oversight

Not-for-Profit Hospitals: Conversion Issues Prompt Increased State Oversight

Published by the Government Accountability Office on 1997-12-16.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to Congressional Requesters




December 1997
                 NOT-FOR-PROFIT
                 HOSPITALS
                 Conversion Issues
                 Prompt Increased State
                 Oversight




GAO/HEHS-98-24
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Health, Education, and
      Human Services Division

      B-275380

      December 16, 1997

      The Honorable Pete Stark
      Ranking Minority Member
      Subcommittee on Health
      Committee on Ways and Means
      House of Representatives

      The Honorable William J. Coyne
      Ranking Minority Member
      Subcommittee on Oversight
      Committee on Ways and Means
      House of Representatives

      Growing competition, spurred by the growth of managed care, and the
      need for capital investment are driving not-for-profit hospitals to sell to or
      establish joint ventures with for-profit companies. Between 1990 and 1996,
      national surveys estimated that 192 of the more than 5,000 not-for-profit
      hospitals in the United States converted to for-profit status. In 1996 alone,
      more than 60 not-for-profit hospitals converted to for-profit status.
      Not-for-profit hospitals have traditionally provided charitable community
      services, including uncompensated care for the uninsured and
      underinsured. In exchange for providing these community benefits, most
      not-for-profit hospitals have received financial benefits, such as exemption
      from federal, state, and local taxes and access to tax-exempt bond
      financing. In general, not-for-profit hospitals are viewed as charitable
      assets that belong to the community. Consistent with this perception, the
      proceeds from hospital conversions are generally directed to not-for-profit
      foundations or other charitable entities. Concerns have been raised about
      the potential loss of community benefits resulting from conversions as
      well as charitable entities’ use of conversion proceeds for
      nonhealth-related activities. Issues have also been raised regarding public
      disclosure, including the extent of community involvement in the
      conversion transactions.

      In response to these concerns, you asked that we review the process that
      some not-for-profit hospitals have used in converting to for-profit status.
      Specifically, we determined for selected conversions (1) the method used
      to value assets; (2) the process used to solicit interest and obtain bids;
      (3) some of the terms negotiated as part of the sales agreement, including
      provisions for continued charity care; (4) the extent of community
      involvement in the process; and (5) how the proceeds from some of the




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sales were used to fulfill charitable missions. We also determined the role
state and federal governments play in regulating and monitoring hospital
conversions.

To identify recent conversions, we obtained a list of not-for-profit hospital
conversions that occurred after 1990 from three major investor-owned
corporations: Columbia/HCA Healthcare Corporation,1 Quorum Health
Group, and Tenet Healthcare Corporation. We selected six states and 14
sites in order to include the following: asset sales and joint venture
transactions; states and sites with multiple conversions, conversions
involving multiple investor-owned companies, or both; and transactions in
which the proceeds were directed to foundations (see table 1). As part of
our site visits, we interviewed hospital officials, attorneys who
represented the not-for-profit hospitals, not-for-profit hospital board
members, foundation presidents and board members, outside consultants
hired to advise the not-for-profit hospitals, and attorneys in the state
attorneys general offices. We also held discussions with officials of the
Internal Revenue Service (IRS), Department of the Treasury, Federal Trade
Commission (FTC), and Department of Justice; health care associations;
interest groups; and investor-owned companies. In addition, for some of
the conversions, we obtained and reviewed documents related to the
transaction.

Further, for some of the conversions, we were not provided documentary
evidence to support information we received through discussions with
officials involved in or knowledgeable about the transactions. For
example, although we requested purchase or partnership agreements,
valuation estimates, and support for the amount of proceeds that resulted
from the conversion, in most cases, neither the not-for-profit nor the
for-profit parties involved in the conversion would provide a copy of their
complete contractual agreement or documents to support valuation
estimates or proceeds. Officials said that they could not provide
documentation because of confidentiality agreements. However, we did
obtain other documentation, including selected segments of contractual
agreements to support terms negotiated, as well as other forms of
documentation on purchase price for most of the transactions we
reviewed.

In our review of the conversion process, we also determined what
processes were used to value hospitals’ assets and derive a final selling

1
 In Feb. 1994, Columbia merged with HCA to form Columbia/HCA Healthcare Corporation. The list of
not-for-profit conversions we received from Columbia/HCA contains conversions for the merged
entity.



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price. We did not determine whether the hospitals were sold at fair market
value. (See app. I for a detailed description of our objectives, scope, and
methodology.) Our work was performed between October 1996 and
November 1997 in accordance with generally accepted government
auditing standards, except where noted above.




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Table 1: Sites Visited
                         Not-for-profit hospital           For-profit company        Conversion type                 Year
                         Alabama
                         Baptist Memorial Hospital         Quorum Health Group Asset sale                            1993
                         Jacksonville Hospital (city-      Quorum Health Group Asset sale
                         owned)                                                                                      1996
                         Lloyd Noland Hospital             Tenet Healthcare          Asset sale
                                                           Corporation                                               1996
                         California
                         Good Samaritan Health             Columbia/HCA              Asset sale
                         System                            Healthcare
                                                           Corporation                                               1996
                         Louisiana
                         Mercy Baptist Medical Center Tenet Healthcare               Asset sale
                                                      Corporation                                                    1995
                         Tulane University Hospital        Columbia/HCA              Joint venture
                                                           Healthcare
                                                           Corporation                                               1995
                         South Carolina
                         Mary Black Memorial Hospital Quorum Health Group Asset sale                                 1996
                         Carolinas Hospital System         Quorum Health Group Asset sale                            1995
                         Hilton Head Hospital              Tenet Healthcare          Joint venture
                                                           Corporation                                               1994
                         Tennessee
                         Goodlark Regional Medical         Columbia/HCA              Asset sale
                         Center                            Healthcare
                                                           Corporation                                               1995
                         St. Francis Hospital              Tenet Healthcare          Asset sale
                                                           Corporation                                               1994
                         Virginia
                         The Arlington Hospital            Columbia/HCA              Joint venture
                                                           Healthcare
                                                           Corporation                                               1996
                         John Randolph Medical             Columbia/HCA              Asset sale
                         Center (public)                   Healthcare
                                                           Corporation                                               1995
                         The Retreat Hospital              Columbia/HCA              Asset sale
                                                           Healthcare
                                                           Corporation                                               1995
                         Note: Most of the information received from the investor-owned companies reflected conversions
                         that occurred after 1993.




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                   The process of converting from a not-for-profit hospital to a for-profit
Results in Brief   hospital was similar among the transactions we reviewed. Most of the
                   transactions were carried out between boards and executives of the
                   selling hospitals and representatives of the for-profit purchasers and not
                   routinely subject to public disclosure. A growing number of states are
                   recognizing the public interest at stake and becoming more involved in
                   overseeing the conversion process and reviewing terms of the conversion
                   transactions.

                   Standard industry methodologies were used to estimate the value of the 14
                   not-for-profit hospitals we reviewed. These methodologies for valuing
                   not-for-profit hospitals involve multiplying the hospitals’ adjusted earnings
                   by a variable, which in recent years has commonly been six, while also
                   taking into account the value of comparable entities. In addition to
                   obtaining valuation estimates, eight of the hospitals received multiple bids,
                   and six accepted the highest bid. Reported purchase prices that the selling
                   not-for-profit hospitals agreed to ranged from $16 million to $212 million.
                   We did not determine the hospitals’ fair market value. In negotiating the
                   terms of the conversion, most hospitals reported including provisions for
                   continued charity care and services in the agreement. The for-profit
                   hospital or joint venture boards that resulted from the conversions are
                   typically responsible for monitoring compliance with these agreements
                   and ensuring that they are enforced. Except for members of the boards of
                   directors, community involvement in conversion decisions was limited,
                   with broader community involvement in only 5 of the 14 transactions.

                   Net proceeds reported from the conversions we reviewed totaled about
                   $930 million. Of the 14 transactions we reviewed, 12 directed net proceeds
                   to charitable foundations. Most of the foundations had broadly defined
                   missions that primarily focused on health and wellness. At the time of our
                   review, eight foundations had started awarding grants, including awards
                   for disease prevention, cardiopulmonary resuscitation and first aid
                   training, and long-term care. One foundation is not issuing grants but has
                   used the proceeds to support an aerospace program; construction of an
                   arts, education, and technology center; and other projects. The activities
                   of the other two entities that received conversion proceeds, a university
                   and a city, were directed to education, working capital needs, and the
                   construction of facilities. Community input on the use of conversion
                   proceeds was obtained through public forums and needs assessments in 6
                   of the 14 conversions.




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In most states, attorneys general have authority to monitor and oversee
hospital conversions through common law and not-for-profit corporation
law. For nine of the conversions we reviewed, state attorneys general in
five states (Alabama, California, South Carolina, Tennessee, and Virginia)
exercised their authority to review the conversion process. Such a review
can explore issues of valuation, conflicts of interest, and use of charitable
proceeds. In one of these reviews, the attorney general ruled against a
proposed use of charitable proceeds that would have benefited the new
for-profit hospital. States are beginning to increase the authority of
attorneys general through specific conversion legislation. However, at the
time of conversion of the hospitals we reviewed, none of the six states had
specific conversion legislation. As of August 1997, a total of 24 states
(including 3 states in our review—California, Louisiana, and Virginia) and
the District of Columbia had enacted legislation to address some
conversion concerns, usually including public disclosure and community
benefit. Some legislation allows a state official to review the terms of the
deal and the direction of the charitable proceeds. In addition, a model act
has been developed by two groups, Community Catalyst and Consumers
Union, to assist states in formulating specific legislation. The act includes
model provisions related to fair market value, conflicts of interest,
community involvement, and use of proceeds to meet health care needs.

The federal government’s role in monitoring hospital conversions is
carried out mostly by the IRS, FTC, and the Department of Justice, which
oversee tax and antitrust issues, respectively. The IRS has raised questions
about the tax implications of not-for-profit and for-profit joint venture
arrangements—for example, whether the not-for-profit partner will retain
its tax-exempt status. IRS officials stated that the operation of the joint
venture may result in more than incidental benefit to the for-profit partner,
thereby creating a basis for denying or revoking the tax status of the
charitable entity. The IRS and the Department of the Treasury expect to
issue joint venture guidance in December 1997 that may address some of
these questions. Another issue related to joint ventures involves the
participation of individuals on both not-for-profit and for-profit boards.
This participation creates a potential conflict of interest because the
not-for-profit has a stake in maintaining the for-profit’s interests. Dual
board membership occurred in the three joint ventures we reviewed. FTC
officials reported that the antitrust issues related to hospital conversions
do not differ from those presented by other mergers and acquisitions, and
the agency’s involvement in hospital conversions has generally been
limited to its routine oversight role. Since 1993, FTC has brought three
antitrust enforcement actions related to not-for-profit hospital



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             conversions; one of these actions involved one of the conversions we
             reviewed.


             A not-for-profit hospital conversion is a transaction that results in the shift
Background   of all or a substantial portion of the assets of a not-for-profit hospital to
             for-profit use.2 Most hospital conversions have been structured as asset
             sales; however, recently some hospitals have, for example, entered into
             joint venture arrangements. In an asset sale, a not-for-profit hospital sells
             its physical assets, name, and accounts to a for-profit purchaser in
             exchange for cash, stock, notes, or other property. In a joint venture, a
             not-for-profit hospital contributes its assets to a for-profit partnership in
             exchange for cash and an ownership interest in the new venture. For
             example, in an 80/20 joint venture, the not-for-profit entity receives cash
             equal to 80 percent of the value of the hospital’s assets and a 20-percent
             ownership interest in the for-profit venture. Other methods of conversion
             include lease arrangements and corporate restructurings. Federal and
             most state laws require that proceeds from the sale of charitable assets
             continue to be used for charitable purposes. These proceeds are generally
             directed to a not-for-profit foundation or other charitable entity.

             Market and institutional factors, such as the growth of managed care and
             the need for capital, are often cited as primary reasons for conversions. To
             be successful in a managed care environment, not-for-profit hospitals must
             be in a competitive position. This position can be achieved by building
             networks that guarantee patient flow and increase bargaining power with
             managed care plans and physician groups. Access to capital is particularly
             important in a managed care environment, in which substantial
             investments may be necessary for information systems, network
             development, and expanding market share.

