Stop the Looting of Charitable Assets

The conversion of nonprofit hospitals and insurers to for-profit companies has resulted in the largest redeployment of charitable assets in history, as Mark Dowie noted in his book American Foundations: An Investigative History.

Most states have laws requiring that the assets from the sales be used to benefit the public, often to establish foundations endowed in perpetuity to promote health issues. More than 165 have been set up in 38 states, with assets that exceed $16-billion.

But not all has gone smoothly. Years of legal and political wrangling have swirled around the switch in the nonprofit health industry to private status, and money that should be used to provide health care to the needy is often diverted to other purposes. Foundation leaders have a duty to speak out against the squandering of nonprofit assets, but so far many have been silent, leaving it to others to look out for the public’s interest.

The latest free-for-all over a nonprofit group’s assets is taking place in New York, where the state’s largest remaining nonprofit health insurer, the HIP Health Plan of New York, with more than one million members, may soon convert to a for-profit company. The estimated $1-billion that would be reaped will probably not go into a foundation. Thereby hangs an irony. Established in 1948, HIP was a pioneering effort to serve the health needs of city workers and other New Yorkers. It was started with loans and grants from the Rockefeller and New York Foundations.

New York legislators — all of whom are up for reelection this year — hope the windfall from the conversion will help plug a huge budget hole. Labor unions representing teachers, firefighters, and other municipal workers lay claim to the funds because they have contributed to the insurance group’s revenue over the years through their premium payments. The unions want the money to benefit the workers they represent, for instance through health-care benefits or increases in pension payments. Some unions are also lobbying for the money to be used to provide additional funds for schools in the state.

A precedent for this money squabble was set in 2002, with New York State’s seizure of more than $1-billion in the conversion of Empire Blue Cross/Blue Shield to a private company. Gov. George Pataki, a Republican, struck a back-room deal with Dennis Rivera, the head of New York’s major hospital union, to use more than $700-million of the proceeds for state-financed salary increases for health-care workers. Through fast-track legislation, New York’s Legislature deemed 95 percent of the Empire proceeds available for use by the state. Pushed through without public review or comment, a conversion bill was approved by the Legislature at 4:30 one morning. In return, Mr. Rivera’s union supported Governor Pataki’s re-election bid.

Only 5 percent of the conversion funds were directed to a foundation, whose board is appointed by the governor and the Legislature. Shares of WellChoice, the private company formed after the conversion of Empire, have since increased in value to $2.5-billion. The transaction, challenged by consumer groups, remains tied up in the courts, with all proceeds frozen by a restraining order.

Regardless of what happens in the courts, other states facing budgetary crises may be tempted to view the money from the conversion of nonprofit institutions as government assets. Even if it is legal for states to capture such proceeds, it is bad policy if the money is diverted to other government programs at the expense of those previously served by the nonprofit health organization.

Instead of providing one-shot budgetary relief, consumer and health advocates believe the money from nonprofit conversions should be used more strategically to help the uninsured and others with unmet health needs. In many states, that has been what has happened. Foundations created through conversions have supported neglected areas like health promotion and disease prevention and have tried to close disparities in access to health care and strengthen public health-care institutions. Many are more responsive to community needs than traditional health foundations.

Still, much more needs to be done to guard the public’s interest. Very few states have taken steps to counteract the inherent tension between shareholder interests and those of patients or consumers in a for-profit health corporation. Nor have many made adequate stipulations about the structure and mission of conversion foundations, so some have ended up making grants to causes that have nothing to do with health. What’s more, foundations created with the conversion assets are sometimes shortchanged because the value of the nonprofit organization that is turning into a for-profit is often underestimated. Executives of the converting hospitals and health plans frequently reap overly generous financial benefits in the transactions.

State attorneys general have played a key role in regulating the terms of the health-care conversions. The state attorney general often is “the only party with standing and is therefore the sole representative of the community interest,” as Margaret Garigan of Georgetown University has observed in a recent study of conversions. He or she is responsible “for insuring that the charity receives fair market value for the assets being converted, that the transaction is fair to the charity, and that there is no private inurement.”

In many cases, she observes, the attorneys general take their leadership role very seriously, even stopping conversions not in the public interest from taking place.

On the other hand, New York’s crusading attorney general, Eliot Spitzer, allowed the Empire Blue Cross deal to go forward. And legislators dealing with the HIP conversion in New York are trying to eliminate the role of the attorney general and courts in reviewing conversions.

Advocacy groups and other nonprofit organizations have been doing what they can to guard the assets of converting institutions. The HIP conversion is being opposed by diverse groups such as Gay Men’s Health Crisis, the New York Senior Action Council, and the National Committee for Responsive Philanthropy. In its amicus brief in support of such community groups, Consumers Union declares, “The state’s ravenous appetite for nonprofit funds creates a serious and irreconcilable conflict of interest with its health policy and charities’ oversight function.”

Some grant-making coalitions have also sought to influence conversion transactions. For example, the New Mexico Association of Grantmakers met with state regulators to ensure accurate valuation of the state’s Blue Cross/Blue Shield plan and helped design a committee of community leaders to plan the resulting new foundation. A Rutgers University study commissioned by the Council of New Jersey Grantmakers was a factor in the withdrawal of a proposed conversion by Horizon Blue Cross and Blue Shield. Philanthropy Northwest, in Washington State, declares that conversion funds “should be used by state or other government only to address the long-term nature of health problems in our state (not short-term state budget hole filling).”

Over all, however, foundation leaders have not spoken out strongly for the preservation of nonprofit health assets for enduring community health purposes, in part for fear of being entangled in politics. It is time for organized philanthropy to pay greater heed and serve as an advocate in the public interest. Given the financial crisis in the nonprofit world, this is no time to permit more charitable assets to be plundered.

Richard I. Magat, senior fellow at Community Resource Exchange, in New York, is former president of the Edward W. Hazen Foundation.