Defending the Deal: AG Review Process in Hospital Conversions

Defending the Deal_The AG Review ProcessAs the delivery of health care continues to evolve and hospitals bear additional pressures to adapt to new payment models, more nonprofit hospitals are partnering with for-profit providers, through a sale, joint venture, or other arrangements.

Partnerships between independent nonprofit hospitals and larger health care systems (nonprofit and for-profit) have been growing over the past two decades. As more nonprofits look to the future, many have determined that to continue to offer services to their communities and remain viable under health care reform, they must consider strategies that involve partnering with a larger, well-capitalized system. This is particularly true given the unique handicap imposed on nonprofit organizations; namely, having access to only one source of external capital—debt. This is also in direct contrast with other large industries in which equity and other capital markets can be readily tapped. As a result, many nonprofit hospitals are considering conversions into for-profit entities to gain access to capital.

When undertaking a conversion from a nonprofit to a for-profit entity, most states require nonprofit hospitals to go through an attorney general (AG) review process, and some states require approval by a court and other regulators before the transactions can close.¹ This can be a particularly unfamiliar and time-consuming part of the transaction, yet it is imperative to consummating the sale or partnership. Adequate preparation and sound process will better equip the parties for success and avoid potential roadblocks to completing the transaction.

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1. See generally U.S. Gov’t Accountability Office, GAO/HEHS-98-24, Not-for-Profit Hospitals Conversion Issues Prompt Increased State Oversight 23 (1997).