The rumblings you feel coming out of California aren't from an earthquake. They're the hint of a backlash developing against the movement to regulate not-for-profit hospital conversions and their leftover charitable foundations.
Last year, California became the second state to pass legislation giving its attorney general oversight authority over the sale of not-for-profit hospitals to for-profit companies. Nebraska was first to do so, and at least a half-dozen states have followed this year.
The California law took effect in January, and the state already has used its extra powers to alter the fate of two transactions in the name of protecting charitable community assets and serving the public interest.
But recently, a new state bill was introduced and quickly withdrawn that would have allowed leftover hospital foundations greater latitude in using their assets.
Its supporters said such a law is needed to correct overly rigid regulations dictating how a foundation's dollars are spent in the community.
The California attorney general objected strongly to such legislation, claiming it would reverse more than a century of case law on the matter.
Ken Maddy, a Republican state senator from Fresno, Calif., introduced the bill on behalf of Good Samaritan Charitable Trust. The trust was created last year when for-profit Columbia/HCA Healthcare Corp. acquired not-for-profit Good Samaritan Health System in San Jose for $165 million.
The deal, which closed in January 1996, endowed the foundation with $56 million, which has since grown to more than $70 million.
Under current California law, leftover foundations such as Good Samaritan Charitable Trust must use their money for purposes similar to those of their predecessor organizations. For Good Samaritan, that means it must spend its money on healthcare services.
Maddy's bill would have allowed a foundation to spend its assets in virtually any manner "in order to maximize the continuing public benefit resulting from the use or expenditure of the proceeds."
Gary Allen, president of Good Samaritan Charitable Trust, said: "Based on a very involved process asking the community about how the funds could best be used, we realized there are few dollars being poured into prevention and wellness. If we were to make major changes in order to keep people out of the hospital, the constraints of existing law are considerable."
In the face of the possible legislation, the state attorney general and Good Samaritan Charitable Trust reached an agreement to set aside $54.6 million, or more than 75% of the trust's assets, to pay for healthcare services for Santa Clara County's indigent population. The remaining $17.2 million would be used for community health and wellness programs-an amount Allen said he considers too low.
The two sides agreed to nullify the agreement if Maddy's bill eventually makes it into law.
The state attorney general is working to make sure that doesn't happen.
In a recent letter to Maddy, California Attorney General Dan Lungren noted that current laws "are premised on the principles of integrity of purpose and keeping one's word" and that not-for-profit community hospitals should not have the same entitlements of asset ownership as for-profit
"Those who contribute to the establishment . . . of such hospitals can rely on the law to ensure that the assets they have created will always be used for hospital and related medical purposes to benefit their communities," Lungren said.
If trust modifications are necessary, he added, they can always be sought on a case-by-case basis through the state court system.
The constituents who would be affected by Maddy's legislation apparently are split in their support of such a bill.
"There is disharmony in hospital land over this bill," said Jim Lott, senior vice president of the Healthcare Association of Southern California. "The (Roman) Catholic and the public hospitals both want the money to be used for hospital purposes only, while others want a broader definition to be used."
While other observers said they believe a change is overdue, they also expressed caution about how legislation is crafted.
"It's a good idea if it allows the community to have more input in the decisionmaking process," said Charles Ewell, president of the Governance Institute in La Jolla, Calif. "But if it's designed to allow foundations to kick back money to a company that set up the foundation in the first place, then some careful questions have to be asked about whether an arm's-length transaction is truly taking place."
Good Samaritan's Allen dismissed Ewell's concerns.
"Those are hollow fears. If we were making contributions to any for-profit organization, we would lose our (Internal Revenue Service) tax-exempt standing," he said. "There's an enormous amount at stake, and those are clanging cymbals being put out to generate fear."
Maddy recently withdrew his bill for consideration in this year's legislative session, planning to reintroduce it next year.