July, 1998
This article was written by the Consumers Union Southwest Regional Office.
1. While these transactions between nonprofit and for-profit hospitals take many different forms, in this report, we will use the term "conversions" to generally refer to all forms, including direct sales, mergers, and joint partnerships.
2. Needleman, Jack, Chollet, Deborah J., Lamphere, JoAnn, "Hospital Conversion Trends," Health Affairs, March/April 1997, p. 189.
3. Kuttner, "Columbia/HCA and the Resurgence of the For-Profit Hospital Business," The New England Journal of Medicine, August 1, 1996, Volume 335: p. 363; and Japsen, Bruce, "Another Record Year for Dealmaking," Modern Healthcare, Dec. 23-30, 1996, p. 37. The figures as reported are: 18 in 1993 (Japsen); 34 in 1994 and 58 in 1995 (Kuttner); and 63 in 1996 (Japsen).
4. Perlman, Ellen, "Healing and Dealing," Governing, December 1997, p. 46.
5. Needleman, et al., "Hospital Conversion Trends," p. 192.
6. Bureau of State Health Data, Texas Department of Health, November 1997; Source: 1990-96 Cooperative TDH/AHA/THA Annual Survey of Hospitals.
7. "Hospital Conversions Issue Paper," Federation of American Health Systems, January 3, 1997.
8. Anderson, Gerard F., "The Role of Investment Bankers in Nonprofit Conversions," Health Affairs, Vol. 16. No. 2, p. 145.
9. Dalton, Rex, "El Paso on Health Care Frontier," July 21, 1996.
10. Anderson, Gerard F., "The Role of Investment Bankers in Nonprofit Conversions," p. 145.
11. Heineccius, Lance, Columbia/ HCA A National Profile, Prepared for the Washington State Hospital Association, Seattle, Washington, December 1, 1995, pp. 18-22.
12. On May 15, 1998, the California Attorney General approved the sale of Queen of Angels Hospital in California to Tenet.
13. Ohio Attorney General's Office, "Attorney General Montgomery Intervenes in Blue Cross & Blue Shield Deal with Columbia/HCA to Protect Charitable Assets," Press Release, July 11, 1996. Columbia/HCA bid $299.5 million in 1996 to purchase Blue Cross/Blue Shield of Ohio (BCBSO), a nonprofit, charitable entity. Community Catalyst, The BCBSO-Columbia/HCA Deal, Boston, MA., 1996, pages 4, 10-16. The deal, which was approved by the BCBSO Board of Trustees, included a provision to provide the chairman and general counsel of BCBSO approximately $10 million for various non-competition and consulting agreements. Solov, Diane and Tatge, Mark, "Government Scuttled Sale of Blue Cross," Cleveland Plain Dealer, February 14, 1998, page 1.C. In addition, former trustees reportedly received sweetheart retirement packages or "golden parachutes" after approving the Blue Cross deal. A civil lawsuit brought by Blue Cross policyholders forced the trustees to return the payments. Solov, Diane and Tatge, Mark, "Government Scuttled Sale of Blue Cross," Cleveland Plain Dealer, February 14, 1998, page 1.C. The Ohio Attorney General intervened in the sale to protect the charitable assets held by BCBSO and the agreement eventually failed in early 1997.
