This transcript has been auto generated
00;00;05;01 - 00;00;26;26
Meg Pekarske
Hello and welcome to Hospice Insights: The Law and Beyond where we connect you to what matters in the ever changing world of hospice and palliative care. Deal Breakers: Identifying Key Issues Early in Member Substitutions. Adam, I'm so glad you're here with me again to talk about all these fine transactional things are working out.
00;00;27;04 - 00;00;31;05
Adam Royal
Hey Meg, happy to be back and happy to talk about transactions.
00;00;31;14 - 00;00;32;02
Meg Pekarske
Yeah.
00;00;32;19 - 00;00;38;09
Adam Royal
I've had a lot going on, so it's fun to kind of think about what we've been working on and what we've learned.
00;00;38;21 - 00;01;04;16
Meg Pekarske
Yeah, exactly. Because I think that reflection back is really helpful. And I always think about, you know, the looking back and like, if I knew, you know, now or if I knew then what I know now, how might I have proceeded differently? And and that's really what the point of this podcast was, was you and I were reflecting on why deals die.
00;01;04;29 - 00;01;55;09
Meg Pekarske
Right, right, right. And I think the purpose of of today's podcast was really to to try to encourage people to talk about some of these deal breaker things early on, because I don't think you want to be like two years into a transaction and then you get to the hard stuff and you've spent all this time which maybe as we start out not that that sort of talk about deal progression or deal length because I think, you know, in dealing in the not for profit world and members substitutions, you know, as we've talked about in some other podcast, just typically what not for profits do when they get affiliate or do acquisitions or whatever, you
00;01;55;09 - 00;02;24;05
Meg Pekarske
come under a common parent. But we've seen a lot of different deals. Some have gone well, some have died. Some have died early, some have died late. But in terms of how long should it take to get across the finish line? Because sometimes I feel like if it's taken too long, something isn't right. And so maybe that's just start there before we go into sort of nuts and bolts of things that have killed deals.
00;02;24;23 - 00;02;56;19
Adam Royal
Yeah. And I guess I guess one point in terms of timing is typically when we get involved in a transaction, the parties have already been talking to some degree, they they know each other and have sort of floated at various levels of formality ideas about how they could affiliate. And so that's that's sort of the the background context that we typically get into.
00;02;56;19 - 00;03;33;03
Adam Royal
So, so and those discussions between the parties could have occurred, you know, over months or even up to a year. But when we get involved by that time, the parties seem to have a pretty clear idea of at least who they might want to affiliate with. And I think the timeline there, you know, depending on how in-depth parties want to get in diligence, that six months to a year timeline is a pretty standard reasonable timeline.
00;03;33;03 - 00;04;03;06
Adam Royal
It could be quicker if the parties are really comfortable and ready to move forward, or it could be longer if they want to spend more time in diligence or if they want to plan out in advance some of the kind of operational integration pieces and that that one year timeframe could also involve, you know, post-closing integration. So the one year timeline is is not necessarily the the end of the member substitution and all.
00;04;03;06 - 00;04;09;15
Adam Royal
It's kind of attendant operational changes. But that would be like the closing.
00;04;10;02 - 00;04;44;00
Meg Pekarske
Yeah. Well and so I think roughly six month timeframe because I think the and I agree with you that when it takes longer that's usually because you're trying to upfront some of the operational integration sort of earlier on in the process. But I guess I wanted to start there because I think very official they go are dilly dallying is is and I don't want to under appreciate that these kinds of affiliations can be difficult for organizations.
00;04;44;14 - 00;05;21;12
Meg Pekarske
But I guess I want to just get people to think about if this goes on too long, like maybe it's just not right, right, right. And so but moving on to now, you can like start the first day with asking these questions that we're talking about, however. Yeah, you know, once you have your letter of intent signed or whatever, you know, trying to get to some of these harder issues in the beginning because, you know, while someone could say, oh, start with the easy stuff.
00;05;21;12 - 00;05;49;12
Meg Pekarske
So you're building rapport and trust. And again, that's one approach and not saying you don't talk about any easy stuff, but I think the the three things we wanted to talk about culture, economics and risk and sort of unbundle that and say, well, what is it about culture that kills deals? And I think starting there, you know, there is governance I think is a big, big issue.
00;05;49;12 - 00;06;21;09
Meg Pekarske
And we put that, I think, under culture. Right, right. Of governance. And I think something that's come up a lot has been just board size is different between two parties and can how do you sort of potentially right sized that and you know because saying goodbye to people on your board can be very difficult to do and you've navigated that issue really successfully.
00;06;21;09 - 00;06;37;15
Meg Pekarske
So why don't you talk about that governance issue and how we've found ways, like we got it out on the table fast and then we figured out ways to get people comfortable that there was equivalent power there.
