RELEASING THE FUNDS
Oversights and strings grow to make sure the leftover money is being spent appropriately on community benefits
A foundation formed when a for-profit company bought an iowa hospital paid for the local fire department's new Jaws of Life.
The struggling community of Ottumwa, Iowa, has found a way to drum up tens of millions of dollars for urban redevelopment, college scholarships, a business incubator and dozens of smaller projects benefitting its residents. But to get there, leaders from across Wapello County had to do what experts say many other community leaders have been loath to do: sell their charitable community hospital to a profit-seeking operator.
In 2010, Ottumwa became the only community in Iowa to host a for-profit acute-care community hospital after Tennessee-based Regionalcare purchased Ottumwa Regional Health Center for $86 million. Proceeds from the transaction went to the creation of a new charity, the Ottumwa Regional Legacy Foundation, which is carrying out an aggressive mission to spend 5% of its endowment annually.
“The good news is, there is new money,” said Brad Little, president and CEO of the Ottumwa foundation. “The bad news is, there’s a reason the community has to sell itself: Because it can’t raise the money itself.”
More than 200 of these healthcare conversion foundations dot communities across the country, and the assets at their disposal exceeded $17.4 billion as of the last comprehensive national study in 2009, conducted by Washington-based healthcare philanthropy organization Grantmakers in Health. Each foundation’s endowment ranges from a cou- ple of million dollars to several billion.
Though their missions vary widely, experts say all of them are formed under the legal principle that tax-advantaged charitable assets should stay in local communities in perpetuity. However, the foundations themselves can serve as magnets for controversy over perceived conflicts of interest, ties to the converted hospitals and roles as watchdogs monitoring promises by for-profit owners.
Many not-for-profits would prefer to merge with another not-for-profit and avoid the need for a foundation, but there’s no guarantee that a new charitable owner won’t simply close the hospital at some point after the merger, said Bradford Gray, a health policy researcher with the Urban Institute. Mayo Clinic, Cleveland Clinic and UPMC, among others, have closed local hospitals in the past two years that they acquired previously.
Nationally, the 1990s saw an explosion in healthcare conversion foundations, stemming from acquisitions by investor-owned hospital chains such as Columbia/hca and Tenet Healthcare Corp. and the conversions of Blue Cross and Blue Shield insurance plans into profit-seeking businesses, said Stephen Isaacs, a partner with healthcare foundation consultancy Isaacs/jellinek in San Francisco.
Clashes over the creation of those foundations, and the lessons learned from 15 years or so of constant operations since then, may offer guidance for what some experts see as a new wave of foundations on the horizon.
“The community engagement from the very beginning that has carried on through has enabled these foundations to be really creative … and open to how they approach issues,” said
Susan Sherry, a deputy director with health policy organization Community Catalyst.
In particular, attorneys general and community advocates continue to ask tough questions about preventing conflicts of interest and golden parachutes for former hospital executives who advocate in favor of hospital conversions and then go to work for the foundations—an issue that dogged such foundations in the past.
As Michigan attorney general, Mike Cox imposed strict anti-conflict rules on foundations created after the $1.3 billion acquisition of Detroit Medical Center by for-profit Vanguard Health Systems in December 2010. In California, Colorado and Nebraska, healthcare-conversion laws specifically forbid decisionmakers from benefitting financially through for-profit conversions, including jobs with foundations.
A March/april 1997 article in Health Affairs noted that board-member pay led to public criticisms of some hospital and insurance executives who went on to get paying jobs with foundations. Other potential forms of self-dealing included board members receiving consulting fees or low-priced stock options in the for-profit acquirer.
In Ottumwa, a majority of the nine board members of the conversion foundation have current or past ties to the formerly not-forprofit hospital. That includes two members who voted in favor of the sale as hospital board members, one being legacy foundation board Chairman Tom Lazio.
Lazio said the hospital board made a conscious decision to have two of its members serve initially on the foundation board. “We wanted people who had a background in healthcare and knew the community and would do what it takes to promote the well-being of the commu- nity,” he said, noting that the foundation does not pay them and board members file annual conflict-of-interest statements.
Little said one of his first orders of business upon becoming president of the foundation was to move the organization’s offices off of the hospital campus to a location in downtown Ottumwa as a sign of its independence from the healthcare provider.
“Initially, we have some representation from the hospital, but there are some things that we are trying to do to distance ourselves from that,” Little said, adding that it can be a challenge to find qualified board members with no hospital ties in a community of 25,000 people where at least 200 people have been affiliated with the hospital board over the years.
Experts say most conversion foundations operate independently of their former hospitals—some are even required by law to maintain independence, under the theory that hospital officials could wield undue influence over the charitable assets.
Ed Kahn, special counsel to the Colorado Center on Law and Policy, said some critics in the state felt that physicians who held dual roles at for-profit healthcare businesses and their legacy foundations in the 1980s had left the charities “partial to the business interests” of the hospitals. Colorado’s Hospital Transfer Act of 1998
was quickly followed by a bankruptcy filing. “This reorganization process will ensure that Christ Hospital will continue to serve the Hudson County community as an acute-care facility,” the hospital said on its website.
The hospital would have been unable to meet payroll in late January without $1 million from Prime Healthcare. When Prime withdrew its bid, the hospital lost any future financial support, according to court documents.
The hospital ended 2011 with liabilities of $70 million and assets of $50 million, following a recent pension settlement, court records said. The hospital’s operating loss for the year totaled $3.1 million on revenue of $144 million.
The bankruptcy court may see more offers for the distressed hospital. Hudson Hospital Holdco, a for-profit with principals who own the 150-bed Bayonne Medical Center and 364-bed Hoboken University Medical Center, made an unsolicited $91.6 million offer in December. A month later, 269-bed Jersey City Medical Center, a not-for-profit hospital, and Community Healthcare Associates, a healthcare real estate developer, came forward with a $104.4 million offer.
Detroit Medical Center’s acquisition by for-profit Vanguard Health Systems steered $150 million to a charitable foundation as part of the deal, announced in 2010 by DMC President and CEO Mike Duggan.