A Context for Decision-Making 3: Guide to Communities Considering Hospital Conversion in the Carolinas

STEPS IN MAKING THE CONVERSION DECISION
A conversion decision is unavoidably political, as it requires a determination of "who gets what, when and how." There are four important sets of stakeholders in any hospital, including the owners, the managers, hospital-based physicians and hospital employees. In the case of a public or not-for-profit hospital, most governing boards recognize their role as stewards of community assets and the importance of community support for whatever decision is reached.6 Therefore, although the governing board itself clearly is a stakeholder, so too are other community leaders and members of the community.

Each of these stakeholder groups has distinct and sometimes conflicting objectives and the great challenge in any conversion decision is to steer a satisfactory course between these. No communities are entirely alike when it comes to the mission and purpose of a local hospital, its role in the community and the "style" of making a decision so critical to the community as is a hospital conversion. But while the best process for making this decision may differ by community, many of the issues needing to be considered are the same.

Key Objectives in Conversion Decisions
It is clear that the public's interest is better protected when elected officials or hospital boards are held to a high standard of care in the decisions affecting the future of the nation's hospitals. The active involvement of Attorneys General and state agencies in the conversion process across the nation has confirmed this need, resulting in a call for a greater focus on several areas in this process:

Ensuring A Fair Price for Hospital Assets
Not-for-profit and public hospitals have invested a great deal in their respective communities, and vice versa. In a health care environment where hospital beds have been shifting to for-profit ownership and where the future of community-supported hospitals is often uncertain, their governing entities are being asked to ensure that the community will receive adequate compensation when the hospital changes hands. In fact, hospital decisionmakers must effectively become the successful financial executors of tremendous public and community assets.

In large part, this may be accomplished by assuring that the assets of the not-for-profit hospital are correctly appraised, utilizing expert consultants if needed. As discussed later, the charitable nature of a hospital's assets may also be protected by elements of hospital decision-making such as the disclosure of conflicts of interest in any dealings and adequate consideration of existing offers.

Safeguarding Community Benefits
Hospital governing boards must ensure that the community continues to benefit from appropriate use of the hospital and any proceeds from a hospital conversion transaction. This may require the use and monitoring of covenants to ensure, for example, the continued availability of hospital services or access regardless of ability to pay. The sheer volume of funds from a conversion may be used to address the individual needs of the community through health education and prevention programs or direct services for the elderly, handicapped, or terminally ill. These funds may also be used to bolster any potential changes in community benefit that result from conversion. Public hearings offer the community the opportunity to voice opinions and concerns, as well as ask questions that may help guide the most appropriate use of these assets.

Ensuring Appropriate Use of Conversion Proceeds
In making conversion decisions, hospital boards must be aware of the potential for conflicts of interest to arise in the hospital's transition. There is clearly the potential for senior management of a converting hospital to guide a transaction in favor of personal financial gain, such as through securing employment in the new hospital or through lucrative financial arrangements such as golden parachutes., This is also true for individuals who may have a financial stake in the new venture or the potential to hold a position on the board of a hospital conversion foundation .36

One approach to addressing the conflict of interest issue is to prevent those on hospital boards or senior management from being involved in either the converted hospital or a new foundation.6 Note, however, that continuity of experience may be a clear advantage for a new hospital or foundation, providing public assurance that community members sensitive to the customs and needs of the local area will continue to have input into decision-making. Some states have recognized that entirely prohibiting such continued service often is not practical and may not even be desirable, resulting in legislation that requires full disclosure of arrangements rather than prohibited continued involvement. What is important from the public's point of view is that such arrangements are fully disclosed in advance.

In any case, careful oversight and avoidance of conflicts of interest may ensure that the proceeds of a hospital conversion may be used in an appropriate charitable manner. For greater detail on the issues involved in foundation formation, see Section VI of this guide.

Stages in Making A Conversion Decision
A conversion decision is one of the greatest challenges that can face a hospital governing board and the local community. Although it may at first glance appear overwhelming complicated, any conversion decision has three basic stages: Strategic planning

Strategic Planning

Know your hospital (mission, vision, strategy, role in community)
Know your community (health needs, current community benefits from hospital)
Know your alternatives (major options)
Know the rules (restrictions on alternatives posed by articles/charter or federal/state regulations)

Developing a Conversion Package

Determine the hospital's value
Define conditions for transfer of control or ownership (covenants)
Conversion proceeds (foundation)
Define the community's role in governance
Develop mechanisms for monitoring and enforcement
Issue RFP or find a potential partner

Finding a Partner

Obtain review and comments by key stakeholders
Evaluate bids against partnership criteria
Select a potential partner
Develop a term sheet
Negotiate terms

This guide provides information of potential use at each stage. Section III contains a discussion of the hospital's mission and community benefits. Section IV describes the pros and cons of various conversion options. Because the various legal requirements governing conversions touch on several different stages, we have tried to make these more readily accessible (and the guide less redundant) by consolidating them in Section VII rather than discussing them at each stage. Section V directly addresses how to develop a conversion package, but because of the importance of the issue of what to do with conversion proceeds, Section VI is devoted exclusively to this issue. Section VIII contains additional insights on selecting a partner, along with a summary of guidelines by other groups about steps or factors to be considered in conversion decisions to ensure that they reflect the best interests of the community.