A Looming Wave of Mergers and Acquisitions

Listen to the March 2022 Future U episode on college consolidations at https://www.futureupodcast.com/episodes/is-consolidation-coming/

Higher Ed Dive is tracking closings, mergers, acquisitions and other consolidation among public and private nonprofit institutions from 2016 to the present: https://www.highereddive.com/news/how-many-colleges-and-universities-have-closed-since-2016/539379/

Fitch Ratings anticipates a deteriorating credit environment for U.S. Public Finance Higher Education in 2023 relative to 2022. 

A new study from researchers at Harvard University and the National Bureau of Economic Research finds that health system mergers only marginally improve the quality of care, but at significantly higher cost.

In the late 1990s, several members of Congress made a push for cost controls in higher education. To learn more, listen to Episode 119 of Future U for our interview with Bill Troutt, former chair of the National Commission on the Cost of Higher Education who's also President Emeritus of Rhodes College in Tennessee, and Harvard economist Susan Dynarski.

Transcript

Jeff Selingo:

Michael, I think a lot of folks thought your predictions about college consolidations would actually happen during the pandemic, but that didn't happen. It was quite the opposite actually.

Michael Horn:

Yeah, yeah, yeah. Thanks for pointing it out, Jeff. But just because it didn't happen during the pandemic doesn't mean we won't see a wave of mergers and acquisitions in the coming years. And today on Future U, we ask two experts who are looking deeply at this question about what they expect around M&A in higher ed this year and going forward.

Sponsor:

This episode of Future U is sponsored by Ascendium Education Group, a nonprofit organization committed to helping learners from low income backgrounds reach their education and career goals. For more information, visit ascendiumphilanthropy.org.

This episode is brought to you by the Bill and Melinda Gates Foundation, working to eliminate race, ethnicity, and income as predictors of student success through innovation, data and information, policy and institutional transformation.

Earn continuing education units this spring with Teaching Practice, an online faculty development program from Course Hero. Over a series of asynchronous courses, you'll uncover new ways to leverage tech in the classroom and build inclusive curriculum all while supporting your own wellbeing. Plus, you'll get weekly office hours support from leading instructors. Enroll for free today at education.coursehero.com.

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Jeff Selingo:

I'm Jeff Selingo.

Michael Horn:

And I'm Michael Horn. Jeff, M&A in higher ed is a topic we've dug into a few times on the Future U Podcast. It's just one of those questions that really drives passions in the sector. And while headlines are popping back up in the media of colleges consolidating, we wanted to take a different look at that question today.

Jeff Selingo:

Yeah, that's right, Michael. We last addressed this on the show in March [of 2022], and we'll add that episode to the show notes. And since that show aired, according to a list compiled by Higher Ed Dive, a dozen colleges have announced their closing, including Cazenovia College in New York and Marymount, California, which was the subject of a previous episode on the show when St. Leo's University in Florida was trying to acquire it. There have also been some acquisitions, most notably Montclair State University in New Jersey, which will acquire nearby Bloomfield College this year. Now Michael, something I've been really curious about is not just how this is going to take shape as we come out of the pandemic, but how is M&A in higher ed fundamentally different from other perhaps analogous sectors like healthcare? Or what does the M&A landscape look like from the perspective of one of the potential acquiring institutions in higher ed since we tend to focus on the weaker partner in these acquisitions?

And so today we have two guests who can shed light on both of those questions as well as give our listeners a sense of the more general landscape out there. With us, we have Sally Amoruso. She's a chief partner officer at EAB in charge of their engagements with senior higher ed leaders, but she also previously worked at the corporate advisory board helping health systems better serve patients. We also have Mary Ludden, who's Senior Vice President of Northeastern University's Global Network and Strategic Initiatives. She oversees a committee at Northeastern, get this, that reports to the President focused solely on M&A opportunities for the university. So Sally and Mary, welcome to Future U.

Mary Ludden:

Thank you for having us.

Sally Amoruso:

Thank you.

Michael Horn:

Sally, I want to start with you, and let's start at the macro level. We're seeing a lot of buzz right now with federal relief funds drying up that colleges that were perhaps in trouble financially before the pandemic might be in trouble again, so that we might see a new wave, if you will, of M&A in higher ed or even closures. And I'm curious, is that your take? And what are the underlying dynamics you're seeing right now?

