Let’s go through some of the most important decisions, principles, rules, action steps that MSO leadership can go through to prevent a worst case scenario of high distress and enormous disruption that comes with really poor performance. What do you think is top of the list?

I think MSO success or failure is often the byproduct of poor process planning before the deal ever gets struck. Sometimes all the parties who come together to form an entity have the best of intentions, but they fail to address fundamental alignment early on in the salad days of the relationship, which creates all sorts of misconceptions of what their intentions are and what their hopes and expectations are somewhere down the road.

What do you mean by salad days? What do you mean by the deal? Who are the actors? Let’s play this out. Party A, company A, investor A, DOA does what?

When an investor and a target gets together and contemplate a merger, they are often coming at this from different perspectives. The investor is looking for an opportunistic gain on their investment. The target is looking for capital, which can be either put into the pockets of the owners, it can be redeployed for growth, or it can be used in other ways to help the organization stabilize itself. Often both sides aren’t aware of what the others’ needs are and what the other’s expectations are, and it leads to a misfire post closure.

Are we talking about a checklist of what to do not to avoid the distress from an integration standpoint, from a post acquisition standpoint? Are we going much more than that and just looking at distress as you see it out there in the marketplace, irrespective of there being M and A?

I think that a failure to execute on a pre closure diligence process and a post closure integration process, which is either incomplete from the perspective of missing elements or incomplete in the form of to-dos that didn’t get done lead to problems, sometimes near term, but usually not long after the merger, in terms of a gap between expectations and actual performance.

Are you saying that on the list of top 10 things that drive MSOs into distress, top of the list, is MSOs that A, engage in acquisitions and B, fail to execute on them well?

Absolutely. The idea that the deal makes sense is relies on execution of integration post closure. When they fail to do that completely, you create problems downstream as it relates to performance because you’ve missed or postponed things.

Acquisitions plus tuck-ins are extremely dangerous. They drive a lot of growth. They drive a lot of risk too.

In integrations, one of the biggest mistakes that MSOs make is that they need to follow a very basic formula post-integration, post close. Stabilization, followed by optimization, followed by growth. What happens is platforms often skip ahead to growth before they’ve conquered stabilization and optimization, and it’s often driven by business development’s responsibility to grow the platform. As such, growth becomes the enemy of stabilization.

Going down the list, top 10 corollaries with failure, how much of this is private equity driven?

I think both private equity driven and management driven, because what happens is when the two parties get together, they enter into a conversation where they may be talking and using the same words, but they misunderstand each other’s intention of those words. For example, a private equity company may say, “We want to focus on optimization and growth,” and the doctors, or the target, may interpret that to mean they’re going to pour money back into the business. The private equity company may say, “Well, we’re actually going to make things more efficient and pull money out versus putting money in.” So you create this bad will, unintentional bad will between the parties about one side saying, “You never told us things were this bad,” and the other side saying, “You told us nothing was going to change.”

Understanding what the word investment means. Investment in what? Investment in acquisitions or investment in the existing platform? Not the same thing. Does a private equity business that doesn’t engage in acquisitions but focuses on organic growth, typically represent a lower risk profile in your mind? It’s not necessarily the initial point of entry, the initial acquisition and the initial leverage, but the constant change, the volatility that comes with constant acquisition that you want to highlight. It’s not necessarily that private equity owns healthcare assets, it’s that these assets are executing on a business plan, a roll up. Tuck in, tuck in, tuck in, that is driving the risk.

Yes. I think that there is a push to do these tuck-ins because they drive growth and balance sheet performance and the quality of those deals begin to diminish because of the inherent push for growth over diligence and discipline as it relates to, “Should we be purchasing this asset or not?” The deal becomes more important than the performance and the quality of these assets begins to diminish as the push to grow is increased too soon.

Whereas the owner of the asset is under sometimes the false impression that the more times you do something, the you better you get at it?

Correct. It’s not a math equation on a spreadsheet versus execution in real life are two different things and there is an under-appreciation for a model being put into practice that says, “If you do this a hundred times, you’ll get better at it.” Whereas the raw material you’re working with is unique on every single transaction and has strengths and weaknesses that will undermine success post deal closure in a way that is unpredictable and not formulaic.

Can you give me an example? You don’t have to name any names, but think of a case study.

Yeah, I can think of a platform we worked with in the distressed asset category, which was characterized by a business development team that was giving marching orders to close deals and giving great latitude in the form of the price of those deals in terms of the quality and the diligence of those deals. The only real criteria they were given was a deadline. These deals need to be closed by such and such a date.

What happened was the quality and the consistency of those tuck-ins began to diminish very quickly. The underlying management team didn’t have the bandwidth to correct for the fundamental problems in place in these tuck-ins while simultaneously was at a disadvantage because the structure of the deal led to early terminations by doctors with no consequence and a lack of a strategic transition plan to solve for that. The platform was left with a large group of practices that were underperforming from day one, had no buy-in from the providers that sold their practices, and no transition plan for when those providers left. The platform was essentially left holding long-term leases, employees and a lack of patients to sustain those offices long-term. Disaster.

