New Report Examines Health-Care Conversion Funds

More than $18-billion is now held by grant-making organizations created after nonprofit health-care groups

converted to for-profit status, a nearly $2-billion increase over 2003, a new report says.

The report by Grantmakers in Health, a Washington group that represents foundations and corporate-giving programs, identified 174 so-called conversion organizations, including nine created since 2001. Total assets held by these foundations rose by 12 percent from 2003 to 2004, reflecting both the addition of new foundations and improvements in the stock market that allowed the organizations’ endowments to grow faster.

Approximately 46 percent of the conversion organizations are private foundations, 50 percent have charity status, and 4 percent are classified as social-welfare organizations, which face fewer restrictions on their spending than charities or foundations.

Because private foundations are legally bound to give away at least 5 percent of their assets annually, those organizations are likely to make grants of $475-million or more this year, the report said.

Most of their grant making is focused on health needs, although about one-third of the organizations surveyed said they gave to other causes, including education, arts and culture, and community and economic development.

More than half the conversion organizations surveyed were created from 1994 to 1999, as nonprofit hospitals, health systems, and health-care plans were bought by or merged with companies. Over the past five years, the pace has slackened somewhat, with just a fifth of the organizations formed in that time.

But the report predicted that conversions will continue, particularly by hospitals, because of the competitive hospital market. Currently, two-thirds of conversion organizations were created with the assets of nonprofit hospitals. By contrast, health-plan conversions, which account for 17 percent of the organizations surveyed, are becoming less common amid growing opposition by lawmakers and others to such a shift in tax status. Most states require the assets of a nonprofit health-care entity to continue to be used for charitable purposes even after the organization changes status.

Governance Policies

Many of the conversion organizations were criticized in the years after their creation because, some nonprofit leaders and state officials said, not enough money was going to legitimate projects dealing with health, and the boards of the philanthropies were not operating independently. But as these grant-making organizations become more established, the report says, they are developing stronger governance and investment policies.

Most of the groups (73 percent) have term limits for board members, and nearly all — 87 percent — have a formal process for awarding grants, rather than allowing trustees to allot the money at their own discretion.

About half the organizations have an explicit policy on how they spend their money, the report says. The median amount spent on administrative and operating expenses was 1.2 percent of a foundation’s assets, meaning half spent more and half spent less.

The health-care philanthropies take a wide array of approaches to investing their money, according the report.

The average foundation reported investing 60 percent of its money in stocks and stock funds, but such investments represented anywhere from 0 to 92 percent of a foundation’s portfolio. The average rate of return on their investments was 16.4 percent, with a range between 7.8 percent and 25.1 percent.

Board Diversity

While the report praised the conversion philanthropies for becoming savvier in their governance and grant-making operations, it said the organizations should do more to diversify their boards.

For instance, it said 44 percent of the organizations had fewer than three female board members, compared with 46 percent three years earlier. In addition, it said members of racial or ethnic minorities make up only one-fifth of board members in a typical foundation, a small gain over the past few years.

The report also urged the foundations to do more to disclose information about their operations. It noted that 34 percent of the organizations do not release annual reports.

Copies of the report, “The Business of Giving: Governance and Asset Management in Foundations Formed From Health-Care Conversions,” can be ordered from Grantmakers in Health, 1100 Connecticut Avenue, N.W., Suite 1200, Washington, D.C. 20036; (202) 452-8331. The cost is $30 apiece. A free copy of the report is also available on the organization’s Web site, http://www.gih.org.