April 2023 – Consolidation Trends Among Nonprofit Institutions

April 2023

Observations and insights into consolidation trends among nonprofit institutions.

This time it’s serious for hospital

Are hospitals in trouble or not? In March, MedPAC recommended that hospital rates increase by the statutory amount, plus 1%. It recommended that many other services have their rates of increase decreased (what Washington calls a “cut”…). This, and some of its commentary, has been taken by some as evidence that hospitals are not in fact having operational issues, only investment losses during last year’s market declines. While some large systems have indeed done spectacularly poorly at investing, there can be no question that operations are challenging as well.

Kaufman Hall’s latest analysis, which shows the median operating margin of acute care hospitals to have been -1.1% in February, has another interesting nugget. The cost driver recently has been increasing inflation in goods and services, rather than wages. We suspect the pause in labor cost growth has more to do with the many layoffs being executed than it does moderation in the unit cost of workers.

Why might it be different this time? The labor shortage doesn’t seem to be easing, despite increasing interest in producing more health sciences graduates at the university level. One wonders whether hospitals were able to use COVID funding to reengineer how they operate, or was it entirely to plug the immediate holes caused by the pandemic. 

Social and political winds shifting?

We are witnessing a social and political change in attitudes toward hospitals, and in particular nonprofit ones, for the worse. The reporting of the MedPAC recommendations, as noted above, seems to suggest that hospitals should stop whining about their operating challenges. A recent JAMA study suggests that nonprofit and public hospitals charge significantly more than do for-profit hospitals for MRIs.

Even more interesting is a recent analysis of PE-backed hospital acquisitions which appears to have upended the authors’ preconceptions. In addition to the results summarized below, they comment that the “incentives [to profit from health care’s “bloat and waste”] are not unique (italics theirs) to PE” and are “indistinguishable from those of major non-profit health systems”. They are shocked to have “witnessed alarming reports” of non-profit hospitals chasing patients for payment or aggressively interpreting 340(b) rules.

Among the statistical findings, PE-owned hospitals:

  • Were no more likely to file for bankruptcy or close than others
  • Were quicker to invest in new services and technologies (e.g. robotic surgery)
  • Were no more likely to reduce unprofitable service lines
  • Did not lead to worse medical or surgical outcomes (and in heart attack patients, led to improved mortality)

This budding social backlash toward nonprofits is reinforced by the FTC’s increasing hostility to hospital mergers.

Another blog deadline, another set of FTC antitrust challenge

In addition to the financial travails of both buyers and sellers, the FTC has been busy finding new ways to stop deals happening.

In November, the FTC announced that it will expand its interpretation of a 1914 statute and has already added cross-market theory questions to second requests in merger investigations, seemingly advancing the theory that cross-market transactions may lead to anti-competitive behavior (if they go after UPH-Presbyterian, we’ll know we have a real situation on our hands). We also have the FTC’s “urging” of states not to use COPA mechanisms, and now a suggestion that noncompete agreements should be consigned to the history dustbin.

This latter is a particularly interesting development for nonprofit health systems. Noncompetes have long been an integral part of the physician hiring landscape. The FTC has estimated that this move would save $148 billion annually, though it says it expects it would increase physicians’ earnings.

It seems that the demise of noncompetes could stimulate in-market poaching and realignment of medical staffs and make the overall system less stable. While it would make acquisitions easier, the “what you’re buying” becomes less valuable and valuations may decline. With more risk and less certainty of return, perhaps PE investors (but probably not large corporates) would become less interested in this sector.

On balance, his looks like an opportunity for nonprofit systems, and a likely uptick in M&A for this sector.

Bottom line

Weaker sellers, more-selective buyers, the reduced presumption that a nonprofit system buyer is “one of the good guys” and increasing FTC/AG obstacles all make for a more difficult M&A market.

The beginning of the beginning of the higher ed M&A trend

Continuing our theme of evidence-lite observations of trends, our feeling on higher ed M&A is that it is quickly becoming acceptable to speak about in polite company. Over the past year, we have noted an increased openness to discussing M&A. More substantively, more institutions are forming board committees to explore the concepts and opportunities that business combinations may provide.

Many institutions remain wary of “merging” and losing their identity: much of the debate is, are we trying to further our mission or our institution; in many cases, the answer is still the latter.

There are a number of consortium models emerging to try to get some of the benefits of a merger without the entanglements. These range from an ownership change to investing in a new parent to strictly contractual arrangements. As with most M&A related situations, the greater benefits tend to flow from the most-invasive structures. We will keep you posted about developments in this area.

Sadly, a willingness to explore mergers and other partnerships does not guarantee success, or even survival. Iowa Wesleyan University is a good example of this unfortunate phenomenon. Having sought a buyer/partner as early as 2019, it had a transaction in view with Saint Leo University that fell through in early 2020. In late 2021 it developed an innovative partnership with the local community college to share expenses and create improved pathways. Despite these efforts IWU announced it would close at the end of this academic year.

We continue to see mainly distressed liberal arts “sellers” with few buyers, but a slowly increasing cohort of strategic “buyers” is emerging to try to redefine the higher ed landscape. These strategic buyers aren’t necessarily larger or more financially secure than others—they are just more intentional, organized and motivated.


It’s not lazy to quote Yogi Berra (we write a little defensively). The man was a great athlete and manager, and somehow kept himself and the Yankees together through some crazy times. He deserves two quotations today.

First, in my 35 (ouch) years of advising nonprofits on mergers, I was involved in the beginning of the nonprofit hospital merger market. As that market has matured, the higher ed market is beginning to take off. The industries are very similar, as we’ve written elsewhere. And the early, tentative steps toward discussing and pursuing mergers are also very similar.

ArchGate’s mission is to help introduce effective approaches to M&A into the nascent activities of higher ed, to increase the efficiency of the market and reduce the number of failures. As Yogi put it,

“It’s like déjà vu all over again.”

One of the key elements of success in uncertain times is to be willing to try new things when the old approaches aren’t working. You saw this one coming, I’m sure:

“When you come to a fork in the road, take it.”

Recommended Posts