Sally Amoruso:

Yeah, thank you for the question. I think it really is a tale of two cities, if you will. So what we're seeing are the larger and selective schools doing well. In fact, some are actually seeing record enrollments. The very small, particularly regional private institutions tend to be struggling more, and as you mentioned, without the HEERF [Higher Education Emergency Relief] funds, some of the underlying weakness of their business models, not all of them, but of some of their business models is really being laid bare. And it's important to note that many of these institutions were on wobbly ground pre-pandemic, and some of the ripple effects of the post pandemic era are exacerbating those vulnerabilities. So for example, we know that there's an oversupply of universities given the demographic decline and post pandemic, what we're seeing are more high school graduates choosing not to attend college, what we call non-consumers at EAB. And so in some ways, the pandemic hastened the arrival of that demographic decline.

We also see students really seeking a clear return on education, which favors the larger or well-known institutions.

And then we've also found that students are generally applying to more schools with test optional, they're stretching up. All that to say these pandemic ripple effects are really exacerbating that tale of two cities. And we're already seeing some small regional private institutions like Holy Names and Cazenovia announcing closures, others are looking for partners. I fully expect this to continue given the supply and demand dynamics and underlying structure, though perhaps not to the level of the Clay Christensen prediction of 50% closed or bankrupt in the next several years. And the recent Fitch ratings called what we're observing, sector bifurcation, and they went on to say, sector bifurcation is going to continue to widen the credit gap between the larger more selective institutions versus their smaller, less selective and more tuition dependent counterparts. So that will continue to actually affirm that disparity.

Michael Horn:

Sally, I'm just curious, are the boards of trustees at  the have-nots, if you will, are they aware of the challenges they're facing and looking proactively at the mergers or acquisition opportunities to avoid the closure scenario? Or are they just trying to operate business as usual or maybe pull a rabbit out of hat if you will?

Sally Amoruso:

That's a great question and really it's a complicated answer because I do think that for the most part, boards are aware of the financial challenges. I think in some cases they're not taking real action until late in the game. Or for some, what we've seen is that the board of trustees would rather close an institution than lose the institutional identity that is so dear to them. So it really depends. Each institution is unique, but the other thing to keep in mind is that the institutional structures and the culture of higher ed are extremely resistant to change. So even when activated, the pace of response isn't always as fast as one might want or as the institution needs. And then there is this tremendous level of optimism in higher, and sometimes unrealistic optimism, and the enduring resilience of these institutions that somehow we're going to find a way through it, that we've been able to limp along for so long that something will happen and we'll find a way. And unlike the corporate realm, you don't have activist investors in higher ed sort of catalyzing change as you might outside of higher ed.

Jeff Selingo:

Speaking of pace of change and activists, I want to bring Mary into this conversation because I know Michael and I both know President Aoun at Northeastern pretty well. We were there last year for the Future U Campus tour and the President Aoun started this M&A committee that you lead. And just kind of curious what the impetus for it was, and for Northeastern, obviously the acquisition of Mills College in California got a lot of attention most recently. But what's the strategic rationale for acquiring colleges? What's the impetus for your committee? And what's the rationale for possibly acquiring even more colleges?

Mary Ludden:

Well, as you said, Jeff, you both know President Aoun very well, and I was at that podcast session where he spoke about this and when everybody in the industry was contracting and worrying about COVID and had to close down, President Aoun saw the trend that you have spoken to him about and that others have spoken about, and Sally spoke about, and noticed that there were probably going to be more institutions that were challenged to stay afloat. And so he is definitely a leader that looks around the corner. He challenges us in a way that's different than what Sally said is indoctrinated in culture in higher ed. He constantly questions us, challenges us to think differently how the model can evolve. And he really thought about the way that higher ed was going to change. And so he formed our committee to look at mergers and acquisitions in March or April of 2020, right in the midst of the pandemic.

