Arkansas Hospital Closures, 1984-1995

Health Insurance Portability Regs Drafted
The federal government has issued new regulations that will make it easier for people who change jobs to keep their health insurance. The regulations, open to public comment through June, implement last year's health insurance portability act, which guarantees workers can keep their insurance even if they have chronic illnesses or other pre-existing medical conditions.

Workers who have had insurance for at least 12 months can change jobs without fear of losing coverage, and they cannot be charged higher premiums than someone in good health. The law takes effect July 1, meaning all health plans must offer insurance to job-changers when their next enrollment year begins. For most health plans, that is January 1, 1998. For a free booklet answering questions about the law, call (800) 998-7542.

Patient Days

Source: American Hospital Association

OutPatient Visits

Improved technology and a move to more managed care combined over the past decade to change the setting in which many hospital services are delivered. Hospitals, once thought of primarily as inpatient service providers, began to find themselves offering a greater array of services to an ever growing number of outpatients.

In Arkansas, inpatient days declined over the past ten years, though not quite as fast as total admissions. That may be at least partially explained by the fact that patients are more severely ill when admitted to a hospital, so the average length of stay, while falling, has gone down relatively little. The more pronounced reduction in hospital days nationally is probably related to a faster growth of managed care in areas outside of Arkansas.

Total outpatient visits, on the other hand, grew substantially faster in Arkansas than other parts of the country between 1985 and 1995 (170% vs. 89%). The improving capabilities to provide quality services on an outpatient basis, along with patient preference, have led physicians to better utilize less costly outpatient settings, when possible. Nevertheless, Arkansans still use outpatient services less than the national average. In Arkansas, the outpatient visit rate per 1,000 population (including emergency and non-emergency visits) was 1,461 in 1995, compared to the national rate of 1,585 per 1,000 people.

Comparative Utilization, Community Hospitals, By State, 1995
Indicators Per 1,000 Population

Source : American Hospital Association

Conversion of Hospitals from Non-profit to For-profit Status
Mergers, joint ventures, and sales of health facilities continue to be actively discussed throughout Arkansas and the nation. In instances when the merger or sale occurs between two non-profit organizations, private or public, there is no issue other than to reassess and reaffirm the community benefits which arise from the transaction. Where the conversion is from non-profit to for-profit status, however, a number of new issues arise that should be considered by management, boards of trustees, and members of the broader community.

The non-profit status of an institution makes it tax-exempt under Federal law, reflecting the public service component of its institutional mission. This public service is seen through such things as the provision of essential health care services, education, and leadership for community health and well-being. In addition, for many non-profit health institutions there is a significant volume of unreimbursed care. The Internal Revenue Service monitors these community benefits on an on-going basis to justify the continuation of tax-exempt status. Should the organization be sold to a for-profit business group the tax-exempt status ceases, and all assets from the sale, under law, must be given to the public.

Because of the complexity of the legal and tax issues involved in such sales, and because this is a relatively new experience for most of those involved, there is little understanding of the implication. In particular, there is confusion on the routes to which the funds derived from the sales should be moved back into the public arena. Experience has been growing in this arena, however, since the number of sales in recent years has increased and since there is ongoing research by groups such as the National Association of Attorneys General and by advocacy groups such as Consumer's Union.

Four general principles have been emphasized for those concerned with oversight from such a conversion: (1) the sale must be open to public scrutiny; (2) there must be evidence of fair valuation of the assets; (3) disposition of the funds must be committed for a valid community purpose; and (4) there must be no conflict of interest between the non-profit board and the acquiring for-profit board. The non-profit trustees are responsible not only for attending to these issues, but for setting up the type of philanthropic organization that will perpetuate these funds in the public's interests.

Four models generally are proposed as the best philanthropic options for vesting the assets of the sale: a public charity, a designated fund in a community foundation, a supporting organization to a community foundation, and a private foundation. Congress classifies philanthropic groups either as public charities or as private foundations; both are considered "charitable" under Section 501 (c) (3) of the IRS code. In general, a public charity receives significant support from the general public (as a community foundation might) or qualifies because of its activities (operating a hospital) or because it is affiliated with another existing public charity (a supporting organization). A private foundation, in contrast, is controlled by a single donor or small group and does not receive ongoing financial support from the general public. Private foundations typically have large endowments and distribute the investment income to public charities in the community.

