Health and Wealth 

Hospital sales spawn mega foundations

The last time Dickson, Tenn., made national news, was when Danny Bass, a house painter, married his mother. The National Enquirer went haywire.

Last week, however, a story in The Wall Street Journal described a different Dickson. This time, the Journal told of a city with dreams of developing a foreign language institute, a city with plans for a joint venture with Microsoft that will link up with universities around the world, a city that plans to pay for the Nashville Symphony to play a Christmas concert for local school kids. If none of those plans works out, Dickson has other dreams: The city can construct its own Olympic-quality sports complex.

The most amazing fact about Dickson’s dreams is that any of them could be well within the city’s reach. As a result of the recent sale of Dickson’s 160-bed Goodlark Medical Center to health-care giant Columbia/HCA Healthcare Corp., dollars have rained down on this small city.

Private hospital chains such as Columbia/HCA own a relatively small percentage of all the hospitals in the country. But as they purchase more and more facilities, they are setting up mammoth grants-making agencies that are reshaping the nature of philanthropy in numerous towns and cities across America. Since not-for-profit hospitals such as Goodlark are operated by boards of directors, they have no actual owners. When a hospital chain acquires facilities such as Goodlark, it usually pays for them by setting up a charitable foundation. The purchase price of the hospital goes into the foundation, where it gains interest and is ultimately used to finance various charitable endeavors in the local community.

In the case of Dickson, the Jackson Foundation, named after Goodlark’s founders, now boasts $80 million. The foundation’s charter demands that its funds be spent on public works in Dickson County. By law, a foundation is required to spend 5 percent of its principal each year. The Dickson foundation must distribute $4 million a year. That kind of money can go a long way.

Until recently, Dickson’s claim to fame was its new Wal-Mart. Now, however, the city is capable of making its wishes come true. It can, in fact, pay for much of what it wants.

Big bucks, small towns

Such stories are not limited just to Dickson. The greatest asset owned by almost any community is its public school system. Its second most valuable asset is usually its hospital. Very few towns—at least thus far—seem interested in selling their school systems, but hospitals everywhere are on the block. As a result, foundations are popping up all over.

“Some of the largest charitable foundations in American history are being set up,” says former U.S. Rep. Jim Cooper, who, during his time in Congress, earned a reputation as an expert on health-care legislation. “Rockefeller, Getty and Carnegie may ultimately be forgotten in favor of the names of defunct local hospitals,” says Cooper, who is now arranging health-care deals at Equitable Securities in Nashville.

The size of some of the newly created hospital foundations is awesome. The Dickson foundation is reportedly the fifth largest in Tennessee. The Atlanta-based Southeastern Council of Foundations estimated in the Journal that the total worth of newly created foundations in the Southeastern United States, including Florida, is in the $1 billion range.

In California, meanwhile, two health-care transactions have created a mammoth foundation with a principal that currently stands at an almost unbelievable $3 billion. At 5 percent a year, the directors of this California foundation will have to spend $150 million a year.

And that would buy a lot of tickets to the Swine Ball.

Closed-door policy

In Madison, Tenn., the sale of Memorial Hospital to HealthTrust last year led to the creation of yet another foundation. The Memorial Foundation’s holdings amount to $108 million.

Many observers applauded the establishment of the foundation. Others were not so elated. Ensuing publicity demonstrated that there are legitimate concerns that arise as a result of the creation of these foundations and because of the closed-door manner in which hospital sales are usually conducted.

Nashville Memorial Hospital was established in 1965 as a 300-bed “community hospital.” It was a not-for-profit institution and was created to serve residents of the surrounding community. Memorial administrators had entered into merger negotiations with nearby Tennessee Christian Medical Center, but the hospital decided to sell to HealthTrust instead.

As is usually the case in hospital sales, Memorial’s sale price was not disclosed. A $108 million foundation was created. According to foundation president J.D. Elliott, the foundation’s mission is to make “grants to civic and welfare organizations for the betterment of the quality of life for the citizens of the community.”

Because of a legal challenge from people who thought the sale was not a good idea, the Memorial sale is still not a totally done deal. Elliott says once the sale is completed, his foundation can get on with the task of spending its money.

“We think we will be able to plow back roughly $5 million a year into charitable causes,” Elliott says. “We plan to do a major thing for the Madison community—a facility for senior citizens. That is a major commitment which was made when the facility was sold and is something we can return back to the community.”

Elliott points out that Madison, which is part of Metro, does not have its own tax base. Sometimes Madison wants, and needs, things that it can’t get from Metro. This is where the foundation could come in.

While the foundation’s establishment has been greeted positively, some have voiced concerns that the sale price of the hospital was not made public. In the health-care industry nationwide, a number of observers have criticized the fact that, as communities sell off their hospitals, their most valuable assets, neither party in the transaction is required to disclose the selling price.

Hospital sales are typically conducted in private, and, on occasion, a price can be much lower than what the market would have borne. If a selling price is too low, the resulting foundation will be able to provide fewer benefits for the area it serves. In the case of Memorial, it is unlikely that anyone will ever know what the selling price was—or whether the Memorial Foundation’s holdings would have been even more substantial. If the citizens of the Madison community are indeed the “owners” of the hospital that is being sold, critics say, they deserve to know what the sale price was.

“Undervaluation of the price of the hospital is a big concern,” says Jeanne Finberg, a senior attorney with Consumers Union, which also publishes Consumers Reports. “The public really does own these assets and are owed a fair-market value of the hospital when it converts. It seems like in our experience that it is very rare that the valuation stated by the entity comes anywhere close to the real value, and that is often made painfully aware to people later.”

Diagnosis uncertain

Meanwhile, other questions have arisen as a result of the foundation spree.

Is it possible for an acquiring company to maintain control of the foundation by setting up what is essentially a “see-through board” to run the new grantsmaking agency?

And what is the likelihood, if an acquiring company maintains control of the local foundation, that it would decide that one of its priorities would be to provide health care to poor people in the area? While indigent health care might sound like a noble concept, it could also serve a dual purpose for the local hospital by taking care of patients who can’t pay their bills. Such a service would be good for poor people, but it could also provide a convenient way for the hospital’s new owners to cover their bad debts.

“Accountability of the board to the community is the second big concern in these transactions,” Finberg states. “You really need board members who have no loyalty to the prior organization, who have no conflicts of interest, and who can fairly assess the needs of the community.”

For the present, however, most observers have chosen to concentrate on the good works being made possible by the foundations.

In 1985, when the Middle Tennessee Medical Center in Murfreesboro was sold to a consortium of Baptist and St. Thomas hospitals, The Christy Houston foundation was created. At $60 million, it has reshaped the nature of charity in Murfreesboro. The foundation has also funded nursing scholarships and a new nursing department building at Middle Tennessee State University, as well as a new local YMCA.

“It is going to be years before we know the true effects of these foundations,” Finberg notes. “We would urge communities to take a close look at what they’re doing, because the effects will likely be huge.”

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