Though some states have begun to protect charitable assets when healthcare organizations convert from not-for-profit to for-profit status, most have repeatedly failed to preserve the full value of those assets and lack a regulatory structure for review of conversion plans.
The Council on the Economic Impact of Health System Change conducted a nationwide survey to ascertain what legislative actions states were taking to protect charitable assets. It found that 10 states had passed legislation, four had bills pending, 28 had no legislation in mind and eight states either didn't respond or didn't provide a clear answer.
Several state officials correctly pointed out that states have been able to exercise authority over hospital conversions through existing legal doctrines. By applying the laws governing charitable trusts, states can regulate any transaction that involves a change in the use of those trusts. States also have employed common-law powers to protect assets belonging to the public.
Nevertheless, the recent history of healthcare conversions is rife with tales of insufficient valuation of charitable assets and enormous private enrichment at public expense. Many of these have previously been reported in MODERN HEALTHCARE. Such conversions amount to the largest transformation of charitable assets in American history, involving billions of dollars.
There are many advantages that accrue to states that pass legislation specific to health industry conversions. Chief among these is that states can establish a process for pre-conversion submission of all relevant documents and information so they can be reviewed by the appropriate authorities. Such a process also can obligate the state to expedite its review and decision process within a set amount of time.
An established process also can be used to inform all stakeholders and interested citizens to encourage their input and involvement in the decisionmaking of industry executives and the healthcare entity's board members. Without such involvement, interested parties are left to the vagaries of litigation. A process of advance submission and review is far preferable than the alternative of dueling lawsuits.
Legislation can take different forms depending on the level of regulation policymakers decide on.
What we at the Council on the Economic Impact of Health System Change call Level I regulation calls for the control of conversions to safeguard and conserve the full value of the not-for-profit's assets and ensure that all proceeds from the conversion are used for appropriate charitable purposes.
Level II calls for the regulation of conversions to ensure that the community continues to have access to needed amounts of healthcare services and that the community is satisfied with the degree of local control over its healthcare delivery system.
We at the council distinguish between these levels because we believe all states have a compelling interest in instituting the first level of regulation as soon as possible. The structure of the healthcare delivery system is changing quickly, and the integrity of billions of dollars of charitable assets is at risk.
How one feels about Level II regulation may be related to how one feels about for-profit healthcare. Proponents of conversions contend they are necessary to help develop a more market-oriented, efficient healthcare system that will make healthcare more affordable and accessible. Opponents argue that for-profits provide less charitable care and community benefits and that apparent efficiencies may actually reflect reductions in service and quality.
To some extent, both may be right. The council believes that Level II regulations can be appropriate, particularly regarding access to health services for underserved populations. At the same time, however, we are concerned that too much regulatory power could be used to maintain status quo interests and to keep out strong for-profit competitors. Such regulatory power could be counterproductive and increase costs.
The council interviewed respondents from states that had enacted legislation to see if they also sought authority to stop or regulate the terms of a transaction if, in the view of the state, the conversion would not be beneficial to the community. States that had such broad powers are California, Mississippi, Nebraska, North Carolina and Pennsylvania. States that had legislation but without such broad powers included New York, Tennessee and Virginia. Oklahoma's response was unclear, while legislation is pending in Massachusetts, Michigan, Missouri and New Jersey.
States that passed legislation did not seem to follow any predictable pattern in terms of geographical location or for-profit penetration. However, it appears that some states probably initiated activity in response to specific conversion cases.
Our survey was presented to the Council on the Economic Impact of Health System Change on Oct. 4. We also presented a comprehensive study of hospital conversions in which we examined the impact of the growth of for-profit organizations on the healthcare delivery system and examined issues regarding the provision of charitable assets that we find compelling and that constitute the real urgency facing policymakers.
More than $1.6 billion of community hospital assets were sold in 1995, and the pace of conversions continues unabated. We believe that state policymakers should consider regulatory initiatives without delay.
Andrea Fishman, a student at Brandeis University and a staffer at the Council on the Economic Impact of Health System Change, also contributed to this article.