The valuation estimates generally represent a benchmark for the not-for-profit hospital to use in negotiating a purchase price. Of the 14 hospitals, 7 received more than one bid. The not-for-profit and for-profit parties to the purchase agreements are relying on the new for-profit hospital boards of directors to monitor compliance and ensure that the terms of the agreements are enforced.Although the for-profit entities and board members are responsible for fulfilling the terms of the agreements, for-profit boards are also responsible for the interests of stockholders and the profitability of the hospital. Specifically, they said public participation in the sales transactions could be detrimental to the value of the selling hospital or result in the disclosure of trade secrets. Of the 14 conversions in our review, 12 directed proceeds to foundations. Some Attorneys General Have Exercised Their Authority to Oversee Conversions

State attorneys general generally have authority to review not-for-profit conversions and, where appropriate, to enforce state requirements that protect charitable benefits. Attorneys general in four states in our review (Alabama, California, South Carolina, and Tennessee) reported that authority to oversee and monitor hospital conversions is granted through state provisions related to not-for-profit corporations. The Virginia attorney general has authority to review conversion transactions through common law. According to the American Hospital Association, hospital officials should (1) ensure that they have devised a plan for providing charity care and other essential community services, (2) obtain a valuation of charitable assets by an independent party, (3) ensure that the resulting charitable entity continues to serve the appropriate health needs of the community, (4) disclose publicly the terms of the agreement and provide an opportunity for public comment, and (5) inform the appropriate state official of the terms of the conversion. For all three joint ventures we reviewed, the charitable foundation board members also participated on the for-profit joint venture board. Joint operating agreements (JOA) raise similar private benefit and conflict-of-interest issues. In carrying out their oversight roles, FTC and Justice investigate and challenge, where appropriate, potentially anticompetitive hospital mergers and acquisitions. IRS officials responded that the report generally reflects the agency’s position. Objectives, Scope, and Methodology

In response to concerns surrounding not-for-profit hospital conversions, we were asked to determine for these conversions the methods used to value assets, to what extent funds from the sale of hospital assets are directed to foundations, to what extent the proceeds from hospital conversions are fulfilling their charitable missions, and what role federal and state governments play in the conversion of hospitals from not-for-profit to for-profit status. As part of our review of the conversion process, we also reviewed the processes used for soliciting interest and receiving bids; the terms negotiated as part of the sales agreement, including provisions for charity care; and the extent of community involvement. To determine the methods used to value assets, the processes used for soliciting interest and receiving bids, the terms negotiated as part of the sales agreement, and the extent of community involvement in the conversion process, we interviewed for-profit hospital chief executive officers (CEO); attorneys who represented the not-for-profit hospitals in the conversion transactions; and other hospital, university, city, and foundation officials with knowledge of the not-for-profit hospital conversion process.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the process that some not-for-profit hospitals have used in converting to for-profit status, focusing on: (1) the method used to value assets; (2) the process used to solicit interest and obtain bids; (3) the terms negotiated as part of the sales agreement, including provisions for continued charity care; (4) the extent of community involvement in the process; (5) how the proceeds from the sale were used to fulfill charitable missions; and (6) the role state and federal governments play in regulating and monitoring hospital conversions.

What GAO Found

GAO noted that: (1) the process of converting from a not-for-profit hospital to a for-profit hospital was similar among the transactions GAO reviewed; (2) most transactions were carried out between boards and executives of the selling hospitals and representatives of the for-profit purchasers and not routinely subject to public disclosure; (3) standard industry methodologies were used to estimate the value of the 14 not-for-profit hospitals GAO reviewed; (4) 8 of the 14 hospitals received multiple bids, and almost all of the hospitals reported accepting a purchase price greater than the valuation estimate; (5) in negotiating conversion terms, most hospitals included provisions for continued charity care and services in the agreement; (6) the for-profit hospital or joint venture boards resulting from the conversions are responsible for monitoring compliance with these agreements and ensuring that they are enforced; (7) except for members of the boards of directors, community involvement in conversion decisions was limited; (8) net proceeds reported from the conversions totalled about $950 million; (9) of the 14 transactions, 12 directed net proceeds to charitable foundations; (10) in most states, attorneys general have authority to monitor and oversee hospital conversions through common law and not-for-profit corporation law; (11) for nine of the conversions reviewed, five state attorneys general exercised their authority to review the conversion process; (12) states are beginning to increase the authority of attorneys general through specific conversion legislation, allowing a state official to review the terms of the deal and the direction of the charitable proceeds; (13) the federal government's role in monitoring hospital conversions is carried out mostly by the Internal Revenue Service (IRS) and the Federal Trade Commission (FTC) which oversee tax and antitrust issues; (14) IRS officials stated that the operation of the joint venture may result in more than incidental benefit to the for-profit partner, thereby creating a basis for denying or revoking the tax status of the charitable entity; (15) another issue related to joint ventures involves the participation of individuals on both not-for-profit and for-profit boards, creating a potential conflict of interest; and (16) FTC officials reported that antitrust issues related to hospital conversions do not differ from other mergers and acquisitions, and the agency's involvement has generally been limited to a routine oversight role.