Tuesday, February 12, 2013

A For-Profit to Nonprofit Hospital Conversion

Last month the Orange County Register reported that the for-profit Prime Healthcare Services had donated its 131-bed facility in Huntington Beach to its nonprofit arm, the Prime Healthcare Services Foundation.  While the article highlighted the benefits to the local community that would come from the change in ownership, it did not go into much depth regarding why a for-profit entity would choose to transfer one of its facilities to nonprofit control other than to note unspecified financial advantages and tax breaks that would come with nonprofit (and presumably 501(c)(3)) status.  Nor did the article provide many details regarding the relationship between the for-profit entity and its related Foundation.

According to the Foundation's Forms 990-PF (available on Guidestar), Dr. Prem Reddy, who is the Board Chairman and CEO for Prime Healthcare Services, formed the Foundation in December 2006.  Since that time Prime Healthcare Services has donated five hospitals to the Foundation, including the Huntington Beach Hospital, and as of October 1, 2009 began the 60-month termination period required for it to convert to public charity (as opposed to private foundation) status.  Based on the Foundation's website, Dr. Reddy currently serves as the Chairman of the Foundation's Board, as well as leading his Family Foundation to which he has donated more than $20 million since its founding in 1989. 

The audited financial statements attached to the Foundation's 2011 Form 990-PF note that some of the Foundation's subsidiaries (which own specific hospital facilities) have management agreements with related, for-profit entities that also bear the Prime Healthcare name, but on their face the fees paid under those agreements appear reasonable.  While the Prime Healthcare system has apparently been the subject of various investigations over its long history, including two current federal investigations relating to Medicare billings and patient confidentiality, none of the investigations appear unusual for a large healthcare system.  Overall, these entities may provide an interesting case study of interactions between related for-profit and nonprofit entities in the healthcare area.

LHM

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