Existing Resources related to Conversion and/or Sale of Nonprofit Healthcare Organizations to For-Profit Companies

To follow are brief descriptions of, and website linkages to, significant publications and organizations in addition to the Alliance focusing on conversion and/or sale of nonprofit healthcare organizations (providers and insurers) to for-profit companies.

PUBLICATIONS

"Conversion FYI"
This quarterly report, co-produced by Community Catalyst and the west coast office of Consumers Union, both of which organizations are described in the next section, seeks to provide the latest information from around the country on hospital and insurance conversions, mergers, bankruptcies and restructurings. Current and past issues are available on its website, www.communitycatalyst.org.

"BlueCross BlueShield Update"
This quarterly report, also produced by Community Catalyst and available on its website, seeks to provide the latest information on Blue Cross Blue Shield plans that are proposing to convert or that have already done so.

Model State Legislation to Regulate Conversions
In mid-1998 the National Association of Attorneys General approved model state legislation related to the reguation of conversions. This document is available on its website, www.naag.org.

In October 2003 Consumers Union released its own model state legislation to regulate conversions. It is available on its website, www.consumersunion.org, in the Health Care section.

In addition, Volunteer Trustees of Not-For-Profit Hospitals, described briefly in the next section, has available on its website, www.volunteertrustees.org, "Proposed Guidelines for State Regulators’ Oversight of Sale and Joint Venture Transactions in Which the Assets of Nonprofit Hospitals or HMOs are Transferred to For-Profit Enterprises".

"When Your Community Hospital Goes Up for Sale"
This 42 page document, published in 1996 by the Volunteer Trustees Foundation (a subsidiary of Volunteer Trustees of Not-For-Profit Hospitals), provides guidance to hospital trustees on what they can do about proposed conversions. This publication received financial support from the Commonwealth Fund, the Public Welfare Foundation and others. Copies can be obtained by calling 202-659-0338.

"The Sale and Conversion of Not-for-Profit Hospitals: A State-by-State Analysis of New Legislation"
This document, self-explanatory, was also published at about the same time by the Trustees Foundation and can be obtained by calling 202-659-0338.

"Nonprofit Health Insurers: The Financial Story Wall Street Doesn’t Tell"
This white paper, written by Susan R. Barrish and commissioned by the Alliance, provides evidence that nonprofit health plans are financially healthy overall. Contrary to the argument made by Wall Street investment firms that an infusion of equity capital is critical to insurers’ survival, Ms. Barrish concludes that nonprofits have been more successful than for-profits in "implementing a capital-building and retention strategy—without access to the equity capital market, when you compare NAIC’s risk-based capital formula for managed care organizations." Click here to view this document.

The For-Profit Conversion of Nonprofit Hospitals in the U.S. Health Care System: Eight Case Studies
This 30 page report, published in May 2001, presents findings of a retroactive study by researchers Sara Collins, Brad Gray and Jack Hadley on the conversion of eight hospitals in the states of Florida, Illinois and California in 1990. Overall, the findings of the study, supported by the Commonwealth Fund, challenged the conventional wisdom about the ability of for-profit purchasers to turn around failing nonprofit hospitals in competitive markets.

The study found that in most of the cases, particularly those in urban and suburban locales where the purchasers were multi-hospital for-profit systems, the purchasers did not have long range strategies. They tended to make minimal investments in the aging physical plants, relied on short-term fixes such as changes in billing practices, experienced high rates of administrator turnover, and underwent subsequent sales or mergers. The study also found that most of the hospitals in the sample did not experience a decline in their community benefit activities, not having engaged in them prior to conversion. There was evidence, however, of decline in teaching, research and care to the uninsured in two cases.

This document is available on the Commonwealth Fund’s website, www.cmwf.org (publication #455).

"Fiscal Options for America’s Best Hospitals"
This 8 page article by Thomas P. Weiland and Glenn M. Pearl, appearing in the June 2001 issue of Managed Care Interface, published by Medicom International, reports on a study contrasting the fiscal health of fifteen of the best teaching hospitals with that of the largest investor-owned chains, HMOs and physician practice management companies. While finding that about half of the former were experiencing some fiscal distress, the authors found even more serious weaknesses in the latter, in both operating margins and debt-equity ratios. The authors contend that, "aside from raising possible ethical, quality and cost issues, this financial analysis suggests that conversion by America’s top teaching hospitals from nonprofit to for-profit might not guarantee an improvement in their long-term fiscal outlook." The article is available on Medicom’s website, www.medicomint.com

