Strategies for rural hospitals and the challenges ahead

February 10 2021

Rural facilities were struggling even before COVID-19 – and while federal funds provided a brief reprieve – big questions still loom about the future of rural healthcare. John Tishler, chair of Waller's healthcare restructuring group, and Rex Burgdorfer, managing director at Juniper Advisory, discuss how decisions made in the next few months could critically impact healthcare availability in rural communities across the United States.

Transcript

Here is a transcript of the conversation:

Morgan Ribeiro: Welcome to PointByPoint. This is Morgan Ribeiro, Waller's chief business development officer and the host of the podcast. Today, we are joined by John Tishler, chair of Waller's healthcare restructuring group, along with Rex Burgdorfer, managing director at Juniper Advisory, for a discussion on rural hospitals and what they are facing during these incredibly challenging times for the industry. John and Rex, thank you for joining me.

Rex Burgdorfer: Thanks for having us.

John Tishler: Looking forward to it.

Morgan: So you both work with hospitals across the country of all shapes and sizes and have done so for several decades now - and have seen a lot of evolution across the industry. To kick things off - are there common questions or concerns that you are hearing right now from rural hospital clients? Rex, I'll start with you.

Rex: Sure. I think the medical and operational forces that were at play before the pandemic causing hospital systems to believe they needed larger networks, larger patient populations to effectively care for their patients have really been exacerbated in COVID and many, especially rural hospitals, are now struggling and trying to determine how they're going to position themselves once the dark days of COVID are over. I think many are of the view that partnering in some form or fashion with a larger system would be strategically advantageous.

Morgan: Absolutely. John, is that similar to what you're seeing?

John: Fundamentally a lot of these rural hospitals have been really squeezed for quite a while. they typically have older facilities. They don't have as large capital available to them. And so in a lot of ways they have a much tougher time than larger systems would. The other thing that's really happened over a several-year period - it's not just a recent phenomenon - is that more and more procedures are being done on an outpatient basis. And so the hospitals themselves are not seeing as many patients. They're not seeing the high-margin procedures that they could do.

Rex: Yeah. There was an interesting article in NPR in late December called toxic individualism and it was about how inequality has run rampant throughout our society. It focused specifically on rural hospitals and how they're struggling to attract and retain physicians who are sometimes frustrated by the toxic individualism that has existed for many decades - skepticism of outsiders, resistance to change. But I think physicians are leading the charge to say maybe this crosstown rivalry that dates back to high school football might be outdated and we might choose to cooperate in new ways to improve our collective outcomes.

Morgan: I'm curious over the last several years, there's been a lot of restructuring, a lot of rural hospital closures, and there's no doubt that these struggles have been exacerbated by the pandemic in many ways. And not only is the pandemic continuing on, it's not "2020 ended and everything went back to normal like maybe some of us had hoped. But in addition to that, rural hospitals must also navigate the incoming power shift in Washington. What are the surviving rural hospitals facing right now? And how are they feeling about the new administration and a shift in power in Congress? I'm curious how that is impacting maybe the way that they are looking at their current situation and evaluating opportunities.

John: I think one thing that's going on and this is not meant as a political statement is there is increasingly a focus on the rural areas. And I think that's probably a good thing for a lot of these hospitals and small hospital systems. I think the questions though probably are different than the ones that have been being asked. As Rick said, this toxic individualism tends to get in the way and stymie innovation and things like that probably need to be being done in these rural areas.

The reality is there are fewer people and there are more needs because the population tends to be older in these rural areas. And frankly, a lot of these areas don't need acute care hospitals as much as they need great clinics, access to larger system-wide sophisticated specialties in bigger cities and things like that. So investing in a different kind of healthcare is probably what would really make a lot of these areas take off.

Rex: I completely agree with that. And the news is good in some ways in that the ways that hospital systems configurated themselves in the past are changing. They used to be hub-and-spoke models where the hubs were viewed as feeders for high-margin services to actually the other way around - the spokes were feeders to the urban tertiary hubs.