To your second question, really for us, the value is Northeastern has received this year, we have not announced it yet, so you'll get it ahead of time, 96,300 applications for undergraduate for 2,500 slots. And so strategic value for us is we recognize that students can't learn and experience context in a single campus like Boston that you visited in ISEC. And so the opportunity for our students to be able to study at a multi-campus system and provide demand in an experiential learning model that is creating value for students, we have 90% of our students find a job post-graduation based on our co-op model in the field that they studied in. So when you think about consumerism, which has always been alive and well in the private sector, it's very much taking root now in higher education and parents and students want value for their education. And I think the experiential learning model at Northeastern is providing that.

Michael Horn:

Mary, it's really interesting to hear the rationale behind it. And I'm curious, are you seeing an uptake in these M&A conversations right now, more institutions coming to Northeastern proactively because they're struggling financially again or has that level of activity stayed constant?

Mary Ludden:

We're seeing an uptick again, and I think that's driven by coming from the private sector and healthcare, we had different cycles, but institutions now know what their enrollment numbers look like for fall '23. They've received applications, they're doing their modeling, they're doing their forecasting, and they're saying the numbers are not aligning with where we need to be to recover, and we're starting to see a slide in their enrollment applications. So I would say over the last three months, we've received probably two to three outreaches per month and are having calls with those institutions. So as you guys know, there was a little bit of a bow wave right after COVID, during COVID, and then I would say 2021, it was a little bit quieter, and now we're seeing it once again accelerate as institutions look at their enrollment numbers and realize that the decline is accelerating much more quickly than they thought.

Jeff Selingo:

So Mary, just a quick follow up on that. Do you get the sense that you're getting these inbound calls and others are as well, or do you feel like, well, people know Northeastern's on the lookout, so maybe you're getting more than others? Any sense of that?

Mary Ludden:

I think it's two things. I think they know that we're active in this space. I also think that they follow … Northeastern has done two mergers now. They did the new College of Humanities in London and we've done Mills College and I think they are students of these mergers. And they watched to see what happened. They watched to see how Northeastern honors the mission and the legacy and the faculty and the staff, how the mergers go. The internet offers them all of that information. And so most of the calls that I have are about the care and the empathy and the humility that we have shown with those mergers. And so there's an understanding of how Northeastern approaches these, whereas other institutions that might be entering this market don't have a proven record of doing them yet.

Jeff Selingo:

So Sally, I'm kind of curious going off of that idea of mission, because there's another sector that pretty well that also is focused on mission and that's health systems. It's an industry of course, that higher ed is also frequently compared to. There's a third party payer system, there's a social good, cost has risen faster than inflation, there's patient care and there's student care, obviously the student experience, the patient experience. We've seen a lot of mergers of hospital systems and the like, much more than in higher ed. So how is the M&A conversation in higher ed the same and different from that in healthcare? Because as I look at healthcare as somebody who knows nothing about it, to be honest with you, but as I look at healthcare, I'm like, huh, why isn't what happened there happening in higher ed?

Sally Amoruso:

So I've thought a lot about this question, and you've mentioned many of the similarities between the two sectors. Mission driven, dominated by not-for-profit institutions, even the professional providers of physicians and faculty could be seen as analogs. And both sectors right now are under withering scrutiny with regard to cost and quality, return on education, return on investment, quality of healthcare for the price. There was also an oversupply of bricks and mortar institutions both in healthcare and in higher ed. But there are some key differences, and one of the key differences that I think drove the rapidity of consolidation in healthcare is just the structure of the market forces. So in the case of healthcare, you have a highly consolidated payor market that made scale for the health systems a necessity, not just from a cost standpoint, but also from a contracting standpoint, a negotiating standpoint, and even in the desire to bear risk for patient populations. And this was necessary in order to compete and to control their own destiny. Higher ed doesn't have that kind of payor structure that's aggressively trying to drive provider costs down in order to maximize their own profits.

And then secondly, you have some divergent incentives. So for the CEOs of these health systems that are merging and acquiring scale, there was and continues to be tremendous personal upside from a monetary perspective. The transactions confer wealth to those involved and scale enterprises drive wealth. Just to give you a sense, the CEOs of the large health systems, even not-for-profit health systems, are compensated much like corporate CEOs. So the CEO of Ascension, for example, one of the largest not-for-profit health systems made over $7 million last year. And then the for-profit systems, which are more prevalent in healthcare than higher ed, are a major consolidator and they have even higher salaries. So the CEOs of Tenant and HCA both earned over $20 million in 2021. And these elevated salaries are directly driven by the scale of these institutions.

