San Angelo, Texas, is a sleepy town of 102,000 that still bills itself as the community Money magazine selected back in 1993 as the country’s thirty-eighth-best “living environment.” One criterion Money used was the quality of the city’s healthcare facilities, which included two community hospitals. But times have changed. In 1995, the San Angelo community hospital was sold to Columbia-HCA, the for-profit hospital chain. About $57 million from the sale was preserved, under charitable trust law, and put into a new healthcare foundation to benefit residents.

Yet today more than a quarter of San Angelo residents have no health insurance and little access to healthcare, while many more are substantially underinsured. At town hearings a year ago, residents told of choosing between buying food or heart medicine, of doing without asthma medicine and of going to crowded hospital emergency rooms with toothaches because dentists wouldn’t care for them. Meanwhile, the San Angelo Health Foundation has been funding fine arts to the tune of $300,000, making a $200,000 grant for an alumni center at the state university and giving $200,000 for a new animal shelter.

San Angelo’s story is not unique. Since 1980, when the election of Ronald Reagan ushered in an era of free-market, privatized economics, more than 400 hospitals and more than a dozen health plans have converted to for-profit status. Most were bought outright by for-profits; a smaller percentage entered into joint ventures, in which just half or less of the nonprofit was sold to a for-profit company. These for-profit conversions are not business as usual, though. Federal and state laws require that when nonprofits become for-profits, the proceeds from the sale must be preserved as public charitable assets and used for purposes similar to those of the nonprofit. After all, a nonprofit’s value derives from years of community donations, volunteer work, tax exemptions and abatements, and other benefits bestowed by government and local residents.

Today, there are more than 134 conversion foundations with assets topping $15 billion, in what has been called the largest transfer of charitable assets in history. And a second conversion wave, involving nonprofit insurers, is under way. Blue Cross of California has already converted and New York’s Empire Blue Cross and Blue Shield is expected to do the same next year. Foundations created by joint ventures become co-owners with the for-profit company of the hospital and share in the profits and management.

While many foundations have spent millions to improve the healthcare of their communities, there is substantial evidence that a number of them are not living up to their obligations. An examination of six foundations, spread geographically across the country, reveals a pattern of problems in how the boards operate and the grants they make. These include conflicts of interest involving trustees and grantees; boards stacked with the directors from the newly converted for-profit hospital; members with no grant-making experience; lavish spending on trustee meetings, compensation and offices; grant-making to for-profit corporate healthcare companies and consultants; and grant-making with no remote health benefit. Even more troubling is evidence that the quality of healthcare has declined after for-profit conversions–even when foundations maintain partial control. It’s just what healthcare activists feared as the for-profit trend accelerated and loyalty to shareholders made the Hippocratic oath seem anachronistic.

Despite the stakes, state and federal regulators and consumer advocates have made little effort to oversee the foundations’ operations. About two dozen states now have laws governing conversions of nonprofits, which usually focus on preserving the full value of a hospital or health plan as public charitable assets. Monitoring the foundation after it’s up and running is the responsibility of state attorneys general, who have jurisdiction over charities. But it’s rarely a priority, says Michael DeLucia, New Hampshire’s assistant attorney general for charitable trusts. “Most AG’s offices are not well staffed or financed,” he says. “We have more pressing issues coming in. The sector has to police itself.”

Meanwhile, the philanthropic sector has watched with concern but is publicly silent because it doesn’t want to see more scrutiny or regulation of its activities. And communities dazzled by the infusion of grants won’t criticize improprieties at the new foundations because that would mean alienating potential supporters.

“This is about power and influence,” says Dr. James Hair, lab director of Rapides hospital in Louisiana, which experienced a conversion. “When people get a couple million under their belts,” he says of foundation trustees, “it’s like a disease.”

Big Easy Giveaway

The Rapides Foundation is a case study in all the problems of conversions: board-of-trustees conflicts of interest, questionable grant-making, declining quality of healthcare after for-profit conversion and an indifferent state attorney general.

Rapides trustees control more than $200 million in a central Louisiana parish of piney-woods poverty and half a million residents. The trustees of the nonprofit Rapides hospital sold off 50 percent of it to the for-profit hospital company Columbia-HCA (now called HCA-The Healthcare Company) in 1994. With the proceeds, they created the first nonfamily foundation in Louisiana; it’s still the largest. The joint venture was arranged secretively by a handful of the hospital trustees, and allegations that the hospital’s charter was illegally changed to allow for the conversion have been leveled. Nonetheless, few observers dared criticize the trustees, says Dr. John Sams, a Rapides physician who is fighting to reclaim the hospital as a nonprofit. “People love their grants more than they love their birthday presents,” says Sams.

