there's basically about a$15 million swing on a$60 million baseline of the value that those rural affiliates were bringing to that system. All of this is to say that one of the important things to do is, yes, operational performance improvement is critical, but also making sure that you're evaluating performance correctly from the get-go. And again, we just have seen so many misses in terms of how organizations evaluate performance. And so then what happens is if you don't understand how cost-based payment works, you might be more likely to cut than you should be. So just very simply, if you're a critical access hospital and you're struggling, removing a dollar of cost, you know, in a PPS hospital, removing a dollar of cost is dollar saved, right? Now there might be some impact on revenue. You need to be mindful of that. But in a critical access hospital, even before you talk about any, changes, impacts on services, removing a dollar of cost for all the cost-based payment that hospital receives is going to be oftentimes 50 cents on the dollar, sometimes more in reduction in revenue because you're getting cost-based payment, oftentimes on a 50% of your revenue base, Medicare and in some states, Medicaid. So long-winded way of saying the analysis is oftentimes more complex than people give it credit for um and it's just important to be really mindful of that um which which really leads to this question we talk about rural challenges and opportunities um and what are some of the unique challenges and opportunities facing rural today and i'm curious tom from your experience are there things that you would point to either unique challenges or unique opportunities
SPEAKER_03:um well uh unique um i think a pervasive situation in all of the rural hospitals in this country is they they deal with and i i often start out by telling boards it's not your fault this is going on all over the country you've got a predominant medicare medicaid uh patient mix you know 80 would be typical then among the customers that you have that have health insurance they have much much much lower reimbursement rates because as an independent hospital you don't have the clout to negotiate higher rates uh so they get paid 200 for a procedure that 50 miles away costs you know will be reimbursed for 500 and so that's a huge difference you know and so that and of course the fact you're independent means you don't have the buying power with the cardinals and the mckessons and the other suppliers that larger systems do and so can that be overcome absolutely it can it can be dealt with i mean you know how it's set up for rural hospitals to pay on a cost plus base, the government to reimburse on a cost plus basis. So it's possible, but you have to be extremely efficient. And that's, and this is where I will highlight the connection between operations improvements and at the same time, maybe looking for a partner, a partner is going to find you far more attractive and, if you are improving your operations than if you say, you know, I'm just going to sit here and wait for somebody to, to come rescue me. The, the, the, the, the white and white night that you mentioned earlier.
SPEAKER_01:Yeah.
SPEAKER_03:You know, that's not near as good a situation as if you have several white nights and they're attracted because you've, You've made the improvements. You're in the process of making the improvements. And as you said, that costs a little money. And it maybe sounds counterintuitive that we have to spend a little money at this time when we're in such tough financial shape. But it absolutely is the right thing to do. And it's been borne out in many cases I've seen. I know you have to. Yeah. Yeah.
SPEAKER_01:Well, you know, that's exactly right. One of the things that we've spent the last few years really kind of proselytizing about is that despite the challenges and headwinds facing rural, there is some intrinsic value there that needs to be recognized. So, you know, yes, operational performance improvement is essential. You need to have sound operating results. But if I'm talking to prospective partners, I need to understand and I need to be able to communicate and quantify to them my prospective value. And so it starts with things like if you're a critical access hospital, the home office cost allocation. So on a pro rata basis, a prospective partner can allocate some of their overhead costs, pro rata portion of their overhead costs. overhead costs through your cost report. Now, in our estimation, about 20% of that overhead allocation might be incremental costs. The rest of it, 80% is a reallocation. So that's a net pickup. So if you're getting 50 cents on the dollar cost-based payment, and you just allocated, let's say,$5 million from the home office costs to that critical access hospital so now there's 2.5 million dollars of incremental revenue now 20 of that 5 million 1 million dollars is incremental cost you're going to have some i.t some other costs associated with with aligning and operating that hospital so um you picked up 2.5 million of incremental revenue via cost-based payment and allocating those costs appropriately. You have$1 million in incremental costs. Now that leaves an incremental$1.5 million of accretive benefit to the system, right? Which is a huge difference, a huge difference. Would not exist without the critical access hospital. And it just starts there. You have swing bed opportunities. One of the things