M&A: Discussing distressed hospitals with Pete Lawson

Hospital mission statements don’t say anything about specific facilities.

That’s a key message Pete Lawson has for distressed hospitals working to chart a new way forward.

Lawson has extensive experience in both healthcare operations and M&A. He’s spent time with investor-owned and not-for-profit health systems, and has served as a hospital CEO and multi-facility corporate leader. Now, as a consultant and strategist, he uses his background on both the buy side and sell side to guide client hospitals through the transaction process.

Here, he talks about what’s causing distressed hospitals, where they are (particularly, but certainly not exclusively, in rural areas), what their challenges mean for the communities they serve and how they can survive.

Listen to the podcast or read the transcript below.

Read the transcript

David Shifrin: Pete Lawson, thank you so much for taking the time. We just had a great conversation with David Jarrard and Isaac Squyres about the distressed hospital. If you would, explain why you’re here and your mission to help the distressed hospital in today’s healthcare landscape.

Pete Lawson: Great. Appreciate being here, David. It’s been a pleasure so far this morning, meeting you guys and seeing each other. I’m here on other business that I’ve been involved with in my M&A work, and a lot of it involves giving strategic advice to, what we see more and more as, distressed hospitals.

As part of our discussion today, part of it is, “what is causing hospitals to be distressed?”. Let alone, “what do communities do to reverse the course of these facilities?”. So, part of what I see, and you see, in healthcare is where are the distressed hospitals?

Many of them are in rural markets and small communities, but more and more you’re seeing them in urban communities. My sense of hospitals is that the distress is being caused in kind of a good way, with clinical advancements in medicine where patients no longer need to be using hospitals as we know them because of advancements in medicine and surgery and that the demand for hospitalization itself, inpatient hospitalization, has really gone in decline. I think that’s one of the challenges hospitals have, is that it’s because of those advancements, that your volume declines – regardless of payer issues and those things. So that’s why the smaller hospitals tend to get more distressed than others, because they don’t have the volume, you know, to treat patients clinically

DS: As all of this is happening, it’s for good reasons. In a clinical sense, as you just discussed, if we’re healthier, maybe not, society isn’t necessarily healthier… we’re finding new ways to care for ourselves, and medicine is doing that. At the same time, the community hospital has always been such a bastion in a hallmark of any individual community. They are representative of community pride. They’re a major employer, oftentimes the largest employer, and there were many people, as you mentioned earlier, people were born at the community hospital, and in many cases, they die there. It really bookends the lives of the people in these communities. So, while there are many positive aspects of this change and this shift out of the acute inpatient hospital, it’s also driving a lot of concern because these communities are seeing their hospitals change, and in some cases, go away.

So talk a little bit about that issue of, the local environment and the local feeling about the hospital.

PL: Sure. It’s very much what you said. The hospitals usually are the largest employer in the market, and people have, especially in smaller communities, been born there, grew up there, work there, died there. So, the continuum of care has been kind of a hallmark of small community hospitals, and it’s a very emotional, social organization.

But, because of changes in healthcare, medical services have changed and shifted to larger organizations, larger institutions that can support providing higher levels of care. And a good example is obstetrics, where today you truly need to have a viable obstetrics program. Your hospital has to merit American College of Gynecology. The marker is 60 deliveries a month. If you’re in a facility that sees that many per year, you’re not creating an environment of good quality health care, you’re more risky health care. So you’re seeing a lot of the obstetrics programs go away and that component of “I was born in the hospital” has gone with it.

So, you do see that challenge of shrinking service lines and people making active choices; for instance, in obstetrics to have their baby delivered 50 miles away in a setting that’s their choice. So, when it comes to elective care in these communities, people are actively choosing their elective care somewhere else.

So it’s not like it all happened overnight, and all of a sudden the hospital lost all its patients. The patients are people who live in those communities. They’re electing when it comes to elective care – to have their children delivered, to have their hip surgery, their open heart, their cancer care provided somewhere else, when they’re able to do that.

Of course, in an emergency setting, you need to have an emergency setting in those smaller hospitals. But when it comes to elective care, people are choosing to leave that community and have their care elsewhere. And that’s the fascinating part about is it’s not like this happened tomorrow and everyone left.

They’ve chosen to do that, so what’s left behind is, by choice, a smaller serviced hospital.

