First Aid for Health Care Companies in Distress
Deloitte Insights video
Before any health care organization can commit to restructuring, it must first admit it’s in distress. Tune into this episode of Deloitte Insights to learn how health care companies can not only better diagnose their organizational well-being, but also prepare a regimen for recovery.
Sean O’Grady (Sean): Hello and welcome to Insights. On this episode, we are diagnosing restructuring opportunities for distressed health care companies, and we brought two guests into the studio to outline the options from the law offices of Cadwalader, Wickersham & Taft LLP, we have Deryck Palmer, a partner and co-chairman of his firm’s Financial Restructuring Department. Deryck has also been recognized by the trade newsletter Turnarounds and Workouts as one of the top outstanding bankruptcy attorneys in the United States. And next to him, we have Louis Robichaux. Louis is a principal at Deloitte Financial Advisory Services LLP with significant chief restructuring officer experience. He also serves as the co-leader of the Health Care Reform Troubled Company Turnaround and Monitoring Solution at Deloitte. So, gentleman, to begin, the health care reform bill is still to some degree meandering its way through Congress, but with that in mind, what do you see health care companies having to face in the short term?
Deryck Palmer (Deryck): It is clear that in the short term, there is going to be a tremendous demand on liquidity. Under the new health care bill, the move to electronic records is going to require a capital investment by a lot of institutions that are quite frankly not prepared to do it. I think you are going to have fallouts also in some of the unfunded mandates that are in the new health care bill that will lead to a need for each institution to look at its operations and to see if there is some way they can reduce their cost of operations. Someone like Louis is perfectly situated to come in and help them diagnose their operations and see what if any improvement can be achieved.
Louis Robichaux (Louis): Firms will also be looking to expand their physician and provider base as they contemplate how to implement accountable care organizations. This is leading to a lot of M&A activity in the provider space as well as for hospital providers looking to acquire other hospitals to expand their market reach.
Deryck: And that expansion is going to lead to a significant consolidation, and I think you are going to see two groups of institutions develop the haves and have-nots. The bigger institutions are going to get big, bigger, and more powerful and will have the capital resources necessary. They will have access to the capital markets, they will have the liquidity they need to fund the transition to electronic medical recordkeeping, but more importantly they will have the resources that leads to capital improvements in their overall operations.
Louis: And to make matters more difficult, all of this has to be implemented during a very difficult economy where we are still struggling to shake the recession of 2008 and 2009.
Sean: So, as if it wasn’t tough enough. We are speaking about distressed or potentially distressed health care organizations. Now, before an organization can commit to the idea of restructuring, they have to first admit that they are sick and that they might potentially need this, so my question is, what are some of the symptoms if an organization is reviewing itself now? How might it know if it is in need of a restructuring?
Louis: If I were on a board of a hospital provider or a large health care company, I would take a look at on a consistent basis three things. Are we funding our operations through our core strategic focus in operations and not relying on outside foundations and charitable giving in order to close the gap? That’s one. No. 2 is, are we still achieving access to the capital markets in a way that it allows us to continue to invest in the company going forward or is our access to capital pinched in any way, and third, I would keep a very close eye on the level of cash and liquidity in the organization. That’s usually the first sign of symptoms of trouble.
Sean: And how about you, Deryck?
Deryck: I would say cash on hand is probably the single largest metric that I look at as a restructuring lawyer. What cash tells me is how good an institution is at their billing and collection, and whether they are outsourcing it to a third party or doing it internally, cash on hand is generally a metric that is simple to understand and it is a clear indicator for a board member to look at. The other factors that Louis mentioned are important and I think one can determine that with a little bit more work, but cash everyone understands, cash everyone can understand how it is going to impact the implication. There are metrics, but generally the rule of thumb is 100 days of cash is a good metric to have and an institution can look and say, “Can I sustain my operations for a 100 days without additional cash?”
Louis: Another qualitative measure you might keep an eye on as well is the inflow of replacement talent in your organization, both at the management level and at the physician-provider level. It is very interesting how the frontline, highly talent individuals within organizations are one of the first ones to be able to sense trouble and those with options usually avail themselves of them.
Sean: Thank you for outlining that criteria for us. I guess logically from here the question is what are you advocating. So, if an organization is finding itself in this position right now, what should they be doing?
Deryck: I think every organization should do a self-examination. That assessment will tell them how they compare to their competitors and that analysis generally is the most helpful metric or tool that someone can have. Once you have done the assessment, whether you’re in a distress or not, a good institution is always going to be restructuring itself because the standstill is to die and in this marketplace with the recession that we are going through, it is incumbent upon management as well as the supervisory board of directors to make sure the operations not only are meeting the needs of today, but are planning for the needs of the future.
Louis: I also think that it is very important that board and management teams demand reliable, hard information and data. Just because a component of an organization is hard to measure doesn’t mean that you shouldn’t be measuring. We manage what we measure and making decision off of reliable data is very important.
Sean: Now that pegs the question of accountability then, so keeping the feet to the flame here, how are we ensuring or how can these organizations ensure that the managerial board is involved in overseeing this process.
Deryck: Well, if you’re nonprofit, some of the techniques of the for-profit world need to be incorporated. If you’re for-profit, the metrics of the market dictate what you are going to do. When you are a for-profit and you’re a publicly traded company, I think the stock market demands result and you’re going to manage to meet those results. When you are a for-profit and you’re a private company still, I think it is a harsher reality, and one looks at the amount of charity care one gives out, one looks at the salaries that it is paying to its employees, one looks at its operating cost with a fine toothcomb. There is a well-known saying in the nonprofit world that without margin, you have no mission. So, people manage their assets so that there is an operating profitable margin. Sustaining your operations is the most important thing, and as Louis mentioned earlier in this broadcast, it is incumbent upon any management team or the board supervising them to make sure that the institution is performing its optimal best. Jack Welch of GE always had the analysis or the belief that you could always get 10 percent of waste out of any business and you have to run health care institutions in the same way and we have to look at how we can be more productive and do more with less.
Louis: It is pretty important for boards to educate themselves. Routine training by outside advisors is one way that boards, in particular not-for-profit boards, ensure that they stay up to date on issues. Not for-profit boards benefit from having mentors to those boards and it’s the most effective not-for-profit boards that I have seen function as though they were a for-profit board.
Deryck: In today’s world of liability for board members when they do not meet the duty of care or the duty of obedience which are basic fiduciary duties for board members, there is too much at stake to not get the training that is necessary or get the legal advice that they need and how to conduct their operations. It is an important part of my practice as well as others who work in this area to make sure that solid advice is given to the board about everyday decisions that they have to make, decisions that will affect their access to the capital market, how they manage their endowment and their foundation funds, as well as significant competitive issues they may have with other institutions in their area.
Sean: Any final thoughts from you, Louis?
Louis: I think Deryck summed it up well.
Sean: Thank you. You summed it up well as well, so it is not just that big shift, but also that regular maintenance that you were speaking about, so thank you both very much for joining us today on the program.
Louis: Thank you.
Deryck: Thank you for having us.
Sean: You’re welcome. Okay, we have been talking about restructuring options for distressed health care companies with Deryck Palmer, the co-chairman of Financial Restructuring at Cadwalader, Wickersham & Taft LLP, and Louis Robichaux, a principal and chief restructuring officer at Deloitte Financial Advisory Services LLP. If you would like to learn more about Deryck, Louis, or any of the topics discussed on today’s broadcast, you could find that information on our website. It’s www.deloitte.com/insightsus. For all the good folks here at Insights, I am Sean O’Grady. We will see you next time.
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