Health Foundation of South Florida
Coimbra Sirica

 

The hospital conversion that spawned the Health Foundation of South Florida was negotiated in secret by a group of five members of the parent board of Cedars Medical Center, which had solicited only one bid––from Columbia/HCA Healthcare Corporation. And when the agreement was reached in October 1992, the hospital's 13-member parent board voted unanimously to accept it.

"Clearly thousands of people were influenced, but only a few of us decided what happened––we were the ones at the plate," says Philip Grossman, M.D., a gastroenterologist and Foundation board member who was on the hospital's parent board at the time of the conversion. "We made a difficult decision. We said we don't want to give up the freedom and the things the hospital has stood for, but we are better off seeking a solution now, while we have a functioning, viable institution."

Cedars Medical Center is located across the street from the University of Miami Medical School and Jackson Memorial Hospital, which provides most of Dade County's indigent care. The founders of Cedars of Lebanon Hospital, as it was known, were a group of professors of medicine from the University of Miami Medical School. They established the teaching hospital in the early 1960s to serve the mostly Jewish community in the area and to allow the doctors to enter private practice. Over the years, the founders lost interest in the hospital and the target population moved away. The community around the hospital became low-income and minority, and the hospital began to draw many of its patients from beyond its immediate neighborhood.

A recent case study of the Cedars Medical Center conversion and the observations of hospital board members reveal some of the reasons why the hospital conversion sparked little controversy (Health Affairs, May 1997). In the 1970s, one of the hospital's CEOs was imprisoned for embezzling about $3 million in hospital funds, and the hospital was thrown into bankruptcy for more than a year. In the 1980s, a group of hospital doctors tried to buy the facility, and a public health care agency, the Dade County Public Health Trust (PHT), explored taking it over by eminent domain.

PHT, the financially strapped system for caring for the poor, had hoped to relieve overcrowding at Miami's Jackson Memorial Hospital while increasing the number of patients with private insurance. A subsequent report showed that the cost of purchasing and running the hospital would have been prohibitive, but the threat of a purchase by eminent domain convinced hospital board members that they should keep their joint venture negotiations quiet.

Grossman describes the transaction with Columbia as something that happened almost by chance. The hospital, which had been running its own home health care agency, was negotiating with Columbia over a joint venture in home health care. Thomas G. Culbreth, who was the hospital CEO, and board chairman John H. O'Neil, Jr., came away from the discussion with no agreement on home health care but with a proposal from Columbia that a joint venture be created between Cedars and Victoria Hospital, which Columbia had acquired in 1988.

"We took the partnership idea and nurtured it, and determined that as a legal structure it could work," says Culbreth. "We were also convinced that the financial projections had enough legitimacy that we could convert a limited benefit into extraordinary benefit. We kept asking ourselves, does Cedars have a right to survive as a health care entity? Is it really doing its service to the community, and could we take this asset and do something more productive with it?"

The parent board of Cedars Medical Center had several reasons for considering Columbia's offer. By 1992, the hospital was losing more than $400,000 a year in operating income. The hospital that had had $18 million in cash reserves in the late 1980s had no more than several thousand on reserve by 1992 (Health Affairs, May 1997). Between 1989 and 1992, to service the hospital's long-term debt commitments and provide for its cumulative capital investment, the board found it necessary to liquidate investments. The difference between operating income and depreciation and the cash flow needed to cover expenses during that period was $11.5 million.

Meanwhile, hospital officials faced an aging facility that needed capital investment. Debt payments for a bond issue that had been downgraded prevented the hospital from borrowing money to address its capital improvement needs.

"Cedars was a very successful hospital, but it got caught in the squeeze that was affecting most hospitals at the time," says Grossman. "We looked at graphs that showed a staircase going down. . . . What influenced us was that this was now a recognizable trend, and not a series of ups and downs."

The parent board members decided that they should try to sell the hospital while it was still viable "rather than waiting to give it away when we fall below the line," Grossman said.

Grossman and his colleagues on the hospital board cite external pressures as well for the decision to enter into the joint venture with Columbia. Between 1991 and 1992, six hospitals were acquired by for-profit companies, which were entering into managed care contracts and increasing the competition among all the local hospitals. Cedars was providing about $9 million in uncompensated care in 1991, which also put a strain on the hospital's resources.

Columbia brought into the Cedars Healthcare Group, Ltd. (the Partnership) the assets and liabilities of Victoria Hospital, which it had purchased in 1988. Cedars signed over its assets and liabilities, for which it gained a limited partnership in the venture.

At the time of the sale, Cedars had a debt load of $56 million in outstanding Series 1987 Hospital Revenue Bonds, and its value had been placed at $120 million by three appraisers. But two separate valuations found that Cedars and Victoria hospitals brought unequal value to the joint venture, and to compensate, the Cedars Foundation received $4 million from Columbia, plus another $14 million in cash agreed to during negotiations.

In an effort to mollify some of the bad feeling between the hospital and the Public Health Trust, the Partnership at first offered to lease Victoria Hospital to the PHT for $1 a year. For tax reasons, it was later offered to the PHT as a gift, but an analysis of the costs of operating the facility caused the PHT to turn down the offer. The Partnership then sold the hospital in 1995 for $2.5 million, and the proceeds were split among the partners.

When Columbia entered into the joint venture with Cedars, it had just announced two other mergers involving Columbia hospitals. Its Deering Hospital acquired Grant Center Hospital, a South Dade psychiatric facility, and its Miami Beach Community Hospital merged with the Miami Heart Institute. At the time, says Grossman, there was no hint that Columbia would someday draw the attention of state and federal authorities investigating its takeover activities and its billing of Medicare.

