July, 1998
This article was written by the Consumers Union Southwest Regional Office.
Consumers Union supports legislative changes which will preserve dedicated charitable assets when transactions between nonprofit hospitals and for-profit corporations occur.
While this massive shift of funds from nonprofit, community- based health care to market-based health care is certain to have an impact on Texas communities, Consumers Union's focus is not to block, prevent or attempt to stop such transactions. However, when the AG and people in the affected community have sufficient information, oversight and input, transactions which are harmful to a community may be stopped or modified.
The current regulatory framework in Texas governing nonprofit hospital conversions is weak and merits stronger oversight provisions. Texas should enact legislation that requires nonprofit hospitals to notify the Texas Attorney General of their intent to enter into a major transaction with a for-profit corporation and allow for public notification, access to information, and involvement in the conversion negotiations.
In addition, Texas should enact standards that will ensure that the charitable assets involved in a nonprofit hospital conversion are preserved in a tax-exempt foundation that is independent from the entities involved and that is dedicated to serving unmet health care needs in the affected community. These standards should apply to all change of ownership transactions, including direct sales, mergers, and joint ventures. CUSWRO supports the following changes to Texas law:
Require parties to a nonprofit conversion transaction to notify the Texas Attorney General prior to closing the deal, and file adequate documentation for the AG to effectively review the transaction.
Require nonprofit hospitals to post in local newspapers their intent to enter into an agreement with a for-profit corporation, and hold a public hearing on the transaction after giving members of the public ample time to review and digest the underlying documentation.
Public Require all transaction documents reviewed by the AG to be public, including the actual sale agreement, all side agreements, all valuation estimates (going back three years), compensation agreements, donor directives, and documents relating to the foundation and use of the charitable assets.
Assets All transactions between nonprofit hospitals and for-profit corporations must preserve the fair market value of the nonprofit hospital's assets, including both tangible and intangible assets, for continued charitable use in the community.
Determine the fair market value of the charitable assets through an independent valuation-- taking into account both tangible and intangible assets. The AG should either review a valuation completed by the parties involved in the transaction, using an independent expert, or hire an independent expert to conduct a complete evaluation. The AG should have the authority to charge the cost of these activities to the parties involved in the transaction.
Require assets from a nonprofit hospital conversion to be set-aside in a nonprofit foundation dedicated to serving unmet health care needs in the local community. Require any proposal by the original nonprofit or the foundation board to amend the original charitable purpose to be reviewed in a public meeting, with public notification and comment.
Ensure the board of the foundation receiving the charitable assets from a nonprofit conversion is independent from the entities involved in the transaction and reflects the diversity of the community.
Require the AG to approve or disapprove all transactions involving a material amount of assets or a change in control from nonprofit to for-profit status before the transaction is complete. Approval should be based on the standards enumerated above. A determination should be made within 120 days of reciept of a completed application. However, no transaction should ever be "deemed" approved.