             Columbia/HCA Healthcare Corporation, Tenet Healthcare Corporation,
             and Quorum Health Group are major players in the hospital acquisition
             market. Columbia/HCA is one of the largest health care services
             companies in the United States. As of February 1996, Columbia operated
             343 hospitals, 135 outpatient surgery centers, 200 home health agencies,
             and extensive outpatient and ancillary services in 38 states, the United
             Kingdom, and Switzerland. Columbia reported 50 not-for-profit hospital
             acquisitions, joint ventures, and lease arrangements between 1994 and
             1996. Until recently, Tenet, a nationwide provider of health care services,

             2
              Not-for-profit hospitals are generally created under state not-for-profit corporation laws. A
             not-for-profit entity can apply to the IRS for federal tax-exempt status. Throughout the report, the term
             “not-for-profit” is used to describe entities that qualify for federal tax exemption.



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                         owned and operated 76 general hospitals and related businesses in 13
                         states. On January 30, 1997, Tenet acquired OrNda HealthCorp, one of the
                         nation’s largest investor-owned hospital management companies, with 49
                         hospitals in 15 states. Through this transaction, Tenet now owns, leases, or
                         operates 130 hospitals in 22 states. Tenet reported nine not-for-profit
                         hospital acquisitions and one joint venture since 1990.3 Quorum owns and
                         operates acute-care hospitals and local and regional health care systems in
                         43 states and the District of Columbia. As of June 1996, Quorum owned 14
                         acute-care hospitals and had management contracts with 253 hospitals and
                         consulting contracts with another 161 hospitals. Quorum reported 12
                         not-for-profit hospital acquisitions and leases since 1990.


                         The hospitals we reviewed followed the same basic process in converting
Standard Methods         from not-for-profit to for-profit status: They valued the hospital’s assets;
Were Consistently        sought out a buyer or partner, generally through a competitive process;
Used to Value            and negotiated the terms of the final agreement. The methods used to
                         determine the hospitals’ value were commonly used approaches,
Hospitals’ Assets, but   according to industry experts. A key component considered in estimating
Other Key Elements       the value of the hospitals we reviewed was their most recent earnings. The
                         valuation estimate is a benchmark that hospital officials can use in
of the Conversion        considering bids from potential buyers or partners. The IRS and others
Process Varied           suggest that hospitals solicit competing bids through a request for
                         proposals (RFP) in order to increase the likelihood that fair market value is
                         realized. While few hospitals followed such a formal competitive bidding
                         process, officials at most hospitals said that they received multiple bids
                         and accepted the highest bid offered. Once a bid is accepted, the terms of
                         the purchase or partnership agreement are negotiated and formally agreed
                         to by both parties. Participants in the conversion transactions we reviewed
                         told us that items negotiated included the final purchase price and
                         continued charity care and hospital services.

                         During the conversion process, the communities that the not-for-profit
                         hospitals served generally were not informed about or involved in the
                         various phases of the transaction. However, the not-for-profit hospitals’
                         boards of directors, who viewed themselves as representatives of the
                         community, reported having responsibility for managing the conversion
                         process and having a fiduciary duty to ensure that the conversion was in
                         the best interests of the organization. The for-profit hospital boards of



                         3
                         This does not include hospital acquisitions and joint ventures acquired as part of Tenet’s recent
                         merger with OrNda.



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                          directors, which usually included former not-for-profit board members,
                          generally monitor and oversee compliance with the purchase agreement.


Three Standard            The IRS and valuation consultants cite the income, market, and cost
Approaches Were           approaches as generally accepted methods for valuing hospital assets (see
Primarily Used to Value   table 2). One or more of these approaches were used to arrive at a
                          minimum dollar value. This estimated value of a hospital is not intended to
Hospitals                 represent its fair market value. Instead, in many cases, it represents a
                          benchmark for the not-for-profit hospital to use in negotiating a purchase
                          price. The income and market approaches, which were the approaches
                          most commonly used in the transactions we reviewed, multiply a
                          hospital’s adjusted earnings by a variable—or multiple—to calculate the
                          hospital’s value. The multiple depends on the weight given to certain
                          tangible and intangible factors, which can include a hospital’s debt and
                          competitive position. For example, lower multiples reflect hospitals that
                          are considered a greater financial risk. Multiples that ranged from 5 to 10
                          were applied by investment bankers to value six of the not-for-profit
                          hospitals we reviewed. In recent years, investment bankers have
                          commonly applied a multiple of six to value independent not-for-profit
                          hospitals. Experts and representatives from organizations who are
                          knowledgeable about hospital finance, such as the Prospective Payment
                          Assessment Commission (PROPAC), suggest that not-for-profit multiples be
                          carefully monitored to ensure that the not-for-profit hospitals are valued
                          appropriately.




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Table 2: Asset Valuation Methods
                                   Methodology     Description
                                   Income          The income method focuses on incorporating the specific operating
                                                   characteristics of the seller’s business into a cash flow analysis.
                                                   Discounted cash flow and earnings analyses are often used. A
                                                   discounted cash flow analysis involves making projections and
                                                   forecasts of future cash flows and discounting them to the present. An
                                                   earnings analysis involves calculating the hospital’s earnings before
                                                   interest, taxes, depreciation, and amortization (EBITDA) for the past
                                                   12 months and multiplying the EBITDA by a factor to calculate the
                                                   value of the hospital. EBITDA multiples reportedly range from a lower
                                                   level of four to about seven. Financially riskier hospitals tend to have
                                                   lower multiples. Factors that determine the multiple used include the
                                                   hospital’s prospects related to managed care, reputation, debt, and
                                                   future capital needs.
                                   Market          The market method measures value in two ways: comparable
                                                   companies analysis and precedent transaction analysis. A
                                                   comparable company analysis relies on EBITDA multiples derived
                                                   from publicly traded hospital companies. A precedent transaction
                                                   analysis uses EBITDA multiples derived from prices paid in recent
                                                   acquisitions of comparable entities. Projections and estimates are
                                                   developed to determine appropriate adjustments for comparability.
                                   Cost            The cost method measures value by first determining the cost to
                                                   replace or reproduce an asset, less an allowance for physical
                                                   deterioration or obsolescence. From this amount, the book value of
                                                   liabilities is subtracted to arrive at a value for the hospital’s assets.
                                                   This analysis assesses working capital, real estate, and equipment,
                                                   as well as permits, licenses, and managed care contracts.

                                   Each of the 14 hospitals we reviewed had obtained either an independent
                                   valuation (or conducted its own valuation of the hospital) or a fairness
                                   opinion, which is a documented analysis and confirmation by a reviewer
                                   that the valuation process resulted in a fair estimate from a financial point
                                   of view. In obtaining their valuation, 13 hospitals hired outside
                                   consultants, whereas 1 relied on in-house expertise. The one hospital that
                                   relied on in-house expertise for valuation, Lloyd Noland, hired experts to
                                   render a fairness opinion. Five hospitals—Arlington, Goodlark Regional
                                   Medical Center, Good Samaritan Health System, Tulane, and St.
                                   Francis—obtained both a valuation analysis and a fairness opinion from
                                   an outside consultant. For the conversions we reviewed, officials with
                                   Columbia/HCA, Quorum, and Tenet told us that they did not retain the
                                   same consultants that the not-for-profit hospitals did for valuation
                                   purposes. However, a Quorum official reported using Valuation
                                   Counselors Group, the consultant retained by the Carolinas Hospital
                                   System, for asset allocation purposes related to that hospital following
                                   completion of the deal. In addition, all three for-profit companies reported
                                   using some of the same consultants for business transactions and services




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                                       unrelated to the conversions in our review. (Table 3 lists the hospitals that
                                       hired consultants by the type of service rendered.)

Table 3: Valuation Services Provided
by Outside Consultants                 Consultant                                         Hospital
                                       Valuation analysis
                                       American Appraisal                                 Mercy Baptist Medical Centera
                                       Cain Brothers                                      St. Francis Hospital
                                       Coopers & Lybrand                                  Jacksonville Hospital
                                       Ernst & Young                                      Baptist Memorial Hospitalb
                                                                                          Hilton Head Hospital
                                                                                          The Retreat Hospital
                                       First Boston                                       Mercy Baptist Medical Centera
                                       Manufacturers’ Appraisal Company                   Tulane University Hospital
                                       KPMG Peat Marwick                                  John Randolph Medical Center
                                                                                          Mary Black Memorial Hospital
                                       Shattuck Hammond                                   The Arlington Hospital
                                                                                          Good Samaritan Health System
                                       Valuation Counselors Group, Inc.                   Baptist Memorial Hospitalb
                                                                                          Carolinas Hospital System
                                       Walsh & Connor                                     Goodlark Regional Medical Center
                                       Fairness opinion
                                       J.C. Bradford                                      Goodlark Regional Medical Center
                                       Cain Brothers                                      St. Francis Hospitalc
                                                                                          Tulane University Hospital
                                       Coopers & Lybrand                                  Lloyd Noland Hospital
                                       Shattuck Hammond                                   The Arlington Hospital
                                                                                          Good Samaritan Health System
                                       a
                                        Mercy Baptist obtained valuation analyses from two independent companies: American
                                       Appraisal and First Boston.
                                       b
                                        Baptist Memorial obtained valuation analyses from two independent companies: Ernst & Young
                                       and Valuation Counselors Group, Inc.
                                       c
                                        As part of the Tennessee attorney general’s review, a second fairness opinion was obtained from
                                       Mercer Capital.



                                       Eight hospitals disclosed the valuation estimates they received; however,
                                       only four provided documentation to support the information. Mary Black
                                       and Retreat reported in their IRS revenue rulings that they received
                                       valuation estimates of $56 million and $14 million, respectively. Carolinas’
                                       valuation report provided an estimated range of $55 million to $60 million,
                                       and Good Samaritan’s valuation report estimated the hospital’s value at
                                       $140 million to $160 million. (See table 4.) The remaining six hospitals



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                                          would not disclose their valuation estimates. The valuation estimates
                                          generally represent a benchmark for the not-for-profit hospital to use in
                                          negotiating a purchase price.

Table 4: Hospitals’ Valuation Estimates
                                          Hospital                                          Valuation estimate (in millions)
                                          Carolinas Hospital System                                                  $55-60
                                          Good Samaritan Health System                                              140-160
                                          Hilton Head Hospital                                                        19-30
                                          John Randolph Medical Center                                                   37
                                          Mary Black Memorial Hospital                                                   56
                                          Mercy Baptist Medical Center                                              188-267
                                          The Retreat Hospital                                                           14
                                          Tulane University Hospital                                                120-135



Most Hospitals Received                   According to officials involved in the conversion transactions, most of the
Multiple Bids From                        not-for-profit hospitals in our review received more than one bid from
Potential Buyers or                       potential buyers or partners (see table 5). The process used to solicit
                                          offers varied among the hospitals. According to the IRS, sellers can more
Partners                                  accurately determine the fair market value of their hospitals by soliciting
                                          competitive bids through an RFP, which opens bidding to the public. Of the
                                          14 hospitals in our review, 4 used an RFP process; 9 said that they
                                          considered several not-for-profit and for-profit entities as potential
                                          buyers/partners before focusing on one or more from which to solicit a
                                          bid(s); and 1, Jacksonville, only considered one buyer, Quorum, which was
                                          selected because of its previous experience—an 8-year management
                                          contract with Jacksonville Hospital. Of the 14 hospitals, 7 received more
                                          than one bid.




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Table 5: Hospitals That Reported
Receiving Multiple Bids and Those      Hospital                                           Multiple bids     One bid
That Reported Receiving a Single Bid   The Arlington Hospital                                               X
                                       Baptist Memorial Hospital                                            X
                                       Carolinas Hospital System                          X
                                       Goodlark Regional Medical Center                   X
                                       Good Samaritan Health System                       X (RFP)
                                       Hilton Health Hospital                             X (RFP)
                                       Jacksonville Hospital                                                X
                                       John Randolph Medical Center                                         X
                                       Lloyd Noland Hospital                                                X
                                       Mary Black Memorial Hospital                       X
                                       Mercy Baptist Medical Center                       X (RFP)
                                       The Retreat Hospital                               X (RFP)
                                       St. Francis Hospital                                                 X
                                       Tulane University Hospital                                           X

                                       Although most of the hospitals we reviewed received multiple bids, not all
                                       reported accepting the highest offer. Some officials told us that the bid
                                       amount is only one of several factors considered by the not-for-profit
                                       hospitals in selecting a buyer or partner. The Retreat Hospital, for
                                       example, accepted a bid from Columbia/HCA that was $3 million lower
                                       than the highest bid it received because the higher bidder did not appear
                                       to bring any complementary strengths, such as access to third-party payer
                                       contracts and economies of scale in operations, to counter Retreat’s
                                       weaknesses. Hilton Head accepted a lower bid from Tenet because of the
                                       for-profit’s financial stability, access to tertiary care, philosophy regarding
                                       patient care and employees, and other health care relationships. Hospital
                                       officials told us that, in addition to bids, they also considered such factors
                                       as the bidding entity’s managed care network, presence in the community,
                                       corporate culture, reputation for providing quality care, and access to
                                       capital, which was reported to be a major factor in the not-for-profit
                                       hospitals’ decision to accept an offer from a for-profit company.


