No Health, No Wealth
San Angelo, Texas, is a sleepy town of 102,000 that still bills itself as the community Money magazine selected back in 1993 as the country's thirty-eighth-best "living environment." One criterion Money used was the quality of the city's healthcare facilities, which included two community hospitals. But times have changed. In 1995, the San Angelo community hospital was sold to Columbia-HCA, the for-profit hospital chain. About $57 million from the sale was preserved, under charitable trust law, and put into a new healthcare foundation to benefit residents.
Yet today more than a quarter of San Angelo residents have no health insurance and little access to healthcare, while many more are substantially underinsured. At town hearings a year ago, residents told of choosing between buying food or heart medicine, of doing without asthma medicine and of going to crowded hospital emergency rooms with toothaches because dentists wouldn't care for them. Meanwhile, the San Angelo Health Foundation has been funding fine arts to the tune of $300,000, making a $200,000 grant for an alumni center at the state university and giving $200,000 for a new animal shelter.
San Angelo's story is not unique. Since 1980, when the election of Ronald Reagan ushered in an era of free-market, privatized economics, more than 400 hospitals and more than a dozen health plans have converted to for-profit status. Most were bought outright by for-profits; a smaller percentage entered into joint ventures, in which just half or less of the nonprofit was sold to a for-profit company. These for-profit conversions are not business as usual, though. Federal and state laws require that when nonprofits become for-profits, the proceeds from the sale must be preserved as public charitable assets and used for purposes similar to those of the nonprofit. After all, a nonprofit's value derives from years of community donations, volunteer work, tax exemptions and abatements, and other benefits bestowed by government and local residents.
Today, there are more than 134 conversion foundations with assets topping $15 billion, in what has been called the largest transfer of charitable assets in history. And a second conversion wave, involving nonprofit insurers, is under way. Blue Cross of California has already converted and New York's Empire Blue Cross and Blue Shield is expected to do the same next year. Foundations created by joint ventures become co-owners with the for-profit company of the hospital and share in the profits and management.
While many foundations have spent millions to improve the healthcare of their communities, there is substantial evidence that a number of them are not living up to their obligations. An examination of six foundations, spread geographically across the country, reveals a pattern of problems in how the boards operate and the grants they make. These include conflicts of interest involving trustees and grantees; boards stacked with the directors from the newly converted for-profit hospital; members with no grant-making experience; lavish spending on trustee meetings, compensation and offices; grant-making to for-profit corporate healthcare companies and consultants; and grant-making with no remote health benefit. Even more troubling is evidence that the quality of healthcare has declined after for-profit conversions--even when foundations maintain partial control. It's just what healthcare activists feared as the for-profit trend accelerated and loyalty to shareholders made the Hippocratic oath seem anachronistic.
Despite the stakes, state and federal regulators and consumer advocates have made little effort to oversee the foundations' operations. About two dozen states now have laws governing conversions of nonprofits, which usually focus on preserving the full value of a hospital or health plan as public charitable assets. Monitoring the foundation after it's up and running is the responsibility of state attorneys general, who have jurisdiction over charities. But it's rarely a priority, says Michael DeLucia, New Hampshire's assistant attorney general for charitable trusts. "Most AG's offices are not well staffed or financed," he says. "We have more pressing issues coming in. The sector has to police itself."
Meanwhile, the philanthropic sector has watched with concern but is publicly silent because it doesn't want to see more scrutiny or regulation of its activities. And communities dazzled by the infusion of grants won't criticize improprieties at the new foundations because that would mean alienating potential supporters.
"This is about power and influence," says Dr. James Hair, lab director of Rapides hospital in Louisiana, which experienced a conversion. "When people get a couple million under their belts," he says of foundation trustees, "it's like a disease."