Considering a Conversion?

The Rise of a Unique Community Asset

Compared to other forms of philanthropy, HCCFs are relatively new in the philanthropic landscape. They first appeared in the late 1980s—as not-for-profit hospitals began to recognize the community benefits that privately operated hospitals and health systems could provide. The sale of these major assets has generated a significant infusion of philanthropic capital into communities throughout the country.

There are currently more than 250 HCCFs in the United States, with philanthropic assets exceeding $30 billion.

With an average endowment of $124 million, the philanthropic assets held by HCCFs frequently exceed other charitable organizations in the community. This is particularly true in rural areas where hospital sales can infuse a community with substantial philanthropic wealth where none existed before. The governing boards charged with managing these new local philanthropic resources face unique responsibilities and obligations that traditional private foundations do not.

Because they’re created from the sale of a community generated asset (rather than the private wealth of an individual donor or company), HCCFs are particularly accountable to the communities they serve. Whereas trustees of a private foundation have the ability to focus their grantmaking on the personal interests or preferences of the founder(s), trustees of an HCCF must always keep the interest and wellbeing of the community at the forefront. Doing so requires a healthy dose of humility, patience, wisdom, and a considerable amount of expertise—both from the board and the advisors it engages.

Defining Total Value

Accountability to the community begins the moment a not-for-profit hospital or health system board considers the possibility of a sale. Before a sale and subsequent conversion of capital into a philanthropic entity occur, those responsible must first understand the total value the transaction will provide to the community. That value should be considered in terms of community health, community wealth, and the philanthropic entity that will emerge from the transaction.

Community Health. Any conversion of a public hospital or health system to a private entity should generate health benefits to the community. Board members should ask: What will be the impact of the sale on community health care quality and access? Will quality improve? Will residents be able to access more and/or better services?

Community Wealth. The sale is more than a monetary transaction. While the price needs to be fair and favorable to the community, hospital and health system leaders need to clearly understand the purchaser’s ability and willingness to invest in capital and other improvements. How much do they plan to invest and in what areas (a new wing, upgraded equipment, physician recruiting, etc.)? You’ll also want to consider and quantify the impact of the purchaser’s investment in the broader community (job creation, economic development, etc.).

New Philanthropic Entity. One of the principal long-term benefits of a health care conversion is the creation of new philanthropic assets. These assets, if managed well, can have a profoundly positive impact on the community for generations. While the law requires a not-for-profit hospital or health system’s sale proceeds to remain in the public trust to provide community benefit, there are several options for fulfilling this requirement. It’s important to consider the pros and cons of transferring these new assets to an existing philanthropic organization (often the hospital or health system’s fundraising entity) or to a new philanthropic foundation.

Leaders must also determine which type of charitable vehicle would best serve the needs of the community. Options include a traditional public charity (this requires being able to meet the public support test by raising substantial resources from the public every year), a supporting organization, or a private foundation.

Each type of charity has its own pros and cons. It’s interesting to note, however, that the majority of conversions to date have ultimately resulted in the creation of private foundations. This allows the new entity to avoid the ongoing public support tests required of public charities and provides more freedom and autonomy than a supporting organization.

Ten Essential Tips for New Conversion Foundations

While an HCCF is unique in its creation and its accountability to the community it serves, it also faces many of the same challenges as other philanthropic organizations. Recognizing these obstacles before entering into a sale transaction can help hospital and other community leaders better anticipate and prepare for the issues and benefits of HCCF philanthropy.

1.      Focus on responsibility to the community.

HCCFs are especially connected—and obligated—to the communities they serve. For years, public support and local charitable donations have flowed into the hospital or health care system, growing a local asset for community benefit. After a sale, that asset must continue to benefit the community.

Trustees of new HCCFs can be overwhelmed by the possibilities that ‘community benefit’ might encompass when no longer confined to direct health care. That’s understandable. And it’s why one of the first tasks new HCCF trustees must tackle is determining which philanthropic strategies align most directly with community needs. At every turn, it’s important to remember that the assets of the HCCF do not ‘belong’ to any one person—or to the hospital’s former board—and aren’t meant to honor any single legacy. Instead, the HCCF board must first and foremost be a steward of the community trust and accountable to the community.

This is easier said than done.

Most hospital boards will have deep expertise and relationships that were important for maintaining hospital operations and support. But those may or may not be suitable for a new community-based philanthropic entity. Often the board of a new HCCF must be augmented to ensure broader community representation, knowledge of local not-for-profit organizations, and expertise regarding specific community health issues. The important thing to remember is that all key decisions should be viewed through the lens of the board’s responsibility to the community.

2.      Resist pressure to perform immediately.

As news of a sale and the resulting creation of a foundation spreads through the community, so will expectations. There will be many opinions about where the HCCF should focus its efforts and how grants should be disbursed. Not-for-profit organizations with long-standing relationships (such as free clinics or hospice providers) may expect grant dollars to flow in their direction. The pressure to begin making distributions will be considerable. Conversely, some members of the community may advocate for HCCF funding to remain focused on health care delivery, rather than broader community issues.

