Profits in Nonprofit

On average, two nonprofit health-care service plans in California convert to for-profit status each year. The prices paid in some of these conversions raise questions about the adequacy of existing legislation to guard the public interest. Assemblyman Alister McAlister (D-Fremont) has introduced AB 520 to provide some additional, essential protection against abuses. Fortunately, it is moving toward final passage in Sacramento.

Health-care finance is a complex matter. State policy in recent years has encouraged competition on the assumption that the result would be reduced costs, or at least deceleration of rising costs. In fact, the effect of competition on health-care costs is by no means clear. There is evidence that the investor-owned health services and facilities, growing in numbers in the climate of competition, are in fact costlier than nonprofit operations.

Many of the problems cannot be cured until the state adopts a comprehensive health policy. That will take time, and a commitment that no recent governor has shown. But there are steps that can be taken, and taken now, to eliminate some of the problems. McAlister’s bill is one of them.

Under current law, health-maintenance organizations can be converted from nonprofit to for-profit status merely by filing notice and setting up a charitable trust equivalent to the value of the property. Establishing that value is not easy. In two recent cases the value set in these self-dealing transactions was substantially below what outsiders were prepared to pay. Furthermore, insiders are generating extraordinary profits in some of the conversions.

Some resist the notion that the ownership should go to the highest bidder when a conversion is proposed. They argue that this would raise the possibility of reduced competition through acquisitions by a few large for-profit entities. McAlister’s legislation would provide a constructive alternative, shifting the control, now in the Department of Corporations, to the attorney general, with specific provision for employing outside experts to help establish fair value while also making clearer the requirements for the charitable contributions.

This is a useful first step in reducing the risk inherent in these conversions.