Inside the nonprofit targeting RHD and other financially troubled health and human services agencies

Ryan D. Smith, CEO of a fast-growing Reading nonprofit, uses a computer program to comb through tax returns looking for financial weakness at human services nonprofits.

His aggressive approach to finding acquisition targets flagged a Philadelphia-based nonprofit providing health and human services operations in 13 states, including three clinics in low-income Philadelphia neighborhoods.

Resources for Human Development landed on his list in April 2023, months before its employees were surprised by layoffs in January, and RHD’s CEO departed abruptly amid deepening financial woes.

Thirteen months after setting sights on RHD, Smith reached a preliminary agreement to acquire the organization for his eight-year-old nonprofit firm, Inperium, whose annual revenue has soared eightfold since he founded it in 2016.

By May, when the agreement was signed, RHD had gone through a second round of layoffs and was on the edge of bankruptcy.

“RHD has been around for 50 years, and it wasn’t looking too promising just a few weeks back, but I’m very confident with some of the moves that we’ve made we’ll be around for another 50 years,” said Jay Deppeler, a consultant who briefly served as RHD’s interim CEO during the spring. He is now its board chair.

Deppeler’s background — he once was an Inperium executive whose annual pay topped $850,000 — is among the complications in the tale of how RHD’s board and its management lost control of the 54-year-old agency long respected for its work serving people with intellectual and developmental disabilities and people with mental illness.

RHD ousted Marco Giordano as CEO in March following 65 layoffs in January and the revelation that it would lose even more money than had been expected during the fiscal year that ended Sunday. And 85 more were laid off in April from the administrative ranks of the agency, which now employs 3,600.

Turmoil continued in May, as eight of 11 RHD board members left after the board approved the Inperium agreement. They were told by Deppeler in a May 13 email obtained by The Inquirer that only four of them could remain.

Under the agreement, Inperium provided a $25 million backup line of credit and gained the right to appoint five people to the RHD board, the email said.

Getting board members as part of a preliminary agreement is unheard of, experts said. The deal is not expected to be completed until next year.

“I’ve never seen that happen before,” said Nancy Weisling, a managing director in the Chicago office of the Braff Group, a health care mergers and acquisitions advisory firm.

“That just opens the door for problems, and conflict of interest. It’s problematic,” said Weisling, who has decades of experience in this area.

Another noteworthy dimension to the deal: RHD is a federally qualified health center, receiving extra government funding to provide care to underserved communities. At least half the board members have to be patients of the RHD clinics under federal rules, which also make ownership change difficult.

Smith started his career in services for intellectually and developmentally disabled people 30 years ago, when he was 22, according to a recent promotional video for Supportive Concepts for Families, a Reading nonprofit that Smith led until he launched Inperium in 2016 with Supportive Concepts at its core.

The idea behind Inperium was to combine back-office infrastructure and other services to help human services nonprofits eliminate duplicate expenses.

Inperium’s annual revenue has soared to a projected $409 million this year from $51 million in 2016. During that period, Inperium has made 37 acquisitions in a dozen states, Smith said in a recent interview. Inperium’s news release on the RHD deal said the combination would create an entity with operations in 18 states and more than $800 million in annual revenue.

As Inperium has grown, so has Smith’s compensation. In 2022, his total pay was $1.3 million, down slightly from $1.4 million the year before, according to Inperium’s latest tax returns. His pay tops that of CEOs at even bigger Philadelphia-area nonprofits in the same field.

Inperium operates mainly in four segments of the health and human services industry: intellectual and developmental disabilities; substance use disorders; behavioral health services; and foster care and other children, youth, and family services. Medicaid, the state/federal insurance program for the poor, accounts for most of its revenue.

To find acquisition targets, Smith’s system compiles data from 990 tax returns collected by Guidestar, an information service on nonprofits. Smith looks at 20 criteria, including stagnant revenues, year-over-year declines in cash, and trends in administrative expenses.

“Our last run from Guidestar produced 3,000 nonprofits” that were dealing with financial trouble, Smith said. “We have a lot of targets.”

Few details are public about how RHD got into such deep financial trouble that its board had to choose between a suitor and bankruptcy.

