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 joel.wittman@verizon.net.


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


Posted by Joel Wittman

Part I – What to consider when evaluating the sale of a not-for-profit organization

Nonprofit health care organizations are faced with a conundrum.  Is entering the world of mergers and acquisitions (M&A) on either, or both, the sell and/or buy sides, a strategy to be undertaken by nonprofit healthcare organizations in response to the changing healthcare landscape?

In March of this year, Moody’s Investor Service predicted increased M&A activity in the nonprofit healthcare arena.  They cited as reasons for this increase decreased Medicare reimbursements, changes to state funding schemes for Medicaid, and a reform environment that urges increased efficiency and care coordination.  As a reaction to these compelling reasons, and in an effort to continue providing care to its constituent communities, some nonprofit providers are being forced to consider merging with another organization or putting the organization up for sale.  This is a very complex and emotional issue facing the Boards of nonprofit providers.  Sink or swim?  Don’t sell or sell?  How to evaluate the options?

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 embeds them in 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.  Nonprofit Boards of Directors typically do not have vast experience working on the M&A process and, therefore, have struggled to identify issues and considerations when evaluating their strategic options, including selling the organization.  This lack of experience makes it necessary for the organization to conduct a thorough analysis, including the option of its sale.

Easier said than done.  What should the Boards and management consider as they begin their strategic review.  The following may be an appropriate way to begin

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

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 the Mission

After wrestling with the question of whether their organization is sustainable, the top concern for 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. Boards need 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

Consideration of stakeholder impact goes along 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.

No one ever said it was going to be easy.  This is the responsibility that Boards members have agreed to assume when consenting to serve on the Boards of Directors of nonprofit healthcare organizations.  Mission vs. Margin (profit, that is).  Are they mutually exclusive?  Can the differences be reconciled?

Next month I will write about issues to consider when a nonprofit organization is the acquirer.

 

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 joel.wittman@verizon.net.