Hospital Sales To Create Windfall For Charitable Foundations

Saint Mary's Hospitals the latest to be acquired by Tenet Healthcare Corporation. The deal has to be approved by state and federal regulators. (Michael McAndrews)

People in Connecticut have talked a lot about what happens to patients and staff at five nonprofit hospitals that are being bought by a Texas hospital chain, but there's another issue.

What happens to the money?

When a nonprofit hospital is sold to a for-profit entity, the proceeds go to an independent charitable foundation to replace the lost benefits of having a nonprofit in the community. But it's not that simple.

It is difficult to say how much Tenet Healthcare Corp. of Dallas will end up paying into each foundation because the hospital's purchase price is modified by any number of adjustments before the deal is done.

Without question, millions of new dollars will be available for charitable causes in the state. Who controls that money and how it will be spent, however, remains to be seen.

Hospitals may have to repurpose their existing charitable foundations, or create new ones to receive the funds. It's not clear who the hospital will put on the boards of these new independent funds, though all of the details must be approved by the attorney general's office.

"There's a potential for tens of millions to be involved here, in total," said Trip Pilgrim, senior vice president of development at Tenet Healthcare.

Tenet announced earlier this month that it will acquire Saint Mary's in Waterbury, the fifth and most recent acquisition. Each hospital acquisition is on a different timetable — Bristol Hospital, Saint Mary's, Waterbury Hospital and Eastern Connecticut Health Network, which includes Manchester Memorial Hospital and Rockville General Hospital in Vernon.

Each deal is subject to approval by the attorney general's office and the state Office of Health Care Access. Pilgrim said he hopes the sales will be done no later than next summer.

Most Connecticut hospitals already have foundations that could receive the funds. For example, Saint Mary's Hospital has the Saint Mary's Hospital Foundation, which had $4.5 million in net assets in 2013, according to tax filings.

"It's our understanding that most hospitals in Connecticut have some sort of charitable fundraising arm or entity referred to as a foundation; however, we do not have an accounting for each individual hospital," said Jaclyn Falkowski, a spokeswoman for the state attorney general.

If existing foundations receive the funds, they may have to be repurposed from a hospital-oriented mission. Connecticut statutes govern the conversion of a nonprofit to a for-profit, and there are requirements for how the proceeds of a sale should be used.

State law requires the money to be used for:

•Appropriate charitable health-care purposes consistent with the nonprofit hospital's original purpose,

•Support and promotion of health-care generally in the affected community.

Some hospitals may have received money from donors over the years. If those donations come with restrictions, and the hospital still has some of that money left, the remaining funds have to be used in a purpose "consistent with the intent" of the donor, according to state law.

Separate from the transaction price, Tenet is committing to spend millions of dollars on capital projects and improvements in ambulatory services in Greater Waterbury as a result of its two hospital purchases in the city. For example, the Saint Mary's acquisition will result in $85 million spent over seven years on capital expenditures and service improvements in Greater Waterbury.

How It Worked

San Antonio, Texas, provides an example of a charitable foundation formed after a nonprofit, urban hospital system was sold to a for-profit company.

In 2003, the Baptist Health System —five hospitals in Greater San Antonio — was sold to Vanguard Health Systems of Nashville, Tenn., which was later acquired by Tenet.