Despite flood of new state laws on conversions, community interests still at risk, study says
Community Interests Still ‘at risk’
Despite flood of new state laws on conversions, community interests still at risk,’ study says
In response to a "tidal wave" of restructurings in the health care market, states have passed a rash of laws that try to protect the public interest in conversions, mergers and acquisitions. Within the last two years, 19 states have passed a total of 21 new laws in this area, says a recently released study by Community Catalyst, Inc. a Boston-based advocacy group and formerly part of
Families USA..
While commending legislators for their quick response to the phenomenon, "not even the best of the new laws is comprehensive enough to protect the many community interests at risk in a nonprofit conversion or merger," the report says.
Among the highlights of the report:
Community Health Services:
Only nine laws require a regulator to consider the community health impact of a conversion. Of these nine laws, all but two govern hospital conversions only. Generally, conversions of health plans or nonprofit insurers are excluded from these reviews
Only seven laws (in GA, LA, NB, OH, RI and WA) give the regulator authority to monitor and enforce agreements on essential community services, free care and community benefits after the transaction. Only three states (CA, ME, RI) require the buyer/acquirer to submit a community benefits plan.
Rhode Island’s law is praised by Community Catalyst because it accomplishes three goals: It places the burden of proof on the buyer/acquirer that free care and community benefits are being provided to underserved populations in the community; it mandates a statewide standard of uncompensated care for both nonprofit and for-profit hospitals and regulators can conduct annual reviews of how each hospital is meeting the standard and can also determine if the standard continues to be adequate.
Charitable Foundations
About two-thirds of the laws require that the value of the nonprofit be transferred to a foundation if there is a conversion to safeguard the public’s financial interest in these conversions, which involve organizations that are not only tax-exempt but which have benefited from donations, grants, volunteer time and "community goodwill." Many of the provisions on setting up foundations focus on valuation issues and other financial issues.
They often fail to otherwise regulate these newly-created foundations and to establish public accountability, the report says.
"What these new laws generally lack is sufficient recognition of the community’s unique role as donor in a conversion foundation," the report says. "Every member of the affected community by virtue of his/her residence has contributed to the assets accumulated in local nonprofit charitable entities."
Without increased accountability, Catalyst cautions that there is a real danger that the funds will not be used appropriately. It cites a 1996 Wall Street Journal article, which reported that a conversion foundation in Tennessee used its endowment to purchase airplanes so that students at the local school could take flying lessons.
A debate has emerged over whether these funds should be used to pay for health services or insurance for the uninsured or whether there should be a broader mission aimed at shaping the system for improved access. The Community Catalyst report states that "at a minimum, it is important to put some language in the legislative provision that guarantees an emphasis on vulnerable populations as opposed to medical research and education, for example."
Vulnerable populations should be represented on the board of directors, Catalyst says. The foundation should be independent of both parties in the transaction and should have access to expertise concerning the health care needs of the community.
Broad range of restructurings
The sale of a nonprofit organization to a for-profit is by no means the only kind of restructuring occurring in the marketplace today. Nonprofits are merging and consolidating with each other and so are for-profit corporations. Associations and joint ventures and mergers across state lines are some of the other transactions. Each of these transactions has different implications. New laws need to use broad definitions of conversions.
One of the key issues to watch is the development of new mutual holding company laws.
"Citing the need to raise capital, mutual insurers have successfully lobbied state legislatures to enact mutual holding company legislation," the report says. New legislation, which varies somewhat from state to state, enables mutual insurance companies to create a series of holding companies, which can sell stock to outside investors.
Only nine laws require a regulator to consider the community health impact of a conversion. All but two govern hospital conversions only.
"Consumer advocates charge that the new mutual holding company laws represent an end-run around the demutualization process because they permit mutual insurance companies to convert to stock companies with compensating their current owners."
At least 15 states and the District of Columbia have passed mutual holding company laws.
The public interest must also be closely guarded when nonprofits spin-off for-profit subsidiaries, says the Catalyst report. Some nonprofits have transferred their most profitable lines of business into for-profit subsidiaries without contributing the value of charitable assets. The nonprofit is left as a shell corporation. According to Catalyst, "conversion legislation passed in Maine and in California enable a nonprofit Blues plan or HMO to transfer virtually all of its business into a for-profit subsidiary, even if that subsidiary plans to offer stock, without triggering the charitable set-aside requirement."
The Community Catalyst report is being published in the March/April issue of the Clearinghouse Review. To obtain a copy, contact the National Clearinghouse for Legal Services at 312-263-3830.
Despite flood of new state laws on conversions, community interests still at risk, study says
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