Assessing Hospital Conversion Options page 4
SALE
Definition: Outright sale of a hospital's assets, name and accounts to another entity in exchange for cash, stock, notes or other property.4 Although subject to certain contractual agreements, the sale of a hospital facility transfers all governing authority to the purchaser, who may or may not choose to include the community in an advisory capacity.
Issues to Consider
Following the national focus on reducing national health care spending, the successful business nature of the for-profit hospital corporations has proven to be attractive to stock market investors. As a result of their financial growth, these national chains have had ready access to the cash needed to pursue integration strategies through the direct purchase of hospitals. A community may clearly benefit from resulting equity from the sale of a hospital facility to a for-profit, with the opportunity to focus on other areas through the formation of a foundation. However, in exchange for these tremendous resources, the community effectively relinquishes all local control of its hospital, subject only to the level of community participation allowed by the acquiring entity. Thus, this is a difficult tradeoff for decision-makers to assess for their communities, raising some of the following questions:How will the sale to a for-profit entity affect the way hospital care is provided in our community?
In exchange for their tax-exempt status, the not-for-profit hospitals have long provided important community benefits such as charity care, outreach and educational services to the areas they have served. It is clearly a great concern that these benefits will be reduced or eliminated through the sale of the hospital to a for-profit institution. However, in analyzing the potential for a loss of health services and other community benefits, the community may be reassured by the fact that the majority of evidence does not show tremendous differences the behavior of not-for-profit hospitals before and after they convert to for-profit status. The differences in performance by ownership type and the possible impact of conversion on community benefits are discussed extensively in Section III.Will the community retain any voice in how the hospital is managed in the future?
Because sales are permanent, communities have to consider carefully how to provide community input regarding the hospital's future operation. An important issue is how to monitor and enforce agreements to maintain community benefits.How will the taxes paid by a newly formed for-profit hospital entity affect the community?
As 501(c)(3) organizations, not-for-profit hospitals are exempt from federal, state, and local property taxes, state sales tax and corporate income tax, to which their investor-owned hospitals, for-profit counterparts are subject. With the decision to bring a for-profit hospital into the community, the community may realize great investment and growth stimulated by the taxes paid by a for-profit hospital. Consequently, the community may focus on much-needed projects such as school and road improvement, while a foundation resulting from such a sale may address other issues of concern, such as health.
NET ASSESSMENT
The conversion process may be viewed as an exercise in finding a balance between continued community control and an acceptable degree of stability for the community hospital. For those making this decision, it may be easier to determine the extent of community control that they believe necessary if the hospital's mission and conversion goals are clearly defined. Judging the situation may be simplified by posing the two-pronged question so fundamental to the conversion process:
There is enormous diversity in how decisionmaking is shared under the various conversion options just discussed. If the community is to retain any such input or authority, this must be negotiated and included in the language of the conversion agreement.
Note that apart from having input into the day-to-day operation of the converted hospital, the community also can retain some measure of control in the form of obligations placed on the new partner. A variety of mechanisms exist to enforce these conditions of a conversion agreement, which also are discussed in Section V. Section V discusses in more detail some of the potential components of a conversion package. These components are at least as important as the basic structure of a conversion deal in terms of the extent to which the community can continue to expect to enjoy the community benefits historically provided by a local hospital.
Even so, such obligations can never cover every future contingency. Thus, to ensure that community interests are taken into account when future decisions are made about hospital activities not covered by such agreements, it generally is desirable to retain some mechanism for on-going community involvement in the converted hospital. These options also are reviewed in Section V.
V. Conversion Package
A Guide to Communities Considering Hospital Conversion
Durham, NC: Duke University, Center for Health Policy, Law and Management, May 1998.
4 Claxton, et al. 1997.
25 Hollis 1997.
26 Gray 1997.
27 See Morlock and Alexander (1986) for an extensive discussion of how the locus of decisionmaking responsibility varies across multihospital systems.