00;06;37;29 - 00;07;15;15
Adam Royal
Yeah. And the governance issues are really where the cultural concerns come out and the details of a deal. And I think like thinking about these member substitutions in comparison to a traditional acquisition. In an acquisition, one party is out and another party is in for the most part. And the member substitutions, the parties oftentimes are more collaborative and are looking for an affiliation and are looking to retain some level of identity in the member substitution.
00;07;15;28 - 00;07;48;26
Adam Royal
And so that's how the governance issues kind of come to bear is you have to think through what are the boards of these two entities going to look like? Post number, substitution. And on the one hand, we want as much consolidation as possible to achieve efficiencies in governance. But on the other, you're you're sort of bringing together two parties that in the nonprofit space are tied to their communities and have representation of the community on the board.
00;07;48;26 - 00;08;18;18
Adam Royal
And they want to protect some of that. I mean, they don't want to completely lose their identity. And the boards are sort of the representation of that identity. So you have discussions about how how big are the boards going to be, who's going to get seats on a member's board as opposed to the subsidiary board? And then what are the reserved rights that a subsidiary board may have relative to that hospice?
00;08;18;18 - 00;08;48;28
Meg Pekarske
Well, in stepping back a bit, I mean, I think the ideal structure is to have a parent, right. So if you have two nonprofits, you know, saying, hey, that's affiliate, ideally you have a non operational parent at the top. We've done deals where that's not always the case, but you have a non operational parent at the top and what we mean by not operational parent is that that doesn't hold any provider numbers or anything like that.
00;08;48;28 - 00;09;31;01
Meg Pekarske
And so essentially the two hospices are going to be subsidiaries under that parent. And sort of visually, if we're thinking about it sort of on equal footing. So then what we're talking about is that big board at the parent frame is becoming the sole member and then because those hospices are likely ink's underneath, they still have to have tell me just nuts and bolts a little bit about parent and then at the subsidiary level because sometimes you just have like the executive committee or something of the big board be, you know, the board of the subsidiary.
00;09;31;01 - 00;09;35;10
Meg Pekarske
But just can you briefly talk about how we've navigated that?
00;09;35;19 - 00;10;09;03
Adam Royal
Sure. Yeah. So using that model, that non-operational parent would have its own board. And we think of that as kind of the the primary board and each of the subsidiary hospices would have some kind of representation on that board. It could be 5050 if the parties are very even in negotiating power or or whatever representation. And then each of the the hospices that are the subsidiaries, like you said, are going to be corporations.
00;10;09;03 - 00;10;38;18
Adam Royal
So they have to have their own separate board. And so the discussion oftentimes is how active are these subsidiary boards at the hospices going to be? One option would be you mentioned using kind of a small cohort of the parent board, like the executive committee or whoever, as well as the board of those subsidiaries. So there is kind of an overlap between the two.
00;10;38;27 - 00;11;14;15
Adam Royal
And then, you know, you could put pretty limited decision making at those subsidiary boards if you want to consolidate a lot of of authority and decision making in parent productivity, those boards at the subsidiary level could be quite independent and could have a lot of sway over the operations of the respective hospices. But that leaves less control at the parent level, which may not be desirable if if the ultimate plan is to consolidate operations and kind of be an integrated health system, so to speak.
00;11;14;15 - 00;11;41;22
Meg Pekarske
Yeah, I think this this governance thing is like the issue, and we're going to touch on a few other things, but I think it has been the sort of biggest thing to work through and embedded in there is identity and some level of control, which I guess I'll lump in here in this culture is ego kills deals too, right?
00;11;41;22 - 00;12;07;24
Meg Pekarske
So and this whole idea of who's going to be in charge, right. And I would say a number of deals we've dealt with and in earlier podcasts we've talked about why do people affiliate there's a lot of forces at work, but sometimes there can be a leadership gap. Right. We have a lot of people retiring soon and there are new leaders and how are you going to find someone?
00;12;07;24 - 00;12;42;16
Meg Pekarske
And so that can be one driver. So if there is a natural departure of someone, you know, a CEO leaving, then sometimes that's less of an issue. But, you know, if you are coming together, how are at the leadership level, how is that going to work out? And I think hopefully there's enough humility, but also it is our duty, you know, fiduciary duty as a leader to do what's best for the organization as opposed to you personally.
00;12;42;16 - 00;13;05;07
Meg Pekarske
And so I think hopefully people who are entertaining these deals are already thinking like, yeah, this is not necessarily about me and my career, but but really this is what's best for the organization. But I think you and I have seen, you know, times where, where that can get a bit dicey.
