Some Guidelines for Managing Charitable Assets from Conversions

Health Affairs

Volumn 16, Issue 2, 1997, Pages 229-237

  Kane, Nancy M ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

ARTICLE; BOARD OF TRUSTEES; ECONOMICS; FINANCIAL MANAGEMENT; HEALTH CARE FACILITY; HEALTH CARE POLICY; HOSPITAL; METHODOLOGY; NON PROFIT HOSPITAL; NON PROFIT ORGANIZATION; ORGANIZATION AND MANAGEMENT; PRACTICE GUIDELINE; SOCIAL WELFARE; STANDARD; TAX; UNITED STATES;

CHARITIES; FINANCIAL MANAGEMENT, HOSPITAL; FOUNDATIONS; GOVERNING BOARD; GUIDELINES; HEALTH FACILITY MERGER; HEALTH FACILITY PLANNING; HEALTH POLICY; HOSPITALS, PROPRIETARY; HOSPITALS, VOLUNTARY; TAX EXEMPTION; UNITED STATES;

EID: 0346042250     PISSN: 02782715     EISSN: None     Source Type: Journal    
DOI: 10.1377/hlthaff.16.2.229     Document Type: Review

References (46)

1. C.E. McDermott, The New "Conversion" Health Foundations: Preliminary Results of GIH Survey (Washington: Grantmakers In Health, 23 April 1996).
2. A.L. Bailey, "Charities Win, Lose in Health Shuffle," The Chronicle of Philanthropy (14 June 1994): 1; M. Meldin and J. Perkins, "HMO Conversions: How to Distribute the Charitable Assets?" Clearinghouse Review (October 1987): 467-472; and J.E. Bell, "Saving Their Assets: How to Stop Plunder at Blue Cross and Other Nonprofits," The American Prospect (May/June 1996): 60-66.
3. A.L. Bailey, "Charities Win, Lose in Health Shuffle," The Chronicle of Philanthropy (14 June 1994): 1; M. Meldin and J. Perkins, "HMO Conversions: How to Distribute the Charitable Assets?" Clearinghouse Review (October 1987): 467-472; and J.E. Bell, "Saving Their Assets: How to Stop Plunder at Blue Cross and Other Nonprofits," The American Prospect (May/June 1996): 60-66.
4. A.L. Bailey, "Charities Win, Lose in Health Shuffle," The Chronicle of Philanthropy (14 June 1994): 1; M. Meldin and J. Perkins, "HMO Conversions: How to Distribute the Charitable Assets?" Clearinghouse Review (October 1987): 467-472; and J.E. Bell, "Saving Their Assets: How to Stop Plunder at Blue Cross and Other Nonprofits," The American Prospect (May/June 1996): 60-66.
5. J.B. Stern, "The Conversion of Health Maintenance Organizations from Nonprofit to For Profit Status: Background, Methodology, and Problems," Saint Louis University Law Journal 26, no. 71 (1982): 711-726.
6. The total market value of Trigon is close to $700 million. Trigon is proposing to provide stock to its policyholders for the balance after the $159 million charitable contribution, yielding a 54 percent ownership to premium-paying employers and a 33 percent share to individual policyholders. D. Ress, "Different States, Different Results for Blue Cross; In Converting Insurers into For-Profits, No Firm Rules Exist," Richmond Times Dispatch, 5 February 1996, A1.
7. R.A. Wexler, "Legal Issues Affecting Foundations Created as a Result of Blue Cross and Blue Shield Plan Reorganizations" (Paper presented to the National Association of Insurance Commissioners Special Committee on Blue Cross and Blue Shield Plans, New York, New York, 4 June 1996).
8. However, government receipt of payments generated by a fund's principal would seem appropriate if they were used to support government activities serving a related charitable purpose.
9. McDermott, The New "Conversion" Health Foundations; and Stern, "The Conversion of Health Maintenance Organizations."
10. McDermott, The New "Conversion" Health Foundations; and Stern, "The Conversion of Health Maintenance Organizations."
11. Internal Revenue Code, sec. 4942.
12. Ibid., sec. 4940.
13. Ibid., sec. 4941.
14. Ibid., sec. 4943.
15. Ibid., sec. 4945.
