Introduction
H istorically, the vast majority of hospital care in the United States has been provided by community hospitals generally organized as not-for-profit institutions. These facilities have cared for the health of the public, providing hospital services, often without regard to ability to pay. Although there is mixed evidence regarding the relative performance of not-for-profit and for-profit hospitals, some communities are concerned about the viability of the not-for-profit hospital and its philanthropic history of health care due to the recent growth in the for-profit hospital sector.While only 10% of all community non-federal, short-term general hospital beds in the United States presently are in for-profit institutions, this share is as high as 41% in some states 1 and is projected to grow. 2 Moreover, the pace of movement from not-for-profit to for-profit ownership has accelerated in recent years. 3 From 1980 to 1993, 147 not-for-profit hospitals nationally converted to for-profit ownership status 4 compared to 206 such conversions from 1994-1997. 5 An additional 80 public hospitals converted to for-profit status from 1980-1993. This tremendous shifting of assets raises great concern for the effect that this movement of health care assets from the not-for-profit to the for-profit sector will have upon public benefit.
Why this change at this time? Over the past decade, the health care marketplace has undergone a dramatic shift. Large employers and the government have been increasingly concerned about lowering health costs. This has resulted in changes in hospital reimbursement, including Medicare prospective payment and the rapid shift towards managed care. These market changes have led to declining lengths of stay, a shift to outpatient care and a search for greater efficiencies through health systems integration, jeopardizing the survival of some hospitals.
These rapid changes have challenged the ability of many stand-alone public and not-for-profit facilities to survive and thrive, especially in rural areas. Some did not survive and were closed completely, while others have remained open only by changing their mission and focus (for instance to long term care services). In the face of such changes in the delivery of hospital care, the boards charged with overseeing them have had to look for creative options to keep their hospitals open and their mission intact.
WHAT IS A CONVERSION?
Use of the word "conversion" in the media and academic literature commonly connotes the movement of a hospital from the not-for-profit to the for-profit sector. 6 While such conversions may have a dramatic impact, many of the issues that hospital boards, elected officials and community leaders must consider are similar regardless of whether the tax status of a hospital changes as a result of an organizational shift.Therefore, for the purposes of this guide, our attention is not limited to transactions that change taxable status. Instead, the manual will take into account all arrangements (including leases, joint ventures, mergers and sales) in which control or a significant equity stake in a hospital changes hands. Because our focus is or the potential loss of community control of a hospital, we have excluded for-profit to not-for-profit ownership changes, as these typically do not involve community decision-makers.
WHY STUDY THE CAROLINAS?
North and South Carolina have not been immune to the sweeping changes in the hospital industry seen at the national level. As of late 1997, 17% of hospitals in the two states were under for-profit control (Table 1), with more than half of these the result of conversions since 1983 (Table 2). 7 On the other hand, during this period, fewer than 40% of all conversions in the Carolinas have been to for-profit status. There also have been many instances—particularly in North Carolina—of publicly owned hospitals, which have converted to not-for-profit status. On average, less than 2 percent of Carolinas hospitals have converted each year, but over time, a large number have or will take this important step.Nevertheless, North and South Carolina may differ from other larger, more heavily urbanized health care markets in important ways. Both states have relatively few very large cities, with many small communities dependent upon county-run or non-profit hospitals for their health care services. Such communities are particularly attractive targets for some large hospital chains that recognize some of the unique qualities of rural hospitals making them profitable targets for consolidation. Acquiring companies may seek out communities no longer interested in running the hospital, make relatively few efficiency-related changes to the existing high quality care and good financial shape of these facilities and benefit from the 'natural monopoly' enjoyed by the dominant provider in a region.
The spread of managed care to rural communities has been slower than in urban areas with higher population density.8 Historically, the Carolinas have experienced lower managed care penetration compared to the national average; however, the trend is toward increasing market penetration of managed care products in both states. Consequently, hospitals in the Carolinas face many of the same issues as elsewhere, but in a unique context. This guide is based in part on the experiences of 10 North and South Carolina communities that made a decision to convert ownership of their hospital (Table 3). These case studies provide valuable insights regarding both the processes by which these difficult decisions were made as well as the broad impact of these conversions on each community's well being.The hospitals selected for these case studies were chosen deliberately to represent a variety of approaches to conversion (e.g., leases, joint ventures, sales), and including a variety of different ownership types (e.g., not-for-profit to for-profit, public to not-for-profit). Other case studies have focused on not-for-profit to for-profit conversions only.11
The communities included in this study may be similar to areas in other states and the lessons learned from the Carolinas experience may be helpful to those facing similar decisions. Thus, although it is tailored for those in the Carolinas, the guide may also serve as a community resource for a broader audience across the U.S.PURPOSE
Hospital conversions are very complicated transactions, yet of great importance to the community. They involve issues of the hospital's mission, how to pay for community needs such as emergency room services, and how to use the proceeds in the event a hospital is sold. This manual provides information designed to help guide decisions about potential conversions by county and not-for-profit hospitals.Understanding what has happened elsewhere is key in developing options for hospitals considering some type of ownership change. This guide makes clear there are many differences in how not-for-profit and public hospital conversions are handled. Nevertheless, the common elements and lessons learned from other hospital conversions may benefit decisionmakers in communities across the Carolinas and U.S. faced with similar choices.
Information Sources Used for this Guide This manual includes conclusions drawn from four major sources. The symbol shown for each is used throughout the manual to avoid needing to repeat the nature of each source of information:
* Carolinas Case Studies. 10 case studies of hospital conversions in North and South Carolina occurring after 1980, conducted by Duke University Center for Health Policy, Law and Management (CHPLM).
* U.S. Case Studies. 21 additional case studies of not-for-profit to for-profit hospital conversions in other states, conducted by Project HOPE and U.S. General Accounting Office.8
* Statistical Analysis. An analysis of the impact of conversions occurring in Tennessee, South Carolina and North Carolina between 1990 and 1996 conducted by CHPLM. The analysis examined the impact of conversions on uncompensated care and profits (TN only), access to Medicaid and Medicare patients and availability of services (all 3 states).
* Literature Review. CHPLM also conducted a detailed review of the conversion literature, including the factors determining which hospitals convert, the impact of different types of conversion on communities and the provision of community benefits and the effects of ownership on hospital performance.This guide will not tell you what you need to do in your situation. There is no single "correct" solution to the varied problems and challenges facing hospitals in the Carolinas. This manual provides a framework for decisionmaking for not-for-profit hospital boards, elected officials, community leaders and interested citizens to understand and direct the conversion process. Our presumption is that greater understanding of the context and experiences of those who have undertaken this challenge will assist decisionmakers in other communities to make an informed decision that will provide a positive impact on the health and welfare of their citizens.
II. Decision-Making
A Guide to Communities Considering Hospital Conversion
Durham, NC: Duke University, Center for Health Policy, Law and Management, May 1998.
