Press Release July 8, 1998	Contact: Lisa McGiffert or Rafael Ayuso (512) 477-4431 Consumers Union Southwest Regional Office

Secrecy and misuse of charitable funds cloud
nonprofit hospital conversions in Texas

The key question is: ‘where’s the money going?’

AUSTIN, TX – Secrecy and misuse of charitable funds cloud nonprofit hospital conversions in Texas, placing at risk hundreds of millions of charitable dollars once dedicated to the health care needs of local communities, according to a new study by Consumers Union.

In these transactions, a nonprofit hospital "converts" to a for-profit venture through a sale or joint partnership agreement.

The Southwest Regional Office of Consumers Union analyzed five hospital transactions valued at approximately $444 million. The hospitals -- located in Amarillo, Austin, El Paso, Gilmer and San Angelo -- included one public hospital and three nonprofit hospitals sold to for-profit corporations, as well as one joint venture between a nonprofit hospital and a for-profit corporation.

The study "Preserving the Charitable Trust -- Nonprofit Hospital Conversions in Texas," calls the transfer of charitable dollars out of the public domain and into the hands of corporations and their investors "possibly the largest transfer of public assets in history."

Lisa McGiffert a CU senior policy analyst, said: "We hope this study serves as a wake-up call for our public officials. Under a cloud of secrecy, millions of charitable dollars keep flowing from public to private hands, a quiet scandal that can rob the public of its dedicated health care money."

McGiffert said nonprofit hospitals have enjoyed numerous benefits through the years in exchange for the fulfillment of their special charitable missions. "These hospitals are invaluable to their communities," she said. "A transfer of ownership does not mean the health care needs of a community disappear. These assets should be preserved for health care purposes in the community the hospital serves."

Between 1980 and 1990, 19 nonprofit hospitals converted to for-profit ownership status in Texas. Another 15 nonprofit hospitals converted to for-profit status between 1990 and 1996, seven of them converting in 1996 alone.

Parties to these transactions negotiate them in secret.

• The Attorney General, the state’s protector of charitable trusts, was not notified in any of the nonprofit hospital transactions reviewed by CU.
  
• In most cases, the parties did not notify the public or hold public hearings.
  
• Because the transactions are conducted in secret, and most foundation boards are composed of the same individuals who made the decision to sell the hospital in the first place, no one involved has both the information and an unbiased motive for assuring the deal does not result in unfair benefit to management.
  

"Without access to information, members of the public are not able to intervene effectively to protect valuable charitable resources," the study states.

Also, without access to transaction documents, Consumers Union was unable to evaluate whether for-profit corporations paid an appropriate price for the nonprofit assets they purchased or control. Furthermore, because of conflicting reports, CU was unable to verify the exact purchase price in some cases.

Normally, foundations are created from the disposition of the sale proceeds. Some foundations continue to support health services in the community, as required by law, but others misuse their funds to support a number of non-health related causes. "Conversion foundations that use funds from the sale of the hospital for non-health-related programs, no matter how laudable, may be violating state common law requirements that charitable dollars remain dedicated to causes as near to their original purpose as possible," the report states.

One large nonprofit absorbed the proceeds into its statewide system and removed them from the community.

Sometimes partnerships between a nonprofit hospital and a for-profit corporation are formed. Joint ventures pose a special problem because the full value of the assets are not transferred to a foundation. In cases where the partnership is not clearly controlled by the nonprofit to assure the assets will be used to further its charitable purpose, the arrangement may violate IRS guidelines and threaten the nonprofit’s tax exempt status.

Among the report’s recommendations:

• Require parties to a nonprofit conversion transaction to notify the Attorney General prior to closing the deal and require the AG to approve or disapprove all transactions involving a material amount of assets or a change in control.
  
• Require public notice and public hearings on the proposed transaction.
  
• Determine the fair market value of the charitable assets through an independent expert review.
  
• Preserve the fair market value of the nonprofit’s assets in all transactions for continued charitable use in the community, and determine the new mission for these charitable dollars in an open and public process.
  
• Ensure oversight of the charitable assets by an independent board with no connections to the parties involved in the original transaction.

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