Hospital Officials Agreed              Officials from many of the hospitals in our review said that their
on a Negotiated Purchase               negotiations with purchasers resulted in a mutually agreed upon purchase
Price                                  price. Officials of some of the hospitals we reviewed stated that they
                                       negotiated a purchase price for their hospitals that allowed them to pay off
                                       their debts and direct money to communities for charitable purposes.
                                       According to hospital officials and for-profit purchasers, purchase prices




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for the hospitals we reviewed ranged from about $16 million to
$212 million; most were less than $100 million. (See table 6 for hospitals’
purchase prices.) The Tulane University and Hilton Head joint ventures
resulted in the not-for-profit entities’ receiving a percentage of the
purchase price in addition to their respective shares of the joint venture.
Officials associated with the Arlington joint venture stated that a purchase
price was not negotiated because Columbia/HCA contributed three
hospitals to the transaction in lieu of cash. Only two of the three
purchasers, Quorum and Tenet, provided purchase price information.
Purchase prices for the remaining Columbia/HCA transactions were
provided by hospital officials. In commenting on a draft of this report, two
reviewers raised concerns about conclusions that might be drawn from
comparing valuation estimates and purchase prices. Because valuation
estimates may or may not reflect a hospital’s fair market value, it could be
misleading to compare valuation estimates with purchase price for
determining whether the purchaser or partner over- or underpaid for the
selling hospital.




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Table 6: Hospitals’ Purchase Prices
                                                                                                                               Purchase price (in
                                      Hospital/purchaser (number of beds)                                                             millions)a
                                                                                                                                                    b
                                      The Arlington Hospital/Columbia/HCA (350 beds)
                                      Baptist Memorial Hospital/Quorum (346 beds)                                                      $56.6 plus
                                                                                                                              $300,000/year for 15
                                                                                                                                            years
                                      Carolinas Hospital System/Quorum (424 beds)                                                               77.5
                                      Goodlark Regional Medical Center/Columbia/HCA (205 beds)                                                 103.0
                                      Good Samaritan Health System/Columbia/HCA (1,155 beds)                                                   176.5
                                      Hilton Head Hospital/Tenet (68 beds)                                                                      31.3c
                                      Jacksonville Hospital/Quorum (90 beds)                                                                    16.3
                                      John Randolph Medical Center/Columbia/HCA (271 beds)                                                      53.0
                                      Lloyd Noland Hospital/Tenet (319 beds)                                                                    47.6
                                      Mary Black Memorial Hospital/Quorum (226 beds)                                                            61.4
                                      Mercy Baptist Medical Center/Tenet (798 beds)                                                            212.3
                                      The Retreat Hospital/Columbia/HCA (227 beds)                                                              17.0
                                      St. Francis Hospital/Tenet (697 beds)                                                                    103.0
                                      Tulane University Hospital/Columbia/HCA (294 beds)                                                       165.0d
                                      a
                                       Quorum and Tenet provided purchase price information; Columbia/HCA did not, and therefore
                                      we relied on information provided by hospital officials.
                                      b
                                       In the Arlington joint venture arrangement, a purchase price was not negotiated. The parties to
                                      the transaction determined the relative value of the four health care facilities contributed to the
                                      joint venture. The value of Arlington Hospital was greater than the combined value of the three
                                      Columbia/HCA-owned hospitals contributed to the joint venture. As a result, Arlington received an
                                      equalization payment of $8 million. Hospital officials would not disclose the value of the three
                                      Columbia/HCA hospitals contributed to the joint venture.
                                      c
                                       Hilton Head Hospital was sold to the joint venture for $31 million, 20 percent of which the
                                      not-for-profit entity invested in the joint venture, with the result that the not-for-profit initially
                                      received about $25 million.
                                      d
                                       Tulane University Hospital was sold to the joint venture for $165 million, 20 percent of which the
                                      University invested in the joint venture, with the result that the not-for-profit ultimately received
                                      $132 million.




Negotiated Terms of the               Most of the not-for-profit hospitals that converted to for-profit status that
Hospital Sale Often                   we reviewed negotiated terms in their purchase agreements with the intent
Included Charity Care and             of preserving charity care for the community and securing protections for
                                      the hospitals and their staffs. All except two of the hospitals (Baptist
Service Provisions                    Memorial and Retreat) negotiated such contract provisions with their
                                      buyers/partners. The types of provisions the 12 hospitals negotiated as
                                      part of their purchase agreements included continuing a certain level and
                                      duration of charity care and hospital services; retaining employees and



                                      Page 15                                         GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
                                         B-275380




                                         certain management positions; and retaining the option to buy back the
                                         hospital if the purchaser decided to sell, close, or substantially change the
                                         focus of the hospital. Many of the negotiated provisions had time
                                         limits—some, a minimum of 3 years; others had no time periods attached.
                                         We were provided documentary evidence of the negotiated terms of the
                                         agreements for ten of the hospitals.4 See table 7 for examples of charity
                                         care and service provisions that were agreed to.

Table 7: Examples of Charity Care and
Hospital Service Terms Hospital          Hospital                 Terms
Officials Reported Negotiating as Part   Charity care
of Purchase Agreements
                                         Goodlark Regional        Columbia/HCA agreed to provide indigent care consistent with
                                         Medical Center           policies of the previous not-for-profit hospital.
                                         Good Samaritan           Columbia/HCA agreed to provide indigent care consistent with
                                         Health System            policies of the previous not-for-profit hospital.
                                         Hilton Head Hospital     Tenet agreed to continue charity care consistent with the policy
                                                                  of the previous not-for-profit hospital.
                                         Jacksonville Hospital    Quorum agreed to the same level of charity care as provided by
                                                                  the previous not-for-profit hospital.
                                         Lloyd Noland Hospital Tenet agreed to maintain the same level of charity care as
                                                               provided by the previous not-for-profit hospital.
                                         Mary Black Memorial      Quorum agreed to maintain charity care levels for 5 years.
                                         Hospital
                                         Tulane University        Columbia/HCA agreed to maintain about the same level of
                                         Hospital                 uncompensated care as provided by the previous not-for-profit
                                                                  hospital.
                                         Hospital services
                                         Good Samaritan           Columbia/HCA agreed to maintain graduate medical education
                                         Health System            programs for 3 years.
                                         Hilton Head Hospital     Tenet agreed to provide for the continuous operation of the
                                                                  hospital as an acute-care facility containing a 24-hour emergency
                                                                  room.
                                         Jacksonville Hospital    Quorum agreed to continue the present level of health care
                                                                  services for at least 5 years.
                                         Lloyd Noland Hospital Tenet agreed to maintain the same clinical services as the
                                                               previous not-for-profit hospital for 3 years.
                                         Mary Black Memorial      Quorum agreed to provide acute-care services for at least 8
                                         Hospital                 years.
                                         St. Francis Hospital     Tenet agreed to maintain the hospital’s emergency room.
                                         Tulane University        Columbia/HCA agreed to maintain graduate medical education
                                         Hospital                 programs for as long as Tulane University maintains medical
                                                                  students and residency programs.


                                         4
                                          As documentary evidence of the negotiated terms, we were provided complete purchase agreements
                                         for two of the transactions and selected sections of purchase agreements and other documentary
                                         evidence for the remaining eight transactions.



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                         B-275380




                         The not-for-profit and for-profit parties to the purchase agreements are
                         relying on the new for-profit hospital boards of directors to monitor
                         compliance and ensure that the terms of the agreements are enforced.5
                         Although the for-profit entities and board members are responsible for
                         fulfilling the terms of the agreements, for-profit boards are also
                         responsible for the interests of stockholders and the profitability of the
                         hospital. Therefore, the board might choose to make cost-cutting decisions
                         that, for example, reduce service levels and charity care in the community.
                         Some states are beginning to address the potential for noncompliance by
                         granting third-party oversight and enforcement authority over negotiated
                         terms of not-for-profit conversion transactions to state attorneys general
                         and health insurance commissioners. For example, a Nebraska statute
                         provides that if the Department of Health receives information and can
                         verify that the new for-profit is not fulfilling its commitments to the
                         community, it can revoke the for-profit’s license.


Communities Were         Federal and state laws in most states generally have not required that the
Generally Not Informed   community be informed about the conversions through mechanisms such
About Conversions        as public hearings and disclosure of transaction documents. For the
                         conversions we reviewed, hospital boards of directors viewed themselves
                         as representing the community through their fiduciary responsibility to
                         protect the not-for-profits’ assets. However, the community at large was
                         often unaware of the pending sale and uninformed of the sale price or the
                         structure of the transaction. Nine of the 14 hospitals we reviewed did not
                         involve the public through hearings and open forums before the
                         conversion. While they did not seek community approval of the conversion
                         or the partnership decision, five of the hospitals we reviewed informed the
                         public of the conversion through public meetings and community forums.
                         John Randolph and Lloyd Noland officials reported briefing community
                         and civic organizations about the sale of the hospitals. Arlington officials
                         reported holding 30 to 35 meetings regarding the conversion, including
                         public meetings, briefings for the Arlington County Board, and meetings
                         with civic organizations. Discussions surrounding the sale of the
                         Jacksonville Hospital were open to the public through city council
                         meetings. Hilton Head Hospital officials reported holding public forums to
                         educate the community about the partnership decision and partnership
                         options.




                         5
                         Good Samaritan Charitable Trust officials reported having responsibility for monitoring compliance
                         with the terms of the purchase agreement.



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                          In commenting on a draft of this report, two external reviewers raised
                          concerns about full public disclosure and community involvement in the
                          sales transactions. Specifically, they said public participation in the sales
                          transactions could be detrimental to the value of the selling hospital or
                          result in the disclosure of trade secrets. One of the reviewers stated that
                          oversight by a state attorney general’s office, including an independent
                          valuation, is a more effective, realistic, and preferable approach.


                          Because federal and state laws require that net proceeds from
Conversion Proceeds       not-for-profit conversions be directed toward a charitable purpose,
Generally Support         charitable institutions often receive substantial resources as a result of
Health and Wellness       conversions. In most of the conversions we reviewed, the proceeds were
                          directed to foundations, but a university and a city also received proceeds.
as Well as Other          Most of the foundations had missions and activities that focused primarily
Community Activities      on the broad area of health and wellness. Other foundations focused more
                          directly on such areas as the arts, education, and religion, in some cases
                          also supporting community health programs and activities. Community
                          participation in determining the use of sale proceeds was solicited in
                          about half the cases we reviewed.


Conversions Often         IRSguidance and some state statutes generally require that proceeds
Provided Millions to      resulting from the conversion of not-for-profit entities be used for
Foundations and Other     charitable purposes. The charitable entities that receive proceeds from
                          not-for-profit hospital conversions use the funds to support various
Entities for Charitable   projects and activities. The use of charitable assets is typically defined by
Purposes                  the mission the foundation adopts. The missions of most of the
                          foundations we reviewed focused on health and wellness, which
                          sometimes included a focus on education, public safety, arts, and religion.
                          Some state regulators argue that a foundation’s mission and the efforts it
                          supports should be closely related to the original mission of the
                          not-for-profit hospital.6 However, decisions have been made to use
                          hospital conversion proceeds to fund nonhealth-related projects, such as
                          building a school and financing an arts, education, and technology center.

                          Conversions of not-for-profit hospitals have resulted in multimillion-dollar
                          endowments to charitable institutions. Although most recipients of these
                          funds are foundations, millions of dollars have also been directed to other
                          entities. For the conversions we reviewed, hospital and foundation

                          6
                           At least one state, Nebraska, has enacted legislation that expressly requires not-for-profit hospital
                          conversion proceeds to be used to provide charitable health care.



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                                        B-275380




                                        officials reported proceeds that ranged from $13 million to $130 million.7
                                        In addition to the funds transferred from the for-profit entity, these
                                        proceeds may also include previous hospital foundation endowments,
                                        hospital reserves, and other not-for-profit assets. For example, in addition
                                        to the $8 million received from the conversion transaction, the Arlington
                                        Health Foundation also received other monies transferred from the
                                        hospital and the previous hospital foundation, which resulted in proceeds
                                        totaling $130 million. Of the 14 conversions in our review, 12 directed
                                        proceeds to foundations.8 Moreover, in addition to transferring proceeds
                                        to a foundation (Baptist Community Ministries), Mercy Baptist Medical
                                        Center directed a portion of the proceeds to the other original sponsor of
                                        the medical center, the Sisters of Mercy Health System of St. Louis, which
                                        reinvested the proceeds in other community hospitals. The proceeds from
                                        the remaining two conversions were directed to Tulane University and the
                                        City of Jacksonville, Ala. The total amount generated from the conversions
                                        we reviewed was $931 million. (See table 8 for the amounts reported as
                                        forwarded to individual charitable entities.)

