July, 1998
This article was written by the Consumers Union Southwest Regional Office.
In most states, the nonprofit hospital conversion process has been "a game with few rules."57 But, because the powerful health care corporations leading the plunder of nonprofit assets have so many advantages over a disorganized public (they control the information, timing and often the outcome of conversion negotiations and conduct negotiations in secret) states began, two years ago, to enact legislation to give their Attorneys General and the public the authority and information necessary to protect the public interest in nonprofit hospitals.
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To date, 14 states and the District of Columbia have enacted legislation affecting nonprofit hospital conversions and an additional 27 states initiated the process.58 The new laws vary in scope with some states enacting stringent standards and others making minor regulatory changes. Nebraska, the first state to pass such a law, gave the Attorney General the authority to review and approve (or disapprove) a sale and required significant public disclosure.59 The for-profit buyer of a nonprofit hospital submits an application to both the Department of Health and the State Attorney General, and the application must include actual transaction documents which become part of the public record. While the law does not require the AG or the Health Department to review and approve the application, if they do they must hold a public hearing (posted in the newspaper) within 30 days. If the agencies do not act, the application is deemed approved in 60 days. Under the law, the Attorney General ensures that the parties to the transaction properly transfer the fair market value of the nonprofit hospital's assets to a foundation organized to serve a charitable health care purpose. To determine the fair market value of the assets, the Attorney General may hire independent experts at the expense of the nonprofit hospital. The Attorney General also reviews the deal for any breach of fiduciary duty or conflict of interest and assures continued access to affordable care.60 According to State Senator Matzke, Nebraska has not experienced any nonprofit to for-profit hospital sales since the legislation took effect in April 1996. 61 |
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The 15 states (including D.C.) that later enacted new laws followed the model set out by Nebraska, with some significant differences. Some states, including California, Connecticut and Washington, require the Attorney General to review and approve all transactions before they are consummated. California gives the Attorney General a maximum of 105 days to make a determination and no filing is "deemed" approved under the statute.62 Connecticut requires the AG to determine, within 20 days, if a transaction involves a material amount of assets or a change in control. If so, then the AG has an additional 120 days to review and approve the agreement. An agreement without such approval is void. 63 Washington requires prior approval by the Department of Health, with the advice of the Attorney General, within 120 days of receipt of a completed application.64
The public hearing process and the amount and quality of information available to the public also varies among different states. While some states with conversion legislation require a public hearing prior to approval of the conversion (Connecticut and Georgia), Ohio only requires a public hearing after approval to discuss the use of the proceeds. 65
In most cases, the AG has the authority to ask for information, but certain states, including Washington, Georgia and New Hampshire list specific documents that must be made public as part of the notice or application to the AG. Georgia, for example, requires the notice to include the acquisition agreement and all related contracts including any lease, service or management agreements, any asset valuations prepared in the past three years, any consultant reports, documents reflecting the purpose of any donation greater than $100,000, and any documents relating to disposition of assets.66 Ohio requires only a summary of the side contracts.67 New Hampshire additionally requires the parties to file for public review "any and all compensation paid or to be paid" in connection with the transaction.68 By contrast, Louisiana allows the parties to make public only a summary of the acquisition agreement.69
States generally require an independent valuation of the assets, but assign the cost differently. Georgia, which requires a notice to the AG but not prior approval, assesses a $50,000 fee on all transactions (payable by either the nonprofit or the for-profit involved in the transaction) and the AG may hire experts or consultants to help determine whether the nonprofit will get a fair value for its assets. 70 Connecticut requires the purchaser to pay the AG for costs of outside experts, and caps the fee at $150,000. 71 Ohio allows the AG to retain an independent expert at the nonprofit's expense. 72
Texas has failed to enact legislation to strengthen its supervision of nonprofit hospital transactions. But, in 1997, the Texas Legislature considered legislation to establish standards for all nonprofit to for-profit conversions involving health care institutions and insurers.
House Bill 1331, authored by Representative Glen Maxey (D-Austin), was initiated by Consumers Union, Southwest Regional Office, to address the issues of notice to the Attorney General, public participation, preservation of the nonprofit entity's assets for charitable purposes, and independent oversight of these assets. Senator Rodney Ellis (D-Houston) filed SB 654, the Senate companion bill.73
Also, a proposed billion dollar sale of nonprofit hospitals held by Baylor University prompted two legislators to file bills identical to the Maxey-Ellis bill, but applying only to nonprofit hospitals.74
Throughout the legislative session ongoing negotiations on HB 1331 involving the bills' sponsors, Consumers Union, individual nonprofit hospitals and foundations, the Texas Hospital Association, the Catholic Hospital Association, Columbia/ HCA and other for-profit corporations, led to a compromise committee substitute. This version was considered during a House Public Health Committee public hearing in early April. Consumers Union and the Texas Hospital Association testified in favor of the compromise bill and Columbia/HCA opposed the bill. The bill was endorsed by 14 other consumer groups and six provider-related organizations. 75
Following the hearing, HB1331 languished in committee awaiting approval from the committee chairman to move it forward. Finally, Representative Maxey agreed to a stripped-down version of the bill which required nonprofits to notify the Attorney General of proposed transactions with for-profit entities. The bill was reported out of the House committee in late April and fell victim to the end-of- the-session time crunch. There was no legislative action in the Senate and no action on either of the hospital-only conversion bills.
