Throughout your career, you run the very real risk of being run over by a fad, some new idea or strategy of the day designed to make you a better leader, make your organization more efficient, more competitive, more successful.
Beware of fads, especially the ones that pop up suddenly and everyone seems to be following, the ones where consultants suddenly abound claiming to have the so-called “depth and breadth of experience” in this heretofore unknown concept, that will guide you to the promised land of success.
As my Grandmother liked to say, “If it sounds too good to be true, then it probably is.”
Several fads that have distracted companies and proved to be anything but a bounty of success are:
Downsizing. This a a serial business fad that has more lives than a cat. It is an equal industry offender, from manufacturing and logistics, to healthcare. The last time it reared its ineffective head was in the late 1980s and 1990s. Consulting companies flooded the zone with one-size-fits-all product templates implemented by young associates, many of whom lacked the experience or common sense required to make complex decisions in industries they did not know.
The result was a lot of wrongsizing, quite a bit of dumbsizing, but very little rightsizing.
There were hundreds upon hundreds of examples of companies that downsized and essential talent and invaluable historical context was lost. Many companies ended up bringing back these essential workers as contractors at higher rates of pay. Well, so much for the savings predicted by the consultants.
Next, Integrated Delivery Systems and Physician Practice Acquisition. First came an article in Modern Healthcare extolling the benefits of a new concept for organizing the delivery of healthcare. The most popular and deadly versions of this fad was something called Vertical Integration. It made sense. It sounded so reasonable. It was, in a business phrase, sexy stuff.
So much so that in the mid-1980s, hospitals began offering insurance products, acquiring medical practices and employing physicians. Once the Modern Healthcare article on system integration appeared, dozens of healthcare consultancies emerged, almost overnight, touting their deep expertise for an idea that had never been done before.
Were there some wise men and women in this group advising hospitals? Absolutely. But many, many CEOs embarked on a strategy about which they had little knowledge and almost no expertise. Buying physician practices seemed particularly attractive because there was a sense that an acquisition meant control; hospitals thought owning their doctors would solve many of their challenges and frustrations and ensure a steady flow of patients. If they knew then, what they know, or should know today, they would have escorted the consultants to the exit and avoided the temptation to follow the proverbial lemmings over the cliff.
The resulting carnage was substantial; health systems and hospitals lost massive amounts of money on each physician in their employ, CEOs and other members of the senior leadership team lost their jobs, and doctors, some of whom sold their successful groups to practice management companies like PhyCor and MedPartners, lost all or substantial amounts of their retirement plans when the stock of those companies collapsed.
There was an upside, however. Turnaround consultancies with lucrative fees made off like bandits.
Now here is an amazing bit of information. The allure of the fad to acquire physician practices was so powerful that there were still executives pitching deals to potential investors even as turnaround executives began to salvage — or try to salvage — some financial value from this epic collapse of this fad.
Today we are revisiting the idea of acquiring physician practices. Armed with a better understanding of the risks, as well as some hard-earned expertise regarding physician compensation plans, employing doctors may work this time.
Supporters of today’s strategy argue that this time it is all different.
Well, time will tell.
Industry consolidations — also known as strategic affiliations, alliances, sale or merger — are endemic in the healthcare industry, or so says Britt Berrett, Director of the UT Dallas undergraduate healthcare management program.
I tend to agree.
Here is what he told me in a recent podcast interview:
“I think the consolidation, the creation of integrated delivery systems is endemic. That is just in the fiber of leaders. They want to consolidate and grow and there is a pendulum that swings back and forth. I don’t think that is the solution. I think leadership is the answer. I am an advocate of local autonomy and responsibility. I think (that) when you put leaders in a community and ask this question: How do we improve the quality of care in this community, you find creative solutions. That usually doesn’t come from the corporate office. I would suggest, and my experience would confirm, that they (health systems with centralized decision-making) are doomed. They are cruising for a bruising.”
More about that later, but first a little context regarding the early days of roll-ups and consolidation.
Phase I, or the genesis of the consolidation game, can be traced to the emergence of the for-profit hospital management companies in the 1970s. Armed with claims of better business practices, the advantages of scale, and guarantees that by selling their hospital, the board would ensure that this valuable community asset would be protected in perpetuity, many took the money and corporations took over local healthcare.
Many county governments that owned hospitals, worried about the financial burden for the taxpayers of trying to maintain local ownership of the hospital, understandably jumped at the opportunity. It seemed like a slam dunk for the County Commissioners and, to be honest, in many cases healthcare improved as a result of the sale and even more positive, the quality of local healthcare continues to do so today.
