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By Monica E. Oss

Consolidation in the health and human service field continues at a rapid pace. In the first quarter of 2018, 30 transactions were announced among hospitals and health systems, up 11% compared to the first quarter of 2017 (see 71% of Healthcare Orgs Say Mergers and Acquisitions Will Increase). And, 71% of health and human service executives expect their organizations’ merger, acquisition, and partnership activity to increase over the next three years (see Hospital Merger and Acquisition Activity Still Strong in Q1 2018).

Just over the past couple weeks, the acquisition of ManorCare by Toledo-based ProMedica (see ProMedica, Welltower Partner To Acquire HCR ManorCare And Create $7 billion Network) and Humana’s acquisition of hospice company Curo (see Humana, Private-Equity Firms To Buy Hospice Operator Curo Health For $1.4 Billion) illustrate the rapid pace of change in the market. The main reasons cited for this accelerated merger activity are the same across many studies—cost pressure, increasing competition, disruptive technology, and value-based reimbursement top the list.

I wrote last month about “blind spot” among many non-profit boards of directors around the effects of system consolidation on competitive advantage and sustainability, particularly among specialty provider organizations. They consider mergers, acquisitions, and affiliations that involve smaller or similar-sized organizations, but becoming part of a larger organization is generally not a strategy consideration (see When & How To ‘Sell’ Being Acquired). That piece drew some very interesting feedback about the challenges of making consolidation work, about economies of scale, and about board governance.

And one of those, from OPEN MINDS Circle member J. Kevin Fee, managing partner of Angler West Consultants, brought up an interesting question about the challenges of moving non-profit organizations to better performance. His premise is that private investor ownership of organizations results in organizations that are “managed to advance their mission, rather than to advance the private interests of those in control.” By comparison, the history of non-profit organizations—funding via cost-based contracts and grant funding—hasn’t created similar pressure for performance improvement and cost efficiencies of non-profit health and human service organizations. He argues that with non-profit health and human service organizations.

“…no similar force has emerged to compel the redeployment of capital from poorly governed and under-managed nonprofit organizations to their superiors. To the contrary, funders—including foundations—continue to funnel resources and support to the non-profit system as if the newly added resources will somehow be employed more effectively than the billions wasted previously.

The best available course for foundations to maximize their impact is to fund one or more enterprises deploying activist strategies for the purpose of advancing industry consolidation. An enterprise separate from the foundations themselves is needed only because foundations seemingly need to be insulated from controversy. Absent another yardstick for determining who should be the consolidators, I propose those non-profits with the highest compound annual growth rates of revenues and net assets over the past five years.

Mr. Fee’s comments provoked some interesting discussion among the OPEN MINDS team. I’m not as certain as he is that the role of private investors in health care is necessarily focused like a laser on advancing their mission, as much as they have substituted the private interests of investors for the private interest of management teams. But that is a subject for debate on a different day.

I do think that the question of how to “compel” the redeployment of capital from poorly governed and under-managed non-profit organizations to their superiors,” is the issue of the day. Over 60% of community hospitals, all community health centers, 30% of nursing homes, and 17% of home health care agencies are estimated to be non-profit (see The Value Of Nonprofit Health Care). And, of the 210,000 non-profit community-based mental health and social service organizations, over half of them have revenues under $250,000, and only 10,000 of them have revenues of over $10 million (see A National Imperative: Joining Forces to Strengthen Human Services in America). How the performance of these organizations is evaluated is critical to improving the effectiveness and efficiency of the health and human service system – and will determine which organizations thrive and which do not.

Mr. Fee’s approach for performance assessment is to use standard organizational financial metrics – annual growth rates of revenues and net assets. For example, the United Way has been developing community impact measurements to focus its investment (see Community Impact Strategy Map). Pay-for-success initiatives using social impact bonds are a real-time experiment in incentivizing organizations to achieve specific results (see $166 Million Invested In Social Impact Bonds In 10 States; OPEN MINDS Releases 2018 Update On Social Impact Bond Funding). The Patient Protection and Affordable Care Act (PPACA) started an avalanche of value-based reimbursement in health care by launching accountable care organizations and health homes (see How Does Case Management Fit Into The New Model Of ‘Whole Person’ Health?). And, our team at OPEN MINDS has developed our own recommended metrics for assessing organizational performance, the subject of my closing keynote, The Transition To Value: Addressing The Challenges Of Performance Measurement, Talent & Capital, at The 2018 OPEN MINDS Performance Management Institute.

Whatever the measures for determining the “superior” in the bunch, consolidation among non-profit organizations in the health and human service space will likely continue. And unlike the children in A Prairie Home Companion’s fictional town of Lake Wobegon, it’s not possible for all of those non-profit organizations to be “above average.”

For more of our ongoing coverage of the shifting financial landscape and its repercussions, check out these resources from the OPEN MINDS Industry Library.

  1. If 1 In 8 Community-Based Organizations Are Insolvent, The Answer Is?
  2. Making Performance Real
  3. Financial Metrics & Leading Performance Indicators: How To Develop & Use A Performance System To Optimize Your Organization’s Financial Performance
  4. Better Data = Better Decisions
  5. Is ‘Financial Accreditation’ The Answer?
  6. For Non-Profits, M&A Activities Have Different Standards For Success
  7. Income Statement Vs. Balance Sheet? The CFO Dilemma
  8. Are Health Plans Your New Competition?
  9. Can You Teach A Fish To Climb A Tree?
  10. Can Small Organizations Survive?

And for even more, join me on June 6 at The 2018 OPEN MINDS Strategy & Innovation Institute for the session, “Challenges In Making Mergers & Acquisitions Work”, featuring Danita Johnson Hughes, Ph.D., President & CEO, Edgewater Health; Nicholas C. Riehl, J.D., MBA, VP of Corporate Development and General Counsel, ncgCARE; and David C. Guth, Jr., Chief Executive Officer, Centerstone.

Editor’s Note: An earlier version of this article stated: “Of the 210,000 non-profit community-based behavioral health and social service organizations, over 17% are under $10 million in revenue.” This statement is incorrect and was removed from the article on 5/3/18

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