Let’s keep going down the list of corollaries. What else is on that list? What do you associate with high likelihood of failure? Poorly diligenced acquisitions, too many acquisitions.

A lack of true involvement by the investor in the day-to-day operations of the business. Typically, lenders or investors assign an operating partner to that asset to sort of manage the relationship, if you will, and those individuals have a highly variable degree of basic business intelligence related to that specialty or service that the healthcare entity is providing. That is associated with a lack of understanding of the levers that are required for those businesses to be successful and a schism between the management, the investment team, and the business management team as it relates to alignment for common goals.

I’m very surprised that a lot of people in the investment community have very little fundamental understanding of how healthcare works from a ecosystem perspective, from a business planning and execution perspective, and from a comprehensive understanding of the variations that could impact a healthcare assets performance, and that leads to disagreement, argument, and frustration between the investment team and the management team in terms of understanding each other’s fundamental strengths and weaknesses.

Where an operating partner has no idea how healthcare RCM works, how the acquisition or hiring of a provider and the ramp up associated with that provider is meaningful from the perspective of revenue creation, and on the other side, a lack of understanding on the part of the management team for cash flow considerations as it relates to creating increasing stress within the business. On the one hand, you have the investor who has no fundamental knowledge base of how revenue is generated and expenses are managed in a healthcare entity. On the other side, you have providers who think that the money is not free, but free and easy, and that there’s no consequence associated with running a poorly managed business.

Where do you see reporting breaking down? Bad reports that are late and inaccurate? Why is it so common for monthly reports to be inaccurate?

I’m going to break that into two groups, and I’m going to call them financial reporting and then I’m going to call it business reporting or the bucket of KPIs that we talk about often in performance management. From a financial reporting perspective, there is a challenge that financial teams have in aggregating data in a timely fashion such that meaningful reports can be produced in a timely fashion to be impactful for the next business cycle, and the part of the reason for that is that often in integrations especially, you’re dealing with multiple financial reporting systems extracting data from multiple EMRs, and it creates inherent challenges in terms of aggregating information into kind of a single contiguous workflow that CFO and their team can put together.

I think a secondary issue related to that is that legacy platforms have varying degrees of capabilities as it relates to reporting as a investor community would like to look at it. By example, a 10 doctor practice that merges with another 10 doctor practice may have limited talent and capabilities to create reports that would suffice to the level of an investor platform, an investor community. They just don’t have the fundamental chops to deal with the kinds of reporting that is meaningful to a financier, and ultimately those people need to be swapped out.

This creates drag in terms of creating meaningful reporting in a timely way that is accurate and understandable by all the stakeholders within the system. I think another problem related to financial reporting is that the provider community doesn’t really understand generally accepted accounting principles or gap rules. They don’t understand what a balance sheet is. They have a fundamental understanding of an income statement because many of them have lived off of an income statement for their entire careers, but really a fundamental lack of understanding of how those things tie together is another fundamental flaw of the financial reporting process, which creates drag and delay.

On the KPI side, if you’re dealing with multiple EMRs aggregating information that is tangible and meaningful and is the same language is a challenge. For example, if EMR A labels something as a new patient visit and the EMR B calls it a consultation, there needs to be a reconciliation of what that terminology means, which can cause delay. There are also limitations with different EMR packages that make it difficult to provide more detailed KPI management. More simplistic EMRs cannot get into fundamental detail in a way that more complex EMRs can, and that creates a gap in timing for reporting therein because there is a aggregation and a translation process that needs to happen. Then, fundamentally, the financial side doesn’t necessarily understand the key driving KPIs inside of a business in the same way a provider may.

Anything else that comes to mind that you see more often than one, more often than anomaly, is correlated with failure.

This falls into the concept of good management post close, but when changes are needed to be made because things are not going well early on, the investors and the providers sort of circle their collective wagons and create a defensive perimeter around their areas of interest. Instead of working through problems, they tend to work around problems. In the early days of a relationship, when you have a provider who has a fundamental disagreement with the investor, they don’t work through that, they put a Band-Aid on it, and it creates a bigger problem down the road. I’ll give you a couple examples of that. In one situation, we had an investor who poured a lot of money into a platform, but took a hands-off approach to the day-to-day management. Literally, the CEO was told, “Run the business as you see fit.