Resist those pressures.

The early years of an HCCF are the time to concentrate on strategy and focus. Don’t start off by making grants in an unorganized fashion in response to community demands, without the benefit of a clear grantmaking strategy and evaluation measurement plan. The more an HCCF invests up front in research, planning, strategy, and evaluation, the more impact it will ultimately have for the community’s benefit. This will also allow the new entity to clearly demonstrate the impact of its grantmaking efforts—right from the start—to the community.

That isn’t to say that HCCFs shouldn’t make grants early on. In fact, the board may wish to consider providing general support to a number of key local not-for-profit organizations engaged in improving community health; or develop a simple grant program designed to improve the organizational capacity of key local organizations; or make grants to support the local United Way or community foundation. These types of temporary grants are excellent ways to address local expectations to begin grantmaking immediately, while providing the Board time to develop a clear grantmaking and evaluation strategy.

3.      Invest in research.

Knowing a community’s needs in the context of providing health care is very different from understanding community needs more broadly. Successful HCCFs often trace the origins of their success back to conducting baseline research and developing insights into broad-based community needs. This enables an HCCF to prioritize issues based on their relative importance, consider the ability of the HCCF to address those issues, and identify potential grant programs that can achieve impact.

A community needs assessment can be a great place to start.

It can show the full range of issues and needs relative to more traditional definitions of health, but also to education, economic security, economic development, safety, housing, the environment, and other issues that make communities livable and thriving. This type of community assessment can further assist a new HCCF board in defining what it means by ‘community health,’ and how narrow or broad that definition should be. Interestingly, many HCCF’s that have invested in community needs assessments have chosen to adopt a broader definition of community health—such as the W.H.O.’s ‘social determinants of health’ rubric.

The HCCF can also conduct research on existing assets within the community to identify strong partners among area not-for-profits, government agencies, and businesses. It can also inventory successful interventions and programs that are already addressing needs. Research might include learning about how other foundations—particularly other HCCFs with long histories—identify needs, create strategies, and deliver value in their home communities. Lessons learned from both the successes and failures of others can be invaluable in informing your future work.

It’s important to note that investment in research shouldn’t be a one-time effort. Some of the most effective philanthropic organizations in the country are those that incorporate ongoing research and learning into their operations—continually informing their work with new data and ideas and applying what they learn to update and adapt their strategies.

4.      Develop a clear strategy.

Within any community, there will be more issues in need of attention than any single foundation—even a large one—can address. Where will your HCCF focus its efforts? How will it prioritize its approaches? Why focus on this particular issue or priority as opposed to others? It can be difficult for a new HCCF to limit its grantmaking to a few focus areas because that means some areas won’t be included. Yet focusing an HCCF’s grantmaking can help increase potential impact by concentrating its resources. A smaller number of priorities can also help the foundation’s board and staff become far more knowledgeable about those priorities than a broader mandate would allow.

From the beginning, your new HCCF should strive to create a clear strategy that’s easy to explain to the community—with defined benchmarks and goals that will demonstrate ultimate impact.

The HCCF’s mission and vision provide the roots, but good strategies are ultimately built on data (gathered through the aforementioned research efforts), preferably disaggregated to show discrepancies and disparities that may exist between various populations within the community. Data provides a clear picture of need, which both supports the chosen strategy and encourages others to join in addressing those needs.

Solid strategies also include community impact evaluation criteria that define ‘success’ in terms of quantitative and qualitative goals. They name the measures that will be used and the frequency at which measurement will occur. Rather than an afterthought, smart HCCFs build evaluation into their overall strategy and every grantmaking initiative or program they design—knowing they’ll regularly need to clearly demonstrate their community impact.

But strategies are never set in stone. They can and should evolve over time, as new community data and evaluation results come to light. Also, HCCF’s may use various strategies for different grantmaking initiatives, tailored in length and scope to meet the specific needs they address. For example, a strategy to build capacity in the not-for-profit community may have a shorter duration, while a strategy to improve education outcomes might span a decade or more.

5.      Create a culture of transparency.

Stewardship of community assets requires openness to broad comment, input, and sometimes criticism. Invariably, the amount of new charitable wealth held in an HCCF will attract the attention of people and organizations who might never otherwise have given the hospital or health system’s assets much thought. So clear, honest, and frequent communication will be critical. Even the message, “we’re still figuring it all out,” can help build trust and confidence.

Explaining you need time to conduct research and develop a strategy is not an admission of weakness or ineffectiveness—quite the opposite. It shows a dedication to a thoughtful process that’s focused on delivering community benefit. Silence or defensiveness, on the other hand, will generate suspicion and distrust. Leadership needs to be ready to communicate regularly to the community through annual reports, websites, public presentations, and social media. Invest time and thought in the creation a communications plan.

Transparency goes hand-in-hand with community engagement.