Table 8: Entities to Which Conversion
Proceeds Were Directed                                                                                                             Reported
                                                                                                                                proceeds (in
                                        Not-for-profit hospital                    Resulting entity                                millions)a
                                        Alabama
                                        Baptist Memorial Hospital                  Etowah Baptist Association                    Not reported
                                        Jacksonville Hospital                      City of Jacksonville, Ala.                              $15
                                        Lloyd Noland Hospital                      The Lloyd Noland Foundation                                  50
                                        California
                                        Good Samaritan Health System               Good Samaritan Charitable Trust                              72
                                        Louisiana
                                        Mercy Baptist Medical Centerb              Baptist Community Ministries                            112
                                                                          b
                                        Mercy Baptist Medical Center               Sisters of Mercy Health System                               59
                                        Tulane University Hospital                 Tulane Universityc                                      100
                                        South Carolina
                                        Carolinas Hospital System                  Drs. Bruce and Lee Foundation                                90
                                                                                                                      c
                                        Hilton Head Hospital                       Hilton Head Island Foundation                                13
                                        Mary Black Memorial Hospital               Mary Black Foundation                                        62
                                                                                                                                  (continued)


                                        7
                                         For 5 of the 14 conversions, supporting documentation was provided for the amount of proceeds
                                        directed to a charitable entity: Carolinas, Goodlark, Good Samaritan, Hilton Head, and Mercy Baptist.
                                        8
                                         The conversion involving The Retreat Hospital did not realize any proceeds after the hospital’s debt
                                        was paid. The amount transferred to the new foundation was the amount held in the former hospital
                                        foundation. One hospital, Baptist Memorial, did not disclose the amount of net proceeds from the
                                        conversion.


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                                                                                              Reported
                                                                                           proceeds (in
Not-for-profit hospital                     Resulting entity                                  millions)a
Tennessee
Goodlark Regional Medical Center            The Jackson Foundation                                        75
St. Francis Hospital                        The Assisi Foundation of
                                            Memphis, Inc.                                                 103
Virginia
The Arlington Hospital                      Arlington Health Foundationc                                  130
John Randolph Medical Center                John Randolph Foundation
(public)                                                                                                  25
The Retreat Hospital                        Annabella R. Jenkins Foundationd                              25
Total                                                                                                $931

Note: For 5 of the 14 conversions, hospital and foundation officials provided supporting
documentation for the amount of proceeds available for charitable use.
a
 In some cases, the proceeds may be lower than the purchase prices listed in table 6 because
the proceeds represent approximate amounts reported for charitable use after defeasement of
debt and payment of other liabilities. In addition to the funds transferred from the for-profit entity,
these amounts may also include not-for-profit hospitals’ accumulated reserves and working
capital, other not-for-profit assets, and previous hospital foundation endowments. As a result, in
some cases, the reported proceeds were greater than the purchase prices.
b
 Mercy Baptist Medical Center directed 65 percent of the proceeds to one foundation, Baptist
Community Ministries, and 35 percent to the not-for-profit Sisters of Mercy Health System.
c
 For the Tulane and Arlington joint ventures, the total amount that Tulane University and the
Arlington Health Foundation receive depends on the ventures’ future success. For the Hilton Head
Hospital joint venture, as of May 1997, Hilton Head Island Foundation officials reported having
divested the Foundation’s 20-percent interest in the joint venture arrangement, in part, because
the Foundation was unable to obtain a distribution of earned profits.
d
 The Annabella R. Jenkins Foundation did not receive any proceeds from the sale of The Retreat
Hospital. The $25 million represents the Foundation’s endowment as of Jan. 1997 and includes
money transferred from the previous not-for-profit hospital.



The foundations that resulted from the sale of not-for-profit hospitals that
we reviewed used conversion proceeds to support a variety of projects,
many of them health related. These foundations do not provide direct
health care services; instead most issue grants to existing community
organizations that support a range of health- and nonhealth-related
activities. Grants have been awarded by 8 of the 12 foundations we
reviewed. These grants have supported a variety of health-related
activities, including disease prevention, purchase of medical equipment,
and CPR and first-aid training. Grants have also been awarded to support
education programs, such as a tutoring program, an adult caregiver
training program, and a summer remediation program. Other grants




Page 20                                      GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
                             B-275380




                             supported arts, public safety, and community development. At the time of
                             our review, three foundations (the Arlington Health Foundation, the Good
                             Samaritan Charitable Trust, and the Lloyd Noland Foundation) had not yet
                             awarded grants.9 One foundation, The Jackson Foundation, is not
                             currently issuing grants but has used the proceeds for projects such as an
                             aerospace program and building an arts, education, and technology center
                             that supports programs in math and science. (See app. II for a summary of
                             each foundation’s mission and grant award activity.)

                             For 2 of the 14 conversions we reviewed, proceeds were not directed to a
                             foundation. The City of Jacksonville and Tulane University received
                             conversion proceeds totaling approximately $115 million. The City of
                             Jacksonville reported using the proceeds to build a new high school and
                             make capital improvements at city facilities. Tulane University reported
                             using the proceeds, in part, for working capital, an addition to its
                             endowment, and capital to fund the development of new programs at the
                             medical school.


Some Communities Were        As the beneficiary of the proceeds, the community is often more involved
Involved in Determining      in determining the future uses of charitable proceeds than in providing
Use of Charitable Proceeds   input during the earlier stage of structuring the transaction. Community
                             participation regarding the charitable proceeds can include providing
                             input concerning the structure, purpose, governance, and activities of the
                             entity that receives the proceeds. Eight of the entities in our review that
                             received these proceeds sought no community involvement. The
                             remaining six foundations obtained community input regarding
                             community needs and use of charitable proceeds through community
                             needs assessments; meetings with community groups, organizations, and
                             agencies; or both. Three of these (the Arlington Health Foundation, the
                             Mary Black Foundation, and the John Randolph Foundation) conducted
                             community needs assessments or relied on assessments already
                             conducted.10 The remaining three foundations (the Good Samaritan
                             Charitable Trust, Baptist Community Ministries, and The Jackson
                             Foundation) sought broad community input through public forums and
                             discussions before determining the foundations’ program agenda. Baptist
                             Community Ministries, the Good Samaritan Charitable Trust, and the Mary
                             Black Foundation held public forums or discussions with community

                             9
                              In the case of the Good Samaritan Charitable Trust, the foundation agreed not to distribute any
                             proceeds to new projects or grants until after the attorney general’s review was completed. However,
                             it has funded several preexisting community health programs since the sale.
                             10
                              The Mary Black Foundation’s community health assessment is not expected to be concluded until the
                             end of 1997.



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                         B-275380




                         leaders, as well as relied on community needs assessments. In addition,
                         the Good Samaritan Charitable Trust formed a community task force to
                         study and recommend how the funds could best serve the health needs of
                         the community.


                         Controversy and concerns about the loss of community health services
State Oversight Is       and the transfer of community assets in not-for-profit conversions have
Increasing in            prompted some states to take an active oversight role in protecting the
Response to              community’s charitable interests. In most states, the attorney general has
                         the authority to monitor conversions to protect the community’s
Conversion Activity      charitable interests but not all attorneys general exercise this authority.
                         Several groups have developed guidance, including a model act, to help
                         attorneys general both develop legislation governing hospital conversions
                         and review proposed not-for-profit conversion transactions. Twenty-four
                         states and the District of Columbia have enacted laws, most in recent
                         years, affecting not-for-profit conversions. These laws contain provisions
                         that include requiring attorney general approval, advance notification, and
                         community involvement. At the time of the conversions of the 14 hospitals
                         in our review, none of the states in which they were located had enacted
                         laws specifically addressing not-for-profit hospital conversions. However,
                         state attorneys general in five of these states did exercise authority
                         granted under state not-for-profit corporation law or common law to
                         review selected conversions.


Some Attorneys General   State attorneys general generally have authority to review not-for-profit
Have Exercised Their     conversions and, where appropriate, to enforce state requirements that
Authority to Oversee     protect charitable benefits. Attorneys general in four states in our review
                         (Alabama, California, South Carolina, and Tennessee) reported that
Conversions              authority to oversee and monitor hospital conversions is granted through
                         state provisions related to not-for-profit corporations. The Virginia
                         attorney general’s authority is founded primarily in common law, from
                         which the doctrine of cy pres is derived. (In this context, the cy pres
                         doctrine provides that when the original purpose of a charitable trust
                         becomes impossible to carry out, another approach may be taken if it is
                         judged to be similar in intent to the original purpose.) In Louisiana, until
                         recently, the attorney general had no authority to oversee hospital
                         conversion activity.11 (See table 9 for a description of state authorities to
                         oversee hospital conversions.)

                         11
                           As of Aug. 1997, Louisiana had enacted specific legislation governing hospital conversions (see app.
                         III).



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Table 9: Attorney General Authorities
to Oversee Transactions                 Authority                  Description
                                        Not-for-profit             Not-for-profit hospitals are generally established under a state’s
                                        corporation code           not-for-profit corporation code, which details how not-for-profit
                                                                   corporations are to be established and operated within the state.
                                                                   These laws typically include, for example, restrictions on conflicts
                                                                   of interest and guidance regarding amending corporation bylaws
                                                                   and how to dispose of assets should the corporation be
                                                                   dissolved. The assets of the not-for-profit corporation are often
                                                                   viewed as held in public trust in exchange for the corporation’s
                                                                   receiving the benefits of not-for-profit status. That is, the assets of
                                                                   the corporation are considered dedicated in perpetuity to the
                                                                   charitable purposes set out in the corporation’s articles of
                                                                   incorporation. In addition, not-for-profit corporations are limited in
                                                                   their ability to engage in profit-making activity. For example,
                                                                   not-for-profit corporations cannot distribute their profits to those
                                                                   who own or control them. Essentially, in most states, not-for-profit
                                                                   corporations and their assets have been viewed as charitable
                                                                   trusts.
                                        Cy pres                    The doctrine of cy pres applies to charitable trusts. Under cy
                                                                   pres, should it become impossible to use the assets of a
                                                                   charitable trust as originally provided when the trust was
                                                                   established, a judicial hearing is necessary to determine what
                                                                   should be done with the assets. At the hearing, the trustees must
                                                                   convince the judge that the original purpose is no longer
                                                                   workable and identify another more practical purpose that is as
                                                                   near as possible to what was originally intended. Some interpret
                                                                   this requirement to mean that the trustees of a not-for-profit
                                                                   charitable corporation must obtain court approval for a
                                                                   conversion.
                                        State legislation          State statute can give the attorney general or other state official
                                                                   specific authority to review a conversion transaction. Such a
                                                                   review may include a review of the disposition and use of
                                                                   charitable proceeds. Some statutes require the converting
                                                                   hospital to obtain the consent of the reviewing official before the
                                                                   transfer of assets.

                                        State attorneys general reviewed about half of the conversion transactions
                                        in our review through authority granted under state not-for-profit
                                        corporation laws. These laws, which require that the not-for-profit entity
                                        give notice of its sale to the attorney general’s office, were the basis for
                                        reviews of the transactions involving the Lloyd Noland Hospital (Ala.), the
                                        Good Samaritan Health System (Calif.),12 Mary Black Memorial Hospital
                                        and the Carolinas Hospital System (S.C.), and the St. Francis Hospital and
                                        the Goodlark Regional Medical Center (Tenn.). These laws may also give
                                        the attorney general authority to review the disposition of assets, which
                                        could include determining whether fair market value is obtained,


                                        12
                                          California’s not-for-profit corporation law was amended in 1996 to include specific requirements for
                                        the conversion of health care facilities. The law took effect in Jan. 1997.



