June 2025
Observations and insights into consolidation trends among nonprofit institutions.
In this edition, we look at:
- The times, they (sure) are a-changin’
- How about some high quality higher ed mergers?
- Are we getting meritocracy right?
- Are health systems doing TOO well?
- Survival guide for your institution, and yourself
Where to start? With almost daily executive orders and policy statements (and reversals), carnage in the markets, whipsawing policy from regulators and a fair amount of upset (from both ends of the political spectrum) in the zeitgeist, how do you run an institution of higher education or a healthcare system?
The current times are among the most challenging in recent memory. No one can be sure what the rules are or whether and when funding might change or disappear. It is tempting to just hunker down and wait for the storms to pass, as some have suggested.
That would be a mistake.
This is not a political column, but healthcare and higher ed (along with defense) are among the industries most dependent on government funding and most subject to regulation. Especially in times of political change, regardless of your side of the aisle, being able to deal proactively with that change is essential to institutional success.
There is a good chance that things won’t return to “normal”, even in 2028. The notion that a new administration might just “put things back”—in funding, regulation and policy—is tempting for people in our industries who are used to having things a certain way, but it’s probably wishful thinking. Even if this could happen, the time to return to a pre-2024 election environment would likely be years if not decades.
And, the underlying trends are still bearing down while we may be distracted by the surface turbulence. Americans are still getting older and needing/choosing to consume ever more healthcare. There is still a demographic cliff among high schoolers and a continuing (possibly intensifying) doubt as to the value of a college degree.
If we’re looking for positives (and who isn’t?), there is a chance that a change in perspective might actually lead to some of the structural changes we all know are needed, but that we have not been willing as a society to undertake. In the meantime, leaders have probably the greatest challenges of their careers facing them.
See below for some tips on how to survive the current chaos.
Mergers and acquisitions, and their potential role as a key strategic tool, remain under-discussed among management teams and boards.
It continues to be early days for higher ed mergers, and most are driven by financial distress. The high ratio of closures to transactions is evidence that schools at financial risk continue to wait too long to seek a partner. This may be because management or boards do not fully recognize the severity of the issues, or in some cases they simply don’t want to face and address them until there is no alternative. By that time there may be no interested parties (at least on attractive terms) or they may be unable to sustain their cash flow through the lengthy approval process to get to a transaction closing.
The fact that almost all transactions are distressed “rescue” situations leads us to wonder: where are the strategic mergers among financially sound, high-quality institutions? Other than the very elite institutions, most will not have sufficient resources to thrive in the long term. In fact, a disconcertingly-high proportion of currently-successful private colleges are in reality just larger versions of the small schools that are now failing.
In contrast, healthcare has in recent years turned to this strategic merger approach. We were involved in the formation of Advocate Health Care, which was an early and continuing example. In 1995 two healthy systems in the Chicago area, Lutheran General Health System and Evangelical Health Systems, merged to form Advocate. In 2018 Advocate merged with healthy peer Aurora Health Care in Milwaukee. This strategic combination doubled the organization’s size, creating complementary market coverage and skill sets as well as economies of scale. In 2022 the merged entity merged again, with Atrium Health of Charlotte.
Why can’t the same thing happen among private colleges and universities? The list of benefits and potential combinations almost writes itself. Complementary geographies. Complementary programs and research strengths. Economies of scale. Catholic or other religious consolidation.
This still feels like it’s a long way off, but someone may surprise us sooner than we expect.
Much of the Trump Administration’s “assault on higher education” has been justified by its supporters as an effort to instill meritocracy in college admissions, faculty appointments and American society in general. Many would agree that merit should be rewarded—we all want an excellent surgeon, right? The debate often centers around how to create a system that gives individuals a “fair” chance to develop and display their merit.
This dilemma is the subject of an insightful article by David Brooks, who is about as close to a “centrist” as anyone we can think of. It appeared in The Atlantic in November; generally when we find ourselves still thinking about an article six months later, there’s something worthwhile in it.
