June 24, 2025 • 49 mins
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.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_00 (00:00):
This episode of AHLA's Speaking of Health Law is
sponsored by Stroudwater.
For more information, visitStroudwater.com.
SPEAKER_01 (00:17):
Well, hello.
Pleased to be here today.
My name is Jeff Sommer, and I'mjoined today by Tom Waldrop.
I'll do a brief introduction ofTom and myself, and then we'll
have a conversation aroundreally partnerships for rural
hospitals and the role thatfinancial and operational
(00:40):
distress plays in that and thenexus between.
of financial operationaldistress and partnerships for
rural hospitals.
So briefly, my colleague ontoday's podcast is Tom Waldrop.
Tom was a United Statesbankruptcy judge with the United
States Bankruptcy Court for theMiddle District of North
(01:01):
Carolina.
He represents debtors, unsecuredcreditors committees, and
trustees in business casesthroughout the country.
He has noteworthy experience incases involving healthcare
debtors, especially hospitals.
And that's how I came to know ofTom several years ago when our
work intersected.
Tom has been practicing law formore than 40 years.
(01:23):
He's a member of the NationalAssociation of Federal Equity
Receivers, the NationalAssociation of Bankruptcy
Trustees, the TurnaroundManagement Association, and the
American Bankruptcy Institute.
And among his notableachievements qualities as an
attorney.
He's listed in Best Lawyers inAmerica, as well as other
(01:45):
notable credits.
Tom received his BA from PurdueUniversity and his JD from the
Indiana University School ofLaw, where he served as managing
editor of the Indiana LawJournal.
Tom, is there anything I missed?
Anything you'd like to add tothat intro?
SPEAKER_03 (02:02):
No, and I thank you for it.
And I thank you for theopportunity to chat with you
today about a subject that youand I both hold dear.
SPEAKER_01 (02:09):
Yeah, absolutely.
And what I'll do is just verybriefly about my background.
I'm Jeff Sommer.
I'm the managing director atStradwater Associates.
And so in addition to wearingthat hat, I'm also head of our
partnerships practice.
I've been working as an advisor,strategic advisor, and
operational performanceimprovement advisor for 30
(02:29):
years, the last 20 of which areat Stradwater.
And my focus has been onpartnerships, affiliations, and
the nexus of operationalperformance improvement and
partnerships.
for the bulk of that time.
So I've advised on a lot ofpartnerships.
I've seen a lot of healthy,stressed, and distressed
community and rural hospitalsaround the country, as have you,
(02:52):
Tom, in your work.
SPEAKER_03 (02:55):
Yeah, a few.
I've probably helped clientspurchase or sell 15 hospitals
and am currently a bankruptcytrustee for seven hospitals.
So, yes, I have seen thedistressed hospital space quite
a bit.
SPEAKER_01 (03:12):
And I'm curious, given that experience.
What do you see as some of theearly warning signs or markers
of an organization that may be,if it doesn't course correct,
may be on a pathway for astressed or distressed
situation, potentially leadingto bankruptcy or a distressed
(03:35):
sale?
SPEAKER_03 (03:36):
Well, so probably the most obvious one is day's
cash on hand.
You've got to be able tooperate.
You've got to have money tooperate.
But if that is dwindling or thatis a concern, then that is a
sign, Jeff, of something farmore dangerous.
wrong and fundamentally wrongwith the hospital.
(03:58):
How did you get in thatsituation?
What are the trends?
How are you going to reversethose trends?
You know, those are those thatought to bring, you know, that
concern to your mind if you're aboard member or if you're an
officer of a hospital and ofcourse declining patient volumes
(04:21):
there can be lots of reasons forthat but there can be some bad
ones uh so
SPEAKER_01 (04:28):
I completely agree.
Both of those are spot on frommy perspective.
I think building off of yourdeclining patient volumes, one
of the things that we see as anearly, and it's usually quite
early, is flat top line revenuefor not just a two-year period,
but really an extended period.
And what...
(04:50):
What triggers our concern thereis organizations will take
appropriate steps to try toreduce losses, maybe try to get
back to breakeven.
But that usually means they'renot investing, they're cutting
and trying to balance theirincome statement to get
somewhere back to equilibrium.
(05:11):
And as that progresses over anumber of years, the
organization is at best,treading water.
At worst, there's more and moredeferred maintenance, erosion of
cash on hand, absolutely, dayscash on hand, all of that.
But that tends to be one ofthose...
items that you see a lot oforganizations that drift for
years.
(05:32):
And we call it kind of strategicpurgatory.
They're not in a sustainablepath and they're trying to do
things to maintain somesemblance of normalcy, but
basically are not doing thethings they need to do to be
long-term successful.
And it can take years.
for that to kind of play out.
(05:54):
And that's really one of thetragedies I think that you and I
have both seen is boards andmanagement teams that are in
that strategic purgatory modefor too long and let things kind
of drift without a coursecorrection or some some fix and
i'm curious your your thoughtsand observations on timing um as
(06:17):
it relates to to some of thethose those items you've seen
SPEAKER_03 (06:22):
so it's a little like the old uh analogy of
boiling how do you boil a frogyou do it slowly and the frog
doesn't jump out and before thefrog knows it it's cooked well
uh there's i see uh somesimilarities between the way
boards of boards of hospitals,independent hospitals, are
(06:43):
wonderful people.
They are the pillars of thecommunity.
They are great at what they do,and they are honored to be
serving on a hospital board.
They are the fire chief and thesuperintendent of schools and
lawyers and accountants and justall kinds of people that are
(07:04):
just wonderful people and wantto help.
They don't know much, however,about operating hospitals and
especially distressed hospitals.
And so they get put on boardsand in my opinion, they don't
ask enough questions and don'task enough tough questions.
And those questions involvegetting themselves informed so
(07:30):
that they can make decisions asa board.
Part of that is gettingperspective from someone like
you.
So you mentioned, you know, getone or two, no, beyond one or
two years of information, getfive years, get 10 years if you
have it.
See the trends.
(07:52):
You know, I'm thinking, see thetrends, but once you see those
trends, Get a consultant to giveyou a perspective.
Is that what everybody's doing?
Are you off the track somehow?
Get that information so that youcan make decisions.
SPEAKER_01 (08:09):
Yeah, I couldn't agree more.
And I know you and I have hadprior conversations around this.
All too often, what theinformation that boards will see
is a comparison to prior year todate or a comparison to budget.
And so it's exceedingly hard,impossible, right?
You can't tell anything fromthat.
You're right.
The longer-term trend is justnot there.
(08:31):
And one of the boardresponsibilities that I think,
and there's a lot of informationout there on the fiduciary roles
of board members, but I do thinkit's to be reasonably
well-informed and periodicallyeducated around the strategic
risk profile of theorganization.
and how that's changing andevolving.
(08:52):
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 keytrends that really are gonna
impact how successful theorganization is and whether it's
able to fulfill its missionlong-term.
And so, I do think for a board,at least once a year, looking at
(09:18):
a five-year, seven-year, 10-yeartrend on some of those key
metrics, both financialoperating and market metrics,
incredibly important.
And, you know, certainly, youknow, we do, and I know you do
as well, a lot of boardeducation around, you know, what
(09:38):
are the options available to theboard?
What are their fiduciaryresponsibilities?
And, you know, frankly, Itbehooves a board.
We often say this, you know,we'll get asked the question,
when is the right time to thinkabout partnering?
And our kind of glib answer, butit has a lot of truth to it is,
(09:59):
well, when you don't have topartner, right?
The right time to
SPEAKER_03 (10:01):
think about partnering.
Yes, they never come to us.
Too soon, Jeff, do they?
SPEAKER_01 (10:05):
Right.
No.
And, you know, if you wait tilleverybody 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 somethingabout it.
You've waited too long.
I mean, the earlier you canintervene.
in improving operationalperformance.
(10:27):
That's gonna give you morerunway because it'll stem the
erosion of day's cash on hand.
It'll allow you to make maybesome key investments And that
buys you time.
It doesn't make the risk go awaynecessarily, unless you really
hit your objectives andunderstanding what that gap,
that performance gap is betweena sustainable level of
(10:47):
performance and your current runrate is really critical.
But the sooner you get to thatpoint and you start making some
of those adjustments, the lessdrastic those performance
improvement steps need to be.
And the more options you franklyhave.
Yes.
One key message.
That's
SPEAKER_03 (11:06):
right.
Yeah.
I want to pick up on that.
The more options you have, ahospital that comes to you or me
that's got 100 days cash on handis quite different than the
hospital with five days cash onhand.
