Hospital and Health Plan Conversions

Like a number of Blues plans before it, CareFirst Blue Cross and Blue Shield of Maryland pursued conversion from non-profit to for-profit status in 2001. The conversion was part of a proposed acquisition of CareFirst by WellPoint Health Networks, Inc., a for-profit California corporation. Two years later, plans for the conversion and acquisition of CareFirst have been derailed, likely for good.

The actions of CareFirst are part of a rapid trend during the past decade of hospitals and health plans foregoing their non-profit status and corresponding tax benefits to enter the world of for-profit health care.

In exchange for favorable tax treatment, non-profit hospitals and health plans are required by law to satisfy certain social obligations, including the delivery of charity care and other services to the indigent. Community benefit is the hallmark of non-profit health care providers - - they answer to the community. In contrast, for-profit providers answer to shareholders and focus on the bottom line. Accordingly, critics of proposed conversions of hospitals or health plans view these transactions as business deals designed to undermine a community's safety net - - the goal of maximizing profits is seen as directly in conflict with access to charity care for a community's vulnerable population. (See Thorpe K.E., Florence C.S., and Seiber E.E., "Hospital Conversions, Margins, and the Provision of Uncompensated Care," Health Affairs, Vol. 19, No. 6, November/December 2000).

The reasons underlying hospital and health plan conversions are varied and may include weak financial performance, a desire to increase market power, or the need for capital. While opponents of non-profit conversions view for-profit ownership as a signaling of the potential loss of health care benefits for those most in need, there often are clear advantages to an entity changing hands. For example, the establishment of charitable foundations and the influx of taxes from the for-profit provider benefit the community.

The analysis of whether hospital and health plan conversions are in the best interest of the affected community varies for each particular case. The CareFirst analysis included an examination of potential adverse effects on the accessibility, availability, and affordability of health care services, as well as whether the assets of CareFirst were fairly valued. Maryland's top insurance regulator ultimately determined that the conversion would negatively affect quality of care, and the conversion did not materialize.

The typical path from non-profit to for-profit status involves the transfer of assets to endow a charitable foundation designed to continue the good works of the non-profit provider in the community previously served by the non-profit. However, in the current time of state budgetary crises, there appears to be a movement toward alternative conversion structures. In the recent case of New York's Empire Blue Cross and Blue Shield's conversion, $2 billion in assets were funneled into the state treasury for use on health-related programs. (See Robinson J.C., "The Curious Conversion of Empire Blue Cross," Health Affairs, Vol. 22, No. 4, July/August 2003). Whether assets generated by nonprofit conversions are better spent on states' programs or whether the public is better served by channeling those dollars to an independent charitable foundation funding research and demonstration projects is not an easy question to answer.

The most significant question relative to proposed conversions rests on the effect on health care delivery. A key component of the analysis of a proposed conversion is the extent to which the resulting for-profit entity will alter or abandon the charitable non-profit mission. As in the CareFirst case, the core question was whether the conversion would result in a reduction of quality of care and access to care.

Going forward, states will continue to grapple with the many factors influencing how best to allocate conversion dollars, while preserving community benefits, as the trend of hospitals and health plans seeking conversion to for-profit status continues.

HCFO has funded research that directly informs policy related to non-profit conversions:

Title: Corporate Finance and Consolidation in Health Care
Grantee Institution: University of California, Berkeley
Principal Investigator: James C. Robinson, Ph.D.
Grant Period: September 01, 2002 - August 31, 2004

What influence has access to capital had, during the period 2000-2005, on corporate consolidation in two health care sectors: insurance and hospitals? Specifically, researchers at UC Berkeley are examining the financial capital/consolidation relationship by developing quantitative data on capital flows, conducting case studies of leading firms, interviewing capital market participants and analyzing finance literature on agency relationships. The objectives of the project are to use capital market analysis to inform public policy relative to (1) the development of regulations governing financial information disclosure; and (2) the development of regulations (e.g. patent, antitrust) governing the influence of financial capital on health care organization and consolidation and (3) the pros and cons associated with conversions by health plans from nonprofit to for-profit status, including how best to value underlying assets.

Title: Hospital Ownership Conversions
Grantee Institution: Duke University.
Principal Investigator: Frank A. Sloan, Ph.D.
Grant Period: December 01, 1998 - November 30, 2001

What is the impact of hospital ownership changes on strategic and clinical outcomes? Using the Lewin database (approximately 600 conversions), particularly those for which there is complete transaction information (approximately 350), supplemented with data from the Medicare Cost Reports, Medicare Provider of Service Files, American Hospital Association Annual Survey of Hospitals, IRS Sources of Income, and the Area Resource File, researchers from Duke University examined: 1) why some hospitals choose to convert to for-profit status and why they select a particular type of ownership change; 2) in what percentage of cases a "fair" price is paid by the acquiring organization; and 3) how conversions affect the hospitals' internal decision-making process. They also obtained some information by telephone from hospitals and other parties familiar with the transactions. Finally, they analyzed how strategic business decisions and clinical decisions are affected by conducting 20 case studies of converted hospitals, comparing the information collected with similar information from 20 matched control hospitals. The investigators hypothesized that organizational goals vary by ownership and differences in goals are reflected in differences in decision-making processes and outcomes. In addition, they posited that conversion increases uncertainty, which, in turn, may reduce the effectiveness of staff and put the hospitals at risk for poor outcomes. The objective of the study was to provide policymakers and regulators with additional information about where oversight and/or intervention with respect to hospital conversions might be desirable.

• Sloan, F.A., et al. "Antecedents of Hospital Ownership Conversions, Mergers, and Closures," Inquiry, Vol. 40, pp. 39-56, Spring 2003.
  
• Sloan, F.A., et al. "Rates of Return from Hospital Conversions," Health Management Review, Vol. 28, No. 2, pp. 107-118.
  
• Anderson, R.A., et al. "Effect of Hospital Conversion on Organizational Decision Making and Service Coordination," Health Care Management Review, Vol. 28, No. 2, pp. 141-154.
  
• Sloan, F.A. and Garber, A.M. "Hospital Ownership Conversions: Defining the Appropriate Public Oversight Role," Frontiers in Health Policy Research, Vol. 5, 2002
  
• Sloan, F.A., et al. "Are For-Profit Hospital Conversions Harmful to Patients and to Medicare?," Rand Journal of Economics, Vol. 33, No. 3, Autumn 2002.
  

Title: The Impact of Nonprofit Conversions on Community Benefit
Grantee Institution: Boston University School of Public Health
Principal Investigator: Gary J. Young, J.D., Ph.D.
Grant Period: September 01, 1997 - August 31, 1998

How do hospital conversions from nonprofit to for-profit status affect the communities they serve? Researchers at Boston University examined both short-term and long-term impacts using several different measures of community benefit, including uncompensated care, provision of unprofitable services, price discounts, and community representation on governing boards. They also assessed the number of conversions that resulted in either hospital closures or changes in service orientation. The researchers studied hospital conversions in three states: California, Florida and Texas. California and Florida data will cover the period between 1979 and 1996; Texas data span 1988 through 1995 (1996 if available). They also examined Medicare Cost Reports and American Hospital Association survey data. The objective of the study was to assess whether, and how, hospital conversions from non-profit to for profit status affects the community that these hospitals serve.

• Young, G.J. and Desai, K.R. "Nonprofit Hospital Conversions and Community Benefits: New Evidence from Three States," Health Affairs, Vol. 18, No. 5, September/October, 1999.