00;13;05;16 - 00;13;36;13
Adam Royal
Yeah. Yeah, exactly. And so it's good to see when when parties have been have had some kind of relationship prior to discussions and are at least familiar with each other's leadership, leadership styles and cultures and kind of come to the deal thinking this is this is going to work where we're similar on a lot of a lot of respects culturally and I kind of want to combine with each other for that reason.
00;13;37;04 - 00;14;05;09
Meg Pekarske
So so again, governance, I think these things that you talked about, I mean, they're not insurmountable, but I think they're good to get on the table first. So like, how big is your board and if there's a huge disparity, are you open to how are we going to, you know, get this right size? Because I think it doesn't make a lot of sense to come together and then say, well, nothing's going to change.
00;14;06;03 - 00;14;30;28
Meg Pekarske
We're just going to be bigger. And I think which moves into the economic piece of this and I think you say it really well, that a member substitution itself doesn't save money. You have to like do something right. This is a tool to consolidate things and do things differently. And I think you people need to actually be committed to it's not going to be the same old same old.
00;14;30;28 - 00;14;57;09
Meg Pekarske
And, you know, at and hopefully it's going to be a lot better. Right. You can get higher quality. You know, it could be higher quality personnel or, you know, better pricing on stuff. I mean, there's just a lot of opportunity there. But if you don't do the hard work of actually operationalizing a deal, you're not going to see those cost savings, which is what is driving a lot of people to affiliate right now.
00;14;57;26 - 00;15;45;16
Adam Royal
Right, exactly. And yeah, and remember, substitution itself is really just kind of amending some articles and bylaws. It doesn't it doesn't save any money, but it does kind of facilitate the operational integration that the parties want to do. And so some of the the main issues that we hear parties talk about and that are major ways of saving costs are consolidating vendor control, consolidating EMR, consolidating both administrative and clinical staff, and then consolidating things like insurance policies, employee benefit plans, all of those types of costs.
00;15;45;16 - 00;16;10;01
Adam Royal
There are, you know, if you have better rates or you can eliminate duplication and consolidating and moving those to a parent, those are ways that betterment or substitution can actually result in cost savings and efficiencies. But it's a lot of a lot of work for the parties to think through that. And it's admittedly difficult to do very early.
00;16;10;11 - 00;16;31;16
Adam Royal
But the earlier you can talk through those issues and think, you know, is this is this an affiliation that's really going to save us money or do we do we just kind of think we like each other culturally and just want to get bigger for the sake of getting bigger. If you kind of answer that question with some level of specificity earlier, it's beneficial.
00;16;31;22 - 00;17;11;07
Meg Pekarske
As well and also actually be committed to doing that because don't waste your time on these transactions because sure, it's just changing some articles and bylaws, but these are expensive transactions. The diligence, the time and ball moved. I mean it derails and part some of your own strategic planning so I think be open to change and like things aren't going to be the same and that's the whole point so do it's it's the mindset and then being committed to actually doing that I think also committed to not just cost savings but growth.
00;17;11;12 - 00;17;31;29
Meg Pekarske
So I think you don't want to live in a scarcity mindset where it's just like, cut, cut, cut, cut, cut, right? If you're leading an organization, you want to be able to say, this is going to allow us to live our mission on a larger scale, right? So it's both surviving into the future, but thriving, right. So what does that mean?
00;17;31;29 - 00;18;03;16
Meg Pekarske
It means like, oh, I can really expand my palliative care service geographically. I'm going to be positioned to get different payor contracts because of my scale. Like there is both, you know, cost savings, but also I think equally and more importantly to actually thriving is how am I going to grow geographically and my service lines and all these other things, because this shouldn't be the stopping point.
00;18;04;02 - 00;18;38;17
Meg Pekarske
You know, it's not business as usual now. We're just bigger and that I'm going to somehow, you know, have savings and more opportunity. You actually have to do the hard work of taking advantage of the scale and eliminating duplication. I guess the last thing we want to touch on here and this is this is in nonprofit land I don't think has been such a deal killer, which is risk and liabilities and stuff like that, because oftentimes the legal entity is staying intact.
00;18;38;17 - 00;19;09;15
Meg Pekarske
Right. And their fundraising dollars may even stay intact and, you know, their endowment and all that stuff. But risk is something that kills a deal. So like, oh, you have a ton of audit liability or you have other concerns related to financial all that are and it might just be you're really leveraged, right? Like right. And because I think that that is a struggle with some of these deals.
