Stung by mounting investment losses, some of the nation's largest healthcare "conversion foundations" are being forced to curtail their grantmaking, raising questions about the aggressiveness of their investment strategies and heightening the debate on the proper use of charitable assets.
The California HealthCare Foundation-created by the for-profit conversion of Blue Cross of California in 1996-has suspended funding of almost all new external research projects next year as its grapples with growing budget constraints. The Oakland, Calif.-based foundation has lost roughly 25% of its total assets in the past two years because of ongoing declines in the stock market. Its endowment now stands at $630 million.
"As with several other foundations, we feel a need to more carefully focus our grantmaking, because there is less money available," said CHCF President and Chief Executive Officer Mark Smith, M.D.
The organization still plans to give away about 6% of its assets next year, largely to research projects initiated in-house, Smith said. That's the same percentage granted in each of the last two years, but in dollar terms, it's significantly less-about $37.8 million, down nearly 25% from about $50 million in 2001.
The California Wellness Foundation, created by the for-profit conversion of insurer Health Net in 1992, said its endowment is down 9% this year to about $1 billion. Although the organization plans to maintain its current 6% giving level next year, "if the stock market continues to struggle and our endowment continues to suffer, the future is a big question mark," said foundation spokesman Julio Marcial.
Anne Schwartz, vice president of Grantmakers in Health, Washington, stresses that these foundations are all still meeting their legal obligations. The Internal Revenue Service requires tax-exempt foundations to give away an average of 5% of assets per year.
Others, however, view the belt-tightening as socially irresponsible at a time when the nation's uninsured population is growing, employers are scaling back their benefits packages and local governments are slashing funding of public-health programs.
"It's precisely during difficult financial times like this that foundations are needed the most," said Daniel Borochoff, president of the American Institute of Philanthropy, a Chicago-based watchdog organization. He and others questioned whether foundations should have taken such risky investment bets.
Most foundations hold roughly 65% to 75% of their assets in equity and 25% to 35% in fixed-income securities like bonds, said the CHCF's Smith, adding that this is a "usual" split for "balanced" investment portfolios. But some experts say not-for-profit or charitable organizations must invest cautiously.
Several not-for-profit health systems have come under scrutiny for pursuing overly aggressive investment strategies (Nov. 4, p. 34); last week, the Cleveland Clinic was slammed in the local press and the financial community for losing roughly $340 million in the stock market during the past two years.
This debate about the proper handling of charitable assets has heightened as a growing number of hospitals and health plans have shed their not-for-profit status. Today, there are 139 conversion foundations-holding a combined $15.3 billion in assets-up from 73 in 1995 and just 21 in 1985, according to Grantmakers.
Common law requires the assets of these foundations to be used for the same charitable purposes as originally intended. Scott Benbow, staff attorney for Consumers Union in San Francisco, pointed to last month's for-profit conversion of WellChoice, the parent of New York's Empire Blue Cross and Blue Shield, as a particularly "egregious" case of funds being diverted from their true purpose. In that case, state legislators had earmarked 95% of WellChoice's $1 billion in assets to pay for raises to private hospital workers (Nov. 18, p. 14). A New York Supreme Court justice has since barred state officials from spending any of the money until a court decides whether salary hikes are a legal use of the community funds.