Not-for-Profit Hospitals:

Conversion Issues Prompt Increased State Oversight

HEHS-98-24: Published: Dec 16, 1997. Publicly Released: Jan 5, 1998.

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Pursuant to a congressional request, GAO reviewed the process that some not-for-profit hospitals have used in converting to for-profit status, focusing on: (1) the method used to value assets; (2) the process used to solicit interest and obtain bids; (3) the terms negotiated as part of the sales agreement, including provisions for continued charity care; (4) the extent of community involvement in the process; (5) how the proceeds from the sale were used to fulfill charitable missions; and (6) the role state and federal governments play in regulating and monitoring hospital conversions.

GAO noted that: (1) the process of converting from a not-for-profit hospital to a for-profit hospital was similar among the transactions GAO reviewed; (2) most 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; (3) standard industry methodologies were used to estimate the value of the 14 not-for-profit hospitals GAO reviewed; (4) 8 of the 14 hospitals received multiple bids, and almost all of the hospitals reported accepting a purchase price greater than the valuation estimate; (5) in negotiating conversion terms, most hospitals included provisions for continued charity care and services in the agreement; (6) the for-profit hospital or joint venture boards resulting from the conversions are responsible for monitoring compliance with these agreements and ensuring that they are enforced; (7) except for members of the boards of directors, community involvement in conversion decisions was limited; (8) net proceeds reported from the conversions totalled about $950 million; (9) of the 14 transactions, 12 directed net proceeds to charitable foundations; (10) in most states, attorneys general have authority to monitor and oversee hospital conversions through common law and not-for-profit corporation law; (11) for nine of the conversions reviewed, five state attorneys general exercised their authority to review the conversion process; (12) states are beginning to increase the authority of attorneys general through specific conversion legislation, allowing a state official to review the terms of the deal and the direction of the charitable proceeds; (13) the federal government's role in monitoring hospital conversions is carried out mostly by the Internal Revenue Service (IRS) and the Federal Trade Commission (FTC) which oversee tax and antitrust issues; (14) 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; (15) another issue related to joint ventures involves the participation of individuals on both not-for-profit and for-profit boards, creating a potential conflict of interest; and (16) FTC officials reported that antitrust issues related to hospital conversions do not differ from other mergers and acquisitions, and the agency's involvement has generally been limited to a routine oversight role.

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