Financing Public Health Through Nonprofit Conversion Foundations

Christopher W. Frost

Research output: Contribution to journalArticle


Protection and promotion of the public's health are typically thought of as governmental responsibilities. Certainly, the core functions of responding to contagious diseases through quarantine, vector control, mandatory reporting, mandatory immunizations, and other coercive measures require governmental power. Historically, public health has been defined by governmental response to immediate threats to the health of the population.

As our view of the public's health expands to take into account broader measures, however, so too can we expand our view of the kinds of institutions that serve to promote the public's health. Most commentators agree that public health is a wide ranging discipline. Professor Lawrence Gostin writes, “The mission of public health is broad, encompassing systematic efforts to promote physical and mental health and to prevent disease, injury, and disability.” While Gostin's focus is on the government's role in promoting public health, there is nothing about contemporary definitions of public health that exclude a role for the private, nonprofit sector.

One cannot doubt the importance of nonprofit institutions in assuring the conditions necessary for the health of the population. Nonprofit organizations operate most of our hospitals, train health care professionals, assure the supply of blood, and perform a myriad of other services that provide the infrastructure necessary to the public's health. In addition, the nonprofit form of organization enables health care organizations to provide public health services that profit seeking organizations are unable to maintain. Nonprofit hospitals provide education, indigent care, preventive health services, prenatal care, and mental health care services that may not be provided by for-profit organizations.

Changes in health care financing and industry structure may substantially reduce the contributions to public health that have traditionally been made by nonprofit organizations. The rise of managed care and the ever increasing reliance on expensive medical technologies have increased the industry's need for capital, and changes in reimbursement formulas have reduced nonprofits' ability to maintain the level of uncompensated and poorly compensated services. At the same time, the changes have created the opportunity for providers to generate profits necessary to support their new capital requirements. The need for capital and the profits available to support it have led to an increase in for-profit ownership of health care facilities. For-profits have increased mainly through the acquisition of assets of nonprofit organizations.

The late 1980s and 1990s have witnessed an increasing number of nonprofit organizations converting to profit seeking ventures. This wave of nonprofit conversions has sent states' Attorneys General and public interest advocates scrambling to find ways to police these transactions. High profile transactions involving Blue Cross/Blue Shield conversions resulted in litigation involving billions of dollars that states claimed should be set aside in charitable foundations devoted to health care. At the same time, smaller transactions involving community hospitals, nursing homes, and ambulance services are also attracting attention. Unfortunately, many of these efforts have been hampered by inadequate conversion laws that force states to regulate conversions on a post-hoc basis with antiquated legal tools.

The conversion of health care assets from nonprofit to for-profit ownership raises questions of particular concern to public health officials. This shift in the health care industry requires that we examine whether the for-profit form of organization can provide health care services in the most economically efficient and efficacious manner, a debate which continues. Perhaps of more direct concern for public health, the conversion of health care assets also raises the question of the value of the nonprofit form to the community as measured by charity care, services to Medicaid patients, cross-subsidization of unprofitable units such as emergency rooms, health education, preventive care, and other, more elusive community benefits that may be lost in a conversion.

Assuming that nonprofit conversions will continue in the health care arena, the challenge to policymakers is to capture and invest the proceeds of such transactions in organizations that can replace the public health functions of the nonprofit. This Article will discuss ways in which proceeds from nonprofit conversions can be used by the nonprofit sector to continue the public health services provided by nonprofit health care organizations. An example can be found in the recent formation of The Foundation for a Healthy Kentucky. This Foundation was established from a $45 million settlement obtained through litigation by Kentucky Attorney General Albert B. Chandler, III against Anthem Insurance Company over Anthem's 1993 merger with Blue Cross and Blue Shield of Kentucky. The Foundation is designed to meet the public health care needs of the Commonwealth through projects designed to influence health policy and improve access to health care generally.

Part I of this Article provides an overview of the law of nonprofit conversions. The law governing nonprofit conversions is founded on common law doctrines of charitable trust. In many states, the procedures surrounding conversions are further regulated by state statutes that provide states' Attorneys General the tools they need to assure that the change in ownership results in adequate proceeds that can replace the public benefits lost in a conversion. Parts II and III provide a case study based on the Kentucky Attorney General's litigation with Anthem Insurance Company. Part II will focus on the difficulties in the lack of a regulatory structure created in the Anthem case. Part III will discuss the process of forming the Foundation for a Healthy Kentucky from the $45 million settlement of that case. The Foundation's focus on health care policy activities aimed at improving the health of all Kentuckians provides an example of one way to capture some of the public health benefits of the nonprofit form of organization.

Original languageAmerican English
Pages (from-to)935-972
JournalKentucky Law Journal
Issue number4
StatePublished - Jan 1 2002


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