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Conversions 101

Across the country, many nonprofit health organizations such as hospitals, HMOs, and insurance companies have changed and continue to change from nonprofit to for-profit status. These transactions are called “conversions.” Consumers Union’s Model Conversion Act (PDF) defines a “conversion transaction” as occurring when there has been a substantial change in a nonprofit’s mission, or the sale, transfer, lease, exchange, transfer by exercise of an option, optioning, conveyance, conversion, merger, affiliation, mutualization, joint venture or other disposition resulting in the transfer of control or governance of 10% or more of the assets or operations of a nonprofit or $5 million, whichever is less.

Under federal law and almost all state laws, the assets of nonprofit organizations must be permanently dedicated to charitable purposes. When a nonprofit converts to for-profit status, it will no longer be organized to serve such purposes and instead will be dedicated to maximizing profits. Accordingly, a converting nonprofit must transfer the full value of its assets to another nonprofit organization that will serve similar charitable purposes. Essentially, as an organization crosses the border between the nonprofit and for-profit sectors, the law requires that nonprofit charitable assets must continue to be channeled into public benefits and not fall into private hands.

Conversions take on many forms and include outright sales of facility and other assets (or a portion of them), transfers of leases, joint ventures, mergers, affiliations, acquisitions, the creation of for-profit subsidiaries and holding companies, or other deals that effectively change the mission of the nonprofit or transform it into a for-profit corporation.

At stake in these conversions are two extremely important community health resources:

Health services such as indigent care, emergency room coverage, and other health services that are critical for maintaining healthy communities.

Access to these crucial health services is at stake when a community’s nonprofit hospital or health plan changes to for-profit. Key questions that advocates should consider are: Which health services will the new for-profit prioritize? Which services will the for-profit continue or expand? Which services will the for-profit reduce or eliminate? What will happen if the for-profit corporation sells, merges, or transfers to new owners? What happens if the for-profit becomes insolvent or closes its doors? What impact will a conversion have on the quality, accessibility, and affordability of healthcare in a community?

Nonprofit assets that have been built by and on behalf of the public are also at risk when any nonprofit health corporation proposes to convert.

Communities should demand that a nonprofit corporation answer many questions during the review of a transaction to ensure its public assets are protected. The questions include: What is the value of those assets? Will the conversion preserve the assets for nonprofit purposes or will the assets go to the for-profit company for private individuals to reap windfalls? How should the charitable organization that receives the assets be structured to ensure that it is independent from the converting corporation and concerned only with working for a healthy community?

Here is a handy one-pager detailing the important issues that arise around proposed conversion transactions. All of theses issues are explained in greater detail, throughout this site.  Issues Raised When a Nonprofit Hospital or Health Insurer Proposes to Convert to For-Profit Status (PDF)

Nonprofit Health Sector: History and Trends

The greatest nonprofit conversion activity to date has been in the healthcare industry. No other group of nonprofits has experienced such a dramatic shift in resources from nonprofits to for-profits. When the trend first began, regulators were often unwilling or unable to become involved in the conversion transaction. Without strong oversight, the early years of healthcare conversion activity resulted in the loss of millions of community dollars and vast health resources to the for-profit sector. Many of those dollars ended up in the hands of former executives, board members, and employees of the nonprofit as well as private investors. Rarely were the transactions and documents made public.

In the late 1980s and early 1990s, after watching their communities lose millions of dollars that should have been earmarked to further the nonprofit mission, a handful of regulators and consumers gradually joined the conversion debate. Several states passed healthcare conversion legislation to protect the public’s interest in conversions. The first conversion transaction to capture national attention was Blue Cross of California’s attempt to transfer its nonprofit assets to a for-profit subsidiary without preserving those assets for the public’s benefit. As community members learned about the transaction, they formed a coalition and called on regulators to prohibit the conversion unless community assets were protected. The California controversy lasted more than three years. Although initially the nonprofit board of directors and its executives denied their public obligations, by the time regulators signed off on the transaction (PDF) in 1996, more than $3 billion in nonprofit assets had been set aside in two charitable foundations dedicated to healthcare. The community groups’ efforts paid huge dividends. Today, these two foundations together make over $200 million in grants each year to improve access to quality healthcare for Californians.

At the request of Blue Cross of California, the National Blue Cross Blue Shield Association changed its by-laws to allow its members to become for-profit health insurance companies. This had a domino effect on other Blue Cross and Blue Shield plans. Soon after Blue Cross of California proposed its conversion, health plans in Missouri, Colorado, Georgia, and Virginia sought to convert. In some of those transactions, state regulators and the community succeeded in enacting legislation or improving requirements to preserve the assets for the public’s benefit.

But lawmakers and advocates in other states were not so fortunate. In Georgia, for example, Blue Cross and Blue Shield lobbyists convinced the state legislature to permit the nonprofit health plan to convert to a for-profit business without leaving any assets for the community. It took three years and a lawsuit before the community was able to unravel the damage caused by that legislation. Again, the battle was worth it—an $80 million nonprofit health foundation was created in Georgia.

Legal Context

Proceedings regarding conversions within the health industry require the making of policy decisions that can have a widespread impact. For this reason it is important that the decision makers take the community perspective into consideration when they act. Communities and consumers essentially own the assets of nonprofits involved in conversion. The law recognizes and protects the public’s investments in these nonprofits, requiring that the assets remain committed to the public good. Also, the statutes that govern these proceedings often provide for some form of public participation. Such statutory provisions vary from simple public notice requirements or mandatory public hearings to the granting of full party status and providing funding to encourage the participation of consumer groups. Laws that facilitate the participation of consumer groups ensure that agency proceedings result in sound policy development, foster consumer involvement and guarantee that the important work of protecting consumers and the marketplace can continue.

Recognizing a Conversion

A conversion occurs when a nonprofit corporation transfers some or all of the control of its nonprofit assets to a for-profit corporation or to another nonprofit with a different purpose and mission. See the Consumers Union’s Model Conversion Act (PDF) for more essential definitions. A health corporation’s assets can include everything from its building, furniture and equipment to its trademarks and patient lists. Conversion transactions include sales or leases of assets, joint ventures, mergers, affiliations, acquisitions, mutualizations, the formation of for-profit subsidiaries and holding companies, or other deals that effectively transform the nonprofit into a for-profit corporation. In these transactions, which are explained in the sections below, assets are changed from nonprofit to for-profit purposes.