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                             charitable proceeds are appropriately directed, and conflicts of interest
                             exist. For example, in the Good Samaritan conversion, the attorney
                             general reviewed the entire transaction, including valuation, inurement
                             issues, and consistency of the sale with the purposes of the trust. The
                             attorney general concluded that Good Samaritan’s administrators and
                             board acted in good faith, in that the institution’s sale price reflected fair
                             market value and all related business decisions had been made with due
                             diligence. The attorney general, in negotiations with Good Samaritan,
                             reached a compromise agreement on how the proceeds would be used.
                             The agreement directs proceeds to fund hospital and medical care for the
                             medically indigent in Santa Clara County and to fund preexisting
                             community health programs historically supported by Good Samaritan.
                             For the Goodlark conversion, the attorney general ruled against a
                             proposed use of the charitable proceeds by The Jackson Foundation.
                             Specifically, the foundation had agreed to purchase a nuclear lab for the
                             new Columbia-owned for-profit hospital. The attorney general prohibited
                             this purchase, ruling that a conflict of interest was present.

                             The common law doctrine of cy pres allows some attorneys general to
                             bring suit if, in a conversion, the not-for-profit assets are found to be
                             directed inappropriately. The Virginia attorney general has authority to
                             review conversion transactions through common law. Officials in the
                             Virginia attorney general’s office reported exercising this authority to
                             review the three Virginia hospital conversions in our study (Arlington,
                             Retreat, and John Randolph).13 However, these officials would not disclose
                             specifically what was reviewed and the results of their reviews.


Model Provisions for State   Several organizations have prepared guidance to assist states in oversight
Oversight of Conversions     of conversion activity. In 1997, the National Association of Attorneys
Have Been Developed          General (NAAG) adopted a resolution containing six specific guidelines for
                             the conversion process. The Community Catalyst and Consumers Union
                             developed a model act with more specific provisions relating to
                             conversions. These sets of guidance are complementary and provide a
                             framework for state attorneys general who will be reviewing conversion
                             transactions. (See table 10 for a comparison of NAAG resolution and model
                             act features.)




                             13
                               As of Aug. 1997, Virginia had enacted specific legislation governing hospital conversions (see app.
                             III).



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Table 10: Features of the NAAG
Resolution and the Model Act     NAAG resolution                                    Model act
                                 State attorney general should receive              State attorney general must receive notice
                                 advance written notice of conversions.             90 days before the transaction is to take
                                                                                    place.
                                 The public should receive advance notice,          The attorney general must provide the
                                 including the names and addresses of the           public with access to all records related to
                                 parties and the terms of the proposed              the transaction at no cost. The attorney
                                 conversion.                                        general must also hold at least one public
                                                                                    meeting no later than 45 days after
                                                                                    receiving notice regarding the proposed
                                                                                    transaction and publish advance notice of
                                                                                    the meeting in local newspapers.
                                 A valuation of the charitable assets should        The attorney general must find that the
                                 be prepared by an independent expert.              nonprofit corporation used due diligence in
                                                                                    arranging the transaction.
                                 Directors and others involved in the               The attorney general must find that the
                                 transaction should not receive excessive           transaction will not result in any financial
                                 compensation.                                      advantage to private people or entities,
                                                                                    any nonprofit organizations receiving
                                                                                    charitable assets and the for-profit entity
                                                                                    involved are totally independent of each
                                                                                    other, and the nonprofit corporation
                                                                                    receiving the charitable assets has
                                                                                    mechanisms in place to avoid conflicts of
                                                                                    interest.
                                 The use of proceeds should be consistent           The attorney general must find that the
                                 with the charitable purpose for which the          transaction is fair and reasonable to
                                 assets are held by the nonprofit health care       affected parties, the transaction is in the
                                 entity and not benefit the for-profit purchaser.   public interest, a charitable trust is set
                                                                                    aside equal to the fair market value of the
                                                                                    nonprofit corporation, and trust
                                                                                    distributions are dedicated to existing or
                                                                                    new tax-exempt organizations.
                                 The attorney general should be able to             The attorney general may charge an entity
                                 recover the costs of reviewing and                 involved in the conversion for the costs of
                                 evaluating the proposed transaction from           providing the public with notice and
                                 the parties involved.                              reasonable access to records relating to
                                                                                    the conversion.
                                 a
                                                                                    The attorney general must find that the
                                                                                    transaction will not adversely affect the
                                                                                    availability of health care and that the
                                                                                    charitable corporation receiving trust
                                                                                    assets will be dedicated to serving the
                                                                                    state’s unmet health care needs.
                                 a
                                                                                    The attorney general must find that the
                                                                                    charitable corporation receiving the assets
                                                                                    will agree to file annual reports, which will
                                                                                    be made public, regarding its
                                                                                    grant-making and other charitable
                                                                                    activities that involve the use of charitable
                                                                                    assets received.
                                                                                                                     (continued)


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NAAG resolution                                Model act
a
                                               The attorney general has the power to
                                               subpoena additional information or
                                               witnesses to help decide whether to permit
                                               the transaction to go forward.
a
                                               The nonprofit corporation generally must
                                               be notified in writing of the attorney
                                               general’s decision within 90 days of the
                                               attorney general’s having received the
                                               initial notice regarding the proposed
                                               transaction.

a
The NAAG resolution contained no complementary provision.



In response to the increasing number of not-for-profit hospital conversions
and public concern regarding the fairness of the transactions and the
potential loss of community benefits, states have enacted legislation
affecting conversions. According to the National Council of State
Legislatures, 24 states and the District of Columbia have enacted such
legislation. These laws often include features similar to those of the NAAG
resolution and the model act. Although the features of each state’s
legislation vary, most legislation contains specific provisions that require
advance notice, state official review and approval, and public
disclosure/hearing. (See table 11 for a list of states with laws affecting
conversions, and key provisions, and see app. III for a brief summary of
relevant state law.) Several other states are also considering similar
conversion legislation.




Page 26                               GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
                                       B-275380




Table 11: States With Laws Affecting
Conversions, and Key Provisions                                                                   Provisions
                                                                                            State official
                                                                                            review and                Public
                                       State                      Advance notice            approval                  disclosure/hearing
                                       Ariz.                      X                                                   X
                                       Calif.                     X                         X                         X
                                       Colo.                      X                         X                         X
                                       Conn.                      X                         X                         X
                                       D.C.                       X                         X                         X
                                       Fla.                                                                           X
                                       Ga.                        X                         X                         X
                                       Ill.                       X                                                   X
                                       Ind.                       X                                                   X
                                       Kans.                      X                         X                         X
                                       La.                        X                         X                         X
                                       Maine                                                X
                                       Nebr.                      X                         X                         X
                                       N.H.                       X                         X                         X
                                       N.J.                       X                         X                         X
                                       N.C.                                                                           X
                                       N. Dak.                                              X
                                       Ohio                       X                         X                         X
                                       Oreg.                      X                         X                         X
                                       R.I.                       X                         X                         X
                                                                  a                         a                         a
                                       S. Dak.
                                       Tex.                                                 X
                                       Vt.                        X                         X                         X
                                       Va.                        X                         X                         X
                                       Wash.                      X                         X                         X
                                       Note: For pertinent details regarding the scope and applicability of these laws, see app. III.
                                       a
                                        The law affecting conversions in South Dakota contains none of these three key provisions.



                                       The American Hospital Association has also adopted guidelines to help
                                       hospital officials deal with the wide range of public accountability
                                       questions that surround changes of ownership or control. These guidelines
                                       are applicable to not-for-profit hospital conversions as well as transactions
                                       between not-for-profit hospitals and are intended to be considered before
                                       changes of ownership or control. According to the American Hospital




                                       Page 27                                    GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
                          B-275380




                          Association, hospital officials should (1) ensure that they have devised a
                          plan for providing charity care and other essential community services,
                          (2) obtain a valuation of charitable assets by an independent party,
                          (3) ensure that the resulting charitable entity continues to serve the
                          appropriate health needs of the community, (4) disclose publicly the terms
                          of the agreement and provide an opportunity for public comment, and
                          (5) inform the appropriate state official of the terms of the conversion.


                          Three federal agencies, the IRS, FTC, and Department of Justice, play
Federal Agencies Play     limited but key oversight roles in hospital conversions. The IRS is
a Role in Overseeing      responsible for enforcing the federal tax laws that apply to the status and
Hospital Conversions      operation of tax-exempt organizations, including not-for-profit hospitals
                          and foundations. Hospital conversions involving joint venture
                          arrangements, in which ownership interests and income are shared
                          between not-for-profit and for-profit entities, raise both tax-exempt status
                          and conflict-of-interest questions. The IRS believes it needs to develop
                          specific guidance addressing joint venture arrangements. FTC and the
                          Department of Justice, as part of their broad mission to enforce federal
                          antitrust laws, investigate and challenge potentially anticompetitive
                          hospital mergers and acquisitions, as necessary. FTC and Justice do not
                          view hospital conversions as posing unusual antitrust issues.


IRS Oversees Tax-Exempt   The IRS Exempt Organizations Division is responsible for reviewing and
Status Issues in          approving applications for recognition of tax-exempt status; issuing
Conversions               revenue rulings, guidance, and other interpretations of tax-exemption law;
                          and performing audits to ensure that tax-exempt organizations are
                          operated for tax-exempt purposes. Revenue rulings are often used as
                          precedents to ensure uniform handling of a tax issue. Of the 14
                          not-for-profit hospital conversions we reviewed, at least four hospitals
                          (Retreat, Mercy Baptist, Mary Black, and St. Francis) received private
                          letter rulings from the IRS. According to Division officials, the conversion
                          of not-for-profit hospitals does not appear to pose pressing or widespread
                          tax-related issues that require special attention. The IRS has attempted to
                          position itself to react quickly to any unexpected activities and believes it
                          maintains sufficient information to pinpoint areas warranting attention.
                          Moreover, IRS officials told us that states are generally in the best position
                          to act on hospital conversions that are problematic, unless it appears that
                          federal law has been violated.




                          Page 28                          GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
                           B-275380




Joint Venture              Joint ventures between not-for-profit hospitals and for-profit entities can
Arrangements Raise Tax     raise questions about whether the not-for-profit will retain its tax-exempt
and Conflict-of-Interest   status and whether income distributed to the not-for-profit partner will be
                           subject to tax. Because of the shared ownership structure in a
Questions                  not-for-profit and for-profit joint venture, the opportunity exists for
                           charitable assets to be used for private benefit.14 The IRS’ position is that,
                           to maintain its tax-exempt status, a not-for-profit’s participation in a joint
                           venture must advance the not-for-profit’s charitable purposes and not
                           result in more than incidental private benefit. According to IRS officials, if
                           the not-for-profit does not exercise control over the day-to-day activities of
                           the joint venture, it cannot ensure that the assets contributed by the
                           not-for-profit will not be used for the private benefit of the for-profit
                           organization. If these assets benefit the for-profit organization, the
                           tax-exempt status of the not-for-profit partner may be revoked. According
                           to IRS officials, if the majority of the not-for-profit organization’s efforts are
                           directed toward exempt activities, the organization will generally retain
                           exempt status. In such a case, however, the income earned by the
                           not-for-profit organization from the joint venture may be subject to income
                           tax under unrelated business income tax rules. At the time of our review,
                           the IRS had not published a position or issued guidance on joint venture
                           arrangements. IRS and the Department of the Treasury are drafting a
                           revenue ruling to provide guidance on the treatment of joint venture
                           transactions under the federal tax rules. The IRS expects to issue this ruling
                           by the end of 1997. This ruling may significantly affect the tax-exempt
                           status of and income earned by the not-for-profit organization
                           participating in the joint venture.

                           Another issue surrounding joint ventures involves the potential for conflict
                           of interest when the same people serve on both the not-for-profit
                           foundation board and the for-profit hospital board after a conversion. The
                           potential for conflict of interest is particularly apparent in joint venture
                           arrangements because the foundation board members have a stake in
                           maintaining the for-profit’s interests. For all three joint ventures we
                           reviewed, the charitable foundation board members also participated on
                           the for-profit joint venture board. However, foundation officials stated that
                           the foundations had not awarded any grants in support of the new
                           for-profit hospitals, which is one example of maintaining the for-profit’s
                           interest.


                           14
                             Charitable hospitals are exempt from federal income tax under section 501(c)(3) of the Internal
                           Revenue Code of 1986. Therefore, they must operate exclusively for charitable purposes and not for
                           the benefit of private interests, such as designated individuals, shareholders of the organization, or
                           third parties.



                           Page 29                                     GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
                          B-275380




                          Joint operating agreements (JOA) raise similar private benefit and
                          conflict-of-interest issues. In a JOA, two or more hospitals or health care
                          entities operate jointly but retain their separate boards, ownership status,
                          and ownership of assets. The profits and losses from JOA activities,
                          however, are shared. Most JOAs have been among not-for-profit entities.
                          However, a JOA can also occur between a not-for-profit hospital and a
                          for-profit entity, an arrangement that is similar to a joint venture. None of
                          the rulings on JOAs has yet involved for-profit participants. Recently,
                          however, a hospital in Jacksonville, Fla., and Columbia/HCA entered into a
                          JOA. The full implementation of the agreement is awaiting an IRS private
                          letter ruling on the tax effects of the operating agreement. While JOAs raise
                          some of the same concerns as joint ventures, the forthcoming IRS and
                          Treasury guidance on joint ventures may not address the specific concerns
                          raised in the context of JOAs.


