The struggling community of Ottumwa, Iowa, has found a way to drum up tens of millions of dollars for urban redevelopment, college scholarships, a business incubator and dozens of smaller projects benefitting its residents.

But to get there, leaders from across Wapello County had to do what experts say many other community leaders have been loath to do: sell their charitable community hospital to a profit-seeking operator.

In 2010, Ottumwa became the only community in Iowa to host a for-profit acute-care community hospital after Tennessee-based RegionalCare purchased Ottumwa Regional Health Center for $86 million. Proceeds from the transaction went to the creation of a new charity, the Ottumwa Regional Legacy Foundation, which is carrying out an aggressive mission to spend 5% of its endowment annually.

“The good news is, there is new money,” said Brad Little, president and CEO of the Ottumwa foundation. “The bad news is, there's a reason the community has to sell itself: Because it can't raise the money itself.”

More than 200 of these healthcare conversion foundations dot communities across the country, and the assets at their disposal exceeded $17.4 billion as of the last comprehensive national study in 2009, conducted by Washington-based healthcare philanthropy organization Grantmakers in Health. Each foundation's endowment ranges from a couple of million dollars to several billion.

Though their missions vary widely, experts say all of them are formed under the legal principle that tax-advantaged charitable assets should stay in local communities in perpetuity. However, the foundations themselves can serve as magnets for controversy over perceived conflicts of interest, ties to the converted hospitals and roles as watchdogs monitoring promises by for-profit owners.

Many not-for-profits would prefer to merge with another not-for-profit and avoid the need for a foundation, but there's no guarantee that a new charitable owner won't simply close the hospital at some point after the merger, said Bradford Gray, a health policy researcher with the Urban Institute. Mayo Clinic, Cleveland Clinic and UPMC, among others, have closed local hospitals in the past two years that they acquired previously.

Nationally, the 1990s saw an explosion in healthcare conversion foundations, stemming from acquisitions by investor-owned hospital chains such as Columbia/HCA and Tenet Healthcare Corp. and the conversions of Blue Cross and Blue Shield insurance plans into profit-seeking businesses, said Stephen Isaacs, a partner with healthcare foundation consultancy Isaacs/Jellinek in San Francisco.

Clashes over the creation of those foundations, and the lessons learned from 15 years or so of constant operations since then, may offer guidance for what some experts see as a new wave of foundations on the horizon.

“The community engagement from the very beginning that has carried on through has enabled these foundations to be really creative … and open to how they approach issues,” said Susan Sherry, a deputy director with health policy organization Community Catalyst.

In particular, attorneys general and community advocates continue to ask tough questions about preventing conflicts of interest and golden parachutes for former hospital executives who advocate in favor of hospital conversions and then go to work for the foundations—an issue that dogged such foundations in the past.

As Michigan attorney general, Mike Cox imposed strict anti-conflict rules on foundations created after the $1.3 billion acquisition of Detroit Medical Center by for-profit Vanguard Health Systems in December 2010. In California, Colorado and Nebraska, healthcare-conversion laws specifically forbid decisionmakers from benefitting financially through for-profit conversions, including jobs with foundations.

A March/April 1997 article in Health Affairs noted that board-member pay led to public criticisms of some hospital and insurance executives who went on to get paying jobs with foundations. Other potential forms of self-dealing included board members receiving consulting fees or low-priced stock options in the for-profit acquirer.

In Ottumwa, a majority of the nine board members of the conversion foundation have current or past ties to the formerly not-for-profit hospital. That includes two members who voted in favor of the sale as hospital board members, one being legacy foundation board Chairman Tom Lazio.

Lazio said the hospital board made a conscious decision to have two of its members serve initially on the foundation board. “We wanted people who had a background in healthcare and knew the community and would do what it takes to promote the well-being of the community,” he said, noting that the foundation does not pay them and board members file annual conflict-of-interest statements.

Little said one of his first orders of business upon becoming president of the foundation was to move the organization's offices off of the hospital campus to a location in downtown Ottumwa as a sign of its independence from the healthcare provider.

“Initially, we have some representation from the hospital, but there are some things that we are trying to do to distance ourselves from that,” Little said, adding that it can be a challenge to find qualified board members with no hospital ties in a community of 25,000 people where at least 200 people have been affiliated with the hospital board over the years.

Experts say most conversion foundations operate independently of their former hospitals—some are even required by law to maintain independence, under the theory that hospital officials could wield undue influence over the charitable assets.