And the incentives now are such that systems are motivated to keep patients closer to home and in lower-cost settings. And as John indicated, there's a different lens being applied to the rationale of how a system functions and - when possible - keeping patients out of the highest-cost settings that might have ICU bed capacity constraints with COVID makes a lot of sense.

 Morgan: In addition, obviously thinking about what's going on in DC right now over the last decade or so, there's been a lot of emphasis on the Affordable Care Act and whether or not states expanded Medicaid. And if our state had just expanded Medicaid that our hospitals would have had a better chance of survival. And most recently we've read a lot about Cares Act funding and Medicare Accelerated and Advanced Payments providing a lifeline, but maybe there's also a false sense of security for rural providers with that funding. Do you see a significant reduction in the number of rural hospitals across the U S. in 2021? Are you seeing that there's maybe a false sense of security with those funds coming from D.C.?

Rex: Yes and no. I think there's some practical understanding that these are very short-term, temporary band-aid funds and that the underlying issues that are present at rural facilities are not going to be solved with a one-time assistance. But I do think it's given those that do hold dear to their heart the notion of independence at all costs an ability to wait out the next six, 12,18 months.

John: Rural hospitals have had difficulties structurally since really even the sixties when Congress first enacted Medicare because so many of them are set up as single, standalone hospitals in rural settings serving a really needy population.

Medicare bases its reimbursement - in a very broad way - primarily on what the average cost of services is going to be. And the cost of serving a rural community where there are many fewer patients is going to be much higher per capita than in a big city with a 20-hospital system or something like that.

Those systems can take advantage of all kinds of efficiencies. And it drives down the overall costs, which ultimately then Medicare takes advantage of reducing costs of certain procedures and that sort of thing. So, as a result, it creates a gap between the actual cost of what these hospitals are incurring for procedures and for their patients and what they get reimbursed at and so that's not going to change. Becker's had an article on hospitals at risk, and they identified that almost 900 American hospitals - and more than 500 of those were rural hospitals. And they were all over the country.

Kansas had 72% of its hospitals. But a lot of them focused and were in States that did not take the Medicaid expansion. So they were heavily weighted toward southern states - Alabama, Tennessee, Mississippi, all or over 50% of their hospitals at-risk. Texas had 82 hospitals at-risk. So you know that really is going to put a lot of stress on our health care system as a nation. We've really got to get our hands around and fix and help these struggling places.

Rex: Morgan, I thought you made a good point earlier about the complexity of managing in a single-site hospital. And we are working with a number of hospitals who share with us that. Compliance, billing, managing electronic health records - has all just become so much harder.

And when we are advising a management team and a board on considering a partnership and they're interviewing prospective partners - you guys are in Nashville and so many of the equity-sponsored systems are based there. When we come to Nashville, they're usually blown away by the support that exists. A couple of hundred people navigating what's coming out of Washington, DC and how to position their hospitals going forward, how to take advantage of certain programs. And just a specific knowledge set that's impossible to do at an independent smaller hospital.

Morgan: Certainly and the regulations, all of that's shifting so quickly and new things are coming out every day. And then you think about this evolution towards consumerism. And, telehealth obviously in a pandemic time, these larger systems have access to that. And that certainly, is something that these rural facilities should be looking at. Their patients and their community could really utilize certain available technologies.

And this leads to my next question, which is, based on the statistics that John just gave, which are really startling, right? No one is wanting these hospitals to close down. So as you're working with board members, are there certain questions they should be asking? Are there certain things that they need to understand about just the fiscal side of running a hospital and evaluating their options? And what advice do you have for board members right now?