14. Nonprofit Corporation Act, Art. 1396-1.02A(3), 2.01
15. Powers v. First Nat'l Bank of Corsicana, 137 S.W.2d 839 (Tex. Civ. App. &endash; Waco 1940), p. 841.
16. Anderson, Gerard F., "The Role of Investment Bankers in Nonprofit Conversions," p. 146.
17. Tex. Tax Code Ann. § 11.18(d)(1), § 151.310, and § 171.063.
18. Jennings, Diane, "Baylor Aims for Accord on Hospital," Dallas Morning News, March 3, 1997, p. 6A.
20. Nonprofit hospitals are charitable entities. The Texas Property Code defines an organization as charitable if it is organized for the promotion of social welfare or any other 501(c)(3) purpose. (Texas Property Code Ann. § 123.001). ""Charitable entity" means a corporation, trust, community chest, fund, foundation, or other entity organized for scientific, educational, philanthropic, or environmental purposes, social welfare, the arts and humanities, or another civic or public purpose described by Section 501(c)(3) of the Internal Revenue Code of 1986 [26 U.S.C. 501(c)(3)]." Both Federal and Texas law include nonprofit hospitals and other health organizations in the definition of a charitable entity. The IRS states that "in the general law of charity, the promotion of health is considered to be a charitable purpose…..A nonprofit organization whose purpose and activity are providing hospital care is promoting health and may, therefore, qualify as organized and operated in furtherance of a charitable purpose." (Revenue Ruling 69- 545, 1969-2 C.B. 117.) According to Texas case law, charitable purposes include "a) the relief of poverty; b) the advancement of education; c) the advancement of religion; d) the promotion of health; e) governmental or municipal purposes; and f) other purposes the accomplishment of which is beneficial to the community." Powers v. First Nat'l Bank of Corsicana, 137 S.W.2d 839, p. 842 (Tex. Civ. App. &endash; Waco 1940) (citing, inter alia, Restatement of Trusts, § 368).
21. Blocker v. State, 718 S.W. 2d page 415, 411 (Tex. App. &endash;Houston [1 st Dist.] 1986, writ ref'd n.r.e.).
22. Ibid., p. 415. 23 Nonprofit Corporations Act, Art. 1396-2.24A
24. Articles of Incorporations, St. David's Community Hospital, Art. VII, p. 4.
25. Blocker v. State, page 411. See also Isaacs, Stephen, Carr, Willine, Beatrice, Dennis, Health Care Conversion Foundations: 1997 Status Report, Grantmakers in Health, October 1997, p. 18.
26. Nudelman, Phillip, and Andrews, Linda, "The Value Added of Not-For-Profit Health Plans," The New England Journal of Medicine, April 18, 1996, p. 1057.
27. Kuttner, Robert, "Columbia/ HCA and the Resurgence of the For-Profit Hospital Business: Ethics, Cross Subsidization and Markets," pp. 362-367.
28. Gottlieb, Martin, and Eichenwald, Kurt, "A Hospital Chain's Brass Knuckles and the Backlash," The New York Times, May 11, 1997, Sec. 3, p. 1.
30. AHA/TDH/THA Cooperative Annual Survey of Hospitals, Prepared by State Health Data and Policy Analysis, Texas Department of Health, 1998. See also, Texas Statewide Health Coordinating Council, Assuring a Strong Healthy Safety Net in Texas, February 1997, pp. 35-37.
31. American Hospital Association, American Hospital Association Statistics, 1994-95 edition, Chicago: AHA, 1994. These calculations do not include Federal hospitals, which represent less than 5% of all hospitals reporting in the U.S.
32. Kaiser Family Foundation Survey on American's Perceptions About For-Profit and Not-For-Profit Health Care, March 1997.
33. Texas Health and Safety Code Ann. § 311.041 to 311.047.
34. Employee Benefit Research Institute, Estimate of the uninsured population, March 1997 Current Population Survey.
35. Heineccius, Columbia/HCA A National Profile, pp. 26-28.
37. Isaacs, et. al, Health Care Conversion Foundations: 1997 Status Report, pp. 10-11. Three percent of the foundations studied in the report incorporated under 501(c)4 of the IRC, which allows them to engage in lobbying and political activities.
38. Speech by John Vinson, Texas Assistant Attorney General, Consumer Protection Division, Charitable Trusts Section, "Texas Attorney General's Oversight of Nonprofit Health Care Entities," delivered to the 10 th Annual Health Law Conference sponsored by the University of Texas, Houston, Texas, April 17, 1998, p. 4.
40. Isaacs, et. al, Health Care Conversion Foundations: 1997 Status Report, p. 15.
42. Interview with F.L. Stephens, Chairman of the San Angelo Health Foundation board (and former Treasurer of the hospital board), January 6, 1998. Paso Del Norte Annual Report, p. 1 and IRS Form 990, Return of Organization Exempt from Income Tax, Providence Memorial Hospital, 1994.
43. Internal Revenue Service, Rev. Rul. 98-15, 1998-12, Internal Revenue Bulletin, March 23, 1998, p. 4.
44. U.S. General Accounting Office, Not-For-Profit Hospitals: Conversion Issues Prompt Increased State Oversight, Washington, DC, December 1997, p. 29.
