Daily Briefing

Pursuing growth in today's financial landscape

Factors like labor, supply costs, and rising costs of capital are making it harder than ever for leaders to develop and implement growth strategies and are showing no signs of letting up anytime soon.

Radio Advisory's Rachel Woods sat down with healthcare strategy experts Colin Gelbaugh and Vidal Seegobin to discuss how health systems' growth strategies have shifted and what leaders can do to improve their organizations' trajectories, even if you're only in survival mode right now.

Read a lightly edited excerpt from the interview below and download the episode for the full conversation.

Rachel Woods: Let me take us back to warmer times when the two of you actually did a survey to try to understand the provider landscape, and specifically what they were thinking in terms of their growth outlook. What were the results then?

Vidal Seegobin: So I have to give Colin more credit than I'm going to take, although I'm going to describe what our findings were. I was curious back in the middle of last year to understand where do different health systems fall out when it comes to their posture for growth? And when you look at a couple of key questions, most specifically where they were looking to retrench, and where they were going to be spending more investment dollars, what we found was that there was four major camps where they fell out with relative proportions.

A small proportion, or about 7%, we characterized as being in survival mode. So these are basically health systems doing everything that they can to stay financially above water. You've got 34% at what we call the regimented focus, who articulated no immediate intention to buy, or acquire, or make large investments, and were largely focused on network integrity and top of funnel referral patterns for their patients.

You had 54%, which is the majority, at what we would call cautious expansion. These are health systems that have probably pulled back some of their investment ambitions, but are still looking to acquire either physician practices, primary care practices of the like to increasingly grow their footprint.

And then finally, at the minority, at 5%, a small number are the group that we called new pastors, who basically described an ambition to both acquire and grow and look for new non-traditional revenue opportunities as a way of bolstering their bottom line.

Woods: So we've got this nice pretty bell curve. On the one hand we've got folks that are really struggling in this survival mode. On the other hand, you've got folks truly growing into new pastures, and the majority falling somewhere in between.

But as I said, this survey was done a couple of months ago, and we know that today things look different. The economy, the market looks different and frankly more difficult than it did a couple of months ago. Inflation is up, the cost of borrowing has increased considerably, non-operating income from investments tanking. Would you change how you categorize these growth archetypes?

Colin Gelbaugh: I would say that the desire to grow hasn't changed across our respondents, but their capacity to grow has changed. So they might be more towards the financial challenges. Let's get on stable footing before we're going to be diversifying and trying new pastures that we don't have experience with.

Seegobin: And the only thing else I'd call out is in surveys like this, you're talking about expressed versus revealed preferences. There was every reason to believe in May of 2022 that there was going to be a significant rebound in the inpatient volume and that we had kind of all of this behind us, so there was reason to imagine you might be optimistic at that point.

But I think now, Rae, to the points that you mentioned earlier, the economic headwinds, the battle for talent, I think makes it a lot harder for us to justify maybe those distributions, even if the four camps I think still remain pretty much accurate.

Woods: But at the same time, to Colin's point, everybody wants to grow. Everybody always wants to grow. That is the goal for healthcare leaders, even if they find themselves in, let's say, maybe more cautious circumstances. My question is if you fall into those circumstances, what does growth even look like, knowing that that is the universal desire?

Seegobin: So Colin and I have had conversations about this, and I think in some ways it's important to remember even if the ambition for growth has not changed, there are headwinds and it requires us to focus on some of the fundamentals, that when you're non-operating income was really, really strong and you were basically starting to see kind of grow through all the inadvertent means, that things are now harder.

Well, I think a lot about network integrity, referrals, productivity as being the key levers that most health systems have to ensure that they are putting at the very, very top of their agenda board for things that they have to work on in order to make it through what I think will be persistent headwinds economically.

Gelbaugh: Yeah, I think the key for health systems right now is to remove obstacles to capturing the demand that's out there. And that includes improving awareness, improving access in the short term, and then long term, addressing preference for your product and being able to ultimately grow stronger in your marketplace.

Woods: Where do you put classic M&A, mergers and acquisitions, on the growth opportunities for today's organizations?

Gelbaugh: So M&A did not rank highly in our survey this year in terms of likelihood to engage in M&A activity. That doesn't mean that we won't see M&A activity this year. When we look at trends, we see a smaller deal number and bigger deal value, and the recent mergers that we are following are the ones that are non-contiguous in nature.

And what we're really tracking there is, are health systems that aren't located geographically next to each other able to create different synergies together and unlock those system benefits that have been elusive for some organizations?

Woods: Let me try to kind of repeat that back. So it sounds like first of all, health leaders are saying that M&A is not at the top of their growth priorities, and that is reflective of the patterns that we've been tracking over the last couple of years when it comes to what we would consider kind of a classic growth path.

That doesn't mean that M&A is not happening, it's just happening with folks that, back to the bell curve, were maybe on the right side, focused more on growing into new pastures, more significantly changing their geographic footprint, et cetera. Is that correct?

Gelbaugh: Correct.

Seegobin: The one thing I would also add is that you can't really paint a broad brushstroke for the different kinds of health systems that we're talking about. You do have some health systems that are still sitting on pretty large amounts of cash and are thinking about their ambitions to be wider than a region.

So for them, M&A still probably has to be part and parcel their growth trajectory, and I think accounts for the reason why the deal amounts are increasing, even if the total number of deals themselves are staying flat.

Then there's a second, which I think you would think about as your survivalists or survival mode. These are not-for-profit hospitals who might be operating in localities where the economy is either flat or declining as well. And that, in and of itself, is going to create structural headwinds that become even more difficult to try to navigate, that buying your way out or M&A probably is just not your path forward.

Woods: Yeah, that's right. And it sounds like regardless of where you fall, there is—I mean, is it an immediate need? A universal need for everybody to get back to basics growth?

Gelbaugh: I think so. I think if you forget where your business is coming from and how to appeal to the preferences of your end users, you leave yourself open to disruption, and ultimately you need to be constantly improving your core product and service. And without that, you can't venture out into new businesses.







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