Mark Hall: A Case Study of Nonprofit Hospital Conversions

I am thoroughly impressed about, but not nearly qualified to evaluate Mark Hall’s case study of for profit HCA Healthcare’s acquisition of Mission Health, formerly one of the most prestigious nonprofit hospitals in the country.  I’ve only read – reviewed, actually — pieces as he has released them in draft form.  He has now completed “Lessons Learned From HCA’s Purchase of Mission Hospital in Asheville, North Carolina” and I am fortunate enough to be on his mailing list.  From his email:

Here is the full final report (177 pages), as well as separate links to each of its parts.  I previously released most of these parts as working drafts. You’ll see that I’ve updated a few parts with a year’s worth of new data from 2023, showing that previous trends have continued. Otherwise, the previous reports remain largely unchanged, reflecting the fact that substantial errors were not identified in the working drafts.  These last two parts, however, are new: Positive or Mitigating Aspects of HCA’s Acquisition and Public Policy and Legal Regulatory Recommendations. Also, there is a new Introduction and Executive Summary, which assembles introductory, background and summary discussion from each of the separate parts.

For me, the most interesting part of the two new sections is the discussion of the AG’s supervision of what was essentially a nonprofit transformation to for-profit status as, for example, is occurring with OpenAI(c)(3).

Nonprofit health care has always been a driver of tax exemption jurisprudence. That’s because it is in health care that greed and altruism most often intersect. But OpenAI (c)(3) demonstrates that it not only health care that involves greed and good works. Health care is much more thoroughly subsidized and, as a result, much more regulated than artificial intelligence. Still, Hall’s telling of the AG’s supervision is instructive beyond nonprofit health care.

A nonprofit can never really “convert,” incidentally.  It may liquidate and then use the proceeds to pursue a charitable purpose in a different manner itself or by donating the proceeds to a nonprofit or government entity.  “Conversion” is the short-hand for that process.  Hall notes that Mission Health now exists as a $1.5 billion charitable foundation.  Stakeholders, under AG supervision, arrived at that amount only after the AG’s challenge not only of the amount but also the process.  Here is an excerpt from his  discussion of the AG’s role in the conversion:

Nonprofit hospitals are permitted to convert to for-profit status if they meet three key conditions: 1) The sales price is at fair market value; 2) The proceeds are devoted to a related charitable purpose; and 3) The governing board’s deliberations leading to its decision were conducted appropriately. If an Attorney General believes one or more of these conditions is not met, they may file suit to block the transaction. Here, NC’s Attorney General (and now governor) Josh Stein evaluated each of these elements carefully before approving HCA’s purchase of Mission, and he approved the sale only after adding significant protective conditions (contained in what was referred to as the “Asset Purchase Agreement”). Regarding market value, the Attorney General’s independent expert confirmed that the HCA’s purchase price of Mission was assessed at fair market value. Moreover, using those proceeds to fund a very large foundation (known as Dogwood Trust), devoted to improving health throughout much of western NC, clearly serves a charitable purpose. Ratifying the hospital board’s deliberation process proved to be more challenging. The Attorney General determined that the board appeared to be overly influenced by the views of the hospital’s CEO, and that the CEO and hospital’s consultant had potentially serious conflicts of interest (in the form of prior or anticipated business dealings with HCA) that had not been adequately disclosed to the board. Specifics of those elements are addressed in Part 1 of this study. What is key to understand, however, is that such deficiencies are not necessarily fatal to a proposed transaction. Instead, it is often possible to cure them once they are identified, and where that is feasible, existing law typically requires that the board be allowed to do so.

Here, the Attorney General took what could be regarded as fairly aggressive action. First, he required the board to re-negotiate their purchase agreement to substantially strengthen the scope, content, and duration of commitments HCA made regarding a range of issues, including maintaining existing services and facilities; completing planned or initiated improvement projects; and maintaining acceptable financial assistance policies. Second, he required the appointment of an “independent monitor” to help ensure that HCA kept its commitments. Third, he insisted on a special meeting with the board to discuss his concerns about the CEO’s apparent influence and conflict of interest, after which the board was required to deliberate and vote again. Not surprisingly, the board reaffirmed its previous decision to approve the sale, which under standard legal precedents likely cured any overt legal deficiencies in its process. Regarding the strengthened purchase agreement and monitoring process, criticisms have been leveled that they were not strong enough. However, they equal or exceed the strongest examples that can be found from other such transactions, and the Attorney General had reason to believe that insisting on more stringent protections would have been challenged in court; if so, he might not have been able to sustain all of the strengthened protective elements that he had been able to negotiate.

Hall completes this section with detailed recommendations regarding the regulation of nonprofit health care conversions that are useful, too, in nonprofit conversions in other sectors.  

darryll k. jones