FTC and Justice Conduct   FTC and Justice share responsibility for enforcing the federal antitrust
Routine Oversight of      laws; however, according to officials of these agencies, hospital
Conversion Antitrust      conversions do not raise any special issues under the antitrust laws.15 In
                          carrying out their oversight roles, FTC and Justice investigate and
Issues                    challenge, where appropriate, potentially anticompetitive hospital mergers
                          and acquisitions. According to FTC officials, antitrust issues presented by
                          not-for-profit conversions do not differ from those presented by mergers
                          and acquisitions between not-for-profit entities, and most hospital mergers
                          do not violate the laws enforced by FTC and Justice. FTC and Justice receive
                          advance notice of many transactions under the premerger notification
                          requirements of Hart-Scott-Rodino.16 However, according to FTC officials,
                          this filing requirement does not apply to some types of mergers and
                          acquisitions (such as those involving public entities) and to certain joint
                          ventures.

                          FTC has investigated ten of the many proposed acquisitions of not-for-profit
                          hospitals by for-profit firms and, in three of these cases, blocked a merger
                          or obtained divestiture as a condition for allowing the transaction to
                          proceed. For example, in 1995 FTC alleged that the proposed acquisition by


                          15
                           FTC enforces the Federal Trade Commission Act, sec. 5 of which prohibits unfair methods of
                          competition. Justice has responsibility for enforcing the Sherman Act, sec. 1 of which prohibits all
                          conspiracies or agreements that restrain trade. FTC and Justice both have jurisdiction under the
                          Clayton Act, sec. 7 of which prohibits all mergers and acquisitions of stock or assets that may
                          substantially lessen competition or tend to create a monopoly.
                          16
                           The Hart-Scott-Rodino filing requirement covers agreements in which the acquiring hospital has net
                          sales or total assets of at least $100 million and the hospital being acquired has assets of at least
                          $10 million.



                          Page 30                                     GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
                   B-275380




                   Columbia/HCA of John Randolph Medical Center, one of the conversions
                   we reviewed, would endanger competition for psychiatric hospital care
                   because it would bring under common ownership John Randolph’s
                   psychiatric unit and a competing Columbia/HCA psychiatric hospital in
                   nearby Petersburg, Va. In its order, FTC permitted Columbia/HCA to
                   acquire John Randolph Medical Center on the condition that it later divest
                   itself of its psychiatric hospital in Petersburg.


                   Concerns about the conversion of not-for-profit hospitals and the transfer
Conclusions        of millions of dollars in charitable assets still exist, because they are
                   carried out essentially privately between boards of the selling hospitals
                   and management of the purchasing for-profit companies. These
                   conversions are not routinely subject to any disclosure requirements,
                   which leaves little opportunity for community involvement outside of the
                   community members who serve on the not-for-profit hospitals’ boards. A
                   growing number of states are recognizing that the public interest is at
                   stake and, as a result, are becoming more involved in overseeing the
                   conversion process and monitoring the terms of such transactions. This
                   increased state oversight may address some questions and concerns
                   related to obtaining fair value for charitable assets, obtaining public
                   disclosure and community input, and ensuring that the proceeds of the
                   transaction are used for appropriate charitable purposes.


                   We provided copies of our draft report to the IRS and several experts on
Agency and Other   hospital conversion issues for review. IRS officials responded that the
Comments           report generally reflects the agency’s position. They noted, however, that
                   they have not fully resolved the issues surrounding joint ventures, and we
                   modified the language in our report accordingly. The expert reviewers
                   suggested that we clarify other issues in our report, and we incorporated
                   revisions where appropriate. We also asked 21 officials, including hospital
                   administrators, foundation executives and board members, and attorneys
                   who represented the not-for-profits in the transactions, to validate the
                   information included in the report. These officials generally agreed with
                   the draft report. Some officials provided technical comments, which we
                   incorporated where appropriate.

                   Subsequently, we were asked to provide a draft of our report to Volunteer
                   Trustees of Not-for-Profit Hospitals, a public interest group, for review. We
                   also provided a copy to the Federation of American Health Systems, which
                   represents for-profit hospitals and health care facilities. One issue of major



                   Page 31                         GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
B-275380




concern to Volunteer Trustees was that we had not obtained documented
evidence of sale information. In response to this comment, we revised our
draft to indicate those instances where we had documented evidence,
including purchase or partnership agreements, IRS revenue rulings,
valuation reports, and fairness opinions, to support the testimonial
information provided in our report. In those cases where we were not
given documentary evidence because of the proprietary nature of the
information and confidentiality agreements, we had to rely solely on
information provided in interviews. Where appropriate, we clarified the
sources used to support information in our report.

We are sending copies of this report to the Secretary of Health and Human
Services, the Commissioner of Internal Revenue, state attorneys general,
appropriate congressional committees, and other interested parties. We
will make copies available to others upon request.

Please contact me at (202) 512-7119 or James O. McClyde, Assistant
Director, at (202) 512-7152 if you or your staff have any questions. Other
GAO contacts and contributors to this report are listed in appendix IV.




Bernice Steinhardt
Director, Health Services Quality
  and Public Health Issues




Page 32                         GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
Page 33   GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
Contents



Letter                                                                                               1


Appendix I                                                                                          36

Objectives, Scope,
and Methodology
Appendix II                                                                                         38

Foundations’ Mission
Statements and
Examples of Grants
Issued
Appendix III                                                                                        41

State Legislation
Appendix IV                                                                                         51

GAO Contacts and
Staff
Acknowledgments
Tables                 Table 1: Sites Visited                                                        4
                       Table 2: Asset Valuation Methods                                             10
                       Table 3: Valuation Services Provided by Outside Consultants                  11
                       Table 4: Hospitals’ Valuation Estimates                                      12
                       Table 5: Hospitals That Reported Receiving Multiple Bids and                 13
                         Those That Reported Receiving a Single Bid
                       Table 6: Hospitals’ Purchase Prices                                          15
                       Table 7: Examples of Charity Care and Hospital Service Terms                 16
                         Hospital Officials Reported Negotiating as Part of Purchase
                         Agreements
                       Table 8: Entities to Which Conversion Proceeds Were Directed                 19
                       Table 9: Attorney General Authorities to Oversee Transactions                23
                       Table 10: Features of the NAAG Resolution and the Model Act                  25
                       Table 11: States With Laws Affecting Conversions, and Key                    27
                         Provisions




                       Page 34                       GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
Contents




Abbreviations

CEO        chief executive officer
EBITDA     earnings before interest, taxes, depreciation, and
                 amortization
FTC        Federal Trade Commission
IRS        Internal Revenue Service
JOA        joint operating agreement
NAAG       National Association of Attorneys General
PROPAC     Prospective Payment Assessment Commission
RFP        request for proposals


Page 35                        GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
Appendix I

Objectives, Scope, and Methodology


              In response to concerns surrounding not-for-profit hospital conversions,
              we were asked to determine for these conversions the methods used to
              value assets, to what extent funds from the sale of hospital assets are
              directed to foundations, to what extent the proceeds from hospital
              conversions are fulfilling their charitable missions, and what role federal
              and state governments play in the conversion of hospitals from
              not-for-profit to for-profit status. As part of our review of the conversion
              process, we also reviewed the processes used for soliciting interest and
              receiving bids; the terms negotiated as part of the sales agreement,
              including provisions for charity care; and the extent of community
              involvement.

              To accomplish these objectives, we worked with three major
              investor-owned hospital corporations—Columbia/HCA Healthcare
              Corporation, Quorum Health Group, and Tenet Healthcare
              Corporation—to develop a list of not-for-profit hospital conversions
              occurring after 1990.17 We used this list to judgmentally select six states
              and 14 sites. We chose these states—Alabama, California, Louisiana, South
              Carolina, Tennessee, and Virginia—and sites because they had one or
              more of the following characteristics: asset sales and joint venture
              transactions; multiple conversions, conversions involving multiple
              investor-owned companies, or both; and transactions in which the
              proceeds were directed to foundations. Our review focused on reviewing
              the conversion processes used by the hospitals selected for site visits, and
              therefore the results cannot be generalized nationally, to a particular state,
              or to a particular investor-owned company.

              To determine the methods used to value assets, the processes used for
              soliciting interest and receiving bids, the terms negotiated as part of the
              sales agreement, and the extent of community involvement in the
              conversion process, we interviewed for-profit hospital chief executive
              officers (CEO); attorneys who represented the not-for-profit hospitals in the
              conversion transactions; and other hospital, university, city, and
              foundation officials with knowledge of the not-for-profit hospital
              conversion process. We also interviewed officials at accounting firms,
              consulting firms, and valuation companies to determine their overall
              involvement in the conversion process and, specifically, the process(es)
              and method(s) used for valuing the hospital assets. From some hospitals,
              we collected documentation on the valuation estimate or range, purchase
              price, and purchase agreement; officials at other hospitals stated that

              17
               In Feb. 1994, Columbia merged with HCA to form Columbia/HCA Healthcare Corporation. The list of
              not-for-profit conversions we received from Columbia/HCA contains conversions for the merged
              entity.



              Page 36                                 GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
Appendix I
Objectives, Scope, and Methodology




because of confidentiality agreements they could not provide such
documentation. We also reviewed Internal Revenue Service (IRS) guidance
governing the valuation of assets and receiving fair market value. Our
review did not include an analysis of whether each hospital received fair
market value from the sale.

To determine the amount of conversion proceeds directed to a charitable
entity and how the proceeds from the sale were used to fulfill a charitable
mission, we interviewed officials from the charitable entity that received
the conversion proceeds (that is, university officials, foundation board
members and presidents, and city officials) and reviewed supportive
documentation where available. We also reviewed and analyzed
foundation mission and purpose statements, grant award criteria, and
board composition. For those foundations that had initiated a grants cycle,
we reviewed documentation provided on the grants awarded: recipients,
award amounts, and proposed uses.

To determine the role the federal government plays in the conversion
process, we held discussions with officials at the IRS, Department of the
Treasury, Federal Trade Commission (FTC), and Department of Justice. In
addition, we reviewed and analyzed applicable federal laws and
regulations governing not-for-profit organizations and use of charitable
proceeds. We also reviewed selected IRS revenue rulings, hospital and
foundation tax return filings, and FTC Hart-Scott-Rodino antitrust filings. In
some cases, hospital officials did not provide documentation of the
hospitals’ filings with the IRS and FTC.

To determine the role that state governments play in the conversion
process, for each state reviewed, we conducted interviews with
representatives in the attorney general’s office and reviewed and analyzed
copies of relevant state legislation. We also coordinated with Consumer
Catalyst in Boston and an attorney with The Harrison Institute for Public
Law, Georgetown University Law Center, to develop a list and description
of enacted and pending state legislation governing hospital conversions.