45. Texas Property Code § 123.002. "For and on behalf of the interest of the general public of this state in charitable trust, the Attorney General is a proper party and may intervene in a proceeding involving a charitable trust. The Attorney General may join and enter into a compromise, settlement agreement, contract, or judgment relating to a proceeding involving a charitable trust." See also, Miscellaneous Corporations Laws Act, Tex. Rev. Civ. Stat., Article 1302-5.01 et seq., and the Texas Nonprofit Corporations Act, Tex. Rev. Civ. Stat., Article 1396-1.01 et seq.
46. Vinson, John, "A 'Major Revolution' in Texas," Health Affairs, March/ April 1997, p. 99.
47. Hale, Ellen, "When the public is involved in a sale, the deal is usually better," Gannett News Service, October 13, 1996.
48. Kuttner, Robert, "Columbia/HCA and the Resurgence of the For-Profit Hospital Business, Part Two," The New England Journal of Medicine, August 8, 1996, Volume 335: p. 446.
49. Internal Revenue Code §6104(e)(1)(A).
50. Nonprofit Corporation Act, Art. 1396-2.23C.
51. GAO, Not-for-Profit Hospitals, p. 2.
52. Office of the Attorney General, Letter Opinion 98-3327, May 18, 1998. Citing to Texas Business and Commerce Code § 17.61; Texas Miscellaneous Corporations Law Act §1302-5.04.
53. Bell, Judith, Snyder, Harry, Tien, Christine, Silas Julie, "The Preservation of Charitable Health Care Assets," Health Affairs, March/April 1997, p. 126.
54. Hone, Michael, "Introduction to the Revised Model Nonprofit Corporation Act," adopted by American Bar Association's Subcommittee on the Model Nonprofit Corporation Corporate Law of the Business Law Section, 1988, pp. 288-299.
55. Downes, John, and Goodman, Jordan Elliot, Barrons Finance and Investment Handbook, New York: Barron's Educational Series, Inc., 1990, p. 298, 320.
56. Anderson, Gerard, "The Role of Investment Bankers in Nonprofit Conversions," p. 146.
57. Miller, Linda B., "The Conversion Game: High Stakes, Few Rules," Health Affairs, March/April 1997, p. 112.
58. Seto, Natalie, Kathy Collins, Bess Weiskopf, "Protecting Health, Preserving Assets: A Comprehensive Study of Laws Governing Conversions, Mergers, and Acquisitions among Health Care Entities," Community Catalyst, October 1997, p. 31.
59. Matzke, Gerald, "A Road Map from Nebraska," Health Affairs, March/ April 1997, p. 89.
60. Nebraska Legislative Bill 1188, 94 th Legislature, 1996.
61. Matzke, "A Road Map from Nebraska," p. 91.
62. California Corporations Code §§ 5913-5919.
63. Connecticut Public Act 97-188, "An Act Requiring Advance Review and Approval of the Sale of Nonprofit Healthcare Facilities to For-Profit Entities."
64. Wash. Rev. Code §§70.44.007, 70.44.240, 70.44.300.
65. Ohio Rev. Code Ann. §§109.35(E).
66. Georgia Rev. Code Ann. 31-7- 402(a).
67. Ohio Rev. Code Ann. §§109.34(B)(2).
68. New Hampshire Rev. Stat. Ann. 7:19-b(III).
69. Louisiana Rev. Stat. Ann. 40:2115.11.
70. Georgia Rev. Code Ann. 31-7- 402(c).
71. Connecticut Public Act No. 97- 188, Sec. 4(c).
72. Ohio Rev. Code Ann. §§109.35(C).
73. These bills were cosponsored by Representatives Naishtat, Delisi, Hirschi, Berlanga, Glaze, Burnam, Davila, Dukes, Guitierrez, and Kamel; Senators Zaffirini, Gallegos, and West.
74. Senator David Cain (D-Dallas) filed SB1264 and Representative Joe Driver filed HB2746.
75. AARP, The Arc of Texas, Advocacy Inc., Children's Hospital Association of Texas, Coalition of Texans with Disabilities, Disability Policy Consortium, Directors Association of Texas Centers of Independent Living, Harris Methodist Health Care System, Mental Health Association in Texas, National Association of Social Workers/Texas Chapter, Texas Advocates for Special Needs Kids, Texas Association of Public and Nonprofit Hospitals, Texas Association of Homes and Services for the Aging, Texas Brain Injury Association, Texas Conference of Catholic Health Facilities, Texas Nurses Association, Texas Planning Council for DD, Texas Respite Resource Network, University Affiliated Program/Assistive Technology Partnership, United Cerebral Palsy of Texas.