John: Yeah, I think the most important thing for a board member and a management team is to step back, take the emotion out of it, and really look strategically at where your hospital is today and where it can reasonably get to in a 5-to-10 year period. And, it's a really hard thing to do, the most important thing is preserving access to affordable health care in that community. That may not mean putting in shoveling, hundreds of thousands of dollars into a. Freestanding acute care hospital that very few people in the community are using because they're driving right past it to go to, 30 miles down the road to a larger system hospital. Instead, I think it's incumbent on that board to take a look at what does the community really need and what can it's for, and more importantly, what will benefit the community because I've unfortunately been involved in some hospital closures. And when you look back at the community after just a few years of its closure, the employment has dropped precipitously. People do not want to live in a community that does not provide healthcare to its citizens. And so you've really got to figure out what it is that you can deliver and what you can deliver with the funds that you have.

Rex: So we talked about trips that some of our board member clients take to learn from prospective systems how they operate. We've found by far the most impactful education that boards can avail themselves of is visiting with like-sized hospitals and learning from them - the decisions they made, whether to remain independent or whether to partner and if it's to partner with whom did they partner and what kind of features of that transaction were present. And usually they're surprised to learn that really not much changes going forward. The board remains in existence. They remain the vital link to the community. And I think the basis of comparison in terms of making a good decision is key. And not that many people are doing that.

Morgan: I think, going back to the emotion piece of it. So that's an important first step. It is oftentimes where your children were born or where you were born or where your family member passed away. And so there was definitely a lot of emotional connection to that that local facility.

John: One other thing to riff on that is that. And I think Rex would agree, not all communities are the same at all. one of the interesting statistics about this pandemic, just as there've been bad things about it for healthcare, there's an interesting positive trend for rural areas because more and more people have been fleeing urban areas since the pandemic began and looking for more wide-open spaces and, I don't know if that's going to continue.

 I was listening to just some social media the other day, and one of the people that was on it was like, Oh, that's just a blip, people overreacted and that kind of thing. As somebody who grew up in a rural area, I know there's a tremendous amount of satisfaction living in rural areas, raising a family, there can be very satisfying and can frankly, make a world of difference to people.

And I think there's a lot of attractiveness to it. As Americans, we've always loved our waters and spaces and being able to get out. Having your kids be able to have an acre in your backyard to place forts or run around in or whatever is a very attractive thing.

But so the question is going to be over the next five years, will that turn into a trend? And if that's a trend that I think a lot of these places we're talking about will have a different issue on their hands, which is taking care of an increasing population, maybe a younger population. That's going to be demanding services that they got in urban areas.

That's going to be an interesting twist.

Rex: [00:14:26] I do think that trend will continue. And the other trend that I think goes along with that is that the number of strategic options available to rural hospitals has increased of late, thanks to innovative structures that knowledgeable attorneys like you guys help put together where one's options 10 years ago might have been to dig in your heels and try to get more effective on your own for rollover and become subsumed by the large regional system.

There are now a host of solutions in between those two extremes. And I suspect that will continue as people move out of urban centers and coordinate care more broadly.

Morgan: That's a good segue to my next question, which is, as you look at the buyer's market out there, and I'm a small rural hospital, are there buyers out there for my facility? Okay. It seems like the big system down the road has already acquired a lot of rural hospitals. Do they still have the appetite for that? Generally speaking, do you feel like they are still interested buyers that are looking at these rural hospitals or, maybe it's a joint venture, like you said, there's some creative structure. It's not just necessarily a straight-up acquisition. So, do you feel like if I'm a rural hospital or I'm a board member at a rural hospital, there are still, a lot of options out there?

John: Yeah, I actually do. I think they're all kinds of innovative structures. I'll let Rex talk about the structures, but I do think there are a tremendously different affiliations, joint ventures being able to bring specialists into an area is a huge opportunity for well-established systems to not only spread their reach a little bit but also to, provide sophisticated care in areas other than densely populated urban areas. And I think it does go back to each state is going to be different.  If it's a CON state, it has its challenges.

 But if it's a non-CON state, Texas is an example and, people have just thrown up all kinds of healthcare facilities throughout the state of Texas. Some of them haven't worked out. Some of them have gone bust, but some of them have been wildly successful and some of them have expanded the reach of some of the larger systems in the state that can bring to bear a lot of their knowledge, a lot of their systems and their supplies and their other advantages to rural areas.