16. Most Blues plans were 501(c)(4) organizations before the federal government revoked their federal tax exemptions in 1986. U.S. General Accounting Office, Health Insurance: Comparing Blue Cross and Blue Shield Plans with Commercial Insurers, GAO/HRD-86-110 (Washington: GAO, July 1986).
17. Wexler, "Legal Issues Affecting Foundations."
18. Blue Cross of California, "Key Elements of Public Benefit Plan" (Unpublished document, 1994), 4.
19. See J. Thelen, "Charity or Advocacy for HMOs?" The Recorder, 30 September 1994; Editorial, "Blue Doublecross?" San Jose Mercury News, 11 November 1994; and Editorial, "The Blue Cross Octopus," Sacramento Bee, 6 December 1994. As the Sacramento Bee's editorial put it, "Such a Foundation would be the $2.3 billion gorilla of California politics and health care, dwarfing the influence of other interest groups." A letter from Silk, Adler, and Colvin, a law firm engaged by the Western Division of Consumers Union, stated, "It would be impossible to assure that [the foundation's] lobbying would represent a broad spectrum of public interest if the organization is controlled by the small group of individuals on its board of directors, no matter how carefully they are chosen . . . ." Greg L. Colvin, to California Commissioner of Corporations Gary S. Mendoza, personal correspondence, 28 October 1994.
20. See J. Thelen, "Charity or Advocacy for HMOs?" The Recorder, 30 September 1994; Editorial, "Blue Doublecross?" San Jose Mercury News, 11 November 1994; and Editorial, "The Blue Cross Octopus," Sacramento Bee, 6 December 1994. As the Sacramento Bee's editorial put it, "Such a Foundation would be the $2.3 billion gorilla of California politics and health care, dwarfing the influence of other interest groups." A letter from Silk, Adler, and Colvin, a law firm engaged by the Western Division of Consumers Union, stated, "It would be impossible to assure that [the foundation's] lobbying would represent a broad spectrum of public interest if the organization is controlled by the small group of individuals on its board of directors, no matter how carefully they are chosen . . . ." Greg L. Colvin, to California Commissioner of Corporations Gary S. Mendoza, personal correspondence, 28 October 1994.
21. See J. Thelen, "Charity or Advocacy for HMOs?" The Recorder, 30 September 1994; Editorial, "Blue Doublecross?" San Jose Mercury News, 11 November 1994; and Editorial, "The Blue Cross Octopus," Sacramento Bee, 6 December 1994. As the Sacramento Bee's editorial put it, "Such a Foundation would be the $2.3 billion gorilla of California politics and health care, dwarfing the influence of other interest groups." A letter from Silk, Adler, and Colvin, a law firm engaged by the Western Division of Consumers Union, stated, "It would be impossible to assure that [the foundation's] lobbying would represent a broad spectrum of public interest if the organization is controlled by the small group of individuals on its board of directors, no matter how carefully they are chosen . . . ." Greg L. Colvin, to California Commissioner of Corporations Gary S. Mendoza, personal correspondence, 28 October 1994.
22. The WellPoint successor company was the result of a multistep transaction by which the nonprofit BCC converted to a for-profit corporation that merged with the for-profit WellPoint corporation. The nonprofit BCC ceased to exist.
