AHLA's Speaking of Health Law

Health Care Organization Portfolio Review: Trends and Developments

• American Health Law Association

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Kris Blohm, Managing Director, Practice Co-Leader, Mergers & Acquisitions, Kaufman Hall, and Courtney Midanek, Managing Director, Practice Co-Leader, Mergers & Acquisitions, Kaufman Hall, discuss the rapid acceleration of major business unit or "operating portfolio" moves within health care organizations that are navigating the complexities of specialized areas such as home health, skilled nursing, DME, outreach labs, and behavioral health. They cover how legal, financial, and operational teams must collaborate strategically to ensure successful outcomes. Sponsored by Kaufman Hall, a Vizient company.

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SPEAKER_00:

This episode of AHLA's Speaking of Health Law is sponsored by Kauffman Hall, a Vizient company. For more information, visit KauffmanHall.com.

SPEAKER_01:

Thanks for joining today. I'm Courtney Medanek, the co-lead of the merger and acquisition practice at Kauffman Hall.

SPEAKER_02:

And I'm Chris Blum. other co-lead of the mergers and acquisitions practice at Kauffman Hall of his ink company. Today, we're here to talk to you about different ways in which health systems and healthcare organizations can think through their portfolio of business and service lines. And one of the interesting dynamics that we're seeing, and Courtney would love to have your perspective on this, is that the operating environment for health systems and healthcare providers has stabilized, but it hasn't really rebounded to the desires and needs of these organizations vis-a-vis margin improvement and accretion. That's putting some pretty meaningful constraints on these types of organizations. I know I'm seeing a lot of interest in portfolio review and rationalization. What are you seeing in the market and how are some of your and our clients thinking through how they evaluate, whether to partner, whether to review, whether to divest.

SPEAKER_01:

Yeah, I think the first thing that I would say is that our point of view is that you really should be thinking about a portfolio review holistically and across all sort of your business units and access points and offerings rather than doing it in a vacuum. We're coming off this five-year period, or maybe it's five-year plus, I guess, at this point, a period of disruption and strong headwinds. And so it can be tempting to... just sort of react to the latest trend or big splashy announcement that you happen to see and say, oh, we should look at this business unit or we should look at this other one. But all of these pieces really sort of fit together. And so again, we really feel like best practices, if bandwidth and resources permit to assess all of this holistically, this is an environment that's constantly evolving. And so it's gonna be a little bit iterative, right? So, for example, you might have an inpatient facility or facilities that's sort of bursting at the seams. And so the natural inclination is we need more inpatient capacity. But if you're thinking across the continuum and looking at, you know, maybe ASC or other ambulatory strategies or home health, you may make different decisions. Right. And so, you know, our sort of first thought is or my first thought today is, you know, to think about all of this together rather than on a one off or ad hoc basis. And then drilling down one level deeper, you know, is sort of the assessment itself. Right. And so, as you might expect, that starts with a drill down on the performance of these business units. And we really caution customers. a fresh set of eyes on these analyses. We see health systems, sometimes very large, very sophisticated organizations that actually don't have a line of sight on how these business units are performing or may have an outdated view of that. We've got leaders of these business units or service lines or others that may have always thought that XYZ area is very profitable and adding a lot to the bottom line. but it really requires a deep dive and a data-driven type of process to really take a look at that. And that's really only the first step, right? We have to look at the market dynamics, headwinds and tailwinds of all of these parts and pieces. And of course, all within the context of you know, capital constraints and resource constraints. If only we had unlimited capital and resources and we could do everything and be all things to all people, but that's just not the environment that we're in right now. And so, you know, again, kind of taking that holistic approach, you know, is really kind of where I would start here. And so maybe to that end, Chris, You know, have you seen situations or how do you think about making sure that this isn't a siloed approach, but rather something that is comprehensive of a lot of different disciplines?