Rex: John makes a good point on the motivations for partnerships. They've really changed in the last few years. It used to be that hospitals sought to enter into partnerships for financial reasons - lower their cost of capital, implement IT systems and that's changed to reviewing how a partnership could improve the quality of care provided.

And Juniper did a study earlier in the fall about the number of ICU beds available across the system. And it found that there was an almost perfect correlation between the size of a system in terms of revenue and growth and reach and the number of acute beds they had possible resulting in improved outcomes and access. So that's really changed. An example of a project in between remaining independent and selling to the big regional system. We worked on one $80 million revenue hospital in central Illinois, which on December 31st completed a combination with its cross-town rival. This was a Catholic hospital. The two had been duking it out for the better part of half a century. And they really thought that by combining they would be able to more effectively manage their business. And importantly as you guys have identified, stepped down in levels of care to clinics and outpatient and to other lower-cost settings.

Morgan: So I want to go back to a question that we were discussing earlier, and that is around the role of the board members. Are there certain questions that they should be asking of their management team right now?

John: Yeah, I think so. We go back to the strategy and the strategic planning before you get to that When sometimes I talked forward members or boards and their approach is - look, if we've got great management and we just get out of management's way and let them do what they want to do. Unfortunately, that approach can lead to lots of problems. It's not that management isn't good. Management is a lot of times very good, but the role of the board -at least the way the law sees it - is that it is supposed to supervise and watch out for management and watch the management and criticize where it's necessary.

In a lot of ways, I look at it as a parent-child relationship. It's great, but management can learn from boards. Boards typically are comprised of leaders in the community. They know the community, they know how to run a business. They know what the hot spots and the cold spots are. And so management really will miss out on a learning opportunity if they don't listen to that board. But the board also needs to demand and have complete transparency. One of the saddest things that I have done, I have been there for the closure of a hospital.

And, when I walked back from the day it closed to the day that I first talked to the board, one of the things is they didn't have good handles on the financial information. I'm talking about just basic cash flow formation. Boards really need to, and I've sat on boards too, and a lot of times I think I don't know that much about it, I'm not an accountant. I can't analyze these financials, but you don't need to be an accountant. You need to just have a basic understanding of inflows and outflows and check and see how is the hospital doing. And if it is consistently running at a deficit, which unfortunately a lot of hospitals do, they're very thin margin business, then you need to stay on top of it, make sure that it doesn't get to a point where it can no longer offer the services that it needs to offer.

Rex: I think it's interesting to look at other industries for a guide as well. We work with boards populated universally by extremely well-intended generous people. But they're volunteers and they are not necessarily experts in the management of a health enterprise. And that's very different as John was describing to the relationship, of a corporate b in which they're compensated for their specific expertise.

 The other point that I think sets this dynamic apart from other industries is the effectiveness of business combinations. Many board members bring to the board room their experience, and often in a rural area. They can remember back to when the factory was humming and they were making things locally and they employed people.

And when that factory sold to a multinational conglomerate in the 1970s - all that change. Jobs were offshored. Benefits were slashed. It was really bad things for the community and in the hospital industry, combinations couldn't be more different. The only way for a health system to grow is horizontally by adding new markets and their incentives are very much aligned with the community to see those hospitals and regions do well. And so I think that both the board composition and the transaction results or effectiveness are very different in the hospital sector.

Morgan: Yeah, that makes sense. And one thing I wanted to go back to as well that we talked about earlier as we, as a board member, you're looking at options. And, of course, the obvious thing that I think immediately comes to mind is getting acquired. But there are many other creative options out there and deal structures. Could you all speak more specifically to some of those other kinds of creative structures that you've seen?

Rex: Sure. Good examples. One we worked on together. Juniper advised a rural hospital in Watertown, Wisconsin. Dairy country - really nice. A hundred million dollar revenue community hospital was performing quite well. Actually, it had strong margins, low leverage, happy physicians and they authentically chose to consider partnerships and we helped them, design and manage a controlled, competitive process whereby they sought the interest of 20-something potential companies that winnowed it down to finalists.