To verify our information, we asked individuals involved in or
knowledgeable about the not-for-profit hospital conversions in our study
to review our draft report. We also provided copies of our draft report for
review to the IRS, three experts on hospital conversion issues, and both a
not-for-profit and a for-profit interest group. We incorporated comments
where appropriate




Page 37                              GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
Appendix II

Foundations’ Mission Statements and
Examples of Grants Issued


                                                                         Year, number of grants,
Foundation                        Mission statement                      and total amount             Purpose of grant
Annabella R. Jenkins Foundation   “[S]upport quality health care and 1996 - 29 grants - $706,774 — Provide summer
                                  effective health care programs in                              “camperships” for disadvantaged
                                  the greater Richmond area.”                                    and chronically ill children
                                                                                                 — Provide adult day care services
                                                                                                 — Fund a community program
                                                                                                 that provides medication to those
                                                                                                 who cannot afford to purchase it
                                                                                                 — Fund a vision screening
                                                                                                 project for at-risk children
                                                                                                 — Purchase medical equipment
                                                                                                 for children of indigent families
                                                                                                 — Support a program to increase
                                                                                                 the new blood donor retention rate
                                                                         a                            a
Arlington Health Foundation       “Its mission is to establish,
                                  promote and support programs to
                                  improve the health and well-being
                                  of the people of Arlington and
                                  surrounding Northern Virginia
                                  communities.”
The Assisi Foundation of Memphis “[F]ocuses on support for        FY 1996 - 83 grants -               — Support research in the area of
                                 innovative programs that address $5,306,593                          cell and gene therapy
                                 the needs of Mid-South residents                                     — Support patient care and
                                 in the categories of health and                                      medical research programs
                                 human services, education,                                           — Assist a university’s science
                                 religion, and community                                              and math programs
                                 development.”                                                        — Increase capacity to provide
                                                                                                      services in a child care center
                                                                                                      — Help pay for construction of a
                                                                                                      new animal hospital and
                                                                                                      quarantine space
Baptist Community Ministries      “[I]n keeping with our Baptist         Fall 1997 - 40 grants -      — Expand an existing adult
                                  heritage, Baptist Community            $7,800,000                   caregiver training program and
                                  Ministries is committed to the                                      dependent child day care support
                                  development of a healthy                                            service in a local housing project
                                  community offering a wholesome                                      — Expand childhood
                                  quality of life to its residents and                                immunization programs in a local
                                  to improving the physical, mental                                   housing project
                                  and spiritual health of the                                         — Fund an antiviolence program
                                  individuals we serve.”                                              — Fund a street crime call-in
                                                                                                      reward system
                                                                                                                            (continued)




                                             Page 38                                  GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
                                            Appendix II
                                            Foundations’ Mission Statements and
                                            Examples of Grants Issued




                                                                       Year, number of grants,
Foundation                        Mission statement                    and total amount             Purpose of grant
Drs. Bruce and Lee Foundation     “[T]o advance the general welfare 1996 - 10 grants - $200,000     — Provide CPR and first-aid
                                  and quality of all life in the                                    training in public schools
                                  Florence, South Carolina area by                                  — Rehabilitate summer camp
                                  providing economic support to                                     facilities
                                  qualified programs and non-profit                                 — Purchase extraction equipment
                                  organizations.”                                                   to rescue entrapped victims
                                                                                                    — Purchase new therapeutic and
                                                                                                    testing equipment for speech and
                                                                                                    hearing disorders
                                                                                                    — Purchase biology lab
                                                                                                    equipment at a college
Etowah Baptist Association        “[T]he promotion of fellowship   Fall 1996-97b                    — Support church and missions
                                  among the individual churches,                                    development
                                  the extension of the Kingdom of                                   — Fund a Meals on Wheels
                                  our Lord Jesus Christ by                                          Program
                                  evangelism and other means; the                                   — Provide drug and alcohol
                                  encouragement and enlistment of                                   education in schools
                                  churches in this Association to                                   — Purchase a passenger van for
                                  promote missions, education, and                                  transporting youth
                                  benevolence . . . .”                                              — Fund scholarships
                                                                       a                            c
Good Samaritan Charitable Trust   [M]aximizes the health of the
                                  people of the greater Santa Clara
                                  Valley by expanding access to
                                  health care and promoting
                                  education and wellness.”
Hilton Head Island Foundation     “Our mission is to be a growing      7/95-6/96 - 53 grants -      — Support need-based
                                  community-supported,                 $946,032                     scholarships for community area
                                  [not-for-profit] endowment of                                     students
                                  resources for the betterment of                                   — Support the development of
                                  our community.”                                                   the infrastructure for an affordable
                                                                                                    housing project
                                                                                                    — Develop a program to assist
                                                                                                    patients suffering from diabetes
                                                                                                    — Support development of a
                                                                                                    youth symphony orchestra
                                                                                                    — Implement a new program
                                                                                                    providing educational support for
                                                                                                    disadvantaged youth
                                                                       d                            d
The Jackson Foundation            “[P]romotion and development of
                                  educational activities supporting
                                  and advancing the quality of life
                                  within the communities it serves.”
John Randolph Foundation          “The foundation is committed to     1996 - 18 grants - $250,000   Fund the following agencies:
                                  identifying and supporting                                        — Hopewell Historic Society
                                  innovative and creative health                                    — Virginia Blood Services
                                  and quality of life improvements in                               — Crater Community Hospice
                                  our community.”                                                   — American Lung Association


                                                                                                                            (continued)




                                            Page 39                                GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
                                        Appendix II
                                        Foundations’ Mission Statements and
                                        Examples of Grants Issued




                                                                       Year, number of grants,
Foundation                    Mission statement                        and total amount                 Purpose of grant
                                                                       a                                a
The Lloyd Noland Foundation   Foundation officials reported their
                              plan is to provide long-term and
                              acute health care services to
                              people in Jefferson County.
Mary Black Foundation         “[T]o utilize its resources to           7/96-2/97 - 7 grants -           Fund the following programs:
                              benefit and enhance the health           $64,938                          — Spartanburg County Health
                              status and wellness of citizens of                                        Assessment
                              Spartanburg County.”                                                      — Healthy Communities Training
                                                                                                        Program

                                        a
                                         As of Jan. 1997, this foundation had not yet awarded grants.
                                        b
                                            Number of grants and total amount were not provided by foundation officials.
                                        c
                                         This foundation has not yet awarded grants, but it does fund and operate several health-related
                                        programs, including nine School Health Centers that provide free primary health care to
                                        low-income children.
                                        d
                                         This foundation is not currently issuing grants but has used the proceeds for an aerospace
                                        program; construction of an arts, education, and technology center; and other projects.




                                        Page 40                                      GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
Appendix III

State Legislation


Arizona         Not-for-profit health care entities must give detailed written notice, made
                available to the public, to the attorney general and other state officials 90
                days before transferring or entering into a joint venture involving all or
                substantially all of their assets. Within 30 days of the written notice, the
                parties must, in agreement with state officials, plan a public hearing.
                Notice of the hearing must be published in the newspaper, and the hearing
                must be held within 10 days of the last publication. At the hearing, the
                parties must submit written summary information addressing various
                factors very similar to the deciding criteria in the model act. The attorney
                general may also present information at the public hearing. A public
                record of the hearing must be produced, and the parties must pay all costs
                associated with the hearing.


California      Not-for-profit health facilities must give written notice, which must include
                information specified by the attorney general, and get written consent
                from the attorney general to transfer, or transfer control of, a material
                amount of assets. The attorney general has 60 days from receiving the
                not-for-profit’s notice to issue a decision but may extend the period 45
                days to obtain additional information. Before reaching a decision, the
                attorney general must conduct at least one public hearing, which must be
                publicized in the newspaper at least 14 days before the hearing. The
                attorney general has discretion in reaching a decision but must consider,
                at a minimum, various factors very similar to the deciding criteria in the
                model act. The attorney general may obtain reimbursement for the costs
                incurred in reviewing, evaluating, and reaching a decision. In addition,
                not-for-profit board members who negotiate a conversion are prohibited
                from receiving any renumeration from the for-profit entity.


Colorado        Not-for-profit hospital, medical/surgical, and health service corporations
                wishing to convert to stock insurance companies must file a detailed
                conversion plan, which must be available to the public and contain certain
                assurances, and apply for an amended certificate. The plan must provide,
                for example, that any officer, director, or staff member of the
                preconversion corporation is disqualified from serving as an officer,
                director, or staff member of the postconversion corporation and that no
                one may own more than 10 percent of the combined voting power of the
                postconversion corporation for at least 3 years. Within 30 days of filing,
                the corporation must begin publishing notice of the conversion for 3
                consecutive weeks. The commissioner of insurance must hold a hearing
                before deciding to approve or disapprove the plan and publish the decision



                Page 41                         GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
                       Appendix III
                       State Legislation




                       within 60 days after the hearing. The commissioner must approve the plan
                       if it meets all filing requirements; is fair, reasonable, and not contrary to
                       law or the interests of subscribers, contract holders, or the public; and
                       provides that the postconversion corporation will meet the standards for
                       stock insurance companies.


Connecticut            A not-for-profit hospital may not enter into a conversion agreement with a
                       for-profit entity without providing detailed notice, subject to public
                       disclosure, to the attorney general and the commissioner of health care
                       access. The commissioner must publish a summary of the notice in the
                       local newspaper, and hold a joint public hearing with the attorney general.
                       The commissioner may not approve the conversion unless the community
                       is ensured access to affordable health care; the purchaser has committed
                       to providing health care to the uninsured and underinsured; and, if
                       applicable, safeguard procedures are in place to avoid conflicts of
                       interests. The attorney general must conduct a review and approve or
                       disapprove the conversion within 120 days of the original notice. The
                       conversion may not be approved if it is contrary to state law or the
                       hospital failed to exercise due diligence, disclose conflicts of interest, or
                       establish a fair market price. In addition, the conversion cannot be
                       approved if the fair market price has been manipulated to cause the value
                       of the assets to decrease; the financing will place the hospital’s assets at
                       unreasonable risk; any management contract contemplated is not for
                       reasonable, fair value; or a sum equal to the fair market value of the
                       hospital’s assets is not being transferred for charitable health care
                       purposes, support of health care in the community, or a purpose
                       consistent with the intent of any donors to someone selected by the courts
                       and not affiliated with the hospital.


District of Columbia   A health care entity may not execute a conversion to a for-profit entity
                       without the approval of the corporation counsel. The counsel must publish
                       a request to convert in local papers, may hold a public hearing, and has 60
                       days to approve or disapprove the conversion. Approval may not be
                       granted unless necessary steps have been taken to safeguard the value of
                       charitable assets, taking into consideration numerous factors similar to
                       those in the model act. Corporation counsel must ensure that assets are
                       placed into an independently controlled charitable trust and may charge
                       the for-profit entity the costs of investigating the conversion. In addition,
                       the converting not-for-profit entity may be assessed a conversion fee equal




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          Appendix III
          State Legislation




          to 10 percent of the property tax it would have paid during the past 5 years
          had it not been tax-exempt.


Florida   Any county, district, or municipal hospital organized under state law may
          be sold or leased to, or enter into management or operating contracts
          with, any Florida corporation. The hospital governing board must find that
          the arrangements are in the best interests of the public and state the basis
          of such finding. The terms of any such arrangements must be determined
          by the applicable county, district, or municipal governing board, which
          must, if it elects to lease or sell the hospital, publicly advertise the meeting
          where the terms will be considered and an offer to accept proposals from
          all interested and qualified purchasers. Any sale must be for fair market
          value, and any sale or lease must comply with all antitrust laws. If the
          hospital receives more than $100,000 annually from the county, district, or
          municipality that owns it, the corporation must be accountable to the
          government entity regarding how the funds are expended. This is done by
          making the funds subject to annual appropriations or, where there is a
          contract to provide funds to the hospital for more than 12 months, making
          it possible to modify the contract with 12 months’ notice.


Georgia   To convert, a not-for-profit hospital must provide the attorney general with
          a detailed notice 90 days in advance, make the notice available to the
          public, and pay a $50,000 fee. Within 10 days of receiving this notice, the
          attorney general must publicize the proposal in the newspaper and invite
          comments. Within 60 days of receiving the notice, the attorney general
          must hold a public hearing to ensure that the public’s interest is protected.
          Under the law, that interest is not protected unless there has been
          adequate disclosure that appropriate steps have been taken to ensure that
          the transaction is authorized, the charitable assets safeguarded, and the
          proceeds used for charitable purposes. This disclosure must address a
          long list of factors similar to those in the model act. The attorney general
          generally must issue his findings regarding compliance with the law’s
          requirements within 30 days of the hearing. In addition, no hospital owned
          by a hospital authority may be sold, or leased unless a notice is provided
          and a local public hearing is held 60 days prior to such transaction. If such
          a hospital is leased, the lease must provide that at least one member of the
          hospital authority will serve as a full voting member of the lessee’s
          governing body and that the governing body will submit financial
          statements annually to the governing authority of the county where the
          hospital is located.



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            Appendix III
            State Legislation




Illinois    Provisions enacted in 1990 authorize county-operated hospitals to be
            transferred, sold, or leased, by ordinance or resolution, to responsible
            corporations or other entities. A public hearing must be held first with
            notice about the hearing published in the newspaper at least 10 days
            before it is held. If the hospital workforce is unionized and the workforce
            will remain substantially the same, the hospital must continue to recognize
            the union for collective bargaining purposes if it timely asserts its
            representational capacity.


Indiana     After a public hearing (notice of which must appear in the newspaper 10
            days in advance) and if the county and hospital governing board agree,
            county-operated hospitals may be leased. If a county and hospital
            governing board agree that it would be in the county’s best interest, such a
            hospital may also be sold to a not-for-profit hospital corporation to
            operate it, but if the corporation ceases operation the hospital reverts
            back to the county.