SPEAKER_02:

Well, it starts, I think, where you started, Courtney, an assessment of whether or not a particular business meets an organization's long-term goals and objectives. Whether that be clinical, business, community, all of the above. And then it really also from an execution standpoint starts with leadership. I think you said holistic approach. It needs to be holistic with leadership as well. So that's not only the C-suite, although it starts with the C-suite, it involves the board as well and the various subject matter experts, whether they be financial, organizational, legal. It really just begins there. It begins with a shared strategic vision of what the organization is trying to accomplish and supported by some level of plan. Now, as you know, we would advocate for a formal plan on paper, not something anecdotal or philosophical, but something on paper, define goals and objectives and constraints, a statement of purpose for the transformation. Again, whether it be clinical or business or financial, And then I think a hard look at what capabilities and constraints an organization has in reaching those goals overall. And then with respect to execution, just good communication and transparency between the management team. A CFO can't do this alone, a CEO can't do this alone, a CMO can't do this alone. We need to consider legal and regulatory constraints, of course, certainly if you're thinking about partnerships, So really it begins and I think ends with management and accountability and really a mindset that change is important and it's important to evaluate. And sometimes that means making hard decisions about certain business lines. Sometimes it means really having a vision to invest in certain business lines, both sides of the coin.

SPEAKER_01:

Yeah, no, I totally agree. And I feel like, you know, we're seeing more and more examples of this and some of our health system clients thinking about how to approach some of these questions. And you may be listening to Chris's and my comments and thinking, you know, they're talking about this holistic approach and bringing all these people in. Are they envisioning like dozens and dozens of people attacking this problem? I mean, I think it's really a balance, right? I think I may have mentioned earlier, I had a colleague years ago who said, you know, when asked, how big of a team are we talking about here? And he said, you know, it should be a team that's, you know, certainly robust enough to cover everything you need, but they should be able to like share a pizza. I mean, we're not talking about, you know, a whole army of folks. And it's a balance, right? Because, you know, we need to have all of the the appropriate inputs, but at the end of the day, have an executive sponsor that sort of calls the shot. And one example that I know I've seen a lot recently, we've seen a lot of outreach lab deals. And I think it's a good example of drawing from many different disciplines. And it's a very iterative type of approach, kind of like the example you just gave, Chris, like a CFO can't do one of these transactions from beginning to end, right? And so what we'll see is, Maybe I'll start there. From a financial point of view, often in transactions like that, we're weighing upfront monetization proceeds with what we're giving up in terms of incremental cash flow. But then we're also taking into consideration clinical and operational impact. So in an outreach lab transaction, we're, you know, considering, you know, making sure that we are still supported from a continuity of care perspective. We still need testing capabilities in our communities And so if we're asking for certain commitments in a transaction to support the clinical and operational needs, and those transactions often it's draw sites or things like that, how does that impact the monetary proceeds in the analysis I just mentioned? And then how do we package all of that up in the transaction itself, which we provide insights on, but our legal side colleagues, you know, really wrap around all of that and provide support, not only on some of the regulatory issues that pop up in transactions like that, but also how we think about the commitments and how we think about what happens if those commitments aren't met. So it's really a pretty holistic process.

SPEAKER_02:

Yeah. And I want to double click, I think, on something you said, Courtney, which I think is pretty unique to healthcare. You mentioned the health system in this case, still needing access to the business. And I think that's something, again, really unique to healthcare. Your partnership, and even in some cases, divestiture, doesn't mean that you let go of the business or asset entirely and never see it again, which I think makes our jobs more interesting, and certainly from the legal side more interesting, because there's a structuring element here that doesn't end with buy, sell, but has a whole host of other commitments and considerations that keep the two entities, buyer, seller, partner, together because there's a necessity to do so down the line. And that's incumbent in lab, that's incumbent in post-acute, that's incumbent in medical products, ambulatory, multi-site, anything and everything you can think of in terms of care delivery. needs to still occur and it's still going to occur the community and the service area. So it just doesn't disappear at the end of the deal. I think that's something really unique. And again, also complex relative to doing these types of or evaluating these types of partnerships.

SPEAKER_01:

Yeah, I totally agree. And I think it actually speaks to the evolution of these transactions and transaction terms, too. I think, you know, A lot of executives that we had talked to maybe 10 or 15 years ago felt like it was sort of this binary. If I own it, I have access to it and I sort of don't need to worry about that. If I don't, then I'm really totally vulnerable. And it doesn't mean that there's no vulnerability, but I think that we have... found creative structural approaches through these contractual arrangements and that there would be some kind of a linkage and partnership going forward. It might not look the same. It might mean that we either don't own it at all or we own a minority part of it, but there are creative ways that I think we've found to continue to make sure you can tap into that continuity of care without owning everything 100%. Right,

SPEAKER_02:

right.