I'll also say for higher ed, for president of a college that is struggling, first of all, there isn't that kind of financial upside. What would drive them is the desire to continue to serve their students and that is a powerful drive, but they also need to manage campus constituencies and trustees who are concerned about that loss of institutional identity, who are really attached to the original mission and the brand and what they remember as alums. No one wants to preside over the dissolution of a beloved school, and that attachment to that institutional identity is much stronger in higher ed than in healthcare. You don't have alums knocking down your door when a hospital's acquired.

Michael Horn:

It's so interesting. I'm curious from your perspective, Mary, looking at that, you know, mentioned to us before the show that you've even spoken to a firm that's historically focused on M&A and healthcare that's actually now getting into higher ed, but how are those M&A conversations different in higher ed from other sectors in your perspective? And I'd love you to get specific, like when you as Northeastern talk to an institution, where does that conversation begin? What's the focus from Northeastern's perspective for the institution that would get acquired? And what are your non-negotiables or your non-starters when that conversation kicks off?

Mary Ludden:

It's a great question. So I came from Anthem, Fortune 20, now Elevance [Health], five and a half years ago to Northeastern as a faculty member. And I would say there's two striking differences in M&A activity in the private sector at scale and a higher ed institution. In the private sector at scale, there's shareholders, there's a value transfer, there is a consumption, there might be a disappearance of something you acquire. You can acquire a competitor to minimize their impact. You can acquire someone to expand your capabilities. There's a lot of different reasons. In higher ed, there are no owners. I like to think of the owner as the mission of the institution, and the board of trustees are empowered and charged with ensuring that the mission continues and is resilient and has a future. Every conversation that we have at Northeastern starts with the same question. So I'm going to give this away, for anybody that reaches out to us, it's what can we do together that alone we can't do?

We like to look at partnerships in terms of creating adjacencies and being additive and being transformative. We don't do an export model at Northeastern. Every campus, every merger is completely unique. Believe it or not, the non-negotiables come much later in the conversation. The teams meet.  We talk about a shared vision.  Sometimes that's with the boards, usually it's with members of the board's small committees that they've formed to do discovery and exploratory. And then once we have a clear vision and there's a shared mission and there's a intersection of cultures amongst the leadership teams, then we talk about non-negotiables. And non-negotiables, I will say to the credit of higher education, always focus on students. There can't be impact to current students, that we have to think about students completing their degrees or mapping into Northeastern degrees, or there has to be a focus on the students. In higher ed, remember, they're nonprofits. So the transaction looks very much like a balance sheet transfer. You assume assets and you assume liabilities. So I would say that's probably an oversimplified version of our process, but that's, at a high level, what that looks like.

Jeff Selingo:

So that said, Mary, I just want to follow up there, because the acquisition of Mills College in particular, you heard from so many people in higher ed, well, that's just a geographic play. Northeastern wants to play in the huge California or the Western market. So how do you respond to that perception that that was largely just a real estate play for Northeastern?

Mary Ludden:

Well I like to share with everybody, we already had campuses on the West Coast. We had a campus in San Jose and San Francisco and Seattle and Vancouver. And honestly, just to get back to that question that we always ask ourselves about what can we do together that alone we couldn't accomplish, the legacy of Mills College, advancing women's leadership, advancing access to underrepresented minorities, creating the Mills Institute that would continue and serve as a vessel for the Mills College, we aren't building a node, we're building a global university system. So the legacy of Mills College, what was so interesting is that impact, the Mills Institute will infuse the rest of the system with the learners, with the research, with the connections. And for us, the ability to impact generations to come, that was the driving reason.

Jeff Selingo:

Yeah, so it's interesting, Sally, as we wrap up here, because Mary just talked a lot about that idea of mission and impact and there's this new study that just came out from Harvard and researchers at the National Bureau of Economic Research, and they were looking at mergers of health systems. And they found that these mergers only marginally improve the quality of care, but at significantly higher cost.