SPEAKER_02 (11:21):
Without
SPEAKER_03 (11:21):
five days, you're in emergency mode.
You know, you're taking thepatient to the ER because
that's, you know, you don't havetime to do any preventative
medicine at all.
SPEAKER_01 (11:33):
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 10years.
And I remember when we startedworking with this organization,
they had a board member who wasa delightful, very opinionated
(11:53):
person.
gentleman from the community.
And he started out when weinterviewed 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 hadseveral years of really
distressed operating results,really depleted their balance
(12:14):
sheet.
And by the end of kind of ourstrategic risk analysis and
board education, you know, hiscomment to us was, I wish we'd
had this conversation two yearsago.
And that's one of those things.
I will say, getting back to, youknow, a comment I made as an
aside, the earlier youunderstand that you're at risk,
(12:37):
the more options you have.
So you do have an optionpotentially at that point, if
independence is near and dear toyour heart to say, okay, here
are the things we need to do tobe sustainable and viable.
Let's try to make those happen.
But you have to be accountableto how you perform.
So if you're not able to hitthose marks as you move forward,
(12:58):
then at some point, you do haveto call the question.
And to your point, Tom, not waittill you have five days cash on
hand to call that question.
SPEAKER_03 (13:08):
That's exactly right.
They boarded gets on the board.
People get on these boards.
Some have been there a longtime, but there can be very
small incremental changes,negative changes that don't seem
alarming at first, but thefailure to sort of address them
(13:32):
means that that trend hascontinued, will continue until
you don't have a lot of optionsand where your independence as a
hospital is no longer inquestion because you simply have
to have the clout that one getsfrom a larger system to deal
(13:54):
with provider agreements and,you know, getting higher
reimbursement rates and thebuying power of a larger
organization.
All these things at, you know,at some point There is no
choice.
Now, whether you do that insideof bankruptcy or outside of
bankruptcy, it's still you'researching for a partner.
SPEAKER_01 (14:13):
Right.
And to drill into that point alittle bit more from your
perspective, Tom, you know, ifan organization is distressed
and either needs to find apartner, a white knight, if you
will, or perhaps look at arestructuring.
SPEAKER_03 (14:31):
Or a management agreement.
I've seen that work.
SPEAKER_01 (14:34):
Sure, sure.
Some type of partnership.
Absolutely.
How, you know, how far inadvance of, you know, for
instance, five days cash onhand, you know, looking at the
run rate or the burn rate ofcash.
I mean, we're talking...
you need months and months toexecute any of those strategies.
(14:55):
We often say it's at least ayear to do, maybe not a
management agreement, but a fullaffiliation requires at least a
year's time.
What would be, from therestructuring perspective, the
minimal amount of time in termsof when an organization is going
(15:16):
to deplete their cash that'srequired from your perspective?
SPEAKER_03 (15:20):
Well, I would say the more the better, obviously,
that I have had.
I have followed.
Hospitals in bankruptcy with oneday cash on hand and immediately
got post-petition financing inorder to keep the doors open in
order to run an affiliationprocess and try to find a
partner.
Because again, that was the onlyoption in that situation.
(15:41):
That is a fire drill.
That is not something you wantto do.
That is expensive and it neednot be expensive.
It need not be chaos.
It could be so much moresmoother.
if we were a year in the past,having recognized the problem,
(16:05):
when we can be a lot more in aplanning mode than we are at
this time, because I mean, it'sjust the earlier in the process,
the more optionality you have.
And any business that can cashflow, and I'm talking about
(16:29):
current expenses versus currentrevenue, can be reorganized.
In bankruptcy, you can do a lotof things to push off debt,
re-amortize debt, discharge debtin order to make the balance
sheet look better.
So bankruptcy may not benecessary if you're early enough
(16:52):
in the process.
Well, and to that point- Theyneed Stroudwater and a
consultant to come in andexplain how to right the ship,
because then you have time toright the ship.
Now, there are sometimesstrategic reasons you do it
inside of bankruptcy anyway, andwe'll get to that.
But I mean, really, time givesyou optionality.
(17:16):
That's the way to think aboutit.
SPEAKER_01 (17:18):
Yeah, I couldn't agree more.
That proactive- imperative is socritical.
And what I would say in mypractice, where we're dealing
with, you know, oftenorganizations that are, you
know, somewhere in thatstrategic purgatory to, you
know, significantly stressed,it's a very different
(17:40):
conversation with a prospectivepartner.
Yeah.
they have a plan, a performanceimprovement plan that they're
working.
Doesn't mean they have to be ata sustainable run rate, but that
they've demonstrated as anorganization, they understand
the magnitude of the problem,they're addressing the problem,
and they're making someprogress.
Because from a prospectivepartner's perspective, if you're
(18:04):
fortunate enough to not be fullydistressed you know, looking at
insolvency from a prospectivepartner perspective, that's a
very different profile in termsof resource commitment.
And it's increasingly not justthe financial resources that
prospective partners are focusedon, it's the managerial
(18:24):
resources.
These organizations are alsolean.
They don't have the bodies andthe expertise to throw at a
turnaround that hasn't beencrafted yet.
So it's a very different, again,that proactive component, you
know, having a plan and workingthe plan is a very different
conversation with a prospectivepartner than throwing up your
(18:47):
hands and saying, we reallydon't know how to fix this.
We just need somebody to bail usout.
Very different conversation,very different set of options
and terms that are going toresult from that.
SPEAKER_03 (18:58):
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 abankruptcy, any purchaser, any
prospective purchaser oraffiliate, they have all the
bargaining power, all of it.
(19:19):
You have none.
You will accept what is beingdictated to you.
And I've explained to quite afew hospital boards over the
years that you don't care whoowns the hospital.
You don't care how much it sellsfor.
What you care about is having anoperating hospital that will
(19:41):
serve the healthcare needs ofyour 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
(20:01):
assurances from a partnerdepends greatly on the financial
strength of your hospital.
Right,
SPEAKER_01 (20:10):
right.
And, you know, emphasizing thatpoint about, okay, so what are
the key mitigating strategiesthat we've been talking about?
Just don't want to, you know,underline this if I can.
What I think we've beendiscussing is, first of all,
imperative to enable the boardto have the right context to
(20:31):
make informed decisions and askinformed questions.
And that gets back to, at leastonce a year, looking at those
longer-term trends.
For financial operating market,we often include a fourth
category called value, which iscost position and quality.
All of those things impact howthe, you know, you're looking at
the organization's trend.
(20:52):
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 beforeit's a crisis, before, you know,
you're in the verge of runningout of cash, you can actually
then have time to affect changeand pursue alternative options,
(21:15):
I think is key.
And one of the things we haven'ttalked about, we've talked about
a little bit, but is just theabsolute imperative of focusing
on operational performance.
And if you're an organizationthat's in that strategic
purgatory and you know you'renot sustainable, yes, you've
(21:36):
still got some cash on thebalance sheet.
The only way you're gonna makethat situation better is if you
take a hard look at operationalresults and dig in and have an
improvement plan that's going tochange that trajectory.
And I think that's true whetheryou ultimately think you might
(21:57):
need to partner or you're reallycommitted to remaining
independent.
Operational performance is theabsolutely essential ingredient
to any strategic option.
SPEAKER_03 (22:08):
You're quite right.
I've seen boards that...
focused on like a financialstatement okay and in the
financial statement will showyeah we've got we've got a
couple million dollars of cashhowever or however many 10
million dollars of cash howevermany days of operations that is
and look our building it's worth50 million dollars and there's
(22:34):
uh you know we don't we don'thave 10 million dollars of debt
i'm making things up but you seewhat i'm saying it it's it looks
like things are great Well, thatbuilding is not really worth$50
million.
That's a book value.
And that hospital is 75, 80years old.
I've seen them being over 100years old.
(22:55):
And so now, what does that looklike as you go forward for the
needs of modern medicine and theway healthcare is delivered
these days by hospitals?
They are looking at the wrongthings.
and they are not drawing theright conclusion.
Operations is the key.
(23:18):
As you said, you can't be ledsort of astray by some of these
other factors.
Right.
SPEAKER_01 (23:26):
And so many of those levers available for operational
performance improvement requiretime, right?
So again, you've got to havetime for those to be realized,
to implement the change, And toexperience the change,
oftentimes you have to spendsome money to benefit from the
change in various areas.
(23:48):
And one of the things we foundin our own firm is working with
smaller community ruralhospitals is performance
improvement plans can generatesignificant benefits.
momentum and positive impact,but timing is essential.