we note is- If there's geographic proximity and coherence, then having a rural affiliate often will boost the market share. So the value of those incremental referrals, if you didn't have that affiliate, market share would scatter, reallocate. We had a client... in the Midwest who picked up a re a new critical access hospital affiliate. And then what they said is our ED transfers previously were 70, 30 going to a competitor. Once we aligned and we had all the clinical systems and the ease of transfers in place, that ratio flipped. So they weren't doing anything clinically inappropriate to be clear, but by virtue of having those operational and clinical relationships really ironed out the, the referral, uh, ratio flipped. And again, that's incremental value. In that same instance, I will say, Tom, that system didn't recognize the value of its rural affiliates. They were not recognizing the overhead cost allocation. They were running, I think, approximately 50 million of system overhead through the various cost reports of their rural affiliates. So real benefit to the system. They were charging their rural affiliates a management fee. And they were starving them of capital, all because I think they didn't recognize that, my gosh, these are little referral centers for the system. And we've got all these opportunities, swing bet opportunities, et cetera. So there's a lot of value often that is unrealized and unrealized within very sophisticated organizations, because this is a different aspect of the business than they deal with day to day, week to week, month to month. And to take advantage of those opportunities. And I mean that in the truest sense of the word, like within the parameters of what's allowed, there are significant opportunities there. So I think that question of rural value in the face of those headwinds you mentioned. So to be clear, there are clearly rural organizations that are really struggling. That's real and it's not going away. But I think part of the opportunity is to figure out where is the untapped or unrealized value, whether that be through performance improvement or through some of these mechanisms, if you decide to partner or to your point, you know, the restructuring process as a way to level set reset going forward.
SPEAKER_03:Right. You can in a bankruptcy, if that's what is is necessary. Right. Again, you can re-amortize secured debt. You can discharge unsecured debt. I'm not going to try to explain the bankruptcy system here in a few minutes, but these are some of the outcomes that you can get. Some buyers, if that's the way you're going to go, would insist on a bankruptcy. And why? Because they get the cleanest title possible. ever. And they don't have to worry about success or liability because it's all blessed by a federal court. I used to be a bankruptcy judge, as you mentioned. And it is just a perfect place for a lot of buyers to know that they're not going to have problems in the future. So, you know, don't be afraid of that if that's the way the transaction has to go within a context of a bankruptcy. And if it's just a pure reorganization, There's no affiliate. There's a peer reorganization. A bankruptcy is not the end. It is rather a new beginning. GM filed bankruptcy, doing just fine right now. Same thing can be done. with a rural hospital, like any other business, if the operations can be improved to the point where it will cashflow, it can be reorganized. A plan from firm by the court, which is just a contract between the debtor and all its creditors. And then you follow that plan. And of course, you have all the projections, you have all the financial data that support that plan. That's another way. I'm not saying any of this is easy. I'm saying, it is a solution to a problem.
SPEAKER_01:Well, and the end goal is something I think you said very, very well earlier, which is to make sure that that hospital is available and serving the community long-term. And so, you know, whether it's performance improvement, whether it's partnering, whether it's via restructuring or some combination of those, the goal is really to achieve the same thing. So that community resource continues to meet the needs of the community going forward without question. I'm curious, Tom, as we kind of wind down, do you have kind of some thoughts you'd like to leave behind with, you know, recognizing our audience, maybe, you know, other attorneys, board members, members of the C-suite, what kind of wisdom would you leave behind for them?
SPEAKER_03:They have to ask the hard questions. They have to demand the information necessary to make informed decisions. You can't do that by looking at what happened last year. You can't see a trend that way. And you've got to then to be able to compare whatever your trend is for your hospital. You've got to be able to compare that with what's happening in the industry. And so you need that perspective. And however you need to get it, you should get that and then have a really informed discussion between management and the board on what the future of the hospital really is. Maybe some changes need to be made. It could be all kinds of things. Many consultants are going to be able to get in there and help you understand how you can make changes that you didn't realize you could make, levers you didn't realize you could pull. But it all starts from understanding what the problem is and then informing yourself about what those solutions are.