Now, we might be able to argue with some of the findings based on other stuff that's out there, but when you just hear that desire, for example, of the Northeasterns of the world, for this to be really around mission and impact and doing something you couldn't have done otherwise, and then you reflect on the stories that people in healthcare told you about how mergers would create a lot more value for patients, what do you think will end up being the same or different in higher ed and how? In other words, will these mergers and acquisitions result in better education, perhaps even at a lower cost or could the same thing happen in higher ed that might have happened in healthcare where maybe the education's not that much better and the cost is not that much lower?

Sally Amoruso:

Well, let me start by saying I don't think the major driver for healthcare mergers or consolidation was necessarily to elevate care, but to create scale for a variety of market-based reasons that we've touched on. And I will also say M&A is not a panacea for underlying business model or value issues. Mergers and acquisitions are challenging operationally, far too often the deal thesis for a merger acquisition is unrealized. And consolidating lots of small institutions that have a fundamentally underperforming business model doesn't actually fix that business model. You then have a large aggregation of institutions that are sort of missing the mark. Sometimes you can get cost savings at scale, sometimes you can elevate different functions because you can invest at a different level, but you just end up with a larger organization that is fundamentally not meeting student needs or consumer needs.

Now if you take an institution like Northeastern and what Mary said, I applaud that approach of thinking about what you can do differently together that you can't do individually to better meet consumer needs. I think that is a really highly strategic and intelligent way to both be mission focused and to be consumer aligned.

Another way to think about it is if you have an institution that does have a differentiated and compelling value proposition that does want to expand the scale of that because there's more demand by students than they can meet as a single institution, that makes sense as well, to scale.

You talked about quality, quality is a very difficult thing to define in healthcare as it is in higher ed. One thing that did arise across the last decade or so in healthcare that I have to applaud is greater differentiation and greater consumer centricity in the offerings. So pure plays that brought down the cost of an MRI, or an x-ray, or more accessible clinics, or telehealth, or online scheduling. And my hope is as higher ed continues to respond to some of these market pressures and hopefully in keeping the mission of higher ed at the center, that what will happen is actually that greater differentiation across the way that we engage with students and serve students so that we can align to what students and their families need and want in a better way.

Jeff Selingo:

So just curious then, we've been trying to make this analogy with healthcare and as I'm listening to both of you, I'm starting to wonder, I travel a lot and I just noticed on the side of highways, wow, that used to be a really big bustling mall 20 years ago, and now it's kind of like a zombie mall. It's like empty. And I'm starting to wonder is that what we might see with some of these colleges and universities in 20 or 30 years, especially if the real estate play can't be acquired by somebody, even a non-high education institution, that we might just see some empty campuses in different places?

Mary Ludden:

Well, Sally mentioned Holy Names and Cazenovia. I mean, those are two recent examples in just the last two months that have announced that they're closing. They don't have a partnership opportunity. What I would say is that the more universities that look at mergers and partnerships prior to getting into state of such decline that they're not recoverable, that's when you're going to start seeing the empty mall like model on the side of the road. But what I think the pandemic taught us, particularly at Northeastern is the residential model and the need for community and the need for students to want to convene and be in person is still very much in demand. It's just, I think, like Sally has been talking about as well, differentiation and recognizing the financial distress long before it gets to be a problem of non-recovery.

Sally Amoruso:

I agree with that, and I think if we can take any of the lessons from COVID, one of the things we saw was much greater collaboration across higher ed. So it is possible to bring together different institutions to work together for greater good. So hopefully to Mary's point, these institutions that are struggling can be open to different ways to accomplish their mission in different constructs and different partnerships. Doesn't always have to be full merger. It can be collaboration, consortium or otherwise, but I am hoping that they embrace those possibilities sooner rather than later.

Jeff Selingo:

So this has been great and really appreciate Sally and Mary joining us. And I don't think this will be the last conversation that we're going to have about closers, mergers and acquisitions in higher ed. I think this is probably a subject, Michael, that we have covered more than probably any other topic on Future U in the six seasons we've been doing it. So again, thank you very much for joining us.

Mary Ludden:

Thank you for having us.

Sally Amoruso:

Thank you for having us.

Jeff Selingo:

We'll be right back after this quick break.

Sponsor:

This episode of Future U is sponsored by Ascendium Education Group, a nonprofit organization committed to helping learners from low-income backgrounds reach their education and career goals. For more information, visit ascendiumphilanthropy.org.