And so, you know, what we'veseen across, I think,
(24:08):
approximately 30 differentperformance improvement plans
we've done in the last 30 monthsis, you know, the ability to
impact margin by 9% over time.
That doesn't happeninstantaneously.
Some of those opportunities maytake several years to be
realized, but some of them aremeasured in months.
(24:31):
But there are opportunitiesavailable to change the
trajectory.
It's just the organization needsto take them.
I'm curious, Tom, not being anexpert in restructurings like
you are, what would you want toshare with, you know, listeners.
(24:51):
I know we talked about timingand it requires time, but are
there any other key factors orconsiderations around
restructuring specifically interms of what you've seen that,
you know, is helpful orimportant for people to keep in
mind?
SPEAKER_03 (25:09):
Well, we've touched on this before.
The board has to be informed.
The board has And that's gotseveral steps in it, and I think
it bears repeating.
The board has to be looking atthe right metrics and a
long-term, you know, 10 years,look at this, and then ask the
(25:31):
questions in addition to gettinga consultant, an expert to give
you that perspective are you isis is this a trend in this area
that everybody is doing or isthis out of the industry norms
and you have to understand thatand say okay what are we going
(25:54):
to do to turn things around andask and ask these hard questions
uh there's i've seen so muchkicking the metric kicking the
can down the road yourmanagement of your hospital is
key Those folks, it's theirresponsibility to bring these
(26:15):
questions and these issues tothe board.
But sometimes they need help,and there's no problem with
that.
Hospitals are in distress andare failing all over this
country.
But there are solutions if youfirst recognize that you've got
a problem that you've got todeal with.
(26:35):
and two, are willing to spendsome money on figuring out what
those solutions are, you maystay independent if you can turn
things around.
I've seen situations whereoperations improvements avoided
any kind of partnership, avoidedany kind of management agreement
(26:57):
and other things.
That's certainly possible, notif you've got five days cash on
hand though.
SPEAKER_01 (27:04):
Right.
No, that's very true.
I'll tell you one of the themeswe see, and it's not true
everywhere.
I mean, you know, there aresituations where it's clear the
organization is not on a viabletrajectory.
But one of the things we see,both in terms of independent
(27:25):
hospitals and how they evaluatespecific programs, whether it be
maybe labor and delivery, Maybeit's some other component.
Or a rural affiliate is part ofa larger system.
And how that larger system isevaluating the performance of
the rural affiliates is we oftenfind that two things are
(27:46):
present.
the evaluation isn't holisticenough.
It doesn't include some of theadditional value that's created.
So rural labor and delivery,maybe not including any of the
ancillary spinoff, all of thelabs, all of the ultrasounds
that are associated with thatprogram.
Conversely, if that organizationhas a robust inpatient surgery
(28:10):
program, then the cost forstandby anesthesia can be spread
between labor and delivery andinpatient surgery.
And so how you allocate costs isreally important.
We've seen examples where folks,critical access hospitals have
allocated costs incorrectly, andthen arrived at conclusions
(28:32):
that, oh my gosh, we're losing$3million 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 systemlevel, rural affiliate at the
system level, we had a systemclient that brought us in and
said, oh my God, these ruralhospitals are bleeding us dry.
Can you help us?
(28:52):
And so they had this narrativethat the rural hospitals were
absolutely torpedoing systemperformance.
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 innet patient revenue between the
four.
And we found about$6 million inincremental cashflow
opportunities of those.
(29:13):
and about another$9 million inkind of missed value or
incorrectly assessed value.
So there's basically about a$15million swing on a$60 million
baseline of the value that thoserural affiliates were bringing
to that system.
All of this is to say that oneof the important things to do
(29:35):
is, yes, operational performanceimprovement is critical, but
also making sure that you'reevaluating performance correctly
from the get-go.
And again, we just have seen somany misses in terms of how
organizations evaluateperformance.
And so then what happens is ifyou don't understand how
(30:00):
cost-based payment works, youmight be more likely to cut than
you should be.
So just very simply, if you're acritical access hospital and
you're struggling, removing adollar of cost, you know, in a
PPS hospital, removing a dollarof cost is dollar saved, right?
Now there might be some impacton revenue.
(30:20):
You need to be mindful of that.
But in a critical accesshospital, even before you talk
about any, changes, impacts onservices, removing a dollar of
cost for all the cost-basedpayment that hospital receives
is going to be oftentimes 50cents on the dollar, sometimes
more in reduction in revenuebecause you're getting
cost-based payment, oftentimeson a 50% of your revenue base,
(30:46):
Medicare and in some states,Medicaid.
So long-winded way of saying theanalysis is oftentimes more
complex than people give itcredit for um and it's just
important to be really mindfulof that um which which really
leads to this question we talkabout rural challenges and
(31:06):
opportunities um and what aresome of the unique challenges
and opportunities facing ruraltoday and i'm curious tom from
your experience are there thingsthat you would point to either
unique challenges or uniqueopportunities
SPEAKER_03 (31:23):
um well uh unique um i think a pervasive situation in
all of the rural hospitals inthis country is they they deal
with and i i often start out bytelling boards it's not your
fault this is going on all overthe country you've got a
predominant medicare medicaid uhpatient mix you know 80 would be
(31:49):
typical then among the customersthat you have that have health
insurance they have much muchmuch lower reimbursement rates
because as an independenthospital you don't have the
clout to negotiate higher ratesuh so they get paid 200 for a
(32:12):
procedure that 50 miles awaycosts you know will be
reimbursed for 500 and so that'sa huge difference you know and
so that and of course the factyou're independent means you
don't have the buying power withthe cardinals and the mckessons
and the other suppliers thatlarger systems do and so can
(32:36):
that be overcome absolutely itcan it can be dealt with i mean
you know how it's set up forrural hospitals to pay on a cost
plus base, the government toreimburse on a cost plus basis.
So it's possible, but you haveto be extremely efficient.
And that's, and this is where Iwill highlight the connection
(32:58):
between operations improvementsand at the same time, maybe
looking for a partner, a partneris going to find you far more
attractive and, if you areimproving your operations than
if you say, you know, I'm justgoing to sit here and wait for
somebody to, to come rescue me.
(33:19):
The, the, the, the, the whiteand white night that you
mentioned earlier.
SPEAKER_01 (33:25):
Yeah.
SPEAKER_03 (33:25):
You know, that's not near as good a situation as if
you have several white nightsand they're attracted because
you've, You've made theimprovements.
You're in the process of makingthe improvements.
And as you said, that costs alittle money.
And it maybe soundscounterintuitive that we have to
spend a little money at thistime when we're in such tough
(33:47):
financial shape.
But it absolutely is the rightthing to do.
And it's been borne out in manycases I've seen.
I know you have to.
Yeah.
Yeah.
SPEAKER_01 (33:57):
Well, you know, that's exactly right.
One of the things that we'vespent the last few years really
kind of proselytizing about isthat despite the challenges and
headwinds facing rural, there issome intrinsic value there that
needs to be recognized.
So, you know, yes, operationalperformance improvement is
(34:20):
essential.
You need to have sound operatingresults.
But if I'm talking toprospective partners, I need to
understand and I need to be ableto communicate and quantify to
them my prospective value.
And so it starts with thingslike if you're a critical access
hospital, the home office costallocation.
(34:42):
So on a pro rata basis, aprospective partner can allocate
some of their overhead costs,pro rata portion of their
overhead costs.
overhead costs through your costreport.
Now, in our estimation, about20% of that overhead allocation
might be incremental costs.
The rest of it, 80% is areallocation.
So that's a net pickup.
(35:02):
So if you're getting 50 cents onthe dollar cost-based payment,
and you just allocated, let'ssay,$5 million from the home
office costs to that criticalaccess hospital so now there's
2.5 million dollars ofincremental revenue now 20 of
that 5 million 1 million dollarsis incremental cost you're going
(35:26):
to have some i.t some othercosts associated with with
aligning and operating thathospital so um you picked up 2.5
million of incremental revenuevia cost-based payment and
allocating those costsappropriately.
You have$1 million inincremental costs.
Now that leaves an incremental$1.5 million of accretive
(35:47):
benefit to the system, right?
Which is a huge difference, ahuge difference.
Would not exist without thecritical access hospital.
And it just starts there.
You have swing bedopportunities.
One of the things we note is- Ifthere's geographic proximity and
coherence, then having a ruralaffiliate often will boost the
(36:09):
market share.
So the value of thoseincremental referrals, if you
didn't have that affiliate,market share would scatter,
reallocate.
We had a client...
in the Midwest who picked up are a new critical access
hospital affiliate.
And then what they said is ourED transfers previously were 70,
30 going to a competitor.