DS: It’s an interesting point, an really interesting way to reframe it because it does shift the conversation from this thing that’s happening to us, the hospital, to – this is a “conscious decision” by our customers, and therefore is a little bit different. It becomes a little bit more of an opportunity for proactive response rather than defensive in some situations.

PL: Right, and I think that’s the difference between hospitals in those markets that end up surviving and the ones that are distressed. When you look at what your facility/organization is, and then evolve your service lines to match that, I think those are the hospitals that will survive; As opposed to, “We’re always going to keep this acute care hospital, regardless of what the changes are in healthcare in the market. We have to have a hospital here, and we have to provide these services, come hell or high water.” What I encourage communities, leadership and facilities to do is to look at your mission statement that has been around since the hospital was formed.

When you really look at those mission statements, David, you don’t see this structure. This hospital is going to be servicing patients in this manner they all talk about. These are a hundred year old missions. They talk about providing health care services to the community. So, what goes undefined that really should be reframed is “what is the hospital?”.

What is that today versus what it was 30 years ago? And then, what is the community? How is this organization going to service both in a way that is viable and provides good care?

DS: What happens when you have that conversation with executives, and you present it in that manner that it doesn’t say anything about these four walls? It says care in the community.

PL: I think executives and boards already know that. They understand that, but part of it is pushing them when they are in a situation of transition to actually adopt that original mission that was there for them to adhere to for the organization’s success. When you do that, you have to talk about strategies of capitalization and service line management, “what are we going to be?”. Which requires a different mindset than we’re just running a hospital. So, it does take a shift, and I think more so going forward, executives should be more mindful of “what are the services we are providing here?”, and it may be uniquely different than what they did historically as a hospital.

DS: The last thing I wanted to touch on a bit was, going back to the community, the feeling of community, the idea of local control and partnerships, and where ownership lies within these organizations. You made an interesting point about local control in our conversation earlier. Talk a little bit about the attitude and the perspective, because I think that fits into the mission of these organizations. The goal is to provide care, therefore, these other important, but ultimately ancillary issues, need to be considered in a different light.

PL: I think it’s similar to reframing the discussion about, “what is a hospital today?”, and then, “who do we serve?”. The same is true of the notion of independence – you see fewer and fewer independent hospitals and then control. So I think independence and control go hand in hand. And those are the kind of the discussion points you see at local levels that we want to be independent, but at the same time, we don’t want to control everything.

Then when you compare that to, “what are you actually controlling?”, “Are you truly independent?”, your discussions should be more robust about “what are you trying to accomplish?”. It gets tied back to the mission. If you really know what your mission is today, and you’re planning for it tomorrow, it should affect the issue of independence and control.

So, if you’re accomplishing your mission of providing healthcare service to a broader community. But you’re doing that with the assistance of a larger regional, say, academic partner that’s helping you with clinical tools, possibly capitalization, managed care agreements. Is that actually a bad thing? If it’s helping you accomplish the mission today and going forward?

And I encourage boards and communities to rethink that notion of independence and control, and think of it as, how are we meeting our mission here as an organization?

DS: Taking all of this, if you can, we like sort of bite sized takeaways. Distill everything we’ve talked about and kind of what you would say to the leaders of a distressed hospital or an organization that is working hard not to get to the point where it is distressed and needs to be reactive. What’s the message?

PL: The message would be: Rethink how you’re leading this organization, and rethink what’s really in front of you already – your mission. Apply what you already know as a seasoned executive and board about where you need to go, and put more oars in the water for resources. If that means partnering with a larger system to help you accomplish that, that should be seen as a measure of success, not failure. And, it’s a better way to accomplish a mission than just trying to go at it alone and being independent.

DS: Great. Tell us a little bit about your work and where people can go to find you.

PL: I’m a 35-year healthcare executive, both operations and mergers and acquisitions, and I have a long history in mergers and acquisitions and operations. My current role today is in my own M&A company where I assist hospitals and physician groups and organizations strategically and have them rethink where to go from here. So I provide strategic advice on both areas. I live in Naples, Florida, and I am available, you know, at the drop of a hat, I guess.

DS: Thank you so much for your time, Pete. It’s a pleasure.

Pete Lawson: Thank you.

David Shifrin
dshifrin@jarrardinc.com