Public charities are not required to pay the excise tax that private foundations do. An even greater advantage to being classified as a public charity is the ease of transition following conversion. The non-profit's initial organizational structure can continue Ð something that might be especially attractive if part ownership of the organization is retained. A worrisome requirement, on the other hand, is that about one-third of the total support of the new organization must come from the general public or the government. The public support test to prove that it indeed qualifies as a public charity thus becomes a major disadvantage: IRS regulations dictate that contributions from any one donor may not exceed two percent of the total support or $5,000, whichever is more. Since the proceeds from the sale usually are quite large, amounting to several million dollars, it means that a public charity needs many donors every year to meet the public support test.

Establishing a fund within a community foundation (i.e., the Arkansas Community Foundation) may be an easier way to be classified as a public charity without the onerous task of the public support test (the community foundation does this on its behalf). It also may be the quickest way for hospital trustees to convert assets from the sale into a tangible community benefit. The proceeds from the sale can be held in a separate account and designated for a specific use. Although the hospital trustees can also appoint an advisory committee to review proposals and recommend grants, the primary responsibility for operating the fund is that of the community foundation.

Supporting organizations to a community foundation have the benefits of public charity status without the pressure of the public support test, but a layer of autonomy is present that one might not find within a community fund. A supporting organization is a non-profit corporation with its own board that has an established relationship to an existing public charity (community foundation). Since the parent charity already has an infrastructure in place that can carry out asset management and grantmaking, the new organization can draw on this expertise and get up and running quickly.

Ninety percent of hospital conversions result in the creation of a private foundation. Trustees to the foundation may be appointed privately and the grantmaking focus is based on the wishes of the founding organization: no public support test is required. Private foundations are subject, however, to a two percent excise tax on net investment income. There is an additional requirement that at least five percent of net assets be distributed each year.

Consideration of these options can help hospital executives and trustees anticipate upcoming issues from a conversion and lay the groundwork for a positive transition.

--submitted by the Arkansas Donor Group

The Arkansas Donor Group is an informal group of corporate, financial, public and private funders in Arkansas. Correspondence can be directed to Robert Bailey, Executive Director, Arkansas Humanities Council, 10816 Executive Center Drive, Suite 310, Little Rock, AR, 72211. This article was written by Thomas A. Bruce, M.D., Program Director for the W.K. Kellogg Foundation and a former Dean of the College of Medicine, UAMS.

Outpatient Surgeries, 1985-1995

Source: American Hospital Association

The growth in outpatient surgical procedures, which accounted for 56% of all surgeries performed in Arkansas community hospitals in 1995, closely mirrors the growth in other outpatient services. This trend (a 15% annual growth rate in Arkansas) is likely to continue for the forseeable future as additional technological improvements in the healthcare field come online.

Hospital CEO Turnover High
The turnover rate of chief executive officers at the nation's hospitals hit a five-year high last year, with 16% of the top spots "turning over" according to new data from the American College of Healthcare Executives. The ACHE released the figures exclusively to Modern Healthcare. The information is based on data from 4,914 hospitals. The 16% CEO turnover rate is the highest reported by the ACHE since 1991, when the rate hit 16.7%. Last year's rate marks the third consecutive year the rate has increased. The highest turnover rate recorded by the ACHE was in 1988, when 18.4% of hospital top spots became vacant.

Not surprisingly, the rising turnover rate since 1993 coincides with the hospital industry's merger and acquisition boom that began in the mid-1990s. When two or more hospitals merge or acquire one another, often one or more CEOs lose their job. According to figures compiled by Modern Healthcare, the number of hospitals involved in merger or acquisition activity last year hit a record of nearly 800. The five states with the highest hospital CEO turnover rates last year were Alaska (38%), New Mexico (29%), Hawaii (28.5%), Florida (27%), and Virginia (26.7%).