Physician owners of hospitals sold in hopes of preserving their legacy. Others cited access to capital markets as their reason. And we should not forget about the opportunity for a payday that would allow them to enjoy a full and secure retirement. Those were all valid reasons to consider a sale or merger.
For some not-for-profit CEOs, they saw a rapidly changing business environment. Some felt they lacked the skills or resources to move their organizations to the next level of performance and were persuasive in getting their boards to agree to the sale. In the 1980s, many of these hospitals were acquired by hospital management companies. After all, what could possibly go wrong. They had money, good management and a clear vision for the future.
Throughout the 1980s, this trend accelerated.
On the not-for-profit side, Catholic hospitals, many buffeted by tough operating climates or weak leadership and/or a desire by their sponsoring order to preserve the religious heritage of their mission — sought out larger Catholic systems for partnership. Some abandoned their religious mission and were acquired by investor-owned corporations or regional not-for-profits.
Some of these mergers of necessity have done well. Some deals designed to protect a legacy – well not so much.
Small town hospitals were not immune to this fad turned trend either. Some did well, many did not and were abandoned by their corporate owners because they could not make an adequate return on investment. There are many small towns across America whose important hospital asset now sits empty, abandoned or on the site where a hospital once thrived, there is now a vacant lot.
For one community in northeast Texas, the sale by a beloved physician of his namesake hospital was greeted with sadness that a legacy was ending. That nostalgia was replaced with excitement when the new corporate owners, a well established, successful firm from Los Angeles, announced they were planning to build a new, larger state-of-the-art hospital on the town’s south side near the Interstate. The old hospital, a combination of an old home and a newer wing, had seen better days so the community said goodbye to that piece of history without much remorse.
If the only the story ended better.
Yes, the new hospital was built on a piece of land leased from the city. Yes, it was a modern, one-story with the latest technology, but cross-town another physician hospital, aware of the competition, sold to a start-up hospital management company. They, too, planned to build a replacement hospital. But then the regulatory and reimbursement climate began to shift, and the second start-up decided to sell their hospital to their larger, cross-town competitor.
Then the well-established LA management company, which it self had merged with another LA-area hospital management company, hit a compliance speed bump — accusations of fraud led to a leadership shakeup and a strategic re-evaluation of their assets. Their smaller northeast Texas hospital, along with many others, no longer fit their plans for the future so, promises made to the town’s respected doctor when he sold his hospital, were forgotten.
An employee-owned stock company — an ESPOP — was created to manage this and other hospitals that were being spun off. This ESOP, which included executives and employees from the original company took over the ownership and operation of the hospital.
Neither the doctor, now long since retired, nor the community had a say in the matter. Ownership and control now belonged to the ESOP.
But the regulatory and competitive environment shifted again and the ESOP CEO, who saw a chance to have a big personal payday, very quietly negotiated the sale of the ESOP owned hospitals to a Nashville-based spinoff of the nation’s largest hospital management company which was undergoing its own strategic reassessment.
This new spinoff, run by some respected executives from the investor-owned hospital industry, quickly expanded when they acquired the hospitals of yet another hospital management company that opted out of the healthcare delivery business in favor of becoming an insurer — to wit, an HMO.
OK, are you still with me?
Then an El Paso based start-up that was showing great promise acquired that Nashville start-up and the little Texas town’s hospital, once again, saw an ownership change. This time, the community barely noticed. Everything at the hospital seemed to be going well, or at least that is how things seemed.
But more change came quickly. The El Paso start-up merged with the nation’s largest hospital operator, the one that had spun off the company that bought the ESOP.
Now this deal got everyone’s attention because, based on the optimistic press releases, this little town’s hospital was now part of the largest, most dynamic of all hospital management companies. Everyone could breathe a sigh of relief and the spirit of the now departed doctor who originally sold his beloved hospital to the LA company, could rest peacefully in his grave. His legacy was protected.
The new owners of our little hospital decided to conduct their own strategic review. Yet again, they determined that this little 75-bed hospital did not really fit in with their business model. They needed larger, more profitable hospitals to help them manage their very large debt load and to make Wall Street analysts happy.
So they, like their predecessors, spun this and several dozen other facilities into a new, public company about the same time as their most recent former owners were settling a nasty fraud and abuse case that cost the CEO and many of his team their jobs.