Kansas      No conversion of an insurer, including not-for-profit medical and hospital
            service corporations, may take place unless certain requirements are met.
            These requirements include filing a detailed statement about the
            transaction or merger and paying a $1,000 filing fee to the commissioner of
            insurance. If the commissioner approves, and after a public hearing, the
            transaction or merger may take place. The commissioner may not approve
            if the insurer would no longer satisfy licensing requirements, the financial
            condition of the acquiring party would jeopardize or prejudice the interest
            of policyholders, the plans are unfair and unreasonable to policyholders
            and not in the public interest, or the characteristics of the individuals
            involved are such that the merger would not be in the interest of the
            policyholders or the public or it is likely to be hazardous or prejudicial to
            the insurance-buying public.


Louisiana   Health care facilities are expressly authorized to enter into cooperative
            agreements or merge with other health care facilities. Such facilities may
            apply (for a fee) to the state Department of Justice for a certificate of
            public advantage, which is intended to immunize them from antitrust laws.
            After a hearing, the Department may issue the certificate if the transaction
            is likely to result in lower health care costs or improved access to health
            care, or higher quality health care without an undue increase in costs. In
            addition, at least 30 days before a conversion, a not-for profit hospital



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           State Legislation




           must submit a detailed application to the attorney general, who must
           publish a notice about it in the newspaper within 5 working days of
           receiving it and who has 60 days to review it and approve or disapprove it.
           The attorney general must hold a public hearing and approve the
           transaction unless he or she finds the transaction is not in the public
           interest because appropriate steps have not been taken to safeguard the
           value of charitable assets and ensure that proceeds are used for
           appropriate health care purposes, taking into account a range of criteria
           similar to those in the model act. In order to prevent the acquisition from
           going forward, the attorney general must seek an injunction blocking the
           action.


Maine      All nonprofit hospital and medical service organizations must file a
           statement of ownership interests and charitable purposes with the
           attorney general by the end of 1997, and it must be approved by the courts.
           All assets of such organizations are expressly held in charitable trusts. To
           engage in a conversion, a nonprofit hospital and medical service
           organization generally must submit a charitable trust plan to the attorney
           general that meets certain requirements (related to, for example, meeting
           unmet health care needs), and the plan must be approved by the courts.


Nebraska   No one may engage in the acquisition of a not-for-profit hospital without
           submitting a detailed application, made available to the public, to the
           Department of Health and the attorney general. Within 5 days of receiving
           the application, the Department must publish a notice about it in the
           newspaper. Within 20 days of receiving the application, the attorney
           general must decide whether to review it. The Department, and the
           attorney general if that office will conduct a review, must hold a hearing
           within 30 days of receiving the application. The Department has 60 days
           from receipt of the application to approve or disapprove the acquisition
           solely on the basis of specific criteria in the law. On the basis of whether
           the acquisition is in the public interest, the attorney general also has 60
           days to approve or disapprove the acquisition, or it is deemed approved.
           Acquisitions are not in the public interest unless appropriate steps have
           been taken to safeguard charitable assets and ensure that proceeds are
           used to provide charitable health care. In determining if the appropriate
           steps have been taken, the attorney general must consider criteria similar
           to deciding criteria under the model act.




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                 Appendix III
                 State Legislation




New Hampshire    In addition to authorities retained by the attorney general and
                 commissioner of insurance, the director of charitable trusts must approve
                 any conversion involving a health care charitable trust. The governing
                 body of any such trust must submit a detailed notice to the director 120
                 days before the transaction and provide reasonable public notice. The
                 director may hold a public hearing and must ensure that the governing
                 body of any such trust has acted in good faith, fulfilled its fiduciary duties,
                 and met numerous other requirements similar to those in the model act.
                 The commissioner of insurance may, however, waive these requirements if
                 the transaction is necessary to avoid the future impairment or insolvency
                 of health insurer or health maintenance organizations that are involved.


New Jersey       For a health service corporation to convert to a domestic mutual insurer,
                 the governing board must adopt a resolution to convert that includes a
                 detailed plan for conversions by a two-thirds vote of all directors. The plan
                 must be submitted to the commissioner of insurance, and after 30 days’
                 notice, a public hearing must be held. The commissioner must approve or
                 disapprove the plan within 30 days after the hearing.


North Carolina   Municipalities and hospital authorities may lease, sell, or convey any
                 hospital facility to a for-profit corporation. To do so, they must first adopt
                 a resolution of intent, request proposals, and hold a public hearing. Then
                 they must hold another public hearing on the proposals, which must be
                 made available to the public before the hearing. Finally a proposal may be
                 adopted only if it is determined at another meeting to be in the public
                 interest. The corporation must agree to provide the same or similar
                 medical services and access to them, and a report must be prepared
                 annually to document compliance. The hospital reverts back to the
                 municipality or hospital authority if the corporation fails to comply. A
                 municipality or hospital authority may also lease hospital land to, or enter
                 into a joint venture with, a for-profit corporation, so long as the hospital
                 facility is maintained as the corporation would have been required to
                 maintain it had the corporation bought it. In addition, a public hospital
                 may acquire ownership interest in a not-for-profit or for-profit managed
                 care organization.


North Dakota     Not-for-profit health service corporations may convert to not-for-profit
                 mutual insurance companies, by seeking approval from the commissioner
                 of insurance under the same procedures as required for consolidation, but



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         Appendix III
         State Legislation




         are not authorized to convert to for-profit status. The new not-for-profit
         mutual insurance company may continue to provide health care and
         related service to members and subscribers and make payments directly to
         hospitals and others rendering such services. The laws governing other
         mutual insurance companies generally apply, but not-for-profit
         corporation laws apply to the operation and control of a nonprofit mutual
         insurance company that converted from a not-for-profit health service
         corporation. If any assets of the not-for-profit health service corporation
         were considered to be in a charitable trust, conversion does not create a
         breach of that trust nor provide grounds for disapproving the conversion.


Ohio     A not-for-profit health care entity proposing a transaction must provide a
         detailed notice, made available to the public, to the attorney general. Not
         more than 7 days after providing the notice, the entity must publicize it in
         the newspaper. The attorney general has 60 days from the time the notice
         is submitted to approve or disapprove the transaction but may, for good
         cause, extend the deadline 90 days. In deciding whether to approve or
         disapprove the transaction, the attorney general must consider, for
         example, if it will result in a breach of fiduciary duty, if the entity will
         receive full and fair market value, if the proceeds will be used for the
         entity’s original purpose, and any other criteria considered appropriate.
         The attorney general may obtain reasonable reimbursement from the
         entity for the cost of making the determination. If the attorney general
         approves the transaction, the entity must hold a public hearing to receive
         comments on the proposed use of the proceeds not later than 45 days after
         it receives notice of the approval. The proceeds must be dedicated and
         transferred to one or more new or existing tax-exempt charitable
         organizations, which may include a foundation if the attorney general finds
         that it meets certain conditions.


Oregon   Any public benefit or religious corporation that operates a hospital (unless
         the hospital is controlled by a political subdivision of the state) must
         provide a detailed notice to and obtain approval from the attorney general
         before converting the hospital to a noncharitable entity, unless it has
         requested and received a waiver, the attorney general has not responded
         to its request for a waiver within 45 days, or the transaction is of a type the
         attorney general has by rule excepted. A mailing list must be maintained of
         members of the public who have requested, and for a fee must be sent,
         copies of such notices. If requested, however, the attorney general may
         maintain the confidentiality of submitted information deemed to be “trade



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               State Legislation




               secrets” unless it is necessary to the determination of an issue to be
               considered at a public hearing on the transaction. Such a hearing is
               required unless the attorney general waives the requirement. Notice must
               be sent to the people on the mailing list about the hearing or waiver of the
               requirement to hold one. If the attorney general has received all the
               necessary information to make a decision, on the basis of whether the
               conversion meets criteria similar to those in the model act, the attorney
               general must approve or disapprove the conversion within 60 days of
               receiving the original notice about it. Fees may be charged to the costs
               incurred in reviewing and evaluating the transaction.


Rhode Island   No conversion may take place without the approval of the attorney general
               and the Department of Health. Detailed applications must be filed and the
               information in them is generally public. Within 10 days of receiving the
               application, the attorney general publishes notices about the conversion
               and a public hearing to consider it in the paper. The attorney general has
               120 days after receiving the application to approve or disapprove the
               conversion and forward it to the Department of Health for review. The
               attorney general may compel parties to testify, and all costs of reports
               generated and experts consulted may be charged to the transacting
               parties. The attorney general must consider a lengthy list of criteria,
               including criteria similar to those in the model act, in determining whether
               to approve the conversion. Proceeds from the conversion must be
               transferred to a charitable foundation, with a judge appointing the initial
               board of directors. Limits are imposed on the frequency with which a
               for-profit corporation may acquire greater than a 20 percent interest in a
               hospital.


South Dakota   Upon the sale, transfer, or merger of at least 30 percent of the assets of a
               not-for-profit corporation, certain information must be submitted within
               60 days after the transaction to the secretary of state on a form provided
               for that purpose. The required information includes information about the
               parties involved, the terms of the transaction and dollar amounts involved
               in it, and an explanation of how the transaction furthers the purpose of the
               not-for-profit corporation.


Texas          Hospital boards may contract with other facilities to supply services and
               for the sale or lease of hospital facilities only with the approval of the
               commissioners’ court. Charity care and community benefit requirements



               Page 48                         GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
             Appendix III
             State Legislation




             are set for hospitals. A not-for-profit hospital must submit to state officials
             an annual report that includes its mission statement, information about the
             charity care and community benefits it provides, and financial data. In
             addition, state officials must provide the attorney general and comptroller
             with a list of hospitals that did not meet the charity care and community
             benefit requirements each year. A mutual insurance company may convert
             to a stock insurance company, but it must first file copies of documents
             relating to the conversion plan with the commissioner of insurance, who
             has 60 days to approve or disapprove the plan but can, on written notice,
             extend this time by 30 days. The commissioner may hold a public hearing
             on the plan, and eligible members of the mutual insurance company must
             have an opportunity to comment on it. If approved by the commissioner,
             the plan becomes effective only after the affirmative vote of eligible
             members.


Vermont      No not-for-profit hospital service corporation or medical service
             corporation may engage in a conversion involving more than 10 percent of
             its assets without applying to and receiving approval from the
             commissioner. The commissioner must hold at least one public hearing
             within 30 days of receiving an application and approve or disapprove it
             within 30 days of the hearing. In considering an application, the
             commissioner must consider factors such as whether the transaction will
             provide cost-effective, high-quality care.


Virginia     Before the disposition of assets, a not-for-profit entity must provide notice
             to the attorney general in order for the attorney general to exercise
             common law and statutory authority over the transaction. The notice must
             be given at least 60 days before the effective date of the proposed
             transaction in order for the attorney general to exercise his common law
             and statutory authority over the activities of the entity. Within 10 days of
             receiving this notice, the attorney general must publish information about
             the proposed transaction in the newspaper. In addition, with the approval
             of the State Corporation Commission, a domestic mutual insurer may
             convert to a domestic stock insurer. After notice and an opportunity to be
             heard are given to policyholders, the Commission must approve the
             conversion if, among other things, it is fair and equitable to policyholders.


Washington   A person may not engage in the acquisition of a not-for-profit hospital
             without first submitting a detailed application, which is considered a



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Appendix III
State Legislation




public record, and paying a fee to cover all the costs of considering the
application to the Department of Health. The Department must publish a
notice regarding the application in the newspaper, conduct one or more
public hearings, and forward a copy to the attorney general. Generally
within 45 days of the first public hearing, the attorney general must issue
an opinion on whether the transaction meets requirements similar to those
in the model act. The Department then has 30 days to approve or
disapprove the transaction, depending on whether it will detrimentally
affect the continued existence of accessible, affordable health care
responsive to the community. This is determined on the basis of whether
the transaction meets certain minimum standards.




Page 50                        GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
Appendix IV

GAO Contacts and Staff Acknowledgments


                  James O. McClyde, Assistant Director, (202) 512-7152
GAO Contacts      Ann Calvaresi Barr, Project Manager, (202) 512-6986
                  Janina Johnson, Senior Evaluator, (202) 512-7139


                  In addition to those named above, the following staff made important
Staff             contributions to this report: Rachel DeMarcus, Assistant General Counsel;
Acknowledgments   Joseph E. Jozefczyk, Assistant Director; Madeline Chulumovich, Senior
                  Evaluator; Rodney Hobbs, Senior Evaluator; Craig Winslow, Senior
                  Attorney; and Nancy Crothers, Communications Analyst.




(108295)          Page 51                        GAO/HEHS-98-24 Not-for-Profit Hospital Conversions
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