America's healthcare not-for-profits are converting to for-profit status at a breathtaking pace. Making sure that billions of dollars in charitable assets are protected in such conversions depends on focused and resolute regulators, state legislators and a concerned media and public.
At least 15 Blue Cross and Blue Shield plans are either in the process of or contemplating a change from not-for-profit to for-profit status. Nationally, the number of not-for-profit hospitals merging with or being acquired by for-profit businesses climbed from 18 in 1993 to 176 in 1994.
Columbia/HCA Healthcare Corp., the nation's largest for-profit hospital chain, purchased or entered into joint ventures with 41 not-for-profit hospitals in 1995. The latest rendition of proposed conversions is the announcement by Columbia and Blue Cross and Blue Shield of Ohio of their proposed joint venture.
The public's assets are at risk in this conversion wave. If we follow one course, state regulators and an educated public can at least force converting not-for-profits to transfer the value of their assets to new charitable foundations.
Most state laws require such a transfer, but the results of the recent conversions are mixed. Some have resulted in new foundations, freeing billions of dollars for grants for healthcare projects. Others have turned the not-for-profits' charitable assets into venture capital for the new for-profit and into excessive executive compensation packages.
Recent experiences in California and Georgia illustrate contrasting outcomes. California now has two new grantmaking foundations with total endowments of more than $3 billion, transferred from the not-for-profit Blue Cross of California when it converted into a for-profit company. The foundations, which resulted from years of advocacy by consumer groups, state regulators and a few outspoken legislators, will be devoted to meeting California's health needs.
Georgia, on the other hand, enacted legislation in 1995 that made it much easier for the state's Blue Cross and Blue Shield plan to go for-profit and to argue successfully that it had no obligation to use its assets for any public benefit. Instead of establishing a foundation to improve health, the Georgia Blues is likely to provide executives and investors with a windfall amounting to hundreds of millions of dollars.
The effects of commercializing America's healthcare system are unclear. However, studies by the California Medical Association suggest that not-for-profits devote more of their resources to providing healthcare than do for-profits.
In 1995, the state's largest not-for-profit, Kaiser Foundation Health Plan, devoted 96.8% of its revenues to healthcare and retained only 3.2% for administration and income. In the same year, the newly converted California Blue Cross subsidiary, Wellpoint Health Networks, spent only 73% on healthcare while devoting 27% to administration and profit. In 1995, of the 10 HMOs that spent the highest portion of revenues on healthcare, nine out of 10 were not-for-profits.
Executive salaries are just one part of the differences in administrative costs between not-for-profits and for-profits. In 1994, the for-profit HMO company Health Systems International paid Chief Executive Officer Malik Hasan, M.D., $8.8 million. In contrast, David Lawrence, M.D., the CEO of Kaiser Permanente, has a salary of $803,000, even though not-for-profit Kaiser is the nation's largest HMO.
State regulators are scrambling to understand proposed transactions, meet their responsibilities to protect the public interest and act on proposals. In some cases, regulators don't recognize the distinct public-benefit responsibilities of not-for-profits and fail to enforce laws governing the use of not-for-profits' assets upon conversion. Even when regulators insist on a transfer of assets to a new charitable foundation, these assets often are undervalued, leaving millions of dollars for use by the for-profit corporation.
Equally important is the state legislature's role. Blues plans in particular have sought changes in state laws to make conversions easier and to turn charitable assets into profit. Virginia, like Georgia, allowed its Blues plan to avoid the requirements of the state's not-for-profit code.
Conversely, legislation was enacted in California and Colorado to clarify regulators' roles, increase the protection of not-for-profit charitable assets and define the healthcare obligations of the converting not-for-profits.
The pending controversial Columbia-Ohio Blues joint venture illustrates the complexity of new transactions and the challenges associated with reviewing them.
The proposal involves the transfer of some of the not-for-profit insurance company's assets to a for-profit venture. While Columbia would set aside almost $300 million of charitable assets, this is arguably an undervaluation, and in an unusual twist, the new for-profit company will have access to these funds; they will not be used to confer any broad public benefit.
In addition, the proposed transaction includes more than $12 million in compensation for four Blues executives, mostly in the form of "noncompetition profits." Another highly controversial provision would allow Columbia to purchase the not-for-profit's remaining assets for $1. This last provision makes the description of the transaction as a "joint venture" appear to be merely a smokescreen to avoid state requirements associated with the disposition of a not-for-profit's assets.
To protect not-for-profit charitable assets, state regulators and legislators should enact the following policies requiring:
Public notice, access to documents and public hearings to review proposed transactions.
The transfer of 100% of the not-for-profit's assets to an independent charitable foundation, using a fair market value to determine the amount to be transferred.
The appointment of an independent legal counsel to ensure that the foundation's interests are represented, even before it has officially been created.
Assurance that a new foundation be governed by a new, independent board of directors reflecting the community, and that the directors and staff follow strict conflict-of-interest and accountability rules.
There isn't a lot of time left for action. For not-for-profit charitable assets to be preserved, the public and media must be vigilant. Regulators and legislators must act to protect the public's interest. Failure to act will mean that billions of charitable dollars for healthcare will be lost forever.
Christine Tien, Consumers Union projects manager in the West Coast regional office, also contributed to this article.