(36:30):
Once we aligned and we had allthe clinical systems and the
ease of transfers in place, thatratio flipped.
So they weren't doing anythingclinically inappropriate to be
clear, but by virtue of havingthose operational and clinical
relationships really ironed outthe, the referral, uh, ratio
flipped.
And again, that's incrementalvalue.
(36:51):
In that same instance, I willsay, Tom, that system didn't
recognize the value of its ruralaffiliates.
They were not recognizing theoverhead cost allocation.
They were running, I think,approximately 50 million of
system overhead through thevarious cost reports of their
rural affiliates.
So real benefit to the system.
(37:13):
They were charging their ruralaffiliates a management fee.
And they were starving them ofcapital, all because I think
they didn't recognize that, mygosh, these are little referral
centers for the system.
And we've got all theseopportunities, swing bet
opportunities, et cetera.
So there's a lot of value oftenthat is unrealized and
(37:35):
unrealized within verysophisticated organizations,
because this is a differentaspect of the business than they
deal with day to day, week toweek, month to month.
And to take advantage of thoseopportunities.
And I mean that in the truestsense of the word, like within
the parameters of what'sallowed, there are significant
(37:55):
opportunities there.
So I think that question ofrural value in the face of those
headwinds you mentioned.
So to be clear, there areclearly rural organizations that
are really struggling.
That's real and it's not goingaway.
But I think part of theopportunity is to figure out
where is the untapped orunrealized value, whether that
(38:16):
be through performanceimprovement or through some of
these mechanisms, if you decideto partner or to your point, you
know, the restructuring processas a way to level set reset
going forward.
SPEAKER_03 (38:29):
Right.
You can in a bankruptcy, ifthat's what is is necessary.
Right.
Again, you can re-amortizesecured debt.
You can discharge unsecureddebt.
I'm not going to try to explainthe bankruptcy system here in a
few minutes, but these are someof the outcomes that you can
get.
(38:49):
Some buyers, if that's the wayyou're going to go, would insist
on a bankruptcy.
And why?
Because they get the cleanesttitle possible.
ever.
And they don't have to worryabout success or liability
because it's all blessed by afederal court.
I used to be a bankruptcy judge,as you mentioned.
And it is just a perfect placefor a lot of buyers to know that
(39:17):
they're not going to haveproblems in the future.
So, you know, don't be afraid ofthat if that's the way the
transaction has to go within acontext of a bankruptcy.
And if it's just a purereorganization, There's no
affiliate.
There's a peer reorganization.
A bankruptcy is not the end.
It is rather a new beginning.
(39:38):
GM filed bankruptcy, doing justfine right now.
Same thing can be done.
with a rural hospital, like anyother business, if the
operations can be improved tothe 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 itscreditors.
(39:59):
And then you follow that plan.
And of course, you have all theprojections, you have all the
financial data that support thatplan.
That's another way.
I'm not saying any of this iseasy.
I'm saying, it is a solution toa problem.
SPEAKER_01 (40:15):
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 andserving the community long-term.
And so, you know, whether it'sperformance improvement, whether
it's partnering, whether it'svia restructuring or some
combination of those, the goalis really to achieve the same
(40:37):
thing.
So that community resourcecontinues to meet the needs of
the community going forwardwithout question.
I'm curious, Tom, as we kind ofwind down, do you have kind of
some thoughts you'd like toleave behind with, you know,
recognizing our audience, maybe,you know, other attorneys, board
(41:00):
members, members of the C-suite,what kind of wisdom would you
leave behind for them?
SPEAKER_03 (41:08):
They have to ask the hard questions.
They have to demand theinformation necessary to make
informed decisions.
You can't do that by looking atwhat happened last year.
You can't see a trend that way.
(41:29):
And you've got to then to beable to compare whatever your
trend is for your hospital.
You've got to be able to comparethat with what's happening in
the industry.
And so you need thatperspective.
And however you need to get it,you should get that and then
have a really informeddiscussion between management
(41:57):
and the board on what the futureof the hospital really is.
Maybe some changes need to bemade.
It could be all kinds of things.
Many consultants are going to beable to get in there and help
you understand how you can makechanges that you didn't realize
(42:19):
you could make, levers youdidn't realize you could pull.
But it all starts fromunderstanding what the problem
is and then informing yourselfabout what those solutions are.
SPEAKER_01 (42:33):
That's incredibly well said.
I think I'm not even sure I canadd to that.
SPEAKER_03 (42:42):
You can.
I've seen you do it.
I mean, I've seen you, what youcan do and what Stroud Watering
has done.
And it's just important that youunderstand that there are
solutions, but only if you ask.
Only if you get out there andfind out.
(43:04):
Right.
SPEAKER_01 (43:05):
Yeah, I think the thing that strikes me most about
having seen a whole bunch ofpartnerships, a whole bunch of
organizations go through whatwe're describing, whether it be
real operating difficulties andhaving depleted balance sheets,
(43:30):
And oftentimes entering into apartnership process from a place
of real weakness as opposed tosome strength is the importance
of timing and being proactive.
And that gets back to one of thethings you said, which is the
board needs to evaluate longerterm trends that drive strategic
(43:54):
risk and understand those trendsand what they mean for the
organization.
And either make sure change ishappening at an appropriate pace
or call the question.
Because allowing that strategicpurgatory drift to continue year
after year, all you're doing isremoving options, depleting the
(44:18):
hospital's value, and ultimatelykind of backing it into a corner
where it's, you know, at the endof the day, If organizations
don't act, they have two optionsavailable to them if they can
make them work.
One is, you know, do apartnership out of desperation,
which means you're not going tohave your choice of partner.
(44:38):
You're not going to have yourchoice of terms.
You're not going to be able toget what we've termed community
benefit, investments, et cetera,that are going to protect the
community going forward or somekind 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'thave enough runway to change
(45:00):
that.
If you've got a fully depletedbalance sheet, you've got an
aging medical staff, you've gottens of millions of dollars of
deferred investment, whetherthat be across IT platforms or
physical space or biomedicalequipment, all of that, you've
just dug such a deep hole.
And there's only a few ways outat that point if those are
(45:21):
available to you.
And that's an if.
SPEAKER_03 (45:24):
The third option that you and I don't like to
talk about, it's closing.
Because if you cannot make oneof those solutions work, that is
all you're left with.
And that is a true disaster forany community, as we all know.
And we don't even like to talkabout it, but there are
solutions to avoid that.
(45:45):
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 themanagement to, you know, to
avoid that.
So my message would be make lifeeasy on yourself by getting
(46:07):
informed quickly, be skeptical,ask the hard questions, so.
SPEAKER_01 (46:16):
You know, the analogy I've sometimes used,
Tom, You know, if I'm a boardmember and I don't understand
the strategic risk profile ofthe organization and how it's
changing, you know, in my mind,that's analogous to entering
some sort of a poker game, butnot understanding what specific,
(46:38):
you know, rules of the handyou're playing.
Is it, you know, five card stud,seven card draw, you know, what
are the odds, you know, andthen, the challenge gets doubly
difficult because so often,whether it be, I live in the
world of partnerships andperformance improvement, but for
partnerships, oftentimes thefolks across the table, the
(47:01):
counterparties, don't understandthe value of a rural affiliate.
And if the folks in theorganization haven't quantified
their value and articulated andmade that case, then there's
nobody at the table whounderstands that, wait a minute,
there are some things here thatwe could take advantage of and
(47:22):
that change the trajectory oncewe come together.
And so to me, that's analogousto not knowing what cards you
have in your hand.
You're literally playing pokerwithout knowing the rules and
without knowing what hand youhave if you don't understand
strategic risk of yourorganization and you don't
understand the value of your
SPEAKER_03 (47:42):
organization.
I think we know how that comesout, Jeff.
SPEAKER_01 (47:44):
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 wordbefore we sign off.
SPEAKER_03 (47:58):
My closing, I guess my closing would be save your
hospital.
You are the one, if you're onthe board, if you're on the
management, if you're advisingone of these hospitals, save the
hospital by forcing them to lookat the tough questions and
(48:20):
informing themselves.
SPEAKER_01 (48:23):
Outstanding.
Well, Tom, I want to thank you.
for what I hope is aninformative conversation for
folks who listen.
I want to certainly thank AHLAfor this opportunity to share
Tom's insights and my owninsights with the audience.
And just delighted to be able toshare this information with all
(48:46):
of you.
So thank you.
Enjoy.
Thank you for inviting me.
Take care, Tom.
Bye-bye.
SPEAKER_00 (48:56):
Thank you.