So the new public company comes to town and reassures the community, as did the previous owners, that, they too, were committed to upgrades in technology, physician recruiting and expansion.
But then a funny thing happened. This new company was acquired in a hostile takeover by the very company that had, years earlier, owned the competing cross-town hospital and had sold it.
Then the predictable happened. To pare down debt created by their hostile takeover, the newest owners decided to sell off assets that could not produce an acceptable rate of financial return. And our little community hospital, now aging, in need of capital and with only a handful of doctors — many of the local physicians, frustrated by all the sales, ownership and management changes, and with real concerns for patient safety — had stopped admitting, was sold yet again.
So a series of, not second tier, but third and fourth tier management companies came, some with dubious pedigrees, to run the facility. Actually what they really did was bleed off the cash. It was no longer about the community or patient care, just the money.
All total, this hospital has seen more than a dozen owners since the early 1980s. What started as a desire to protect a doctor’s legacy to and capitalize on equity for retirement — by selling to corporate owners as was the big fad of the time — ended with a city of more than 15,000 having no hospital. Residents drive 20 to 30 miles to the next nearest facility for care.
This amazing story reminds me of the old saying: No good deed goes unpunished.
Or perhaps the more accurate phrase should be: Once you sell your hospital, there is no going back.
And then came Obamacare, the Patient Protection and Affordable care act and a host of pilot projects to test ways to control America’s spiraling healthcare costs. Accountable Care Organizations, Pay-for-Performance and population health management fueled a new way of thinking — you have to get bigger if you hope to survive.
While there is some merit to that argument, if I had $1 for every time I heard this prediction since 2013 — if you are not part of a bigger system it will be very difficult for you to survive — I would have plenty of money in the bank. This is not only evidence of a fad but it is demonstrably not true.
If you run a hospital and you suffer from declining revenue, a less than stellar or unengaged medical staff, and stronger market competitors who can dominate you at every turn, then perhaps a merger — a sale — is in the best interest of your community. Yes, there are times when this sort of affiliation makes perfect sense, just as it seemed to be for our legacy doctor in North Texas.
But if you have a strong, committed medical staff, loyal local businesses who value having a viable community hospital in place and who are willing to support the enterprise, then wanting to merge because you think it is the only way forward is just not right. Once you sell, or merge, even to a strong regional not-for-profit or a faith-based network, there are absolutely no guarantees.
The answer to survival is not size, but good, effective leadership. With size comes more expense and loss of flexibility along control that allows a local board to do what is right for the community they are supposed to serve.
Corporate overhead, the monthly membership fee to be part of a bigger system, can run between 5 or 6 percent to as much as 15 percent of your net revenue. That is money that cannot be reinvested in your community. This also drives up costs. But some executives feel that is a fair trade off to get access to state-of-art technology and scale for reimbursement programs that will entail risk.
However, never, in the history of hospital mergers, has one of these consolidations resulted in lower costs for the patients.
Over the last several years there has been a rush to this form of consolidation. Some of it is driven by CEOs who have lucrative change of ownership severance agreements. Unfortunately, communities and medical staffs aren’t always privileged to those motives. Fortunately, these CEOs are in the minority.
Most of these consolidations are being driven by a sincere desire to create an organization with the financial strength, the expertise and other resources to be a survivor in what promises to be an interesting transformation of healthcare in the US.
Consolidation, the formation of local networks like Memorial Hermann in Houston, has proven beneficial in many markets across America. While costs have not declined, some of these networks have improved access, enhanced quality and ensured better safety for their patients, and that is a very good thing.
That said, there are already signs that some of these national systems are experiencing financial challenges that may require significant restructuring which could include divestitures of some hospitals and local networks.
For hospitals that are now part of a large national or regional system, the loss of flexibility and the nimbleness to respond to what could be rapid changes in reimbursement and regulations could be very problematic. As one hospital CEO explained: If I have a competitive facility, a good, fully engaged medical staff, a loyal following in my community and the ability to hold market share, then why would I want to throw in with a network that may not be fully committed to my community, my colleagues, my friends and neighbors, my fellow business executives? I have been down that road twice and I know, first hand, that, all the corporate promises to the contrary, if there is an initiative that my community wants and will support but could disadvantage their flagship hospital, then I will not get the resources we need.
We must always remember that to be truly successful, we must be true to our mission to serve our communities.
If you are entertaining consolidation, be wary of the fads.
Remember this: Great leadership is built on trust. Without truth there can be no trust.
© 2017 John Gregory Self