This episode is brought to you by the Bill and Melinda Gates Foundation, working to eliminate race, ethnicity, and income as predictors of student success through innovation, data and information, policy and institutional transformation.

Michael Horn:

We're back on Future U, off that interview with Sally and Mary about a topic that just won't go away in higher ed: mergers and acquisitions. So while it might seem, Jeff, that we've exhausted our takes of that subject, there were a few things that were new to me that I think are worthy of further discussion. And for one, Sally mentioned the credit gap for colleges. The have-nots either can't get credit or they don't have a good credit rating at just the time when they kind of need to take on some debt to potentially improve. And that of course, exacerbates this downward spiral. You don't have the money to spend that you need to spend so you don't improve. And enrollment continues to plummet.

Now, we've had John McIntosh and the show before from C:Change Partners, which has funds for these partnerships, but I think the question that this begs is this, do we need some sort of funding mechanism to help colleges before they get to that stage of even looking for the partnerships? And I think it's notable that Southern New Hampshire University, for example, is making some noise around this, Jeff, with a fund to support struggling colleges, but going short of M&A, and we know that they have the budgets to do the M&A but they're not there. And perhaps it's because, as Sally mentioned, M&A is not always the panacea that maybe it seems to be on the surface.

Jeff Selingo:

Yeah, I think this is a great question, Michael, because in the private sector, capital markets connect investors who have money with entrepreneurs who have ideas, but little money. The flow of funds of course, is rarely direct, that there is a set of institutions that have evolved to facilitate this exchange of information and capital between investors and businesses. For example, we have venture capital and private equity firms, they raise large sums from individuals or endowments. They perform a great deal of research and they invest heavily in companies that they considered undervalued or that are capable of substantial growth. And we just don't have that capital market in higher ed. Higher ed relies on donations and infusions of cash from their endowments, which are essentially their reserves and they rely on debt. But if you're an institution on a downward trajectory, then you really don't have those levers available to you.

Now, I'm no expert in corporate governance or law or nonprofits. So I'm going to throw out some ideas here and we'll probably get some note from some listener that none of this can be done. But Michael at ASU (Arizona State Univerity), where I'm a special advisor, it created what it calls Enterprise Partners seven years ago, which is essentially a holding company for the university to do what President Michael Crow calls resource raising. Now, I wonder if colleges and universities that need resources can create separate arms where they allow investors to share in the equity and returns on that investment. Now, obviously there would need to be something of value to invest in, and we've seen private markets like this develop on the public-private partnerships and housing and dining, for example, where investors do think there is something of value. We've also seen the same in the OPM (online program management) market too, with online education. But in this case it would be the university taking the lead in assessing what's valuable.

Say they want to start a new graduate program for physician's assistance, which investors know would pay off, so they're more likely to pony up money for some return on that investment. And given that there would be some public benefit to this investment, the returns don't have to be huge. So in some way, it would give higher ed shareholders much like in the private sector. Now, Michael, I remember asking you months ago about this idea of shareholders in higher ed. In other words, who does the board of trustees at a college or university ultimately answer to? Because in the public markets, they ultimately answer to the shareholders. And when I asked you this question, you said mission, and as we just heard, Mary agrees with you, but how do we make the mission more central to what boards do? Because when you ask a board member, and I have asked them this, about their responsibility, they're going to say they have a fiduciary responsibility to the institution, which can mean something very different from the mission of the university.

Michael Horn:

I think it's a good distinction, and because all too often in my experience on nonprofit boards, and Jeff, this isn't just in higher ed, but in nonprofits, my experience is that the board members are very focused on preserving the current institution. They may even want to grow the organization perhaps things like that. And they are not asking what's the best way to accomplish our mission? And the answer frankly isn't always through the organization as it's currently operating. And I think it's a misnomer. And again, we're talking about nonprofit higher ed, and when you're talking about that nonprofit context, I think the legal case is pretty clear that your fiduciary responsibility is to the mission. That's why you got to be a 501C3 in the eyes of the US government, not to the organization itself.

But to go back to something you said, Jeff, because it relates I think to this question of for-profit and not for profit, and you had this fund idea. When you go down that road, of course, maybe higher ed starts to look like a for-profit venture, not a nonprofit, or frankly, more similar to some of the other sectors that you named.