During a Feb. 2 employee town hall meeting posted on YouTube, then-CEO Giordano explained that a projected $6.7 million operating loss for fiscal 2024 had jumped to $8 million after poor financial performance in the last three months of 2023.

The nonprofit is now expecting a $10 million loss on $325 million in revenue in the year that ends Sunday, Deppeler said in a joint interview with Smith on June 6.

RHD had a $3 million loss in fiscal 2023. One of the reasons for RHD’s deepening financial hole is that it spent $30 million on pay raises since 2020. The cost was not all offset by rate increases from RHD’s government revenue sources, Giordano said in February.

Another growing overhead expense: RHD’s administrative and back-office staff increased 25%, to 250 employees this year from 200 in 2019, CFO Deanna Cerwin told employees during the February meeting. “The growth of our organization did not match that,” she said.

Cerwin also noted that RHD was not efficient at financial management. It took RHD 30 days to close the financial books on the previous month. It’s not unusual for far bigger organizations to close the books in five days.

The RHD board initially wanted to remain independent. Members tried but failed to find alternative financing as its bank, which had provided a $25 million line of credit, grew inpatient.

If being acquired was the only solution, the RHD board wanted the organization to keep its name. That’s what Inperium offered, said Brian Matthew Rhodes, an RHD board member who was appointed acting CEO on June 4.

Rhodes, a lawyer who had worked at RHD as general counsel from 2015 to 2017, joined the RHD board in April 2022 and helped bring Inperium and RHD together.

In December, Rhodes started working at Obermayer Rebmann Maxwell & Hippel LLP, whose clients include Inperium. There, he met Smith through a colleague and learned of Inperium’s earlier interest in RHD.

“I went to the board and said, ‘Hey, here’s a possible solution,’” Rhodes said in a June 21 interview. He said he disclosed the potential conflict, but said he didn’t know that Obermayer represented Inperium in negotiations on the RHD deal. Obermayer and RHD officials signed a conflict of interest waiver on April 29.

“It’s turning out to be the best option,” Rhodes said of the Inperium acquisition. “We are a 54-year-old company that wanted to continue to provide the services that we’ve been providing to the communities we serve across this country,” Rhodes said.

Rhodes was not allowed to vote on the Inperium agreement, but he helped vet the deal by speaking with CEOs of organizations that Inperium had already acquired.

“Every CEO I spoke to spoke highly of what they were able to gain by entering into this model,” he said.

Inperium consolidates back-office processes such as billing and other financial services through a subsidiary called Apis Services Inc. It charges the nonprofits it acquires its costs, plus 2%, Smith said. “It’s generally less than 10% of expenses for the affiliates,” he said.

But the extra 2% is a heavy lift in an industry that does well to have a 1% margin, experts said.

The ability to keep operating independently is part of the pitch when Smith approaches financially distressed nonprofits, but Inperium tends to roll up acquisitions into larger entities, its fiscal 2023 audited financial statement shows.

Inperium’s February offer letter to RHD said it would cede control of four entities — South Jersey Behavioral Health of Pennsauken, Children’s Home of Reading, Pittsburgh-based Abraxis Alliance, and Crossroads Programs in Willingboro — to RHD after the deal closed. Those nonprofits had $148 million in revenue in fiscal 2023.

Nothing is final, Smith said: “We are looking at all of our businesses in Inperium and strategically determining based on the breadth and reach of RHD and our size and scale which of the states and which of the services would function more efficiently under the RHD name.”

The experience at Wake Enterprises, a small North Carolina nonprofit serving adults with intellectual and developmental disabilities, speaks to what can happen after an acquisition by Inperium.

The board bought into the notion that Wake would continue operating independently, but with the benefit of back-office support and help growing programs, said Oshana Watkins, a former Wake Enterprises executive director. Inperium acquired Wake in 2018.

“Credit to Inperium, we streamlined a lot of processes,” Watkins said.

Inperium also helped Wake get its financial books in order. But the organization also ended up with $400,000 in debt after Inperium took over, and had new expenses, such as a monthly charge for Inperium’s lawyers, Watkins said.

“They sell you on, we’ll help you, we’ll upgrade you, we will get you into our systems, but in the end you’re still paying for them — and you’re paying them with interest.”