Not-for-Profit Hospitals

Competition and the growth of managed care are driving not-for-profit hospitals to sell to, or establish joint ventures with, for-profit hospitals. Between 1990 and 1996, nearly 200 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 made the switch. Not-for-profit hospitals have traditionally provided charitable community services, including uncompensated care for the uninsured. In return, most non-for-profit hospitals have received financial breaks, such as tax exemptions and access to tax-exempt bond financing. Concerns have been raised about the potential loss of community benefits resulting from conversions as well as charitable groups' use of conversion proceeds for nonhealth-related activities. Public disclosure has also been an issue, including the extent of community involvement in the conversion transactions. This report examines several conversion issues, including the potential loss of community benefits associated with not-for-profit hospitals and how sales proceeds are targeted to charitable missions.

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.