Jeff Selingo:

Yeah, Michael. And as you know, I was really interested in having Sally and Mary on because both had expertise in the healthcare sector before higher ed. So let's focus the rest of our conversation here on the points they made about the differences between healthcare and higher ed, because I think a lot of college presidents and college leaders are really interested in this comparison because they see healthcare as very similar to what they're doing. So maybe a little rapid fire between us. So first up, they told us that the third party payers in healthcare force price discipline in a way that scale is often necessary to make money. Now, in higher ed, the government is a third payer, but there is an insurance industry that also pays. So is it impossible to achieve that price discipline as a result?

Michael Horn:

Jeff, I found this answer so interesting because I always think of higher ed, just like you said, as analogous to healthcare because of the third party payer. But I think what Sally and Mary told us in essence is it's different. In healthcare, government through Medicare is just trying to squeeze prices. And let's be honest, that can have a downside. Organizations that might need to recoup costs and investments, or maybe they'll pull back on investments and innovations and new lines of products and services that would have long term benefit to citizens and consumers. But in higher ed, we sort of have the reverse problem. We've created a floor that basically says, first, why in the world would you price tuition below say a Pell Grant? And then second, given the lack of limits on federal borrowing, not just in cost, but frankly Jeff, in terms of what you can spend those loans on. And we don't talk about this a lot, but as you know, you can spend those loans on things like travel, food, housing, entertainment. It's not just tuition.

Well, I'm embarrassed to say I never fully thought about this, like the opposite incentives seem to be in play here. And as you know, I've long argued we need to be looking much more at value and putting in place some sort of mechanism that allows programs or institutions to only be able to access certain federal financing when their students get good jobs with good income, or to have institutions sharing the risk with their students for their outcomes in terms of their ability to repay debt or maybe have the institution's cosign on the loans.

But basically, I want mechanisms that would cause institutions to not just think about how can I bring in money now, but is that money going to be able to get repaid because it's a good investment down the road. So really shifting the focus from the here and now to the short, medium, and long-term implications of the price you charge. Now, of course, that would require some HEA higher ed act reauthorization, I guess though.

Jeff Selingo:

Yeah, not only reauthorization, but really rethinking the whole mechanism, the whole ecosystem. And we discussed with Bill Troutt a few episodes ago that one of the discussions that his national cost commission had in the late 1990s was cost controls. And several people in Congress wanted that. And given the huge investment the US government makes in higher ed, I think there's a lot more they can negotiate with colleges and universities in terms of tuition prices in exchange for loan and grant dollars.

Michael Horn:

Yeah, I look, I guess I'd rather that whatever we put in place that it's commensurate with the value it creates for students and society, not something artificial that's detached from value or actual costs or that frankly is arbitrary. And I guess I worry about price controls because they can have a huge downside in terms of those future investments and on the supply side of a market as well. But look, if in line with this question around price and costs and such, something else that Sally and Mary mentioned are the paydays for hospital CEOs and it gives them financial incentive to grow. And Jeff, look, you covered presidential salaries for years at The Chronicle. One of our favorite annual things is top salaries of presidents in higher ed at The Chronicle. And frankly, pay packages of $1 million or above, they cause huge controversy. So my mind sort of again, something I'm a little embarrassed I'd never thought of before. I just can't imagine higher ed incentivizing presidents to pursue M&A with money we see in healthcare.

Jeff Selingo:

No, and I can't either, Michael. But I'm wondering if there's some sort of incentive compensation within the presidential contract because that's not a big thing in higher ed like it is in the corporate world. Pay packages in higher ed are pretty plain vanilla. People may not like the money that presidents get, but it's really salary and deferred compensation for retirement, and that's about it. So I think that boards can encourage presidents to both improve outcomes and hold down costs and perhaps pursue partnerships by tying a portion of their compensation, not all of it, but a portion just like they do in the corporate world to certain measures.

Michael Horn:

Well, I like the sound of that, Jeff, anything that aligns with mission and value for students. So I will cosign on that one.

