RE­LEAS­ING THE FUNDS

Over­sights and strings grow to make sure the left­over money is be­ing spent ap­pro­pri­ately on com­mu­nity ben­e­fits

Modern Healthcare - - FRONT PAGE - Joe Carl­son

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.

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