July, 1998
This article was written by the Consumers Union Southwest Regional Office.
In spite of limitations placed by charitable trust laws on the use of nonprofit assets, nonprofit hospital conversions in the U.S. have been occurring at a rapid rate since 1980, primarily in the largest states--California, Texas and Florida. Between 1980-90, 110 nonprofit hospitals nationwide converted to for-profit ownership.2
More importantly, the number of conversions between 1993 and 1997 alone far outpaced the previous decade. Since 1993 more than 170 transactions between nonprofit hospitals and for-profit corporations occurred. 3 In 1995 alone, $1.6 billion in nonprofit hospital assets were transferred, representing a staggering shift of charitable dollars across the country.4
Nonprofit conversions in Texas also accelerated in the 1990s. Between 1980 and 1990, 19 nonprofit hospitals converted to for-profit ownership status.5 Another 15 nonprofit hospitals converted to for-profit status between 1990 and 1996, seven of them converting in 1996 alone.6
For-profit proponents claim that conversion to for-profit status positions a hospital to better serve its community, because it increases the tax base, increases the efficiency of the regional hospital system and improves the hospital's ability to raise capital. According to the Federation of American Health Statistics, an association of for-profit hospitals, publicly traded hospital groups are able to raise capital by using equity financing or low cost debt financing that is not available to nonprofit systems.7
On the other hand, non-profit hospitals have access to tax-exempt bond financing that is unavailable to for-profit systems. Further, studies of efficiency conducted in the 1980's found that for-profits generally had higher costs and greater markups than nonprofits. "The few studies that have been done subsequently have not shown major differences in efficiency between for-profit and nonprofit hospitals," wrote Gerard Anderson, Professor of Health Policy and Management, Medicine and International Health at Johns Hopkins University.8 Finally, while a for-profit hospital pays local taxes, the money generated is not necessarily used for health care services.
For-profit companies may purchase a nonprofit hospital primarily to gain competitive advantage in the market. "Backed by investors, for-profit chains are buying major nonprofit hospitals as a way of controlling regional health care systems," John H. Parker, an Atlanta based attorney who monitors the industry for nonprofit hospitals, told the San Diego Union Tribune. This lets them dictate prices employers must pay for private insurance and, eventually, what governments must pay for programs for the aged and the poor.9
More directly, publicly traded stock companies can profit immediately from the purchase of a nonprofit hospital. Publicly traded hospital chains typically purchase a nonprofit hospital for a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA)--typically six times earnings. But the chains themselves are now valued by the market at fifteen to twenty-five times earnings. This difference gives the chain new money for investment in additional hospital purchases.10
For example, a community hospital that makes a one year profit of $10 million (before taxes, interest, depreciation and amortization) might sell for $60 million (six times earnings). But this additional annual profit may be valued by the market at $180 million (18 times earnings.) The difference of $120 million is a windfall for the for-profit that it can use to purchase yet another hospital.
For-profits also gain access to or control of intangible nonprofit assets, including the acquired hospital's local name recognition, respect, and community support.
For instance, Columbia/ HCA's acquisition strategy primarily focused on purchasing nonprofit hospitals in less regulated metropolitan markets (as in Texas where no hospital certificate of need program exists, for example), with an existing client population base, prior ownership of facilities in the area and the potential for facility consolidation. Through its acquisition and merger strategy, Columbia/ HCA sought to become a powerful and profitable presence in the markets in which it operates. 11
While Columbia/HCA's acquisition activity has slowed significantly (it now plans to sell many of the hospitals it acquired in the past five years), other for-profit companies, such as Tenet Healthcare Corporation, remain active around the country.12
Finally, nonprofit conversion may present an opportunity for insiders, including board members or directors, to receive attractive financial benefits. While federal and state tax rules prohibit private inurement (benefit) in transactions involving charitable organizations, the opportunity for personal financial gain by nonprofit hospital execu tives and managers is considerable. And, because these deals are conducted in private between directors and their corporate lawyers it is practically impossible to trace impropriety.
The proposed merger between the nonprofit Blue Cross/ Blue Shield of Ohio and Columbia/ HCA failed in 1997 in part due to concern raised by the Attorney General, the media and the public, about benefits accruing to BCBSO chairman and CEO, John Burry, Jr., and certain trustees.13
