The “perfect storm” is upon us in nonprofit healthcare.
Moody’s Investors Service released a report this month predicting increased M&A activity in the nonprofit healthcare sector, citing decreased Medicare reimbursements, changes to state funding schemes for Medicaid, and a post-reform environment that urges increased efficiency and care coordination. This report further validates the research and analysis we produced late last year and earlier this year, which noted a “perfect storm” of variables that will drive heightened M&A activity in this sector throughout 2018 and prompt a flurry of Boards looking at selling a nonprofit organization.
Some nonprofit healthcare provider organizations are being forced to consider merging with another organization or putting the organization up for sale, both of which are emotionally charged issues for nonprofit boards.
Nonprofit providers historically have played a large role in healthcare as a traditional care provider; their work with the surrounding community and their focus on their nonprofit missions not only roots them to a community, but often limits the creative thinking that might allow the expansion and extension of the mission. However, in today’s healthcare environment, it is imperative that board members of nonprofit provider organizations evaluate all of the options available to them.
In a previous blog post, DealZumo outlined some considerations for nonprofit organizations seeking to acquire another nonprofit. Although most M&A transactions feature similar components and processes, we have noticed some nonprofit boards struggling to identify issues and considerations when evaluating their strategic options, including selling the organization.
We normally recommend that nonprofit organizations thinking about selling undertake a rigorous strategic analysis, but the following four considerations are a good start to that strategic process:
- Sustainability of the Mission
- Impact on Mission
- Impact on the Community and Stakeholders
- Impact on Quality and Service Lines
Sustainability of the Mission.
With the deterioration of the reimbursement environment and decreasing margins, nonprofit boards are being forced to consider the sustainability of the organization.
First, a board has to evaluate what strategies it could pursue that will better position the organization for survival in the post-reform environment (see our white paper entitled, “Choosing a Successful Post Acute Business Strategy in Today’s Changing Healthcare Environment”).
A key component of this evaluation is the organization’s ability to access capital. One of the greatest challenges reported by nonprofit healthcare organizations is obtaining necessary funding or financing to upgrade facilities and equipment. Boards are often reluctant to use reserve funds to invest in innovation or changes in strategy. Many boards view reserve funds as their mission’s backstop. The critical decision point is whether the use of funds will truly sustain the mission or just provide a temporary fix to a fatal decline.
Ultimately, a board may come to the conclusion that its long-term mission is at risk and decide it is better to sell the company and use current cash reserves and proceeds from the sale to alter or extend the mission. Evaluating this issue is a complex process, requiring a deep understanding of trends in the industry combined with a thorough analysis of an organization’s strategic options.
Impact on mission.
After wrestling with the question of whether their organization is sustainable, the top concern we hear from nonprofit boards when they think about selling is how the transaction will ultimately affect the organization’s mission.
Although boards will examine multiple variables in the acquisition process, the impact on mission is critical – it is the board’s ultimate fiduciary responsibility. When we advise nonprofit boards about these issues, we often ask them to consider the potential positive impact on the community if they sell to another provider and use the proceeds of the sale and current cash reserves to expand, extend or alter the mission.
Some boards find that the community can still receive high quality care from another provider, and the use of proceeds from a sale can allow the organization to serve more community members in need in other ways. This is especially so for those providers faced with declining margins who might struggle to survive as the environment worsens. Such a scenario requires board members to consider how flexible the organization’s mission is, how open to adjustment it might be, and how any changes to its mission would affect its ability to serve the surrounding community.
Impact on community/stakeholders when selling a nonprofit.
Consideration of stakeholder impact goes hand in hand with thinking critically about how an acquisition will affect an organization’s mission. Any nonprofit board thinking about selling to a for-profit company should think carefully about how a potential sale might affect all of the various stakeholders – patients, staff, surrounding community members, donors and volunteers.
How a board begins the search for a buyer can be a delicate matter. Any advisors the board retains should be well-versed in not only finding the right buyers, but in finding them in a way that is respectful of its role in the community.
Many stakeholder groups make negative assumptions about the effects of the purchase of a nonprofit organization by a for-profit entity, even though research suggests that such assumptions are not valid. Careful consideration and planning can ensure that all stakeholders are on board with a potential sale and the benefits it can bring to an organization and the community it serves.
Impact on quality and service lines when considering selling to a for-profit.
A common concern by nonprofit boards when considering selling the organization – particularly to a for-profit – is that they could experience a drop in quality of care.
Research shows that this is false – in many cases, providers maintain the same level of care or experience an increase in quality.
Board members should think about dedication to quality in examining potential buyers, as well as how an acquisition might affect service lines and community benefit. Most nonprofit providers offer services that are less lucrative or even unprofitable, usually as part of their stated missions or in service to the surrounding community. Board members should ask themselves whether they would be willing to see a change in service mix after an acquisition and how that might affect the organization and the community overall.
The Congressional Budget Office (CBO) has reported virtually no change in the amount of charity care provided before and after an acquisition of a nonprofit provider by a for-profit company. In fact, nonprofit boards should consider the possibility that the right buyer could find ways to meet their mission profitably and efficiently. CBO analysts have cited studies showing that for-profit providers tend to be more efficient and cost-effective than nonprofit providers, adeptly changing their mix of services to respond to reimbursement patterns and aggressively coding to increase reimbursement.
Wyatt Matas, Choosing a Successful Post Acute Business Strategy in Today’s Changing Healthcare Environment, February 2012. http://www.wyattmatas.com/successful-post-acute-business-strategy
Congressional Budget Office. Nonprofit Hospitals and the Provision of Community Benefits. December 2006. http://cbo.gov/sites/default/files/cbofiles/ftpdocs/76xx/doc7695/12-06-nonprofit.pdf
New York Times. Hospital Groups Will Get Bigger, Moody’s Predicts. March 8, 2012. http://www.nytimes.com/2012/03/08/health/hospital-groups-will-get-bigger-moodys-report-says.html