The foundation’s 1996 tax filings listed fourteen conflicts of interest involving trustees and grant recipients: a $2.8 million grant to the Alexandria Museum of Arts, whose treasurer was also a Rapides trustee; a $16,000 grant to the Dartmouth College Parents Fund while a board member’s child attended the school; a $310,000 grant to an economic development agency whose chair was a Rapides trustee; $9,000 to a museum at the old Crowell family sawmill while Richard Crowell was a trustee; a $479,000 grant to Northwestern State University to build a flight simulator when Northwestern alumnus Greg O’Quin chaired the Rapides Foundation board and sat on the university’s foundation board.

Many grants had nothing to do with healthcare, like $1.5 million to the Alexandria Zoo and $516,000 to Louisiana College to build a fitness complex. Joseph Rosier, executive director of the Rapides Foundation, says trustees must reveal any conflicts of interest regarding grants and abstain from voting on them. But in a small community, he says, it’s hard to avoid funding projects with which some trustees may have a connection. As for funding priorities, “We’ve adopted a broader definition of health, including quality of life issues to address determinants of health,” he says.

Of most concern, though, is that the Rapides Foundation, as a co-owner of the for-profit hospital, has presided over deteriorating quality of care, according to physicians there. Dr. Lawrence Dreup, a Rapides surgeon who was chosen by hospital staff as their representative on the foundation board, says equipment quality is down and patient care has suffered. “I didn’t know much about Columbia when it took over, but it took over with a vengeance,” he said. “The foundation, we thought, would be our ally. But when it came time for them to step up and help the hospital, they couldn’t.” The foundation and Columbia closed the childcare center for nurses’ children and sold half the ambulance service. They also closed the school of laboratory and X-ray technology. And hospital rates have skyrocketed.

Meanwhile, the foundation and HCA are enjoying ample profits from the hospital’s operations. According to the lab director, Dr. Hair, who is also chairman of the joint venture’s governing board, the Rapides Foundation and Columbia have taken $63 million in profits from their enterprise since 1994. At the same time, capital outlays at the hospital have plummeted, he found, from an average $8.5 million annually before the for-profit conversion to $5 million.

Rosier denied that medical care has declined under the HCA-Rapides partnership. “There have been no issues of patient care that have reached the level of the board,” he says. “If we thought we were doing good with our grant-making at the expense of the hospital, we wouldn’t feel good about that.”

Although Louisiana has no laws governing nonprofit conversions, the AG does have jurisdiction to monitor charitable trusts. But Pam LaBorde, his spokesperson, says, “We haven’t received any complaints about this foundation.”

Arlington’s Foundation Fiasco

Arlington Hospital Foundation wasn’t around for very long, but it left its mark. Its board of trustees presided over a rapid decline in healthcare for the poor and attempted questionable grant-making for its for-profit partner. In just three years, the foundation was forced to dissolve under Internal Revenue scrutiny of its joint venture with for-profit Columbia-HCA.

In 1996 Columbia-HCA courted and won Arlington Hospital, a 374-bed nonprofit in northern Virginia, to gain a foothold near Washington, DC. Led by Arlington Hospital board chairman Patrick Healy, hospital trustees consummated a deal to create Columbia-Arlington Healthcare System, a limited-liability corporation (LLC) owned jointly by Columbia and the new Arlington Hospital Foundation (AHF). Healy headed both the new foundation board and new LLC. The AHF was endowed with $140 million at the end of the year.

The exact terms of the merger remain a mystery to this day. Virginia law required no approval from then-Attorney General Jim Gilmore (now governor), and dealmakers on both sides brushed off requests for information from the press and community members. Dean Montgomery, head of the state Health Systems Agency of Northern Virginia, feared the for-profit venture would hurt healthcare in the area, and he was right. His agency issued a report in September 1998 that noted: “In 1995…Arlington Hospital had the highest charity care rate in Northern Virginia: 4.3 percent of total charges. Two years later…the charity care rate was 32 percent lower at 2.9 percent of charges.” Meanwhile, charges at Arlington Hospital were 27 percent higher than its competitor hospital in Alexandria; two years before the for-profit venture, Arlington’s charges had been 9 percent lower. Fewer Medicaid patients were admitted as well, the report found. Says Montgomery, “They were making money hand over fist.”

Half of all profits from the joint venture were funneled to the new foundation. In 1998 the AHF proposed to make its biggest grant yet–$25 million to the for-profit Columbia-Arlington Healthcare System–to build a new for-profit hospital in Springfield, Virginia. Montgomery wrote a scathing report against the plan, maintaining that Columbia-Arlington Healthcare System was “using AHF funds as a venture capital pool.” In October 1999 the Columbia-Arlington merger dissolved under the threat that the IRS would start taxing the foundation’s profits from its for-profit partnership.

