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McDermott recently launched the second episode of its special edition podcast providing an in-depth discussion of the interplay between State Attorneys General enforcement authority and nonprofit Board of Directors responsibility in the governance and operation of health systems. This special edition of the Governing Health podcast series welcomed four prominent State Attorneys General (AGs) to discuss the transformation of the nonprofit health care sector.

In episode two, our panelists discussed how the evolution of nonprofit health care affects business activities, including M&A, Board of Directors obligations, and state nonprofit law across the health care landscape. Here are four key takeaways:

  • Beware the dangers of “mission drift.” Mission drift occurs when a change in corporate purpose conflicts with donor intent. As large health care organizations increasingly take on all aspects of health care, they often acquire nonprofit facilities endowed with gift assets. Health systems must consider how the original donor intended for those assets to be used in the community, said Karen Gano, President of the National Association of State Charity Officials and Assistant Attorney General of Connecticut, Special Litigation Unit.
  • Keep beneficiary interests front-and-center when considering a sale or a conversion to a for-profit business model. In New York, there is a statutory requirement that any sale of charitable assets must be for fair consideration and in the best interests of charitable beneficiaries, said Jim Sheehan, Chief of the New York Attorney General’s Charities Bureau. Even if a transaction makes good business sense for the organization, Boards must ask themselves, what provisions are we making for the community served, and how does this transaction serve the nonprofit’s underlying mission? “We don’t have the authority to substitute our judgment for that of the Board, but we are obliged to ensure that the board has exercised its fiduciary duties of both loyalty and care in arriving at the decision to sell or convert,” said Mark Pacella, Chief Deputy Attorney General of Pennsylvania, Charitable Trusts and Organizations Section.
  • Retain control when engaging in a joint venture with a for-profit entity. The state AG office will examine joint ventures—whether they involve new programs or services, or the construction of a new facility—to ensure there is actual control with an emphasis on care and no excess benefits to any individual or to the for-profit partner, said Bob Carlson, Assistant Attorney General of Missouri.
  • Ensure that investment in innovative activities is objective. If the investor is the entity itself or its executives, the investment process can become politicized. “One the expectations we have is that there be a very rigorous process for assessing both initial investments and whether additional money is put in the same way [as it would be in] any other investment,” Jim said.

Click here to listen to the full podcast.

Coming Soon: Episode Three

In the final episode of this special three-part podcast series, our guests will discuss how operating activities, fiduciary duties and the class of beneficiaries are affected by the transformation of nonprofit health care.

Infographic: How Do State Attorneys General Track Nonprofit Health Care?

McDermott recently launched a special edition podcast providing an in-depth discussion of the interplay between State Attorneys General enforcement authority and nonprofit Board of Directors responsibility in the governance and operation of health systems. This special edition of the Governing Health podcast series welcomed four prominent State Attorneys General (AG) to discuss the transformation of the nonprofit health care sector.

Episode one focuses on the jurisdiction of the State Attorneys General, the types of data commonly flagged for review, and the importance of an actively engaged Board of Directors. Here are five key takeaways:

  • An actively engaged board is critical to avoid pitfalls. The board of directors must provide strategic oversight and organizational direction to help a nonprofit avoid pitfalls. When a board becomes complacent or overly deferential to executive management, problems almost always arise, said Mark Pacella, Chief Deputy Attorney General of Pennsylvania, Charitable Trusts and Organizations Section. Given the sheer size of the nonprofit sector, state AGs cannot monitor every entity for early warning signs, such as diversions of assets or conflicts of interest. Therefore, “[directors] have to be actively engaged, they have to put themselves in a position to be aware of a nonprofit’s activities, to be aware of the risks,” said Bob Carlson, Assistant Attorney General of Missouri.
  • The AG has broad jurisdiction over nonprofit health care matters. In Pennsylvania, for example, court rules of procedure require that the AG’s office be notified of Orphan’s Court proceedings and civil matters that implicate a charitable interest, giving the AG the opportunity to intervene. Investigators also follow up on developments published in the news media, and complaints from whistleblowers or competitors.
  • Red flags in a Form 990 can lead to an investigation. State AGs are moving from a complaint-driven enforcement system to a system driven by data and analytics. With the automation of the 990 process, for example, the New York AG office can proactively identify warning signs in a nonprofit health care entity’s financial activities, including negative net worth, loans to officers (which are illegal in New York), and indicators of asset or cash flow problems. This data-driven system allows investigators to make more sophisticated decisions not just about enforcement, but about outreach. “The goal is not to make [these organizations] miserable,” said Jim Sheehan, Chief of the New York Attorney General Charities Bureau. “The goal is to say, ‘OK, looks like you have a difficulty, let’s talk with the agency that pays you and with the charities about what you can do to address it.”
  • In an investigation, the AG can and will subpoena directors and officers.The AG’s formal investigation tools include subpoena power and civil investigation demands, which often involve interviewing insiders such as board members, Carlson said.
  • State registration for charities that solicit public funds is about to get much easier. The National Association of State Charity Officials (NASCO) is developing a single-registration portal, said Karen Gano, President of NASCO and Assistant Attorney General of Connecticut, Special Litigation Unit. Currently, 40 states require registration of charities that solicit funds from the public. The NASCO portal will eliminate duplication and onerous data entry by allowing organizations to register online once, rather than filing registrations under 40 different state regimes, Gano said. The portal will be introduced in phases starting in fall 2018.

Our guests include:

  • Bob Carlson, Assistant Attorney General of Missouri
  • Karen Gano, President of the National Association of State Charity Officials and Assistant Attorney General of Connecticut, Special Litigation Unit
  • Mark Pacella, Chief Deputy Attorney General of Pennsylvania, Charitable Trusts and Organizations Section
  • Jim Sheehan, Chief of the New York Attorney General’s Charities Bureau

Click here to listen to the full episode, and stay tuned for episodes two and three of this special series, which will cover topics such as the consequences of “mission drift,” considerations in M&A transactions, collaboration between state and federal regulators, guidance for operating across state lines, and much more.