They took the trips that I mentioned, and they ultimately concluded to do a whole hospital joint venture. With LifePoint who Waller was advising and a whole hospital joint venture is an arrangement in which the local board remains intact. They continue to own a minority share of the hospital.

It usually about 80/20, but importantly, they retain a 50% blocking interest on the board. So ownership in that case does not follow control. And so they can say, honestly to the community, nothing can happen here in Watertown, Wisconsin, that we don't want to because we have a secured a permanent voice in corporate decision-making while tapping into the system benefits of a company that manages 70 hospitals in 25 States. So that's one example.

John: Yeah. We've been fortunate to help several hospitals, in a very similar way. Lifepoint's a good example. They have several joint ventures - one with Duke in North Carolina, one in the upper peninsula of Michigan. And, they really work well because what they're doing is they're leveraging really good regional systems that have great brand names and bringing those brand names to really saturate the regions of that brand.

And so it's a win-win for everybody. And like you said, it's creating much stronger community hospitals.

Rex: So we were talking in that case about the whole hospital joint venture. Another arrangement that I know you guys have been quite active with as well is the buyer joint venture that marries a top tier often academic medical center with an equity sponsored company and the two of them together.

 Go out and try to develop a system and our community hospital clients often view those arrangements, the best of both worlds. They have the quality and the safety and training of a really highly rated nonprofit company with the access to capital and business know-how of a for-profit and people have found that very appealing and I suspect more of those will be formed in the coming years.

John: One of the interesting things to me about that is it really gets at a problem in these rural areas, which is the attraction of talented physicians. If you hook up with an academic medical center, suddenly you've got a potential stream of doctors and nurses and all other well-trained folks coming.

They could come to your community and that's really the lifeblood of these places. They just get overlooked a lot of times. Good, well-trained doctors and nurses a lot of times think that they need to go and be in urban areas. The lifestyle choice of a rural area is much better, but maybe what prevents them from going there is they're afraid they won't get the sophisticated practice, but these joint ventures that you're talking now really get at that. And give them the best of both worlds, I think.

Rex: Yeah. Get back to COVID. I also think it gives physicians in rural markets newfound confidence if they have the support and ability to tap into the expertise of an academic. We advised a hospital a couple of years ago in rural Illinois that partnered with Northwestern.

And when COVID was all new to everyone and there was a call for all hands to all medical hands to, race into the ER and help Northwestern was able to put on training exercises for physicians in this rural community that gave them the confidence of we have support, we have backup, there are people behind us helping and I think to John's point, that's going to give some physicians a level of comfort to make the lifestyle choice to live in a rural environment and develop a nice medical practice, but knowing they have some behind them.

Morgan: I think we've covered a lot of ground. I think, for our listeners out there, do you have any parting words for a board member or a member of a management team?

John: I think mine would be to just keep your head up and keep looking around. There's a lot of opportunity out there. There is a lot to be positive about. I think the trends are I'll put it this way. I think that the winds are shifting around in such a way that the rural communities should start seeing some real benefits.

Rex: I think there's a benefit to management teams in particular learning how others have navigated this world and communicating with. There are peers at conferences or events like this and learn how they went about making decisions of a strategic nature related to partnerships.  

Morgan: There's many that have been through this and whether or not there are other hospitals who have been through it or advisors that they can lean on to reach out and ask those questions. I think people are always willing to share sort of what their experience was and the pros and cons and how, the way such a decision. Cause it is a big decision and it shouldn't be taken lightly.

 But I agree with you, John, that there are definitely positives that can come of it. And as we talked about earlier, taking the emotion out of it is easier said than done, but it is a key step and really thinking strategically and about the big picture implications of considering such a process.

 Appreciate your time today. Always enjoy connecting with both of you and look forward to future conversations.

Rex: Sounds great. Thanks very much.

John: Yeah. Thank you, Morgan. Appreciate it. Thanks.