Some observers might judge the conversion and its foundation as a failure by any yardstick. In three years, the AHF made just 140 grants, worth $7.5 million, out of total assets of $408 million in 1999. Yet Philip Peck, who was chief financial officer of Arlington Hospital and the foundation, calls the venture “successful.” He disputes Montgomery’s data on decreased charity and Medicaid services, and he says he is proud of the grants made to improve community health. The only mistake made, Peck says, was not gaining IRS approval for the joint venture before the deal was done. The AHF no longer exists as an operating foundation, its millions having reverted to the original nonprofit hospital association that ran Arlington Hospital. But the three-year experiment was hardly a wash, says Montgomery. “The winners are the people who handled the transaction and those who were put into a philanthropic role to give out grants,” he says. “Losers are the communities who end up paying for all this. They squandered community assets built up over years with the dubious argument that nonprofits can’t operate without changing.”

One Man’s Grab for Glory

The story of the Health Foundation of Southern Florida is that of one man’s grab for power and glory and a board of trustees that watched passively as he spent extravagantly and ruled tyrannically. The foundation, with assets currently valued at $130 million, was created in 1993 after Columbia-HCA corporation bought nearly half of nonprofit Cedars Medical Center in Miami. Seemingly without a hitch, John O’Neil ran the health foundation and its two subsidiaries as chairman of the board and/or chief executive officer for most of its seven years, paying himself a hefty six-figure salary. The foundation got tremendously positive press, doling out millions to local causes. But in 1999 O’Neil and his board of directors became mired in controversy after they began suing each other for control of the foundation.

The insurgents were shocked at O’Neil’s expenditures for the foundation’s posh headquarters in the gated Courvoisier Center on Brickell Key. They questioned the need for board retreats with spouses to tropical destinations like Cancun and Puerto Rico, the fact that he hired family and friends to do foundation work and his decision to invest more than $200,000 of foundation funds with his brother-in-law without consulting the rest of the board. When the board called a special meeting to discuss his free-spending ways, he retaliated by suing them to stop. The board critics “were concerned that as fiduciaries of this public trust, we were not exercising the control as a board that we should have,” board member Sheldon Dagen told a local newspaper. After hundreds of thousands of foundation dollars were spent on litigation, the lawsuits were settled and O’Neil was ousted.

Florida’s attorney general provides no oversight of hospital conversions, much less the foundations they spawn. According to assistant AG Cecile Dykas, they’d like to but they just don’t have the resources. “There is no one really reviewing whether these enormous foundations are carrying out their duties to their communities,” said Dykas.

Charity, Texas Style

The San Angelo Health Foundation now controls more than $67 million in charitable assets, derived from the sale of the 165-bed San Angelo community hospital to Columbia-HCA in 1995. But in a town that needs healthcare, the foundation is giving away millions with no health purpose–and no one can stop them.

Lisa McGiffert, senior analyst for Consumers Union’s Austin office, notes that more than half the $4 million the foundation donated in 1997 was unrelated to health: $300,000 to the San Angelo Museum of Fine Arts, $1 million for subsidized assisted living for retirees and $19,000 for a heating/cooling system for the Girl Scouts headquarters. Grants in 1998 and 1999 were in a similar vein: $200,000 for an alumni visitors’ center at Angelo State University, $252,000 to renovate the Junior League office in the town’s historic district and $200,000 for a new animal shelter.

Foundation president Tom Early defends its use of funds, arguing that “in a small town with so much poverty, everything is interwoven. Health, education, culture, housing, all go hand in hand.” Early says the hospital’s original bylaws called for assets to be used for science and education, in addition to health, should the hospital ever dissolve. And he says most of the foundation’s recent donations have been health related. But a review of recent donations reveals contributions for housing, libraries, the Junior League, historical landmarks, museums, a university lectureship in the humanities and more.

McGiffert says local people may be afraid to bite the hand that feeds them. “This foundation is everyone’s best friend because they are holding the purse strings, and most people would not dream of upsetting them by complaining,” she says. “But this community needs to exert public pressure on the foundation to meet their needs. It is, after all, the community’s money.”

California’s Gold Rush

In 1996 nonprofit health insurer Blue Cross of California morphed into for-profit Wellpoint Health Network. Consumer advocates and the attorney general fought hard to make sure the public would not be shortchanged. Their efforts paid off when two conversion foundations were born–the California Endowment and the California HealthCare Foundation–with combined assets of $3 billion.

Advocates hold up the California example as a model conversion: community involvement in forming boards of trustees, an aggressive attorney general and foundations dedicated only to healthcare. But the truth is more complex.

