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Non-profit conversion: basic corporate structures in healthcare

Basic Corporate Structures in Healthcare

A conversion encompasses a broad range of business transactions. In these transactions, a corporation changes some or all of its assets from nonprofit to for-profit purposes. However, before examining the many forms a conversion can take, it is helpful to discuss the basic structures of healthcare corporations.

Healthcare organizations structure themselves in many different ways depending on particular state laws. Many of the nonprofit categories described below are not mutually exclusive. For example, before Blue Cross of California was a for-profit company, it was both a nonprofit healthcare service plan and a public benefit corporation under California law. Advocates must research state laws to determine the legal corporate structures available to healthcare organizations that may be converting or contemplating conversion. Following is a list of the most common corporate structures for healthcare organizations.

Nonprofit Health Corporations

Public Benefit Corporations: Typically, nonprofit hospitals and clinics and some nonprofit insurers are incorporated under state laws as “public benefit corporations.” Public benefit corporations are organized as nonprofits and operate for broad charitable or public purposes. They fall within section 501(c)(3) or 501(c)(4) of the Internal Revenue Code and are usually exempt from payment of federal income taxes. Not all states, however, have a category of nonprofit corporations defined as public benefit corporations. Some states simply categorize all nonprofits under a general nonprofit corporation law.

Hospital, Health, and Medical Service Corporations: In the 1930s and 1940s, most states enacted laws to allow insurance companies to organize for the first time as nonprofit corporations, giving rise to Blue Cross and Blue Shield plans. Known as hospital, health, or medical service corporations, many states have preserved these special categories for Blue Cross and Blue Shield plans. Where states have maintained these special categories, many but not all, also are governed by a state’s general nonprofit corporation law. Furthermore, a nonprofit corporation can be a hospital, health or medical service corporation and simultaneously be a public benefit corporation.

Mutual Benefit Corporations: A mutual benefit corporation is a nonprofit organization which is dedicated to serving a particular class of individuals. For example, most chambers of commerce are organized as mutual benefit corporations. As a nonprofit, however, a mutual benefit corporation is not owned by the class of individuals it is organized to serve. The assets cannot be distributed directly to the class. Instead, the assets of a mutual benefit corporation must be preserved for nonprofit activity. (This is in sharp contrast to a mutual insurance company, which can distribute its assets upon dissolution to its members.)

Nonprofit or For-Profit Health Corporation

Mutual Insurance Company: A mutual insurance company is organized to benefit its policyholders or members. Unlike mutual benefit corporations, mutual insurance companies are not automatically organized as nonprofits. In most states, private individuals can personally benefit from a mutual insurance company’s activities; therefore mutual insurance companies are not treated as nonprofit corporations. In fact, many are organized under statutes that parallel for-profit stock corporations. Upon dissolution, the mutual insurance company can distribute its assets to its policyholders. There are, however, significant differences between mutuals and for-profit companies. Although members of a mutual insurance corporation (generally the policyholders) are permitted to have an economic interest or own the corporation, they cannot sell their interest. Unlike stockholders in a for-profit corporation, a mutual policyholder retains an interest in the corporation only as long as his/her policy is in effect.

Some insurers that originally were nonprofit health, hospital or medical service corporations and later became mutual insurance companies continue to be nonprofit, even when they become mutual insurance companies. For example, the state of North Dakota created a special nonprofit mutual insurance company law to govern its Blue Cross and Blue Shield plan. The law allowed the Blue Cross and Blue Shield plan to become a nonprofit mutual insurance company. It is still categorized and treated under state law as nonprofit and is defined by law as a charitable and benevolent organization. It cannot distribute its assets to its policyholders, nor can it undertake for-profit activity.

A number of other Blue Cross and Blue Shield nonprofits are now organized as or converting to mutual insurance companies, although many began as health, hospital, or medical service corporations. If a nonprofit corporation becomes a mutual insurance company, or if a mutual acquires a nonprofit corporation, the corporation must retain the responsibility to distribute the charitable assets to another nonprofit with a similar mission. Thus, when a nonprofit becomes a mutual insurance company, the charitable obligation owed to the public is transferred to the corporation in its new form. The mutual company takes the assets of its predecessor subject to the charitable trust obligation. After it becomes a mutual company, any assets built on behalf of its members belong to the members. However, assets built while it was a nonprofit health service and/or public benefit corporation must be preserved for charitable purposes on behalf of the public. Advocates should urge that a snapshot valuation be done at the time the nonprofit becomes a mutual and set aside, because this change in corporate form may make it more difficult to determine a corporation’s charitable assets at a later date.

For-profit Health Corporation

For-profit publicly-held corporations: A for-profit corporation that is publicly-held is owned by and incorporated to benefit the stockholders of the corporation. A publicly-held company makes shares of stock available to the public on a stock exchange, subject to regulation by the Securities and Exchange Commission (SEC). The company must file regular reports with the SEC. Upon dissolution or sale, the company distributes its assets or proceeds to the stockholders.

For-profit privately-held corporations: Privately-held for-profit corporations issue stock or other interests in the company to private investors. Any sale of stock is exempt from SEC regulations. Unlike a publicly-held for-profit corporation, the interests or stock are not available to the public to buy on a stock market. Privately-held corporations may not be required to file any public documents with the SEC.