23. California Department of Corporations, Order Approving Notice of Material Modification and Related Undertakings, Blue Cross of California, File no. 933-0303 (7 September 1995). Further complicating the BCC resolution was the role played by the Blue Cross and Blue Shield Association (BCBSA), which insisted that certain restrictions be placed on the 501(c)(4) as long as it held more than a 5 percent voting interest in the for-profit company holding the Blue Cross trademark. These included the requirements that a majority of the board be former board members of BCC for a period of five years; that the foundation could not vote more than 49 percent of the for-profit company's stock, even though the foundation's share was 80 percent; that the foundation must reduce its voting interest to 20 percent after three years and 5 percent after five years; and that the Blue Cross trademark cannot be used if any entity other than the initial foundation acquired more than 5 percent of the company's stock. The policy concern here is that due to these restrictions, the 501(c)(4) is not free to maximize the value of its greatest asset, the WellPoint successor company stock. It cannot sell a controlling interest to an outside party that might be willing to pay a premium for that interest, without losing the value of the trademark; and it cannot exercise its majority stockholder position to vote to remove the for-profit company's board or management if the company is managed poorly or has unsatisfactory performance from a shareholder point of view. See N.M. Kane and G.S. Mendoza, "Seeing Red in the Rules of the New Blue Cross," The New York Times, 7 July 1996, A10.
24. Wexler, "Legal Issues Affecting Foundations;" and Meldin and Perkins, "HMO Conversions."
25. Wexler, "Legal Issues Affecting Foundations;" and Meldin and Perkins, "HMO Conversions."
26. H. Meyer, "Selling or Selling Out: The Lure," Hospitals and Health Networks (5 June 1996): 22-46; and Meldin and Perkins, "HMO Conversions."
27. H. Meyer, "Selling or Selling Out: The Lure," Hospitals and Health Networks (5 June 1996): 22-46; and Meldin and Perkins, "HMO Conversions."
28. Meyer, "Selling or Selling Out."
29. Associated Press, Sports News, 27 October 1986.
30. McDermott, The New "Conversion" Health Foundations.
31. Some observers have argued that such action is consistent with the goals of wellness, healthy behavior, and disease prevention. Meyer, "Selling or Selling Out."
32. Presentation to the Community Outreach Committee of the Rose Foundation, Denver, Colorado, 6 November 1995.
33. Kansas Health Foundation, A Decade of Kansas Philanthropy: 1985-1995 (Wichita: Kansas Health Foundation, 1996), 1.
34. Winter Park Health Foundation brochures, 1995.
35. G. Jaffe and M. Laugley, "Generous to a Fault? Fledgling Charities Get Billions from the Sales of Nonprofit Hospitals," The Wall Street Journal, 6 November 1996, A1, A5.
36. Blue Cross of California, press release (Woodland Hills, Calif.: BCC, 5 March 1996).
37. Mission statement developed when The California Wellness Foundation was created in 1990.
38. E. Hamburger, J. Finberg, and L. Alcantar, "The Pot of Gold: Monitoring Health Care Conversions Can Yield Billions of Dollars for Health Care," Clearinghouse Review (August/September 1995): 473-504.
39. B. Japsen, "CEO Profits as Hospital Changes Status - Again," Modern Healthcare (9 October 1995): 50, 54, 56.
40. PR Newswire Association, "Healthcare Returns to Nonprofit Colorado-Based Ownership with Completion of American Medical Assets Aquisition," 11 April 1991.
41. Definition supplied by Perry Allan Craft, deputy attorney general, Tennessee.
42. N.M. Kane, "Critical Ingredients in the Governing Structure of Foundations Born of Conversions," Legal Network News (Spring/Summer 1996): 2-4.
43. Karen Wolk Feinstein, executive director, Jewish Healthcare Foundation of Pittsburgh, cited in presentation to the Community Outreach Committee, Rose Foundation, 6 November 1995.
44. McDermott, The New "Conversion" Health Foundations.
45. J. Greene, "Are Foundations Bearing Fruit? Millions of Dollars Are Doled Out for Research and Charity, but Critics Question the Community Benefit," Modern Healthcare (20 March 1995): 53, 56-58, 68.
46. Ibid.