The Role of Mergers and Aquisitions in the Not-For-Profit Healthcare Sector: Part II

Posted By Joel Wittman

Part II: Part II – What to consider when a not-for-profit is the acquirer

In last month’s post, I wrote about the considerations to take into account when evaluating the sale of a not-for-profit health care entity.  In this month’s article, I will look at the issues to consider when a non-profit is the acquirer.

Since Congress enacted health reform legislation in 2010, there has been a marked increase in mergers and acquisitions in the healthcare space. Although for-profit organizations drove the bulk of the nearly 1,000 transactions taking place in 2011, a growing number of nonprofits have begun to see mergers and acquisitions as part of a larger strategy to effectively navigate the reformed healthcare marketplace. This reflects the increasing role that nonprofit organizations play in the delivery and financing of healthcare in the US – according to an estimate by a nonprofit healthcare trade group, about 60 percent of community hospitals are nonprofit, roughly one-third of nursing homes are nonprofit, and almost 20 percent of home health agencies are nonprofit. Further, over 40 percent of all private health insurance enrollees receive services from a nonprofit health plan.

Nonprofit healthcare organizations consider mergers and acquisitions for the same reasons for-profit entities do. They seek to improve quality or efficiency; they desire increased access to capital, enhanced capital base or expansion of cash flow; they want to expand service lines, enhance product offerings or target other geographic areas; or they seek to gain specific types of talent or other assets. But unlike the for-profit environment, nonprofit organizations have other specific issues to consider as they plot a merger or an acquisition strategy. It is recommended that a nonprofit organization’s board and management perform a detailed strategic analysis before executing an M&A strategy.  The following four considerations are a solid start.
Fit. The idea of considering organizational fit when thinking about pursuing a merger or an acquisition with another company seems simple, but it can be a rather complicated matter. Although for-profit companies also consider whether a potential buyer or acquisition fits strategically or organizationally, nonprofit organizations have their mission to the communities they serve to consider beyond these primary issues when it comes to fit. Unlike for-profit companies, nonprofit healthcare organizations exist within a framework of mission-based operations, and the mission colors everything from operational strategy to daily execution. The leadership of every nonprofit organization considering an M&A strategy needs to be clear about its mission, how open to change that mission might be, how an M&A strategy will affect that mission, and what limitations – or opportunities – that mission offers. And if acquiring another non-profit, boards must think about how changing the target’s mission affects perception or buy-in among the target’s patients, providers, staff or payers.

Financial impact. Nonprofit board members and staff management need to think carefully about the financial implications of the potential transaction. Naturally, a common part of the M&A process is to weigh the financial advantages and disadvantages of the transaction, as well as to evaluate an organization’s financials and assess its real value. Part of the discussion is whether an acquisition is best the use of funds to further the organization’s mission.  In today’s environment, many providers are leveraging their healthy balance sheets to reach a level of scale that can offset future reimbursement cuts.  This may be an appropriate strategy, but an organization that may not have internal acquisition and integration experts must evaluate if the use of funds for an acquisition is priced appropriately considering the internal and external integration risk.  Nonprofits also need to consider additional layers of financial impact; any partners advising a nonprofit about a transaction need to be well-versed in these layers. Special tax situations must be considered, as well as the value and disposition of certain types of charitable assets.
Process. There is a logical process to every transaction – but nonprofit organizations have additional steps to follow and angles to consider. The additional steps can extend the acquisition timeline and put the nonprofit buyer at a disadvantage when they are competing for a target.  An experienced advisor can help a nonprofit board and leadership prepare and execute the specific processes that need to happen and minimize the potential disadvantages. All nonprofit M&A transactions will naturally need to involve a realistic valuation of the transaction, a substantive due diligence process, evaluation of legal and antitrust issues and a detailed analysis of financial impact. The legal and financial implications of a nonprofit transaction differ from those of a for-profit transaction, so any strategic process should accommodate not only specific evaluation and analysis of these implications, but appropriate planning to execute them.

Access. Probably the biggest difference between a for-profit entity considering a merger or an acquisition and a nonprofit entity is that in the nonprofit world, there are relatively few knowledgeable financial and strategic advisors who understand the nonprofit environment, and of these, even fewer have significant access and deep relationships across the industry. As your organization considers an M&A strategy, ask yourself whether you have the right access – not just to sources of capital, but also to potential buyers or acquisition targets. Do you know how to source and evaluate potential targets? Do you how to begin a conversation with a target? Finding the right partner with the right access and market credibility is critical to the success of your M&A strategy.

Last month’s and this month’s postings provided the reader with some thoughts about both the sell and buy sides of mergers and acquisitions in the non-profit health care community.  So, for all of you not-for-profit health care organizations out there, are you a seller or, perhaps, a buyer?  Either consideration will require a thoughtful and careful approach.   Please let me know what you decide to do.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry.  He can be reached at

The Business of Nonprofits

Posted by Debbie Koh

The Wall Street Journal recently ran a special section on philanthropy and charitable giving. I recommend reading the entire report (available here), but the article that first caught my eye was Should Philanthropies Operate Like a Business?

The “yes” side argues that nonprofits should adopt more business practices in order to create social returns on one’s philanthropic investment. More specifically, the authors argue that data collection and measurement are necessary for nonprofits to generate impact. The argument against this kind of business approach hinges more on a market-gap argument; that nonprofits serve a population that government and business don’t. The author of this “no” side worries that a dramatic shift toward a businesslike mentality will end up leaving the underserved, well, underserved.

I’m inclined to fall somewhere in the middle. It is critical, though inherently difficult, to find ways to measure and evaluate impacts in health, welfare and other social issues. Such efforts must be undertaken with great care. Ill-defined criteria may be useless at best or end up subverting the intended effects at worst.

Achieving specific indicators, like serving x many people food, doesn’t address what might be a systemic problem that requires policy change achieved by sustained advocacy efforts. A hyper-focus on hitting specific benchmarks, like enrolling y number of children participating in an after school program, can be detrimental to the quality of service provision if resources are spent on recruitment efforts rather than curriculum development.

But, I don’t think the debate here is really about the application of “business thinking” to the social sector. The authors are essentially arguing about the role of the philanthropist: how much say should an individual or institution get when it comes to how their money is spent? I think this concern reflects an often-voiced uneasiness or ambiguity the larger public holds about nonprofits and social service organizations: they recognize the importance of the work but struggle to see how their donation really leads to change. They’re trying to figure out how exactly you hold the whole nonprofit, social impact sector accountable for the money they receive.

This issue can be frustrating even to me, a practitioner in this field. (I think this is why featuring child sponsorships or individual loan needs have become such a popular fundraising strategy. That individual connection, the feeling that one’s money will meet a person’s specific need, is powerful.) Like measurement, instituting such accountability can be a double-edged sword. Meeting current donor requirements, whether government or private, is already an arduous task for many organizations. Additional requirements may push some organizations beyond their current capacity or simply take away resources from achieving those desired returns. More money might be needed to hire extra staff or to create an IT system to track all those new indicators, for instance.

There are no clear answers here but these are issues that we should continue to grapple with, whether we are on the giving or receiving end. Overall, I’m happy that this kind of discussion is moving beyond the classroom and into a larger forum. Please feel free to share your thoughts.

Debbie graduated from Wagner in 2010 with her MPA in Healh Policy and Management, International Health She returned to her native California in 2011 and
currently works for Venture Strategies Innovations (, a US-based nonprofit organization committed to improving women’s health in developing countries.  All views expressed  in this post are her own.