Who's minding the store? States snooze as foundations have free hand with $9 billion in public health assets

Watchdog group calls for legislative oversight to ensure that monies are used for health care

Over the past decade, foundations set up to administer the money generated by selling nonprofit health care systems to investors have swelled to almost $9 billion in assets, but there has been virtually no oversight of these foundations or what they are doing with the money, a consumer watchdog group claims.

This is why states have begun to enact laws that give them more control over what happens when these sales occur, and who does what with the money. Nebraska enacted such legislation in 1996, and it has been "tremendously positive," Nebraska state Sen. Don Wesely told fellow lawmakers at a recent meeting of the National Council of State Legislatures in Tarpon Springs, FL.

Nebraska's Non-Profit Hospital Act was prompted by the proposed sale of two not-for-profit hospitals, Mr. Wesely says. Both hospitals eventually decided it was in their best interests to reject their suitors after undergoing the review process outlined in law. Had the law not existed, it's questionable whether the communities would have had the time and resources to determine that, he says.

Nebraska's law requires a prior review of potential conversions and includes specific criteria by which the Attorney General or state's Department of Health and Human Services can veto a proposed deal. Before passage of the law, the state's authority was limited to the attorney general's traditional oversight over the use of charitable assets, and that could have come after the sale was completed.

It's clear the oversight is needed. Blue Cross and Blue Shield of Colorado has struggled with finding the right entity to receive the payoff of the "public mortgage" generated by its conversion from nonprofit to for-profit, plan vice president Carl Miller says. The plan considered, then rejected as impractical, the idea of making past and current policy holders the beneficiaries of the assets of the corporation. Instead, the fair market value of the plan, defined as 100% of the proceeds from the initial public offering, is slated to go to an independent, nonprofit foundation.

Colorado's foundation joins the ranks of huge, cash-rich nonprofit entities that could become a substantial force in health care if that is where their efforts and monies are focused. But at this juncture, critics say, no one—least of all taxpayers—knows just what those foundations are up to.

A big problem gets bigger

That's what concerns Frank McLoughlin, Jr., a staff attorney with a Boston advocacy group called Community Catalyst, which tracks the development and performance of the foundations. By the end of 1997, health-related foundations controlled more than $9 billion in assets in the United States, according to Health Care Conversion Foundations 1997 Status Report, a report supported by the Robert Wood Johnson Foundation and the Henry J. Kaiser Family Foundation.

"It's very safe to say there will be more," Mr. McLoughlin says. "It's a huge issue." So big, in fact, Mr. McLoughlin says its problems can no longer be overlooked. He has three specific worries:

The public may not be getting its money's worth in the rush to sell nonprofits.

There's inadequate oversight to ensure that the foundations set up with sale proceeds are directed toward health care.

There's inadequate oversight to ensure that the foundations are being held accountable for carrying out the activities to which they commit.

A substantial portion of that $9 billion in foundation assets is the result of a single $3.2 billion transaction that created two foundations from the 1996 conversion of Blue Cross and Blue Shield of California. Still, the balance of the foundation activity is more than enough to keep regulators and public watchdogs busy. Almost $6 billion in health care assets is now held in more than 80 foundations that are likely to grow in size and number in the upcoming years.

"These are really going to be a dominant player in health care in the next few years," says Mr. McLoughlin. In particular, smaller communities are likely to feel the impact of the newly created cash-rich foundations. In 1994, for example, the 50,000 residents of Alexandria, LA, saw the creation of the $175 million Rapides Foundation to make grants in the areas of health science education, arts, and "human caring."

"Ideally, residents will have a large, friendly benefactor in their communities—ideally. It's important for the attorney general and others to get involved," Mr. McLoughlin says. If more states take Nebraska's lead and get more involved in the conversion process, Mr. McLoughlin sees several areas for regulators to address:

Undervaluation. The more than $9 billion in assets that conversion foundations had collected by 1997 probably doesn't reflect the full value of the corporations sold off to investors, Mr. McLoughlin says. Most of the conversions occurred in the midst of the health care merger mania of the early and mid-1990s.

"The valuation process and the negotiation process can be unreliable, to say the least," Mr. McLoughlin says. "Given the fact that before 1995, conversion was a new phenomenon, and a lot of regulators and consumer advocates were kind of asleep at the wheel, it's very safe to say there should be more than $9 billion.

"There are hundreds of million of dollars in nonprofit assets still out there that will be converted and put into foundations in the near future. Undervaluation is a real issue, a real concern," he says.

Secrecy. Consumer advocates, the media, and other organizations often do not get good information on conversions as they take place. "We think that is a community right," Mr. McLoughlin says.

Weak regulation. While Nebraska, California, and Colorado should be congratulated for "getting out early" on conversion legislation, regulatory oversight in most states is inadequate, Mr. McLoughlin says.

"Even in states with wide-awake legislators, [conversion] still can be a perilous process for consumers." In Connecticut, Kansas, and Kentucky, for example, regulators are struggling in their battle with Blue Cross and Blue Shield mutual holding companies who want to convert to for-profit status. As mutual companies, the plans are rejecting claims on their assets from anyone other than policy holders. Mr. McLoughlin says this position unfairly ignores the public contributions that have built the Blues since their inception in the 1930s.

"If the contribution set-aside doesn't happen, the investors are getting the [public] benefit for free. Just because now the Blues operate like insurance companies doesn't mean their history is erased," he tells State Health Watch.

But not every state will need new conversion legislation, says Florida League of Health Systems president Ralph Glatfelter. Florida's attorney general felt that his office could effectively oversee nonprofit to for-profit conversions with existing statutory and common law authority, he says.

If legislation is needed, Mr. Glatfelter suggested it contain these features:

• a definition of the types of transactions to which it should apply;

• a specific asset threshold for review;

• a specific timetable for decision making;

• guidelines for what information should be made public and when;

• a restrictive definition of those who can challenge an administrative decision regarding a conversion. "If everyone can challenge, you'll never get from A to B," Mr. Glatfelter says.

Assuming the conversion process is handled correctly, how do regulators evaluate the foundation it establishes? Mr. McLoughlin recommends evaluating a conversion foundation on whether it remains true to the mission of the nonprofit entity that created it, whether the foundation is responsive to the community, and whether it is effective in carrying out its goals.

Finally, legislators should prepare to address the conversion of for-profit hospitals to nonprofit status, a panel of NCSL members said. While the end result is different, the need for public access and oversight of the process is just as crucial, they said. "For-profit health care comes, but it doesn't always stay," Mr. McLoughlin warns.

Contact Mr. Wesely at (402) 471-2610, Mr. McLoughlin at (617) 338-6035, and Mr. Glatfelter at (850) 224-9407.