The California Endowment, whose mission is to expand access to healthcare for underserved Californians, was situated inaccessibly in a corporate park in Woodland Hills, an hour from downtown Los Angeles. The offices were lavishly renovated, with state-of-the-art teleconferencing, sleek leather conference-room chairs and a $43,000 custom-made conference table of imported granite. “People have called them the Beverly Hillbillies because they got rich overnight,” says one former employee referring to the CE trustees.

The state mandated that the endowment make grants totaling $150 million in its first three years, but trustees failed to meet this target. They did, however, vote to establish a yearly $200,000 discretionary grant fund that could be used for their pet causes. Trustees also compensated themselves amply. In 1997 twenty trustees collected a total of $568,250 for spending from one to fifteen hours a week on board work. In 1998, the total was $672,750. The payment was based on a basic stipend and bonuses for committee work.

The foundation’s first CEO, Stephen Uranga McKane, a former program officer from the Kellogg Foundation, was ousted in October 1998 by trustees dissatisfied with his lack of leadership. His replacement was Dr. Robert Ross, a trustee since 1997. Ross acknowledges that the endowment has been struggling to “get up and running,” but he considers that typical of any new nonprofit. The endowment headquarters is moving to Los Angeles’s El Pueblo section to get closer to the people it aims to serve, Ross says, and he is working on a fifteen-year plan that emphasizes multicultural healthcare.

Are Californians better off with a foundation now worth nearly $4 billion than with nonprofit Blue Cross? Ross isn’t sure. He worries that the endowment will simply end up funding services that are being diminished in the for-profit marketplace that created the foundation in the first place. “I can’t say that California is a healthier state because of the conversion,” Ross says.

Meanwhile, the California HealthCare Foundation, the second entity created by the Blue Cross conversion, has granted millions for research into market issues in health and managed-care delivery, to Internet websites and even to for-profit health maintenance companies. Funding for-profits isn’t illegal, but consumer advocate Jamie Court thinks it’s a violation of the charitable purpose of conversion foundations. “What’s legal isn’t necessarily what’s right,” says Court, director of the Foundation for Taxpayer and Consumer Rights in Santa Monica. “I’m concerned that taxpayer money is being used against the taxpayers.”

Court cites, as one example, a $40,000 grant CHCF made in 1998 to the California Association of Health Plans, an HMO lobbying group that Court says has fought his organization on every HMO reform it has proposed. CHCF president Dr. Mark Smith said the grant was for research on how health plans could improve services for the elderly, and he dismissed Court’s criticisms as “part of a campaign of smears and distortions” based on his “political agenda.” A $730,800 grant last year went to the Advisory Board Company, a Washington, DC-based for-profit organization of drug companies, hospitals and health plans, to support a free online news service for “healthcare decisionmakers and practitioners” in California.

Not that CHCF doesn’t fund smaller nonprofits: Its 1998 grants included $65 to the San Francisco Food Bank, $1,000 to Homeless Healthcare-LA and $2,100 to Asian Health Services.

The Buck Stops Where?

The basic problem with healthcare conversion foundations is that they’re the products of a deal with the devil, a tantalizing payoff to communities that lose a nonprofit healthcare institution. While nonprofit hospitals are not always above criticism and can fall short in serving their communities, they are not governed by the bottom-line imperative of delivering dividends to shareholders. Consumer advocates who were critical of the for-profit conversion mania were caught up in trying to save the pieces–the proceeds of nonprofit sales–because they were unable to turn back the conversion trend.

“When we first got into this issue, we tried to get the approving agencies to rule on whether the conversion was in the public interest,” says Harry Snyder, director of Consumers Union’s West Coast office, who was involved in the California Blue Cross conversion. “There was such a mantra about the marketplace being good, so that was settled. Getting the money focused our attention. We did not have enough energy or resources to look at what happened to the money. Then we found there were foundations doing funny things.”

Turning back the for-profit tide would be a task of Sisyphean proportions. But holding foundations accountable to the public, whose trust they are betraying, ought to be a matter of governmental concern. And if communities cannot halt a conversion, they can insure that the new foundation is properly set up and monitored, which is just what happened in Framingham, Massachusetts. There, backed by an aggressive state attorney general, community activists helped create the MetroWest Health Care Foundation, with current assets of $50 million, an exclusive funding focus on healthcare and a board that includes community representatives.

Whether MetroWest will prove to be more valuable to the community than the nonprofit hospital it lost remains to be seen. But what is already clear is that conversions, no matter how well done, are almost certain to weaken, rather than strengthen, the quality of healthcare. That’s because for-profit conversions, like all other results of the drive toward privatization that began in the Reagan era, put marketplace concerns above public service. Until we find an antidote for that illness, healthcare dollars will keep hemorrhaging from the communities that need them most.