Conversions 101
Across the country, many nonprofit health organizations such as hospitals, HMOs, and insurance companies have changed and continue to change from nonprofit to for-profit status. These transactions are called “conversions.” Consumers Union’s Model Conversion Act (PDF) defines a “conversion transaction” as occurring when there has been a substantial change in a nonprofit's mission, or the sale, transfer, lease, exchange, transfer by exercise of an option, optioning, conveyance, conversion, merger, affiliation, mutualization, joint venture or other disposition resulting in the transfer of control or governance of 10% or more of the assets or operations of a nonprofit or $5 million, whichever is less.
Under federal law and almost all state laws, the assets of nonprofit organizations must be permanently dedicated to charitable purposes. When a nonprofit converts to for-profit status, it will no longer be organized to serve such purposes and instead will be dedicated to maximizing profits. Accordingly, a converting nonprofit must transfer the full value of its assets to another nonprofit organization that will serve similar charitable purposes. Essentially, as an organization crosses the border between the nonprofit and for-profit sectors, the law requires that nonprofit charitable assets must continue to be channeled into public benefits and not fall into private hands.
Conversions take on many forms and include outright sales of facility and other assets (or a portion of them), transfers of leases, joint ventures, mergers, affiliations, acquisitions, the creation of for-profit subsidiaries and holding companies, or other deals that effectively change the mission of the nonprofit or transform it into a for-profit corporation.
At stake in these conversions are two extremely important community health resources:
Health services such as indigent care, emergency room coverage, and other health services that are critical for maintaining healthy communities.
Access to these crucial health services is at stake when a community’s nonprofit hospital or health plan changes to for-profit. Key questions that advocates should consider are: Which health services will the new for-profit prioritize? Which services will the for-profit continue or expand? Which services will the for-profit reduce or eliminate? What will happen if the for-profit corporation sells, merges, or transfers to new owners? What happens if the for-profit becomes insolvent or closes its doors? What impact will a conversion have on the quality, accessibility, and affordability of health care in a community?
Nonprofit assets that have been built by and on behalf of the public are also at risk when any nonprofit health corporation proposes to convert.
Communities should demand that a nonprofit corporation answer many questions during the review of a transaction to ensure its public assets are protected. The questions include: What is the value of those assets? Will the conversion preserve the assets for nonprofit purposes or will the assets go to the for-profit company for private individuals to reap windfalls? How should the charitable organization that receives the assets be structured to ensure that it is independent from the converting corporation and concerned only with working for a healthy community?
Here is a handy one-pager detailing the important issues that arise around proposed conversion transactions. All of theses issues are explained in greater detail, throughout this site. Issues Raised When a Nonprofit Hospital or Health Insurer Proposes to Convert to For-Profit Status (PDF)
Conversions 101 |
Tools and Background |
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Greatest nonprofit conversion activity has been in the health care industry
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Key factor when the National Blue Cross/Blue Shield Association changed it’s bylaws to allow members to be for-profit.
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Communities struggle to retain their community assets.
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