SPEAKER_01:

Yeah. You mentioned, Chris, earlier the mindset of some of the executives. What are some of the things that you've seen in terms of an important mindset when embarking on a journey like this?

SPEAKER_02:

Well, yeah, this is going to sound cliche, but it's to not fear change and to do a continuous, I'd say, evaluation of one's business and one's portfolio. rather than look at it as a one-time transformational event. There could be a whole host of various initiatives, including partnerships that are part of a larger plan. And I know that that sounds daunting because where do you start and where do you prioritize? And I think it goes back to what you began with, Courtney, which is take a look at the entire picture, look at the goals and objectives of the business overall, and start to do an operational or even strategic slash operational assessment of each of the portfolio pieces on whether they help an organization ultimately meet that goal. And that, again, could be financial, operational, clinical, or otherwise. But it's to not fear change. It's to constantly look at the optimal mix of the business. It's be willing to make hard choices about legacy businesses and assets that have been part of the fabric of the organization for a long time or maybe forever. And it sounds, I think, again, counterintuitive because healthcare providers are in the important business of delivering care and you wanna be able to do that, but there's also a business component to it. Not be afraid to rent versus own in some cases, an organization, may find that one of its important service lines that could very well be core but not thrive in its current state may thrive with a partner or with some other construct. And I think that's an important decision to make. And really just continually map your portfolio against your broader strategy. So it sounds intuitive when you talk about it, but I think putting it in practice is something that is a lot harder to, taking that first step and being organized about it, right?

SPEAKER_01:

Totally. I was at a client a couple of weeks ago and we were having this conversation and talking about, and one person said, well, we have to think about like, what are our sacred cows? And someone else said, in this environment, we have to eliminate that mindset altogether. There can't be sacred cows anymore. We have to put it all on the table and then we assess it, right? And we think about our goals and objectives and our constraints and we do that in a holistic fashion, inclusive of our mission, but we have to have that open mindset on the front end, right? Easy for us to say.

SPEAKER_02:

Yeah, yeah. And you can't, You can't, or it's at least very hard to evaluate those sacred cows unless you really put some, I'd say empirical rigor behind it, right? First and foremost, what's the financial performance of the sacred cow or the service line? What's the growth opportunity? What's the market opportunity? What are your resource realities? When you start to do that analysis, and it's hard work, once you start to do that analysis, That should give you the answer. If everything checks out, then it's pretty straightforward. There's a potential to invest. If two, three, or four more of your major priorities and checklists don't check out, then you kind of have the answer to a pretty hard question. Yeah, and we're seeing so many important service lines, like physician constructs, for instance, where certain pockets of ambulatory just be diluted from a financial perspective in the market for no other reason than the market forces or payer forces are headwinds against them, having nothing to do with the organization or even the people. And that's just a market reality that some of our clients need to accept. And the good news is there are resources to help them do that.

SPEAKER_01:

Definitely, definitely. Well, I think we covered a lot of ground. What did we miss here? I

SPEAKER_02:

don't think we missed anything. We went through the importance of being both open and pragmatic about an organization's resources and constraints and being really deliberate about looking at a portfolio holistically and evaluating or operationally assessing portfolio components. We talked about some of the metrics and some of the mechanisms to do that. And I think we talked about some of the constraints or roadblocks in doing that. I just maybe close and say, at Kauffman Hall, we really do pride ourselves on this holistic approach. Our M&A practice, for instance, helps organizations evaluate how partnerships as an inorganic growth and optimization strategy can help an organization meet its objectives. We understand that each organization is unique, so requires a customized approach and we pride ourselves on being able to deliver that approach to our clients.

SPEAKER_01:

Terrific. Well, we appreciate everybody's time and joining the podcast today.

SPEAKER_02:

Thanks, everyone.

SPEAKER_00:

Thank you. you