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What happens if your hospital goes from nonprofit to for-profit?

Lawrence Henze
Published:  03/01/2012

Originally published in the March 1, 2012 AHP Connect

A conversation with James DeLauro, Ph.D., DeLauro and Associates Consulting, San Diego, Calif.

The health care industry is experiencing a surge of hospital mergers and acquisitions the likes of which hasn’t been seen since the 1990s. Some of these are conversions from nonprofit to for- profit organizations. As a result, many AHP members are facing new and complex challenges. Some excellent information came from the experiences of the '90s, and to that end AHP spoke with James DeLauro, Ph.D., who was part of an AHP think tank project in 1996 on managing the movement to for-profit conversions.

AHP: Can you give some background on what happens to a foundation and its assets when a nonprofit hospital is sold to a for-profit company?

DeLauro: A nonprofit hospital is a public asset “owned” by the community, not by shareholders or investors. In exchange for providing charity care and other community benefits, including the reinvestment of any profits for the good of the community, the nonprofit hospital is granted tax-exempt status. Since the hospital is owned by the community, when it is sold to a for-profit company the public is entitled to be compensated for the asset which will now be in private hands.

In the past, when a nonprofit hospital was sold, a substantial amount of money—tens or hundreds of millions of dollars—was paid to either a public nonprofit foundation that was best positioned to continue the charitable mission of the hospital or to the religious order that owned it.

AHP: What are some of the implications for the hospital foundation once the hospital is sold?

DeLauro: If your hospital is sold to a for-profit company, then the hospital is no longer tax exempt and donors can no longer get a tax exemption for donating to it. Similarly, your foundation can no longer donate to the hospital, because it is owned by private investors and any money you give to the hospital would be considered enrichment of the private investors. You can’t give charitable donations to further the business interests of private owners or individuals.

If your foundation still exists after the merger, its purpose would most likely change to support community health programs. There are a number of fairly substantial “conversion foundations” around the country that received millions of dollars in payment from for profit-companies when they compensated the community for the privatization of their hospital asset.

AHP: When a foundation is faced with a conversion, what are some of the key questions development professionals should be asking?

DeLauro: When a foundation gets a huge infusion of funds like this, there is always a scramble to figure out who will control the money. Foundation directors should get as involved as they can in the process. I would want to know details on how the foundation will be compensated from the sale and what the plans are for distributing the funds to the community. In the past, health care was not always the priority.

Also, your foundation won’t exist in the same way. This represents a “sea change” in the size and function of many foundations. The focus will most likely shift from raising money to distributing grants. You will want to think about whether you have the right staff and the right board members, among many other issues.

AHP: How does a conversion change the foundation’s relationship with the community?

DeLauro: If your foundation is no longer seeking donations, the dynamic will change from cultivating donors to having others cultivate relationships with you to receive grants. In the past, backlash against conversions was seen when money was taken out of the immediate community or used for purposes other than health care. I recommend open and ongoing communication with the community you serve.

AHP: In your opinion, did the nonprofit conversions of the 90s end up being good or bad for the health of the communities they served?

DeLauro: That’s something that’s hard to quantify. You could say it’s a good thing if the buyouts allowed struggling hospitals to continue to exist in the community. However, for-profit hospitals may not maintain the same departments and services as nonprofit hospitals if these programs are found to be unprofitable.

On the positive side, the creation of a conversion foundation provides a huge influx of cash that can be spent on community health programs. But this can create challenges as well. It’s a dramatic change in purpose for hospital foundations and they may not be equipped to handle it.

In the end, my top recommendations for foundations going through a conversion are to stay abreast of plans for the sale, keep communication open with your community and reach out to other foundations that have gone through this process and emerged successfully.

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Meet The Author

Lawrence Henze
Managing Director
Target Analytics, a Blackbaud company

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