You’re a provider, you manage the providers, and we’ll just sit in the background and allow you to do what you’ve been doing.” What happened was the CEO implemented changes that increased costs, did not increase revenue, and fundamentally dissociated provider behavior from good management. Specifically, the providers had no P and L responsibility. They had revenue responsibility, but no P and L responsibility, and so costs exploded relative to revenue to the point where marginal revenue was outperformed by a marginal costs over a sustained period. When the CEO was confronted with that, he said, “You said I could do this. None of the things that you want to change can be changed and figure it out a different way.” On the investor side, they had no internal working knowledge of the fundamental underlying performance related issues inside the practice, and were sort of left with their hands on their hips not knowing what to do, and they basically created an impasse, which led to increased capital calls and continued under performance until the asset receipt reached crisis point where millions of dollars were being lost and a large dispute ensued.

I think a second example is when you have a legacy CEO who’s a provider who will defend his providers at all costs and not be a good steward between private equity or the investor and the providers. The CEO is protecting the providers and their behavior and fundamentally is not executing on the business plan of the platform. That usually has its roots in post closure expectation, the creation of expectations, the management of expectations, and the execution of a business plan based on those expectations is fundamentally missing. I think that that creates a lot of bad will, under performance, and then high, highly stressed situations, financially stressed situations that lead to a disruption in the business.

Okay. What are some of the go-to measures that you use to stabilize a platform that is in distress? If we think of a playbook, what is the playbook?

I think the first and most valuable thing one can do is to be transparent with information that describes the situation for what it is. What I mean by that is that if the business is losing money, everyone needs to know that the business is losing money because I think most people understand that losing money is not the goal and losing money is not sustainable as it relates to future state. I think that the first and most important thing is to educate people on what the scenario is, educating them on why things are the way they are, and then engaging them in terms of trying to come up with tactical solutions that will be beneficial to the business, but also not disruptive. An example of that is engaging the providers in four wall PI education leading to those providers gaining from gains in the PI.

I think aligning providers with profitability is very important because, at the end of the day, they control a lot of the decision making that drives revenue and costs, and if they have a fundamental understanding of what is driving revenue and costs and what the output of that is, they can be more helpful if they are engaged in the process. In terms of go-to, I think it’s important to engage at a very local level, at minimum, the practice leader from a clinical perspective, the practice leader from a business perspective in transparency of information and solutions that are executable at the office level and roll up to the corporate level in a way that is realistic. I think that that’s an important piece of this. I think a second fundamental important piece of this is recognizing that when you’ve made a mistake is to acknowledge the mistake and learn from it and not repeat it.

I spoke earlier about the business development team running amuck at the cost of stabilization and optimization, and I think it’s important to learn institutionally from those mistakes and do so in a way that’s not combative or judgmental, but recognizes the fact that the way that you’ve done this and this we’re incorrect and we need to correct for those things and not repeat them on a sustained basis. I think that’s very important to create this learning culture. Doctors by example, or doctors and dentists are scientists and they understand there’s a learning process associated with clinical care. There’s a learning process associated with business management. I think fundamentally often a lot of these decisions and grow within businesses do so in silos. I think that a lot of these problems can be avoided by earlier engagement in a fundamental shift in business performance versus expectation versus waiting for things to blow up.

I think what is also in that playbook is a understanding that when a business gets to a certain point that turnarounds may not be enough, and restructuring could be in play. By restructuring, we often speak of that in terms of office consolidation as it relates to underperforming assets and a recognition of the fact that that is sometimes required due to the cash bleed in certain situations and that turnarounds and restructuring, the levers that influence this are how long is it going to take, how much is it going to cost, and what is our risk tolerance for whether or not it’s going to actually work have to be balanced against, do we keep an office or division open versus consolidated and come up with a different plan for a particular geography or a particular service line that’s underperforming?

I think, fundamentally, that’s an important thing that has to be part of any turnaround and restructuring campaign that a business undertakes and people need to come to the table with an understanding that all these things are possible, and while we don’t love to consolidate because it’s, in a lot of ways, the opposite of growth. Sometimes it’s required in the near term to shore up of the balance sheet of the business in order for the business to survive. I think that that’s another aspect to this. I think another aspect of turnarounds that’s very important is creating top to bottom alignment between everyone in the organization as it relates to what the goals and expectations are. By example, the office staff, the mid-level staff and the providers and the office manager and the regional managers all need to understand what are our goals?

What are our goals related to patient care? What are our goals related to RCM performance? What are our goals related to year-over-year growth? Everyone needs to understand their role in that process and, hopefully, have a reward for success. It’s very interesting, in a lot of larger platforms, the key decision makers who end up being the people scheduling patients, the people performing revenue cycle management, their voices are not part of the conversation as it relates to performance until you get to crisis mode. By engaging these people earlier on and giving everyone within the organization skin in the game, if you will, it helps correct for a lot of problems. If a front desk person knows that seeing 10 additional patients a week equates to an extra $200 in their paycheck at the end of the month, you’ve essentially solved for that problem. It’s interesting that in many, many organizations, those people are the most marginalized as it relates to input into the process.