Ed Kahn, special counsel to the Colorado Center on Law and Policy, said some critics in the state felt that physicians who held dual roles at for-profit healthcare businesses and their legacy foundations in the 1980s had left the charities “partial to the business interests” of the hospitals. Colorado's Hospital Transfer Act of 1998 prohibits close connections between for-profit hospitals and their conversion foundations.

“We thought it was important for the foundation to have a clean start and not be unduly influenced by the progenitor of the process,” Kahn said.

Susan Zepeda, president and CEO of the Foundation for a Healthy Kentucky, which was created after the conversion of a Blue Cross affiliate, said her personal opinion is that it's “very healthy” to create barriers between the new foundation and the former healthcare organization. “I think my strong recommendation is that members of the old board not be the majority of the new board,” she said.

Some foundations have found themselves in adversarial roles with their former hospitals.

Nashville-based for-profit chain HCA found itself in court last October after a conversion foundation it helped establish, the Health Care Foundation of Greater Kansas City, sued it for allegedly failing to meet the commitments HCA laid down in purchasing Health Midwest in 2003, including spending $450 million on capital projects and $300 million on charity care.

HCA Midwest spokeswoman Susan Kaufmann said in an e-mailed statement that a trial was held last October, and a judge is expected to render a decision this year after both sides submit post-trial briefs.

In Michigan, the acquisition of six-hospital Detroit Medical Center led to the conversion of the hospital's former board into an organization now called Legacy DMC, which is charged with monitoring Vanguard's commitments in the deal.

Those include promises to spend $500 million on capital projects and another $350 million on general maintenance at the Detroit hospital system, along with an agreement to at least maintain if not exceed DMC's former charity-care policies. In all, Legacy DMC is monitoring 20 commitments by Vanguard, none of which was violated during the first year.

Joe Walsh, president of Legacy DMC, said the organization is still growing into its watchdog role, including the establishment of templates to monitor spending and policies, and setting up a hotline for residents to report issues. (Keith Crain, chairman of Crain Communications, which owns Modern Healthcare, chairs the Legacy DMC board.)

Legacy DMC also has its own covenants to worry about, Walsh said, because the $150 million set aside following the Vanguard purchase came with many strings attached. “The very, very high majority of those assets represent donor gifts with fairly specific restrictions on their use.” Walsh said.

Since receiving the money, Legacy DMC has transferred $90 million to the Children's Hospital of Michigan Foundation, which will use the funds to benefit pediatric patient care and prevention of childhood diseases, the group's website says. The remaining $60 million will eventually go to the new Health & Wellness Foundation of Greater Detroit, which will use it for grant-making consistent with donors' intents.

Another issue is whether creating a foundation is even feasible.

The $895 million acquisition of Boston's not-for-profit Caritas Christi Health Care by a subsidiary of private-equity firm Cerberus Capital Management in November 2010 did not end with the creation of a conversion foundation, according to a spokesman for the health system, now called Steward Health Care.

Massachusetts Attorney General Martha Coakley, who closely scrutinized the deal before giving her approval, said in a 64-page written statement in October 2010 that forcing Steward to carve out a foundation fund would have just driven up the overall cost of the transaction, since all $895 million went directly to retiring the system's old debts and making long-needed capital improvements.

“To require it to assume the charitable obligations of Caritas, and to pay taxes, and to fund a community foundation, has no basis in law or sound public policy,” Coakley said in the statement. “The attorney general has concluded that the purchase price is fair and reasonable. Requiring an increase in price to fund community foundations is neither appropriate nor reasonable.”

Martin Rash—chairman and CEO of RegionalCare, the investor-owned system whose acquisition created the Ottumwa foundation—said Coakley's statement that a foundation would increase purchase costs was “a bizarre thought.”

In the case of the purchase of the Iowa hospital, Rash said RegionalCare submitted its purchase price without regard to whether a foundation would be established. “When we submitted our purchase price, at that point it was unclear whether there would be a foundation or not, to be candid. It had no impact on the purchase price,” Rash said.

So far, Brentwood, Tenn.-based RegionalCare has acquired seven hospitals since the company started operations two years ago, and the results have been a “mish-mash” of solutions for keeping charitable funds in the local communities, Rash said.

The purchase of 85-bed Clinton Memorial Hospital in Wilmington, Ohio, led to the establishment of a fund of more than $62 million administered through county government. The acquisition of two other community hospitals in Alabama did not result in any foundations because RegionalCare committed to new hospital construction instead, Rash said. “It's really the community that drives it.”