SPEAKER_01:That's incredibly well said. I think I'm not even sure I can add to that.
SPEAKER_03:You can. I've seen you do it. I mean, I've seen you, what you can do and what Stroud Watering has done. And it's just important that you understand that there are solutions, but only if you ask. Only if you get out there and find out. Right.
SPEAKER_01:Yeah, I think the thing that strikes me most about having seen a whole bunch of partnerships, a whole bunch of organizations go through what we're describing, whether it be real operating difficulties and having depleted balance sheets, And oftentimes entering into a partnership process from a place of real weakness as opposed to some strength is the importance of timing and being proactive. And that gets back to one of the things you said, which is the board needs to evaluate longer term trends that drive strategic risk and understand those trends and what they mean for the organization. And either make sure change is happening at an appropriate pace or call the question. Because allowing that strategic purgatory drift to continue year after year, all you're doing is removing options, depleting the hospital's value, and ultimately kind of backing it into a corner where it's, you know, at the end of the day, If organizations don't act, they have two options available to them if they can make them work. One is, you know, do a partnership out of desperation, which means you're not going to have your choice of partner. You're not going to have your choice of terms. You're not going to be able to get what we've termed community benefit, investments, et cetera, that are going to protect the community going forward or some kind of restructuring. Because at the end of the day, if you let it go so far, that's really what you're looking at. Performance improvement, won't have enough runway to change that. If you've got a fully depleted balance sheet, you've got an aging medical staff, you've got tens of millions of dollars of deferred investment, whether that be across IT platforms or physical space or biomedical equipment, all of that, you've just dug such a deep hole. And there's only a few ways out at that point if those are available to you. And that's an if.
SPEAKER_03:The third option that you and I don't like to talk about, it's closing. Because if you cannot make one of those solutions work, that is all you're left with. And that is a true disaster for any community, as we all know. And we don't even like to talk about it, but there are solutions to avoid that. And so whatever you have to do, when you look at that as a solution or as an alternative, it's worth a lot of time and effort by the board, by the management to, you know, to avoid that. So my message would be make life easy on yourself by getting informed quickly, be skeptical, ask the hard questions, so.
SPEAKER_01:You know, the analogy I've sometimes used, Tom, You know, if I'm a board member and I don't understand the strategic risk profile of the organization and how it's changing, you know, in my mind, that's analogous to entering some sort of a poker game, but not understanding what specific, you know, rules of the hand you're playing. Is it, you know, five card stud, seven card draw, you know, what are the odds, you know, and then, the challenge gets doubly difficult because so often, whether it be, I live in the world of partnerships and performance improvement, but for partnerships, oftentimes the folks across the table, the counterparties, don't understand the value of a rural affiliate. And if the folks in the organization haven't quantified their value and articulated and made that case, then there's nobody at the table who understands that, wait a minute, there are some things here that we could take advantage of and that change the trajectory once we come together. And so to me, that's analogous to not knowing what cards you have in your hand. You're literally playing poker without knowing the rules and without knowing what hand you have if you don't understand strategic risk of your organization and you don't understand the value of your
SPEAKER_03:organization. I think we know how that comes out, Jeff.
SPEAKER_01:Yeah, that's not a game I want to play for sure. Well, Tom, very helpful. Again, any closing words? I'll give you the last word before we sign off.
SPEAKER_03:My closing, I guess my closing would be save your hospital. You are the one, if you're on the board, if you're on the management, if you're advising one of these hospitals, save the hospital by forcing them to look at the tough questions and informing themselves.
SPEAKER_01:Outstanding. Well, Tom, I want to thank you. for what I hope is an informative conversation for folks who listen. I want to certainly thank AHLA for this opportunity to share Tom's insights and my own insights with the audience. And just delighted to be able to share this information with all of you. So thank you. Enjoy. Thank you for inviting me. Take care, Tom. Bye-bye.
SPEAKER_00:Thank you. you