Proposed Conversion of CareFirst BlueCross BlueShield of Maryland
The website of the Maryland Insurance Commission, www.mdinsurance.state.md.us, contains a wide range of information about the proposed conversion and sale of CareFirst to Wellpoint Health Networks, including the decision by State Insurance Commissioner Steve Larsen to disapprove the proposal, transcripts of depositions and hearings, expert reports, insurance commission media statements, RFPs for consultants to the commission, and CareFirst’s application. The Maryland Hospital Association provided strong opposition to the conversion. This Website also includes a subsequent legislativelv mandated report by the insurance commission analyzing potential legal violations by CareFirst and the potential needs for further legislation to ensure appropriate future regulation of nonprofit health service plans in the state.

A 117 paper by Carl J. Schramm of the Abell Foundation, released in November 2001, entitled "Blue Cross Conversion: Policy Considerations Arising From a Sale of the Maryland Plan." concludes that "the loss of Maryland’s commitment to a system that protects the poor and the otherwise uninsurable, while providing a predictable environment for the State’s hospitals and insurance companies, would be an intolerable price to pay for CareFirst’s corporate ambitions." The author also notes that ‘there are no economic or business reasons why Blue Cross of Maryland should be sold. Similar transactions involving other Blue Cross plans have not benefitted the communities in which those plans operate by achieving lower premiums or better service. The percentage of premiums that are paid out for medical claims is significantly lower in for-profit plans than non-profits."

The American Health Lawyers Association published in October 2003 "CareFirst Conversion: A Road Map for Nonprofit Corporate Responsibility", examining what can go wrong in a major nonprofit conversion and what other state regulators will be examining when it happens. This paper is available for purchase and downloading on the association’s website, www.healthlawyers.org.

An April 8, 2003 article in the Baltimore Sun, by staff writer M. William Salgane, reports on the Maryland General Assembly’s unanimous approval of legislation "locking CareFirst’s mission into law", giving state regulators the power to review executive pay and severance packages, and controlling the appointment of most of the board members. The article is available at by clicking here.

Consumer Catalyst, noted earlier and in the next section, also includes on its website an analysis and comments on the CareFirst conversion.

"The Curious Conversion of Empire Blue Cross"
The July/August 2003 issue of the Health Affairs Journal (Project Hope) includes an 18-page article by James C. Robinson, a professor of health economics at the University of California at Berkley, chronicalling the seven-year political and legislative battle that ultimately culminated in the conversion of Empire Blue Cross to a publicly traded company. The author notes that "the philosophical question of whether to convert should have been addressed prior to the posing of the political question of who should receive the organization’s assets subsequent to conversion. As a practical matter, however, the changing responses to the second question exerted a decisive influence over answers to the first. Each of the stakeholders began with a philosophical opposition to for-profit insurance and then switched in favor of conversion in anticipation of obtaining control of the assets".

This article is available on the Health Affairs website, www.healthaffairs.org.

Sale of Health Midwest
The website of the Office of the Attorney General of Missouri, www.ago.state.mo.us, contains a July 23, 2003 news release on Attoney General Jay Nixon’s final settlement agreement with Health Midwest, a large multi-hospital system, on its sale to HCA Inc. and on the creation of a new independent foundation to serve the greater Kansas City area with more than $425 million in assets. (A Kansas foundation was also formed in a separate agreement between Health Midwest and the state of Kansas, with the foundation receiving 20 percent of the assets from the conversion.) The website also has links to the actual final settlement document and to testimony at public hearings by Health Midwest (claiming capital shortfalls) and others.

Proposed Conversion of Blue Cross and Blue Shield of Kansas
The website of the Kansas Insurance Department, www.ksinsurance.org, provides a wealth of information about the proposed conversion and sale of this nonprofit health plan to Anthem Insurance Companies, including the proposed sale agreement, testimony by a variety of interested parties, and the findings and February 11, 2002 order by the Kansas Insurance Commissioner disapproving the conversion. The Kansas Supreme Court’s website, www.kscourts.org, provides an August 6, 2003 press release and summary of its unanimous decision to uphold the Insurance Commissioner’s decision.

Proposed Conversion of Premera Blue Cross
The website of the Washington State Office of the Insurance Commission, www.wa.gov/special/premera, provides historical and current information on this proposed conversion to a publicly held company. A decision will be made in 2004. This website contains legal filings by various parties, information about expert consultants, the May 2002 application by Premera to convert, testimony at public hearings held to date, and information about future public hearings.

