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Foundation Operations: Board Issues-> Conversion Agreements

What considerations should be included in a conversion agreement and how can they affect the new health foundation?

Many conversion agreements contain covenants—agreements that obligate the for-profit purchaser to provide or continue important services or community benefits. Examples of issues often covered in conversion agreement covenants are:

  • transfer of financial obligations;
  • continuation of indigent care and other access issues;
  • costs;
  • quality; and
  • economic impact.

Some of these agreements are time-limited, obligating the purchaser to continue the service or benefit for a specific time period after the sale. Others obligate the purchaser in perpetuity.

Often, covenants in the conversion agreement can affect the operation of the new health foundation. For example, if a conversion agreement permits a for-profit purchaser of a hospital to decrease the level of indigent care provided, the foundation may find itself facing a decrease in access to care for uninsured populations and accompanying increases in demands on other providers serving this population. Similarly, if a new purchaser discontinues a low-profit or high-risk service, for example obstetrics and maternity care, the community may turn to the new foundation to address the new access problem.

The types of issues addressed through covenants may vary, depending on the specific circumstances and whether the converting organization is a health plan, a health system, or a hospital. Among the issues that can be addressed through covenants are:

  • levels of charity/indigent care;
  • maintenance of community-based clinics or health centers;
  • operation of community health education and outreach programs;
  • continuation or addition of particular types of health services;
  • agreements about premium increases for health plans and cost increases for hospitals;
  • responsibility for debt and other financial obligations;
  • capital investments; and
  • support for other health-related organizations in the community or region.

Covenants can be very detailed. Inclusion of details about the population to be served, the parameters of the service or community benefit, the location, and the cost can help prevent conflicts in interpretation after the conversion. Detailed agreements can also provide the basis for measuring progress and monitoring compliance.

The time periods contained in conversion agreements should also be carefully considered. Covenants requiring purchasers to maintain services or benefits for only a few years may not give communities and their service systems enough time to adjust to the transition to a for-profit owner.


Related Reading

Building Strong Foundations: Creating Community Responsive Philanthropy in Nonprofit Conversions

A Guide for Communities Considering Hospital Conversion in the Carolinas

Sustaining the Charitable Mission of Horizon Blue Cross Blue Shield after Conversion to a For-Profit Corporation: Issues and Best Practices


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