His thesis is that, once Ivy League presidents decided to change admissions criteria to reward academic achievement rather than simply wealth and position, much of the rest of society adapted: schools began tracking more students toward college, parents learned how to helicopter, and a large admissions testing and advising industry sprang up.
But this adaptation only penetrated as far as the middle or upper middle class. Over time, children who began with this head start learned to play the new game and to excel at it: Brooks cites a study estimating that children of the 1% are 77 times more likely to attend an elite university than all other students.
And a major point he makes—and this one may hit home for many readers, as it did to us—because we believe that we have become members of the new elite due to our own merit, we as a group have lost the spirit of noblesse oblige, with obvious and destructive social consequences.
His hopeful conclusion is that perhaps the current moment—ideological conflict and demographic challenges—may help us rethink both the intellectual approach and the business model of our entire educational system. Retaining the objective of mastering knowledge while taking a broader approach on pedagogy and talents beyond just “book-learning” would re-sort the applicant pool for admissions and job selection. A different and more well-rounded society might result.
A broader approach would also surely create more ways for universities to differentiate themselves and be successful.
Despite a backdrop of potential Medicaid changes and other revenue disruption, major nonprofit systems seem to be having no trouble finding capital to spend.
Among the more interesting trends in health system M&A over the past couple of years is the increased willingness of nonprofit systems to purchase hospitals and other assets from for-profit operators. For a very long time, the trade went in the other direction: struggling or realigning nonprofits selling to growth-oriented for-profits. But with many of the for-profits seeking to prune their acute care portfolios, and larger nonprofit systems needing larger transactions to provide meaningful growth, the sectors’ interests have increasingly converged.
Tenet has been a major beneficiary of this nonprofit buying spree, selling four hospitals to UCI Health for $950 million, two to Adventist Health for $550 million and 70% of five Alabama hospitals to Orlando Health for $910 million. CHS has also unloaded a number of facilities and joint venture interests. In the ambulatory space, Ascension appears close to buying AmSurg for $3.9 billion.
Several of these transactions have been at eye-watering valuations, so hopefully the buyers can generate significant strategic growth ahead since there probably isn’t much expense reduction to be had.
Nestled alongside this trend have been a number of high-profile (and high-priced) building projects across the country. These include dueling towers in Boston totaling $3.6 billion, three new hospitals for Orlando Health, nearly $1 billion announced by WVU Health last year and this, and a new tower at Scripps for $664 million.
Will some attentive policymakers, payors and the public ask, “If you have all this money to spend, tell me again why you need higher reimbursement rates?” Given the debate around the “Big Beautiful Bill”, are we maybe at that point?
As promised at the beginning of this post, we have a couple of suggestions on how to sanely and constructively navigate the current unstable environment. We suggest:
- Focus on strategy . Reshaping your institution for the larger trends will lead you in the same general direction regardless of shorter term shocks. Policy and enforcement will keep changing (possibly back and forth) for several years until a new consensus emerges, so keep forging your longer-term path. As with investing, don’t think you can time the market.
- Actively consider the role M&A should play in your strategic planning. At a minimum, exploring M&A will help educate your teams so you will be ready when the need or the opportunity arises. It also sends a signal that management and the board are dutifully preparing for all scenarios during a challenging time for everyone. Transactions and other partnerships take a long time even for the most prepared; such preparation could be the difference between success and failure.
- Continuing our David Brooks fandom, we recommend that you read his recent book How to Know a Person, a guide for building meaningful relationships. We especially appreciated the sections about starting new relationships with people who don’t seem to be like you. Adopting some of these principles can help deepen relationships, build community, and help us in small ways out of the mess we’ve gotten ourselves into. At a bare minimum, it will make you a more interesting person at Becker’s or NACUBO.
Thoughts? Feedback? Ideas you’d like us to explore in future Insights? Let us know at info@archgatepartners.com.