To see the Alliance’s Special Report on this proposed conversion on the Alliance’s website, click here.

Out-of-State Transfer of Assets by Banner Health from Sales of Some of its Providers
In 2002 Banner Health, a nonprofit system with headquarters in Phoenix and provider holdings in eight states, sold a number of its facilites, both hospitals and nursing homes, which were located in North Dakota, South Dakota and New Mexico. In these cases, the sales were to other nonprofit healthcare organizations, rather than to for-profit companies. The attorneys general in these three states each sued Banner to prohibit the sales proceeds from being diverted to Banner’s headquarters, arguing that long-standing tax exemptions and private philanthropic donations created an implied trust, and that the sales proceeds are therefore subject to the law of charitable trust and must not leave the areas served. Banner counter-sued in U.S. District Court each case, claiming among other things that the state laws do not grant state control over the sales, that the facilities were sold to other nonprofits better prepared financially to meet future needs and that Banner had itself invested, time, effort and millions of dollars in the maintenance and expansion of facilities.

Law suits in New Mexico have been dropped, with Banner agreeing to provide $4 million for local charities and $4.5 million to pay off debt. In North Dakota, in August 2003 a judge within the state dismissed the state attorney general’s suit, ruling that he had failed to prove that Banner had an implied agreement with the state and the communities served. See the article at www.bizjournals.com. In December 2003, in the midst of an appeal to the state supreme court, the state attorney general and Banner reached an out-of-court settlement wherein Banner will pay $1 million in proceeds from the sales of facilities in North Dakota into a charitable trust for the benefit of the affected communities. One of the reasons stated for the settlement was the novel and untested legal theories involved in the suit. In South Dakota, the state supreme court ruled in May 2003 that the assets of a nonprofit healthcare corporation, and proceeds from any sale, are subject to the law of charitable trust, and that an out-of-state corporation must leave charitable assets with the local community. The court also held that banner’s corporate officers may have breached their fiduciary duty to the facilities sold. This case will now proceed to trial in U.S. District Court.

(See the article at www.consumersunion.org.)

ORGANIZATIONS (in addition to the Alliance)

Community Health Corporation
This organization, established in 1996 by VHA Southwest, a cooperative of nonprofit hospitals in Texas and New Mexico and supported by working capital from a number of VHA Southwest’s members and from VHA, Inc., seeks to "preserve the not-for-profit status of community-based healthcare organizations…and to help them improve operations and care through partnership and shared vision." CHC assists community hospitals with education and consultative services, managerial support, leasing or purchasing of hospitals and participation in joint ventures. Since 1997, CHC has provided consultative assistance to more than 36 hospitals, primarily focused on privitization of publicly governed hospitals. It has also conducted community campaigns to prevent conversions to for-profit and has coordinated the acquisition of for-profit hospitals by nonprofit organizations. CHC currently has three leased hospitals in Texas and New Mexico and has acquired two hospitals in Texas. Its education and consulting services are offered throughout the U.S.

More information about CHC is available on its website, www.communityhealthcorp.org.

Community Catalyst
This organization grew out of and became separate from the Boston office of Families USA in 1997.

In addition to the conversion-related publications noted in the previous section, Community Catalyst has a monthly newsletter posted on its website, www.communitycatalyst.org, and has initiated a Community Health Assets project in partnership with the west coast office of Consumers Union. With support from the W.K. Kellogg and Ford Foundations, this Project provides legal and policy analyst support on conversions and held its first conference on November 13-14, 2003, in Chicago.

Consumers Union
Consumers Union, publisher of Consumers Report , is an independent, nonprofit testing and information organization serving consumers. They have three advocacy offices (Washington, DC, Austin, TX and San Francisco, CA) and a Consumer Policy Institute (Yonkers, NY) addressing policy issues affecting consumers, including nonprofit healthcare conversions. In addition to the publications noted in the previous section, its website, www.consumersunion.org, contains a list (with website links) of selected conversion-related articles, testimony, press releases, et al over the past four years.

Volunteer Trustees of Not-For-Profit Hospitals
As noted in the previous section, this organization, based in Washington, DC, published several documents on conversions in 1996 and 1997. Its website, www.volunteertrustees.org, does not describe any more current work related to conversions per se. It holds an annual national conference in the fall.

Duke Center for Health Policy Law and Management
This Center has on its website, www.hpolicy.duke.edu/cyberexchange/conversion/regnconv.html, a list of articles and other publications on conversion, both general and state-specific.