July, 1998
Preserving the Charitable Trust:
Nonprofit Hospital Conversion in Texas
This article was written by the Consumers Union Southwest Regional Office.
Nonprofit to for-profit hospital and health plan conversions 1 represent the transfer of hundreds of millions of charitable dollars out of the public domain and into the hands of big corporations and their investors--possibly the largest transfer of public assets in history. This study examines the conversion of five Texas hospitals (one public and four nonprofits) to determine whether existing law adequately protects the public interest in these valuable community assets.
The Case Studies
Consumers Union Southwest Regional Office (CUSWRO) studied five hospital transactions valued at approximately $444 million: the sales of one public hospital and three nonprofit hospitals to for-profit corporations and one joint venture between a nonprofit hospital and a for-profit health corporation.
We reviewed tax returns, annual reports, and news reports, and attempted to gather actual transaction documents. We interviewed nonprofit hospital administrators, foundation board members, and members of the public interested in the transactions. From these sources we developed a snapshot of nonprofit hospital conversions in Texas, the information publicly available, and the disposition of the assets.
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When the public has access to transaction documents and valuation estimates, an open process can result in a better deal with assurances that funds previously used for indigent care continue to be used for indigent care. |
- Nonprofit hospitals do not release to the public (and therefore would not release to CUSWRO) actual documents related to the transaction, such as the sale agreement, management agreements, valuation estimates, or compensation arrangements. Even years after a transaction, nonprofit foundation board members, who continue to hold the former hospital's documents, refuse to release them (see all case studies except for Northwest Texas Hospital).
- Without access to transaction documents, CUSWRO was unable to evaluate whether for-profit corporations paid an appropriate price for the nonprofit assets they purchased or control. In many cases, because of conflicting reports, we were unable to determine exactly what price they paid. The state's Nonprofit Corporations Act requires "all records, books, and annual reports of the financial activity of the (nonprofit) corporation" to be public. A nonprofit's conversion to for-profit status is probably the single most important financial action a board can take and transaction documents should be available to the public.
- Currently, nonprofit hospitals notify neither the Attorney General nor the public about pending transactions, and negotiations with for-profit buyers are held in secret (see case studies Providence Memorial Hospital and St. David's Health Care System). In none of the nonprofit hospital transactions we reviewed did the parties hold public hearings on the value or future use of the nonprofit assets.
- Without access to information, members of the public are not able to intervene effectively to protect valuable charitable resources (see case studies for Providence Memorial Hospital and Gilmer Medical Center).
When the public has access to transaction documents and valuation estimates, an open process can result in a better deal with assurances that funds previously used for indigent care continue to be used for indigent care (see case study Northwest Texas Hospital).
- While some foundations created from the disposition of sale proceeds continue to support health services in the community, as required by law, not all communities benefit in this way. One foundation uses its funds to support a number of non health-related causes, while another large nonprofit absorbed the proceeds into its statewide system and removed them from the community (see case studies for Angelo Community Hospital and Gilmer Medical Center). Conversion foundations that use funds from the sale of a 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 (cy pres) their original purpose as possible.
- Foundation boards and management are not necessarily independent of the parties that negotiated the sale and conflicts of interest may exist. Most foundation boards are composed of the same individuals who made the decision to sell the hospital in the first place (see case studies, Providence Memorial Hospital, Angelo Community Hospital).
- Joint ventures pose a unique set of problems because the nonprofit hospital changes to for-profit ownership but its value is not set aside for charitable health purposes. Instead, the nonprofit corporation now owns a single asset (its share of the partnership) upon which all its fortunes rest. In cases where the partnership is not clearly controlled by the nonprofit partner, which can assure that the partnership uses the charitable assets only in furtherance of a charitable mission, the new venture may violate IRS rules and threaten the 501(c)(3) status of the nonprofit (see case study, St. David's Health Care System).
- Transactions involving public hospitals do not come under the scrutiny of the Attorney General. They also require oversight to ensure that the tax dollars used to fund these services continue to be used for the purposes for which they were collected, that is, for health care.
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