(49:26):
you
This episode of AHLA's Speaking of Health Law is
sponsored by Stroudwater.
For more information, visitStroudwater.com.
SPEAKER_01 (00:17):
Well, hello.
Pleased to be here today.
My name is Jeff Sommer, and I'mjoined today by Tom Waldrop.
I'll do a brief introduction ofTom and myself, and then we'll
have a conversation aroundreally partnerships for rural
hospitals and the role thatfinancial and operational
(00:40):
distress plays in that and thenexus between.
of financial operationaldistress and partnerships for
rural hospitals.
So briefly, my colleague ontoday's podcast is Tom Waldrop.
Tom was a United Statesbankruptcy judge with the United
States Bankruptcy Court for theMiddle District of North
(01:01):
Carolina.
He represents debtors, unsecuredcreditors committees, and
trustees in business casesthroughout the country.
He has noteworthy experience incases involving healthcare
debtors, especially hospitals.
And that's how I came to know ofTom several years ago when our
work intersected.
Tom has been practicing law formore than 40 years.
(01:23):
He's a member of the NationalAssociation of Federal Equity
Receivers, the NationalAssociation of Bankruptcy
Trustees, the TurnaroundManagement Association, and the
American Bankruptcy Institute.
And among his notableachievements qualities as an
attorney.
He's listed in Best Lawyers inAmerica, as well as other
(01:45):
notable credits.
Tom received his BA from PurdueUniversity and his JD from the
Indiana University School ofLaw, where he served as managing
editor of the Indiana LawJournal.
Tom, is there anything I missed?
Anything you'd like to add tothat intro?
SPEAKER_03 (02:02):
No, and I thank you for it.
And I thank you for theopportunity to chat with you
today about a subject that youand I both hold dear.
SPEAKER_01 (02:09):
Yeah, absolutely.
And what I'll do is just verybriefly about my background.
I'm Jeff Sommer.
I'm the managing director atStradwater Associates.
And so in addition to wearingthat hat, I'm also head of our
partnerships practice.
I've been working as an advisor,strategic advisor, and
operational performanceimprovement advisor for 30
(02:29):
years, the last 20 of which areat Stradwater.
And my focus has been onpartnerships, affiliations, and
the nexus of operationalperformance improvement and
partnerships.
for the bulk of that time.
So I've advised on a lot ofpartnerships.
I've seen a lot of healthy,stressed, and distressed
community and rural hospitalsaround the country, as have you,
(02:52):
Tom, in your work.
SPEAKER_03 (02:55):
Yeah, a few.
I've probably helped clientspurchase or sell 15 hospitals
and am currently a bankruptcytrustee for seven hospitals.
So, yes, I have seen thedistressed hospital space quite
a bit.
SPEAKER_01 (03:12):
And I'm curious, given that experience.
What do you see as some of theearly warning signs or markers
of an organization that may be,if it doesn't course correct,
may be on a pathway for astressed or distressed
situation, potentially leadingto bankruptcy or a distressed
(03:35):
sale?
SPEAKER_03 (03:36):
Well, so probably the most obvious one is day's
cash on hand.
You've got to be able tooperate.
You've got to have money tooperate.
But if that is dwindling or thatis a concern, then that is a
sign, Jeff, of something farmore dangerous.
wrong and fundamentally wrongwith the hospital.
(03:58):
How did you get in thatsituation?
What are the trends?
How are you going to reversethose trends?
You know, those are those thatought to bring, you know, that
concern to your mind if you're aboard member or if you're an
officer of a hospital and ofcourse declining patient volumes
(04:21):
there can be lots of reasons forthat but there can be some bad
ones uh so
SPEAKER_01 (04:28):
I completely agree.
Both of those are spot on frommy perspective.
I think building off of yourdeclining patient volumes, one
of the things that we see as anearly, and it's usually quite
early, is flat top line revenuefor not just a two-year period,
but really an extended period.
And what...
(04:50):
What triggers our concern thereis organizations will take
appropriate steps to try toreduce losses, maybe try to get
back to breakeven.
But that usually means they'renot investing, they're cutting
and trying to balance theirincome statement to get
somewhere back to equilibrium.
(05:11):
And as that progresses over anumber of years, the
organization is at best,treading water.
At worst, there's more and moredeferred maintenance, erosion of
cash on hand, absolutely, dayscash on hand, all of that.
But that tends to be one ofthose...
items that you see a lot oforganizations that drift for
years.
(05:32):
And we call it kind of strategicpurgatory.
They're not in a sustainablepath and they're trying to do
things to maintain somesemblance of normalcy, but
basically are not doing thethings they need to do to be
long-term successful.
And it can take years.
for that to kind of play out.
(05:54):
And that's really one of thetragedies I think that you and I
have both seen is boards andmanagement teams that are in
that strategic purgatory modefor too long and let things kind
of drift without a coursecorrection or some some fix and
i'm curious your your thoughtsand observations on timing um as
(06:17):
it relates to to some of thethose those items you've seen
SPEAKER_03 (06:22):
so it's a little like the old uh analogy of
boiling how do you boil a frogyou do it slowly and the frog
doesn't jump out and before thefrog knows it it's cooked well
uh there's i see uh somesimilarities between the way
boards of boards of hospitals,independent hospitals, are
(06:43):
wonderful people.
They are the pillars of thecommunity.
They are great at what they do,and they are honored to be
serving on a hospital board.
They are the fire chief and thesuperintendent of schools and
lawyers and accountants and justall kinds of people that are
(07:04):
just wonderful people and wantto help.
They don't know much, however,about operating hospitals and
especially distressed hospitals.
And so they get put on boardsand in my opinion, they don't
ask enough questions and don'task enough tough questions.
And those questions involvegetting themselves informed so
(07:30):
that they can make decisions asa board.
Part of that is gettingperspective from someone like
you.
So you mentioned, you know, getone or two, no, beyond one or
two years of information, getfive years, get 10 years if you
have it.
See the trends.
(07:52):
You know, I'm thinking, see thetrends, but once you see those
trends, Get a consultant to giveyou a perspective.
Is that what everybody's doing?
Are you off the track somehow?
Get that information so that youcan make decisions.
SPEAKER_01 (08:09):
Yeah, I couldn't agree more.
And I know you and I have hadprior conversations around this.
All too often, what theinformation that boards will see
is a comparison to prior year todate or a comparison to budget.
And so it's exceedingly hard,impossible, right?
You can't tell anything fromthat.
You're right.
The longer-term trend is justnot there.
(08:31):
And one of the boardresponsibilities that I think,
and there's a lot of informationout there on the fiduciary roles
of board members, but I do thinkit's to be reasonably
well-informed and periodicallyeducated around the strategic
risk profile of theorganization.
and how that's changing andevolving.
(08:52):
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 keytrends that really are gonna
impact how successful theorganization is and whether it's
able to fulfill its missionlong-term.
And so, I do think for a board,at least once a year, looking at
(09:18):
a five-year, seven-year, 10-yeartrend on some of those key
metrics, both financialoperating and market metrics,
incredibly important.
And, you know, certainly, youknow, we do, and I know you do
as well, a lot of boardeducation around, you know, what
(09:38):
are the options available to theboard?
What are their fiduciaryresponsibilities?
And, you know, frankly, Itbehooves a board.
We often say this, you know,we'll get asked the question,
when is the right time to thinkabout partnering?
And our kind of glib answer, butit has a lot of truth to it is,
(09:59):
well, when you don't have topartner, right?
The right time to
SPEAKER_03 (10:01):
think about partnering.
Yes, they never come to us.
Too soon, Jeff, do they?
SPEAKER_01 (10:05):
Right.
No.
And, you know, if you wait tilleverybody 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 somethingabout it.
You've waited too long.
I mean, the earlier you canintervene.
in improving operationalperformance.
(10:27):
That's gonna give you morerunway because it'll stem the
erosion of day's cash on hand.
It'll allow you to make maybesome key investments And that
buys you time.
It doesn't make the risk go awaynecessarily, unless you really
hit your objectives andunderstanding what that gap,
that performance gap is betweena sustainable level of
(10:47):
performance and your current runrate is really critical.
But the sooner you get to thatpoint and you start making some
of those adjustments, the lessdrastic those performance
improvement steps need to be.
And the more options you franklyhave.
Yes.
One key message.
That's
SPEAKER_03 (11:06):
right.
Yeah.
I want to pick up on that.
The more options you have, ahospital that comes to you or me
that's got 100 days cash on handis quite different than the
hospital with five days cash onhand.