00;19;09;15 - 00;19;42;07
Meg Pekarske
If you go into the deal too late, like you're financially on the ropes, one, you're going to just have less, as you say, bargaining power. But ultimately, you know, someone who you're affiliating with doesn't want to go down the drain. And so I think don't wait to do these affiliations till you're so far on the ropes, because it just can be a real challenge and someone might not want to affiliate with you if you're sort of in dire straits.
00;19;42;07 - 00;19;43;19
Meg Pekarske
But what else there, Adam
00;19;44;11 - 00;20;26;28
Adam Royal
Yeah, exactly. And that that piece you were just talking about isn't too terribly different from any other deal, like a traditional acquisition. And you just want to look and see what what risks are out there and diligence, particularly financial. But then also, you know, one thing that is a little bit different with the members substitutions is how the hospices are going to to fit into the broader organizational structure post-closing and and you mentioned kind of having a non operational parent and that is from a risk perspective, the ideal situation.
00;20;26;28 - 00;20;58;06
Adam Royal
And because that parent isn't going to be exposed to the broader liabilities that someone that or an entity that is actually operating a hospice or any other type of health care facility is going to be exposed to vice versa. If there's a an operational parent and an operational subsidiary, there's a risk that the subsidiary could be exposed to the liabilities of the parent just by virtue of being it's subsidiary.
00;20;58;22 - 00;21;30;09
Adam Royal
So that's a risk to think through in structuring the deal one and two, or once you determine the structure, just the desirability and feasibility of the member substitution. If the proposed parent appears like it's going to have no excessive liabilities or liabilities, that that the subsidiary wouldn't be comfortable being subject to potentially, then that can impact a deal as well.
00;21;30;18 - 00;22;05;10
Meg Pekarske
Well, and we have and maybe this is a great place to to stop and put a plug for our our next podcast, which is, I think, you know, talking about some of this restructuring so that say I'm a hospice and I'm thinking about, you know, building something that may attract other hospices. How do you sort of restructure? I think a lot of even fairly large nonprofits have a pretty limited organizational structure sometimes.
00;22;05;20 - 00;22;48;19
Meg Pekarske
And so they don't have an operational parent. And so who is the parent is their biggest you know, it is their operating hospice and whatever. And I think that that can be a problem. If you want to get other people interested in coming under you. And so some of the projects that we're working on now is doing some restructuring to help people be able to build something that is a good foundation for other people to join and and thinking through proactively some of this governance stuff, which has been, I think you know, fun to, to do for us.
00;22;48;19 - 00;23;23;29
Meg Pekarske
But yeah, it's I think deal structure when you're thinking about doing this from the get go of someone who hasn't sort of put in that proactive restructuring in advance, you know, thinking through it when you're coming together so anyway, but this has been, I think, really an interesting and and fun time to help people come together. And I think, you know, hopefully these tidbits help help people, not that this is rocket science like, oh, I never thought about these things, but no.
00;23;23;29 - 00;23;47;15
Meg Pekarske
And like from someone who does a lot of these of what is the reflection of when deals die, why did they die? Was there something and maybe and I don't think it's like if I talked about the staff the deal when enough died. But the point of this is let it die early as opposed to, you know, spending a year of your time dealing with this.
00;23;47;15 - 00;24;08;21
Meg Pekarske
And again, I think then if that was your strategic plan as this affiliation, that then after a year doesn't work, now you're a year behind, right? So like that I think is the end all be all of this podcast which is it's get to the stuff that matters most. And if you can't come to terms on that, like then pull the plug.
00;24;08;21 - 00;24;30;22
Meg Pekarske
But don't wait years and years to do that because if it doesn't feel right or you can't navigate the things that are difficult, then it's probably not going to work out. And there is no harm in that. It's just we're trying to save people time and money. And because there are there's lots of movement on in the market.
00;24;30;22 - 00;24;34;12
Meg Pekarske
So there's going to be other opportunities there, even if this one isn't the right one.
00;24;35;03 - 00;24;36;15
Adam Royal
Yeah. Yeah, exactly.
00;24;37;14 - 00;24;48;15
Meg Pekarske
So. All right. Well, more to come. We'll talk about restructuring. It's like, yeah, we could just podcast about all these transactions because they're there. There's a lot, as you said, cooking.
00;24;48;15 - 00;24;50;29
Adam Royal
So there is. Yeah. Exciting stuff.
00;24;51;11 - 00;24;54;25
Meg Pekarske
Yeah. So thank you. And until next time.
00;24;55;02 - 00;24;57;20
Adam Royal
Thank you.
00;24;57;20 - 00;25;15;14
Meg Pekarske
Well, that's it for today's episode of Hospice Insights: The Law and Beyond. Thank you for joining the conversation. To subscribe to our podcast, visit our website at huschblackwell.com or sign up wherever you get your podcasts. Until next time, may the wind be at your back.