Change of Status

In reviewing the hospital's long-term strategic options to continue facility operations and improve community services through access to investment capital, the board may decide to sell the nonprofit hospital to a for-profit hospital ownership entity. But before taking this step, trustees must ensure that an open and fair process is used to reach the best decision possible for the organization and the community it serves.

When a nonprofit hospital board considers a sale to a for-profit operator, the attorney general of the home state often is required to provide an opinion regarding the protection of donated assets and the safeguarding of the health and well-being of the state's residents. Because nonprofit hospitals are often major health care providers in a state, and an associated sale involves significant dollars of donated assets and large employment bases, the attorney general will want to ensure that the nonprofit hospital board reached the decision to sell in a comprehensive and transparent way.

In addition, a for-profit conversion can raise numerous community concerns about the continuation of hospital operations, essential services and charity, uncompensated and underinsured care.

The board can shorten the approval process by following basic steps to ensure that there is no conflict of interest, all options have been considered, and no charitable assets are transferred to the for-profit entity. By following these steps, the trustees and hospital leaders demonstrate that the transition from nonprofit to for-profit was a transparent process predicated on serving the community.

Review Process for Conversion

The following list outlines a three-part conversion review process that a board should use when its decision will require the approval of the attorney general: background and process; review of purchaser; and legacy entity considerations. Documentation should be available from board and committee meeting minutes, outside consultant reports, confidentiality agreements, purchase and sale agreements, and filing documents to provide evidence of due diligence.

Background and process:

• Demonstration of a principled reason for the need for change rooted in the charitable purpose of the organization instead of the interest of any buyer
• Evidence of an open review and deliberation process. Information, including all consultants' reports, should be available to all board members. However, this transparency must be balanced with the need for confidentiality. For example, if information is released prematurely, physicians may leave the hospital or worry about an adverse impact on their practice.
• Absence of potential or actual conflicts of interest within the board or senior management
• Demonstration that all viable strategic options, other than the sale to a for-profit entity, were considered. These alternatives should include remaining independent or merging with or aligning with another nonprofit entity.
• Demonstration of consideration of any options that could preserve the community's interest and, as close as possible, continue to fulfill the hospital's mission
• Proof that an independent valuation process was conducted
• Evidence that the short- and long-term risks of the hospital will be assumed and addressed as a result of the approved transaction
• Demonstration that multiple offers have been received and considered.
• Evidence in the board and committee meeting minutes that considerable deliberation occurred over a time frame that allowed for opposing board member opinions to be heard and considered.

Review of purchaser

• Evidence of a review of the potential impact on the for-profit owner's financial performance after overlaying the contractual terms for the potential transaction. This financial review should include the impact of continuing agreed-upon:
  
  1. operations as a hospital.
  2. essential or core services, including those services that have been historically unprofitable.
  3. charity care.
  4. various research and educational programs.
• Determination of any terms and conditions of the sale that result in buyer obligations

Legacy entity considerations

• Evidence that the remaining legacy entity has sufficient funds to monitor compliance with the terms of the sale and to fund any required enforcement.
• Evidence that meetings for employees and physicians, as well as community forums, have been conducted to seek input and discussion regarding the conversion's impact on potential stakeholders.
• Evidence that a plan has been developed to properly redeploy charitable assets according to the terms of the gifts and for the benefit of the community for which the gifts were directed.
• Evidence that the charitable entity receiving the proceeds of any assets of the nonprofit entity is not subject to direct or indirect control by the for-profit purchaser.
• Evidence that the transaction does not allow for future claims on the transferred charitable assets by the for-profit buyer.
• Evidence that any proposed foundations are created in keeping with the required charitable purposes of the donations.
• Evidence that the proposed board members of legacy entities, foundations and the buyer are not overlapping to create conflicts of interest.

Protecting the Community

The conversion of a nonprofit hospital to a for-profit hospital must be a decision grounded in sound financial analysis and informed decision-making. Trustees must undertake a comprehensive review process to ensure that the hospital's service mission will be continued after the transaction is complete. It is their responsibility to investigate options to provide ongoing service, and to vet potential purchasers.

Outside experts can enhance the transparency of the process by providing valuation, process and transaction review, as well as ongoing performance review of both the hospital and the charitable entity.

In a recent conversion situation, experienced advisers enabled the hospital and the attorney general, required to provide an opinion regarding the transaction, to better structure the sale transaction. This structure ensured that the trustees performed their responsibilities both during and after the conversion by providing funding during the transaction to monitor and enforce the charitable purposes clauses in the purchase and sale agreement.

Daniel McMurray (d.mcmurray@focusmg.com) is a managing director with Focus Management Group, Tampa, Fla.