SPEAKER_02 (11:21):
Without
SPEAKER_03 (11:21):
five days, you're in emergency mode.
You know, you're taking thepatient to the ER because
that's, you know, you don't havetime to do any preventative
medicine at all.
SPEAKER_01 (11:33):
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 10years.
And I remember when we startedworking with this organization,
they had a board member who wasa delightful, very opinionated
(11:53):
person.
gentleman from the community.
And he started out when weinterviewed 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 hadseveral years of really
distressed operating results,really depleted their balance
(12:14):
sheet.
And by the end of kind of ourstrategic risk analysis and
board education, you know, hiscomment to us was, I wish we'd
had this conversation two yearsago.
And that's one of those things.
I will say, getting back to, youknow, a comment I made as an
aside, the earlier youunderstand that you're at risk,
(12:37):
the more options you have.
So you do have an optionpotentially at that point, if
independence is near and dear toyour heart to say, okay, here
are the things we need to do tobe sustainable and viable.
Let's try to make those happen.
But you have to be accountableto how you perform.
So if you're not able to hitthose marks as you move forward,
(12:58):
then at some point, you do haveto call the question.
And to your point, Tom, not waittill you have five days cash on
hand to call that question.
SPEAKER_03 (13:08):
That's exactly right.
They boarded gets on the board.
People get on these boards.
Some have been there a longtime, but there can be very
small incremental changes,negative changes that don't seem
alarming at first, but thefailure to sort of address them
(13:32):
means that that trend hascontinued, will continue until
you don't have a lot of optionsand where your independence as a
hospital is no longer inquestion because you simply have
to have the clout that one getsfrom a larger system to deal
(13:54):
with provider agreements and,you know, getting higher
reimbursement rates and thebuying power of a larger
organization.
All these things at, you know,at some point There is no
choice.
Now, whether you do that insideof bankruptcy or outside of
bankruptcy, it's still you'researching for a partner.
SPEAKER_01 (14:13):
Right.
And to drill into that point alittle bit more from your
perspective, Tom, you know, ifan organization is distressed
and either needs to find apartner, a white knight, if you
will, or perhaps look at arestructuring.
SPEAKER_03 (14:31):
Or a management agreement.
I've seen that work.
SPEAKER_01 (14:34):
Sure, sure.
Some type of partnership.
Absolutely.
How, you know, how far inadvance of, you know, for
instance, five days cash onhand, you know, looking at the
run rate or the burn rate ofcash.
I mean, we're talking...
you need months and months toexecute any of those strategies.
(14:55):
We often say it's at least ayear to do, maybe not a
management agreement, but a fullaffiliation requires at least a
year's time.
What would be, from therestructuring perspective, the
minimal amount of time in termsof when an organization is going
(15:16):
to deplete their cash that'srequired from your perspective?
SPEAKER_03 (15:20):
Well, I would say the more the better, obviously,
that I have had.
I have followed.
Hospitals in bankruptcy with oneday cash on hand and immediately
got post-petition financing inorder to keep the doors open in
order to run an affiliationprocess and try to find a
partner.
Because again, that was the onlyoption in that situation.
(15:41):
That is a fire drill.
That is not something you wantto do.
That is expensive and it neednot be expensive.
It need not be chaos.
It could be so much moresmoother.
if we were a year in the past,having recognized the problem,
(16:05):
when we can be a lot more in aplanning mode than we are at
this time, because I mean, it'sjust the earlier in the process,
the more optionality you have.
And any business that can cashflow, and I'm talking about
(16:29):
current expenses versus currentrevenue, can be reorganized.
In bankruptcy, you can do a lotof things to push off debt,
re-amortize debt, discharge debtin order to make the balance
sheet look better.
So bankruptcy may not benecessary if you're early enough
(16:52):
in the process.
Well, and to that point- Theyneed Stroudwater and a
consultant to come in andexplain how to right the ship,
because then you have time toright the ship.
Now, there are sometimesstrategic reasons you do it
inside of bankruptcy anyway, andwe'll get to that.
But I mean, really, time givesyou optionality.
(17:16):
That's the way to think aboutit.
SPEAKER_01 (17:18):
Yeah, I couldn't agree more.
That proactive- imperative is socritical.
And what I would say in mypractice, where we're dealing
with, you know, oftenorganizations that are, you
know, somewhere in thatstrategic purgatory to, you
know, significantly stressed,it's a very different
(17:40):
conversation with a prospectivepartner.
Yeah.
they have a plan, a performanceimprovement plan that they're
working.
Doesn't mean they have to be ata sustainable run rate, but that
they've demonstrated as anorganization, they understand
the magnitude of the problem,they're addressing the problem,
and they're making someprogress.
Because from a prospectivepartner's perspective, if you're
(18:04):
fortunate enough to not be fullydistressed you know, looking at
insolvency from a prospectivepartner perspective, that's a
very different profile in termsof resource commitment.
And it's increasingly not justthe financial resources that
prospective partners are focusedon, it's the managerial
(18:24):
resources.
These organizations are alsolean.
They don't have the bodies andthe expertise to throw at a
turnaround that hasn't beencrafted yet.
So it's a very different, again,that proactive component, you
know, having a plan and workingthe plan is a very different
conversation with a prospectivepartner than throwing up your
(18:47):
hands and saying, we reallydon't know how to fix this.
We just need somebody to bail usout.
Very different conversation,very different set of options
and terms that are going toresult from that.
SPEAKER_03 (18:58):
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 abankruptcy, any purchaser, any
prospective purchaser oraffiliate, they have all the
bargaining power, all of it.
(19:19):
You have none.
You will accept what is beingdictated to you.
And I've explained to quite afew hospital boards over the
years that you don't care whoowns the hospital.
You don't care how much it sellsfor.
What you care about is having anoperating hospital that will
(19:41):
serve the healthcare needs ofyour 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
(20:01):
assurances from a partnerdepends greatly on the financial
strength of your hospital.
Right,
SPEAKER_01 (20:10):
right.
And, you know, emphasizing thatpoint about, okay, so what are
the key mitigating strategiesthat we've been talking about?
Just don't want to, you know,underline this if I can.
What I think we've beendiscussing is, first of all,
imperative to enable the boardto have the right context to
(20:31):
make informed decisions and askinformed questions.
And that gets back to, at leastonce a year, looking at those
longer-term trends.
For financial operating market,we often include a fourth
category called value, which iscost position and quality.
All of those things impact howthe, you know, you're looking at
the organization's trend.
(20:52):
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 beforeit's a crisis, before, you know,
you're in the verge of runningout of cash, you can actually
then have time to affect changeand pursue alternative options,
(21:15):
I think is key.
And one of the things we haven'ttalked about, we've talked about
a little bit, but is just theabsolute imperative of focusing
on operational performance.
And if you're an organizationthat's in that strategic
purgatory and you know you'renot sustainable, yes, you've
(21:36):
still got some cash on thebalance sheet.
The only way you're gonna makethat situation better is if you
take a hard look at operationalresults and dig in and have an
improvement plan that's going tochange that trajectory.
And I think that's true whetheryou ultimately think you might
(21:57):
need to partner or you're reallycommitted to remaining
independent.
Operational performance is theabsolutely essential ingredient
to any strategic option.
SPEAKER_03 (22:08):
You're quite right.
I've seen boards that...
focused on like a financialstatement okay and in the
financial statement will showyeah we've got we've got a
couple million dollars of cashhowever or however many 10
million dollars of cash howevermany days of operations that is
and look our building it's worth50 million dollars and there's
(22:34):
uh you know we don't we don'thave 10 million dollars of debt
i'm making things up but you seewhat i'm saying it it's it looks
like things are great Well, thatbuilding is not really worth$50
million.
That's a book value.
And that hospital is 75, 80years old.
I've seen them being over 100years old.
(22:55):
And so now, what does that looklike as you go forward for the
needs of modern medicine and theway healthcare is delivered
these days by hospitals?
They are looking at the wrongthings.
and they are not drawing theright conclusion.
Operations is the key.
(23:18):
As you said, you can't be ledsort of astray by some of these
other factors.
Right.
SPEAKER_01 (23:26):
And so many of those levers available for operational
performance improvement requiretime, right?
So again, you've got to havetime for those to be realized,
to implement the change, And toexperience the change,
oftentimes you have to spendsome money to benefit from the
change in various areas.
(23:48):
And one of the things we foundin our own firm is working with
smaller community ruralhospitals is performance
improvement plans can generatesignificant benefits.
momentum and positive impact,but timing is essential.
And so, you know, what we'veseen across, I think,
(24:08):
approximately 30 differentperformance improvement plans
we've done in the last 30 monthsis, you know, the ability to
impact margin by 9% over time.