Jeff Selingo:

Michael, I also thought it was interesting how they said that since there are more for-profit entities in healthcare than in higher ed, they tend to force changes in the sector and then the nonprofits come along as a result. And in many ways, I think that used to be the case in higher ed. For-profits in the sector particularly 20 years ago, forced change, but then the nonprofits took their playbook and regulatory changes of course at the federal level made it really difficult for for-profits to operate. Now there doesn't seem to be as much of a dim view on for-profit healthcare as there is in for-profit education, Michael. So I'm starting to wonder though, do we need for-profits to kind of return and return in a big way in higher ed to kind of force changes again, much like they did 20 years ago?

Michael Horn:

So I never thought you would ask this question. I feel like you're goading me a little bit, Jeff, but as you know, look, I don't have a problem with for-profits in education. I edited an entire book on this topic with Rick Hess of the American Enterprise Institute titled Private Enterprise and Public Education. But I do think that one of the conclusions of that book is that while for-profits are not inherently bad or good, they are very good at scaling against incentives. And if those incentives are bad ones, well then you get problems like we had. And so this goes back, I think, again, to my bigger push, which is I just think we ... I would love to do that because that energy for scale and investment that you're talking about, Jeff, I think could be a tremendous force for good. But then we just need some mechanisms in place that focus on the actual value created for students, and not just in for-profits, but for all institutions.

And I guess that's kind of like where I'd love to land the conversation, which is the same point I think John McIntosh really made to us, which is around the real reason for merging or acquiring. And as Mary said, when Northeastern starts a conversation with an institution, they ask one question. And that question is, what can we do together that we can't do alone? In healthcare, it seems there are many reasons to merge, but sadly doesn't seem like patient care is at the top of that list because again, this is my view, I think they have some flawed business models underlying things. But Jeff, what do you think the reason should be to merge or get acquired in higher ed?

Jeff Selingo:

Well, Michael, I don't think it should be simply to survive. And unfortunately, I think in this conversation right now, that's where we are. How about you?

Michael Horn:

Yeah, I don't think I disagree with that, Jeff. So let's leave the conversation there. This was fascinating, but let's turn to our last segment of the show, special segment this year sponsored, of course, by Course Hero, where we field questions from listeners as well as individuals from higher ed more broadly. And this one comes from Simon Njumbwa, I hope I'm pronouncing that correctly, from Roberts Wesleyan University. And Simon's question is, "The public has in recent years questioned the value of higher education, which in the past was the key to better lives. What should higher education do to regain public trust?" And Jeff, I picked this question out of the pile because it relates obviously to the conversation I think we've been having because frankly at the sort of root cause of all this, if the public had more faith in higher ed and more people were enrolling, well, maybe we'd see a little less pressure in the M&A sphere right now. What are your thoughts?

Jeff Selingo:

Well, Michael, when you look at the various surveys from Pew and Gallup and even the new one from Populace that I talked about in a recent newsletter, in my opinion, the lack of public trust comes down to two things. One is political. Sure, the country is pretty polarized right now, but generally the US is a pretty moderate country and the feeling is that higher ed has veered too far to the left politically. Now most presidents I talk to don't want to go there, but they really need to in terms of how their faculty hire other faculty in terms of their curriculum, in terms of speech on campus. And I think if they do go there and engage on these issues, I think they're going to start to gain back the public trust on that front. There will always be a segment of the public they won't get, but I think higher ed has lost the middle in my opinion, and that is a problem going forward.

Now second is in the area where I do think they're making strides and that's on value and outcomes. Colleges know that people are questioning the value of the degree. So they are adding micro-credentials to their degrees, like in the UT system and in CUNY and at the University of Colorado. They're reworking career services like at Wake Forest to make them more valuable to undergraduates. They're partnering with employers like at Queens University in Charlotte, which has just built this new cohort based model with students and local employers like Ally and Lowes. And making sure the degree pays off will ultimately help higher ed regain the public trust. And I think when combined with trying to lower the flames on the culture wars, I think we actually could see the dawn of a new age in higher ed if we do those two things.

Michael Horn:

Well, I like that optimistic take, Jeff, and let's end on that note. And for all those listening, thank you for joining us and please continue to share this podcast with your friends and colleagues. And of course, rate us so that others can find us.

Jeff Selingo:

We'll see you soon.