In all its activities (from initial planning to ultimate grantmaking) an HCCF should consider including a cross-section of community voices and perspectives in its work. The more community members can see themselves reflected in and connected to the benefits of the HCCF’s work, the more supportive they’ll become. While trustees may sometimes feel as if they’re operating in a fishbowl, the trust and confidence that results will be well worth the effort.

6.      Pay close attention to governance.

Choosing the right board for a new HCCF will be one of the most important and delicate matters to consider. The skills, abilities, and connections that make for a valuable hospital board member are not necessarily the same as those required to serve on the board of an independent grantmaking organization that’s accountable to the community. The duties and responsibilities associated with funding and operating a hospital are quite different those required to direct local grantmaking and maximize philanthropic impact. An HCCF that’s accountable to the community should incorporate a board that’s rooted in and reflective of that community—ideally including a diversity of race and ethnicity, age, income, professional expertise, and more. Therefore, the board of the HCCF should, over time, look very different than the board that ran the hospital or health system.

Regardless of who sits on the new HCCF board, however, members will need training and education. It would be unfair and ineffective to assume a new board, many of whom may be working together for the first time, will be able to perform their duties without support. From fulfilling their fiduciary responsibilities to developing strategy, establishing grantmaking policies, ensuring legal and regulatory compliance, understanding and managing the financial investment program, and hiring the HCCF’s first executive, board members have broad responsibilities that will be critical to the new HCCF’s success.

7.      Understand fiduciary roles.

The most important role of an HCCF board is to understand and fulfill its fiduciary duty to the organization. Although a complex topic, the primary fiduciary duties include:

• Putting the foundation’s interests first and before any board member’s personal interests by avoiding private inurement, self-dealing transactions, and conflicts of interest;
• Providing the stewardship required to ensure that a foundation may exist in perpetuity;
• Establishing prudent investment policies, hiring investment professionals with expertise in working with charitable grantmaking entities, and monitoring investment performance;
• Establishing wise spending policies;
• Ensuring that all grants are consistent with the foundation’s mission and priorities;
• Hiring and supervising the foundation’s CEO; and
• Ensuring compliance with legal and regulatory requirements.

Even if the board contains experts in some of these areas, it’s often advisable to retain objective outside expertise and counsel, to ensure the board fulfills its fiduciary responsibilities wisely.

Many HCCF’s are perpetual foundations.

The requirement that a foundation exist in perpetuity places a special fiduciary duty on an HCCF board. In these situations, the board must ensure that the foundation’s investment program generates enough long-term return to maintain its purchasing power. Additionally, the board must monitor the HCCF’s current spending with an eye towards ensuring perpetuity and intergenerational equity–maintaining the balance between philanthropic gifts made to the community now, and those that will be available to subsequent generations. Overspending now can have dire consequence for the ability to ensure perpetuity.

8.      Remain in compliance at all times.

HCCFs must remain in compliance with all state and federal laws and regulatory requirements governing foundations. Compliance issues are often complicated and can change as state or federal policy changes. There are also different requirements for public charities, supporting organizations, and private foundations related to charitable distributions, investments, prohibitions against insider transactions, and many more aspects of operation. It’s important, therefore, that an HCCF board retain an objective, expert advisor on compliance issues who can monitor the foundation’s ongoing legal and regulatory requirements.

9.      Hire the right CEO.

Managing the initial research and strategy development for an HCCF, as well as the day-to-day administrative and grantmaking operations, will require dedicated, experienced staff. Choosing the first CEO will be a key decision for the HCCF board. They may need to weigh the pros and cons of choosing a trusted and respected community leader who lacks foundation leadership experience versus a CEO who has a proven track record in leading a successful foundation or HCCF, but who comes from outside the community. Practicing transparency throughout the recruitment process and having a clear strategy that prioritizes a CEO’s desired characteristics will work to the HCCF’s benefit.

10.  Ask for help.

Many communities have a strong ‘do it ourselves’ ethic that may have served them well. But few have all the ‘know-how’ they’ll need to understand and guide the sophisticated nuances of developing a successful HCCF—including the research, strategic planning, investing, spending, compliance, grantmaking, and communication needed to reach the new foundation’s full potential. Fortunately, as the field of HCCFs has grown, so has the field of experts skilled in providing insight and counsel. In addition, there are several national and regional associations of foundations that can also provide new HCCFs with guidance and peer connections to inform the way forward. These resources include:

• Truist Foundations and Endowments Specialty Practice: With more than 100 years’ experience providing fiduciary guidance and expertise to not-for-profit organizations (including foundations and HCCFs), we tailor investment advisory, grantmaking, and administrative solutions that empower foundations and HCCFs to achieve meaningful and measurable results.
• Grantmaker(s) in Health: A national association specifically for grantmaker(s) focused on a broad range of health and health-related issues, including social determinants of health.
• The Foundation Center: A national research and resource center for and about grantmakers.
• Regional Associations of Grantmaker(s): There are dozens of state, regional, and national grantmaker(s) associations that bring together funders of all different types who serve shared geographies or shared interests.