That doesn't happeninstantaneously.
Some of those opportunities maytake several years to be
realized, but some of them aremeasured in months.
(24:31):
But there are opportunitiesavailable to change the
trajectory.
It's just the organization needsto take them.
I'm curious, Tom, not being anexpert in restructurings like
you are, what would you want toshare with, you know, listeners.
(24:51):
I know we talked about timingand it requires time, but are
there any other key factors orconsiderations around
restructuring specifically interms of what you've seen that,
you know, is helpful orimportant for people to keep in
mind?
SPEAKER_03 (25:09):
Well, we've touched on this before.
The board has to be informed.
The board has And that's gotseveral steps in it, and I think
it bears repeating.
The board has to be looking atthe right metrics and a
long-term, you know, 10 years,look at this, and then ask the
(25:31):
questions in addition to gettinga consultant, an expert to give
you that perspective are you isis is this a trend in this area
that everybody is doing or isthis out of the industry norms
and you have to understand thatand say okay what are we going
(25:54):
to do to turn things around andask and ask these hard questions
uh there's i've seen so muchkicking the metric kicking the
can down the road yourmanagement of your hospital is
key Those folks, it's theirresponsibility to bring these
(26:15):
questions and these issues tothe board.
But sometimes they need help,and there's no problem with
that.
Hospitals are in distress andare failing all over this
country.
But there are solutions if youfirst recognize that you've got
a problem that you've got todeal with.
(26:35):
and two, are willing to spendsome money on figuring out what
those solutions are, you maystay independent if you can turn
things around.
I've seen situations whereoperations improvements avoided
any kind of partnership, avoidedany kind of management agreement
(26:57):
and other things.
That's certainly possible, notif you've got five days cash on
hand though.
SPEAKER_01 (27:04):
Right.
No, that's very true.
I'll tell you one of the themeswe see, and it's not true
everywhere.
I mean, you know, there aresituations where it's clear the
organization is not on a viabletrajectory.
But one of the things we see,both in terms of independent
(27:25):
hospitals and how they evaluatespecific programs, whether it be
maybe labor and delivery, Maybeit's some other component.
Or a rural affiliate is part ofa larger system.
And how that larger system isevaluating the performance of
the rural affiliates is we oftenfind that two things are
(27:46):
present.
the evaluation isn't holisticenough.
It doesn't include some of theadditional value that's created.
So rural labor and delivery,maybe not including any of the
ancillary spinoff, all of thelabs, all of the ultrasounds
that are associated with thatprogram.
Conversely, if that organizationhas a robust inpatient surgery
(28:10):
program, then the cost forstandby anesthesia can be spread
between labor and delivery andinpatient surgery.
And so how you allocate costs isreally important.
We've seen examples where folks,critical access hospitals have
allocated costs incorrectly, andthen arrived at conclusions
(28:32):
that, oh my gosh, we're losing$3million 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 systemlevel, rural affiliate at the
system level, we had a systemclient that brought us in and
said, oh my God, these ruralhospitals are bleeding us dry.
Can you help us?
(28:52):
And so they had this narrativethat the rural hospitals were
absolutely torpedoing systemperformance.
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 innet patient revenue between the
four.
And we found about$6 million inincremental cashflow
opportunities of those.
(29:13):
and about another$9 million inkind of missed value or
incorrectly assessed value.
So there's basically about a$15million swing on a$60 million
baseline of the value that thoserural affiliates were bringing
to that system.
All of this is to say that oneof the important things to do
(29:35):
is, yes, operational performanceimprovement is critical, but
also making sure that you'reevaluating performance correctly
from the get-go.
And again, we just have seen somany misses in terms of how
organizations evaluateperformance.
And so then what happens is ifyou don't understand how
(30:00):
cost-based payment works, youmight be more likely to cut than
you should be.
So just very simply, if you're acritical access hospital and
you're struggling, removing adollar of cost, you know, in a
PPS hospital, removing a dollarof cost is dollar saved, right?
Now there might be some impacton revenue.
(30:20):
You need to be mindful of that.
But in a critical accesshospital, even before you talk
about any, changes, impacts onservices, removing a dollar of
cost for all the cost-basedpayment that hospital receives
is going to be oftentimes 50cents on the dollar, sometimes
more in reduction in revenuebecause you're getting
cost-based payment, oftentimeson a 50% of your revenue base,
(30:46):
Medicare and in some states,Medicaid.
So long-winded way of saying theanalysis is oftentimes more
complex than people give itcredit for um and it's just
important to be really mindfulof that um which which really
leads to this question we talkabout rural challenges and
(31:06):
opportunities um and what aresome of the unique challenges
and opportunities facing ruraltoday and i'm curious tom from
your experience are there thingsthat you would point to either
unique challenges or uniqueopportunities
SPEAKER_03 (31:23):
um well uh unique um i think a pervasive situation in
all of the rural hospitals inthis country is they they deal
with and i i often start out bytelling boards it's not your
fault this is going on all overthe country you've got a
predominant medicare medicaid uhpatient mix you know 80 would be
(31:49):
typical then among the customersthat you have that have health
insurance they have much muchmuch lower reimbursement rates
because as an independenthospital you don't have the
clout to negotiate higher ratesuh so they get paid 200 for a
(32:12):
procedure that 50 miles awaycosts you know will be
reimbursed for 500 and so that'sa huge difference you know and
so that and of course the factyou're independent means you
don't have the buying power withthe cardinals and the mckessons
and the other suppliers thatlarger systems do and so can
(32:36):
that be overcome absolutely itcan it can be dealt with i mean
you know how it's set up forrural hospitals to pay on a cost
plus base, the government toreimburse on a cost plus basis.
So it's possible, but you haveto be extremely efficient.
And that's, and this is where Iwill highlight the connection
(32:58):
between operations improvementsand at the same time, maybe
looking for a partner, a partneris going to find you far more
attractive and, if you areimproving your operations than
if you say, you know, I'm justgoing to sit here and wait for
somebody to, to come rescue me.
(33:19):
The, the, the, the, the whiteand white night that you
mentioned earlier.
SPEAKER_01 (33:25):
Yeah.
SPEAKER_03 (33:25):
You know, that's not near as good a situation as if
you have several white nightsand they're attracted because
you've, You've made theimprovements.
You're in the process of makingthe improvements.
And as you said, that costs alittle money.
And it maybe soundscounterintuitive that we have to
spend a little money at thistime when we're in such tough
(33:47):
financial shape.
But it absolutely is the rightthing to do.
And it's been borne out in manycases I've seen.
I know you have to.
Yeah.
Yeah.
SPEAKER_01 (33:57):
Well, you know, that's exactly right.
One of the things that we'vespent the last few years really
kind of proselytizing about isthat despite the challenges and
headwinds facing rural, there issome intrinsic value there that
needs to be recognized.
So, you know, yes, operationalperformance improvement is
(34:20):
essential.
You need to have sound operatingresults.
But if I'm talking toprospective partners, I need to
understand and I need to be ableto communicate and quantify to
them my prospective value.
And so it starts with thingslike if you're a critical access
hospital, the home office costallocation.
(34:42):
So on a pro rata basis, aprospective partner can allocate
some of their overhead costs,pro rata portion of their
overhead costs.
overhead costs through your costreport.
Now, in our estimation, about20% of that overhead allocation
might be incremental costs.
The rest of it, 80% is areallocation.
So that's a net pickup.
(35:02):
So if you're getting 50 cents onthe dollar cost-based payment,
and you just allocated, let'ssay,$5 million from the home
office costs to that criticalaccess hospital so now there's
2.5 million dollars ofincremental revenue now 20 of
that 5 million 1 million dollarsis incremental cost you're going
(35:26):
to have some i.t some othercosts associated with with
aligning and operating thathospital so um you picked up 2.5
million of incremental revenuevia cost-based payment and
allocating those costsappropriately.
You have$1 million inincremental costs.
Now that leaves an incremental$1.5 million of accretive
(35:47):
benefit to the system, right?
Which is a huge difference, ahuge difference.
Would not exist without thecritical access hospital.
And it just starts there.
You have swing bedopportunities.
One of the things we note is- Ifthere's geographic proximity and
coherence, then having a ruralaffiliate often will boost the
(36:09):
market share.
So the value of thoseincremental referrals, if you
didn't have that affiliate,market share would scatter,
reallocate.
We had a client...
in the Midwest who picked up are a new critical access
hospital affiliate.
And then what they said is ourED transfers previously were 70,
30 going to a competitor.
