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conversion foundation




By Doug Easterling, Allen Smart and Laura McDuffee

This is adapted from the upcoming book Stakeholder Health: Insights From New Systems of Health, edited by Teresa Cutts and James Cochrane.

Before probing how hospitals can work productively with foundations—at the most general level, organizations that disburse money for activities that the Internal Revenue Service regards as “charitable,”—here are some basics on how foundations are structured and how they work.

One typically thinks of philanthropy as high-profile national foundations with billions of dollars in assets, such as the Bill and Melinda Gates, Ford, the Rockefeller, Robert Wood Johnson, and William K. Kellogg Foundations. However foundations come in all shapes and sizes. Some are highly visible (for example, those that sponsor National Public Radio) while others can be found only by searching a philanthropic database. Some foundations make grants throughout the world while others focus on a particular state or community. A typical grant in some foundations is well over $100,000 while in others it is under $10,000. Some have a large staff with specialized expertise while others have a barebones administrative structure. Some have highly defined funding interests while others are more open and responsive to ideas that come from outside.

conversion foundation Foundations also vary in their organizational structure and legal status. “Grantmaking foundations” disburse charitable funds to nonprofit organizations and government entities, while “operating foundations” carry out charitable work themselves. Among grantmaking foundations, some draw from an endowment (often established through a bequest or an estate), while others raise the money they give away. From the standpoint of the Internal Revenue Service, the former are “private foundations” while the latter are “public charities.” Federal tax law requires that private foundations spend at least 5 percent of their assets each year on charitable expenses (which includes not only grants made to nonprofits but also the foundation’s own administrative costs). Public charities are not subject to the same requirement but in practice most of these foundations give away at least 5 percent of their assets each year. However, since fundraising foundations rely more on ongoing donations than on endowments, this statistic is less meaningful.

Two foundations of interest

Two specific types of foundations are particularly relevant to Stakeholder Health: hospital foundations and health conversion foundations. Each has an intimate linkage to health care organizations, but they have very different lineages, purposes and lines of accountability.

  • Many hospitals set up a foundation to raise funds from individuals and organizations. These hospital foundations channel charitable giving to projects aligned with the donors’ interests and the hospital’s strategic priorities, which might include an expansion of a facility, new equipment, patient support services or subsidies for medical care.
  • Health conversion foundations (also called “health legacy foundations”) are formed when a nonprofit hospital, health care system or health plan is either acquired by a for-profit firm or converted to for-profit status. The proceeds from these transactions are transferred into the endowment of a foundation that maintains the general mission of the entity which was sold (that is, improving or advancing the health of the population served by the entity). These conversion foundations began emerging in the 1980s as for-profit corporations extended their market reach by acquiring non-profit hospitals. Many of them affiliated with religious denominations. A second spate of foundations was formed in the 1990s, including large ones in California and other states through the conversion of Blue Cross Blue Shield plans from nonprofit to for-profit status. Another large cohort of over 300 foundations has come into existence over the past five years as the health care market has adjusted to the Affordable Care Act. The most recent census identified 306 conversion foundations that submitted their annual Form 990 to the IRS in 2010. Together they held a total of $26.2 billion in assets. A more recent census is not available, but it’s safe to say that at least another 100 have been established since 2010.

doug easterling foundations healthThe assets of conversion foundations range from less than $10 million (for foundations formed when small hospitals are acquired or closed), to more than $3 billion (for foundations such as the California Endowment and the Colorado Health Foundation, formed when large systems or health plans are sold or converted). The largest conversion foundations typically have a statewide focus, but most serve a particular community or sub-state region. Many of these locally oriented foundations award at least $5 million per year in grants.

The most obvious philanthropic partners for Stakeholder Health systems will be the foundations that are affiliated with their collaborating hospital(s). But health conversion foundations may actually be more crucial to the work because, generally, they have more staff and a higher leadership profile in the community. And even non-health foundations, especially community foundations, can add value because they often fund work that addresses various social and economic issues that influence health.

The financial assets that foundations can bring to Stakeholder Health work are obviously valuable, especially because foundations often have a great deal of discretion in deciding how and where to invest their grant dollars. Yet, it is crucial to recognize that foundations are more than funders. They can bring many other resources and can take a variety of actions that enhance the effectiveness and impact of a Stakeholder Health initiative. To better recognize this strategic value, it is useful to take a deeper look at the business of philanthropy.

Related post: Q & A with Doug Easterling.

Glass Art: David Patchen, Creative Commons.