(36:30):
Once we aligned and we had allthe clinical systems and the
ease of transfers in place, thatratio flipped.
So they weren't doing anythingclinically inappropriate to be
clear, but by virtue of havingthose operational and clinical
relationships really ironed outthe, the referral, uh, ratio
flipped.
And again, that's incrementalvalue.
(36:51):
In that same instance, I willsay, Tom, that system didn't
recognize the value of its ruralaffiliates.
They were not recognizing theoverhead cost allocation.
They were running, I think,approximately 50 million of
system overhead through thevarious cost reports of their
rural affiliates.
So real benefit to the system.
(37:13):
They were charging their ruralaffiliates a management fee.
And they were starving them ofcapital, all because I think
they didn't recognize that, mygosh, these are little referral
centers for the system.
And we've got all theseopportunities, swing bet
opportunities, et cetera.
So there's a lot of value oftenthat is unrealized and
(37:35):
unrealized within verysophisticated organizations,
because this is a differentaspect of the business than they
deal with day to day, week toweek, month to month.
And to take advantage of thoseopportunities.
And I mean that in the truestsense of the word, like within
the parameters of what'sallowed, there are significant
(37:55):
opportunities there.
So I think that question ofrural value in the face of those
headwinds you mentioned.
So to be clear, there areclearly rural organizations that
are really struggling.
That's real and it's not goingaway.
But I think part of theopportunity is to figure out
where is the untapped orunrealized value, whether that
(38:16):
be through performanceimprovement or through some of
these mechanisms, if you decideto partner or to your point, you
know, the restructuring processas a way to level set reset
going forward.
SPEAKER_03 (38:29):
Right.
You can in a bankruptcy, ifthat's what is is necessary.
Right.
Again, you can re-amortizesecured debt.
You can discharge unsecureddebt.
I'm not going to try to explainthe bankruptcy system here in a
few minutes, but these are someof the outcomes that you can
get.
(38:49):
Some buyers, if that's the wayyou're going to go, would insist
on a bankruptcy.
And why?
Because they get the cleanesttitle possible.
ever.
And they don't have to worryabout success or liability
because it's all blessed by afederal court.
I used to be a bankruptcy judge,as you mentioned.
And it is just a perfect placefor a lot of buyers to know that
(39:17):
they're not going to haveproblems in the future.
So, you know, don't be afraid ofthat if that's the way the
transaction has to go within acontext of a bankruptcy.
And if it's just a purereorganization, There's no
affiliate.
There's a peer reorganization.
A bankruptcy is not the end.
It is rather a new beginning.
(39:38):
GM filed bankruptcy, doing justfine right now.
Same thing can be done.
with a rural hospital, like anyother business, if the
operations can be improved tothe 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 itscreditors.
(39:59):
And then you follow that plan.
And of course, you have all theprojections, you have all the
financial data that support thatplan.
That's another way.
I'm not saying any of this iseasy.
I'm saying, it is a solution toa problem.
SPEAKER_01 (40:15):
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 andserving the community long-term.
And so, you know, whether it'sperformance improvement, whether
it's partnering, whether it'svia restructuring or some
combination of those, the goalis really to achieve the same
(40:37):
thing.
So that community resourcecontinues to meet the needs of
the community going forwardwithout question.
I'm curious, Tom, as we kind ofwind down, do you have kind of
some thoughts you'd like toleave behind with, you know,
recognizing our audience, maybe,you know, other attorneys, board
(41:00):
members, members of the C-suite,what kind of wisdom would you
leave behind for them?
SPEAKER_03 (41:08):
They have to ask the hard questions.
They have to demand theinformation necessary to make
informed decisions.
You can't do that by looking atwhat happened last year.
You can't see a trend that way.
(41:29):
And you've got to then to beable to compare whatever your
trend is for your hospital.
You've got to be able to comparethat with what's happening in
the industry.
And so you need thatperspective.
And however you need to get it,you should get that and then
have a really informeddiscussion between management
(41:57):
and the board on what the futureof the hospital really is.
Maybe some changes need to bemade.
It could be all kinds of things.
Many consultants are going to beable to get in there and help
you understand how you can makechanges that you didn't realize
(42:19):
you could make, levers youdidn't realize you could pull.
But it all starts fromunderstanding what the problem
is and then informing yourselfabout what those solutions are.
SPEAKER_01 (42:33):
That's incredibly well said.
I think I'm not even sure I canadd to that.
SPEAKER_03 (42:42):
You can.
I've seen you do it.
I mean, I've seen you, what youcan do and what Stroud Watering
has done.
And it's just important that youunderstand that there are
solutions, but only if you ask.
Only if you get out there andfind out.
(43:04):
Right.
SPEAKER_01 (43:05):
Yeah, I think the thing that strikes me most about
having seen a whole bunch ofpartnerships, a whole bunch of
organizations go through whatwe're describing, whether it be
real operating difficulties andhaving depleted balance sheets,
(43:30):
And oftentimes entering into apartnership process from a place
of real weakness as opposed tosome strength is the importance
of timing and being proactive.
And that gets back to one of thethings you said, which is the
board needs to evaluate longerterm trends that drive strategic
(43:54):
risk and understand those trendsand what they mean for the
organization.
And either make sure change ishappening at an appropriate pace
or call the question.
Because allowing that strategicpurgatory drift to continue year
after year, all you're doing isremoving options, depleting the
(44:18):
hospital's value, and ultimatelykind of backing it into a corner
where it's, you know, at the endof the day, If organizations
don't act, they have two optionsavailable to them if they can
make them work.
One is, you know, do apartnership out of desperation,
which means you're not going tohave your choice of partner.
(44:38):
You're not going to have yourchoice of terms.
You're not going to be able toget what we've termed community
benefit, investments, et cetera,that are going to protect the
community going forward or somekind 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'thave enough runway to change
(45:00):
that.
If you've got a fully depletedbalance sheet, you've got an
aging medical staff, you've gottens of millions of dollars of
deferred investment, whetherthat be across IT platforms or
physical space or biomedicalequipment, all of that, you've
just dug such a deep hole.
And there's only a few ways outat that point if those are
(45:21):
available to you.
And that's an if.
SPEAKER_03 (45:24):
The third option that you and I don't like to
talk about, it's closing.
Because if you cannot make oneof those solutions work, that is
all you're left with.
And that is a true disaster forany community, as we all know.
And we don't even like to talkabout it, but there are
solutions to avoid that.
(45:45):
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 themanagement to, you know, to
avoid that.
So my message would be make lifeeasy on yourself by getting
(46:07):
informed quickly, be skeptical,ask the hard questions, so.
SPEAKER_01 (46:16):
You know, the analogy I've sometimes used,
Tom, You know, if I'm a boardmember and I don't understand
the strategic risk profile ofthe organization and how it's
changing, you know, in my mind,that's analogous to entering
some sort of a poker game, butnot understanding what specific,
(46:38):
you know, rules of the handyou're playing.
Is it, you know, five card stud,seven card draw, you know, what
are the odds, you know, andthen, the challenge gets doubly
difficult because so often,whether it be, I live in the
world of partnerships andperformance improvement, but for
partnerships, oftentimes thefolks across the table, the
(47:01):
counterparties, don't understandthe value of a rural affiliate.
And if the folks in theorganization haven't quantified
their value and articulated andmade that case, then there's
nobody at the table whounderstands that, wait a minute,
there are some things here thatwe could take advantage of and
(47:22):
that change the trajectory oncewe come together.
And so to me, that's analogousto not knowing what cards you
have in your hand.
You're literally playing pokerwithout knowing the rules and
without knowing what hand youhave if you don't understand
strategic risk of yourorganization and you don't
understand the value of your
SPEAKER_03 (47:42):
organization.
I think we know how that comesout, Jeff.
SPEAKER_01 (47:44):
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 wordbefore we sign off.
SPEAKER_03 (47:58):
My closing, I guess my closing would be save your
hospital.
You are the one, if you're onthe board, if you're on the
management, if you're advisingone of these hospitals, save the
hospital by forcing them to lookat the tough questions and
(48:20):
informing themselves.
SPEAKER_01 (48:23):
Outstanding.
Well, Tom, I want to thank you.
for what I hope is aninformative conversation for
folks who listen.
I want to certainly thank AHLAfor this opportunity to share
Tom's insights and my owninsights with the audience.
And just delighted to be able toshare this information with all
(48:46):
of you.
So thank you.
Enjoy.
Thank you for inviting me.
Take care, Tom.
Bye-bye.
SPEAKER_00 (48:56):
Thank you.
(49:26):
you
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