The joint venture with Cedars followed a model Columbia has used successfully throughout the United States. It was also common to encourage physicians to become partners in the hospitals that were converting. An article in the Miami Herald on December 7, 1992, described Columbia's strategy: "Buy failing or underperforming facilities, then merge them. Physicians are allowed to invest in the hospitals, creating a partnership that helps attract patients." According to Columbia, the newspaper reported, this system, "reduces excess beds, allows for economies of scale, and improves the quality of care."

The December 7 article about the Columbia mergers seemed to reflect some of the issues that were being debated in Miami at the time. Columbia Chief Executive Richard Scott was asked who would care for the indigent if corporations began to dominate the local hospital industry. The article says that Scott "acknowledges the problem," but that he questions whether corporate America should be responsible for solving it. "Do we have an obligation to provide health care for everybody?" he asked. "Is any fast-food restaurant obligated to feed everyone who shows up?"

Arthur Hertz, then chairman of the Public Health Trust's Finance Committee, objected to Scott's outlook, adding that the for-profit hospitals could "siphon off" well-insured patients from Jackson Memorial Hospital, leaving the public hospital with less money to care for the indigent. Culbreth told the newspaper that the hospitals had not been able to compete as nonprofits. "I see an industry beginning to apply business principles, where it didn't always before," said the CEO. "I don't see anything Columbia's doing that isn't representative of sound business practices."

The 13 people on the hospital's parent board saw themselves as the "brakes on the deal" with Columbia, according to Grossman, and to obtain the best terms, they sought the advice of lawyers and valuation consultants. Columbia and the parent board had each had the hospital's value appraised, and the Public Health Trust had done so as well in 1991.

When negotiations with Columbia began in mid-1992, the hospital staff were concerned that the board would not represent their interests and that the hospital would be closed. Grossman described the hospital staff as skeptical and mistrustful in the months that preceded the announcement of the joint venture agreement. O'Neil said that in October 1992 he sent out letters to medical staff, hospital donors, and former patients, outlining the hospital's financial condition and "the need to make a business decision." The mailing, which included an offer to return any funds remaining from donations made to the hospital, produced only "one or two responses." Some donors to the hospital had asked to have funds earmarked for certain projects, so the board set aside approximately $1.2 million in restricted funds that have been applied to grants that conformed to the donors' requests.

In response to the concerns of medical staff, quarterly meetings were held to assure them in general terms that their fears were groundless. Other meetings were eventually held to brief department heads on the negotiations, but they were asked not to discuss the details of the negotiations with their staff members. "It was the medical equivalent of telling patients that they need a procedure that carries risk in order to prevent a condition that would bring greater risk down the road," says Grossman. "We were asked if we were turncoats, if we were selling out."

The medical staff learned of the joint venture only when it was announced in October 1992.

Larry Hawkins, the metro commissioner who had argued for the sale of Cedars to the PHT, says he would have liked a say in the conversion process but had not been told of it in advance. Hertz, who is still on the PHT board, said that at the time it had not occurred to him or to other colleagues or policymakers that they might ask for a role in deciding the terms of the sale or the mission of the resulting foundation.

PHT Director Ira C. Clark refers to Cedars as "an 800-pound gorilla" because of its large size and its presence on campus. Despite having once had hard feelings over PHT's failure to acquire Cedars, Clark maintains a benevolent view of the transaction with Columbia.

"I don't think there was ever an effort to exclude anyone," Clark says. "There wasn't anything unethical or unreasonable about the transaction." There are no requirements in Florida that would require a hospital board to hold public meetings or to inform the attorney general of a plan to convert the hospital to a for-profit, and, unless there are accusations of self-dealing, fraud, or misuse of assets, the attorney general would not review the conversion process. Recently, however, the Florida attorney general joined a group of five colleagues in proposing that the National Association of Attorneys General pass a resolution to adopt model legislation on the conversion of nonprofit health care entities to for-profit status. The attorney general's office has prepared a piece of legislation but has not yet identified a legislative sponsor for it.

After the conversion, the Health Foundation of South Florida was created from the Cedars Foundation, the hospital's fund-raising arm. Two supporting organizations for the Health Foundation were created from the nonprofit subsidiaries that had been associated with the hospital-the Cedars Medical Center and the hospital's Florida Home Health Agency. The Health Foundation retained a 46.5 percent noncontrolling interest in the hospital. It also received $18 million in cash and a "put," which gave the Foundation seven years in which to sell its interest back to the Partnership for $27 million. In addition to Columbia and the Health Foundation, there is a third partner comprising a group of physicians who paid $15,000 for each share of a seven percent interest in the Partnership. Of the 10 seats on the current hospital board, four are held by Columbia, four by the Foundation, and two by the physician investors group.

"Our objective was to complete a transaction that was fair to everyone concerned," says Culbreth. "We wanted legitimate value for that institution. Our hope was that the transaction would benefit the community, the institution, and our partners."

Although the Foundation is only a limited partner in its joint venture with Columbia, its seats on the board give it some influence over quality of care at the hospital and an ability to ensure that the hospital continues to serve the indigent at the level agreed to during the negotiations with Columbia. Culbreth, who is now a member of the Foundation board, notes that he and his colleagues on the hospital board had negotiated the joint venture with the leadership of Columbia/HCA, "who understood that income was critical to us in terms of creating remarkable new grant processes." Since then, however, new managers have taken over the company operations, and the Foundation board has found it useful to be represented on the hospital board. Armed with information about the hospital's substantial earnings during 1997, for example, the Foundation was able to convince the general partner to disburse an extra $6.1 million to the Foundation in June 1998. It might be worth noting that the Internal Revenue Service will apparently review disbursement rates to Columbia's nonprofit partners in the wake of a ruling that would retroactively ban certain hospital joint ventures, according to a source familiar with the process.

"We analyzed the revenue streams and the debt structure, and discussed in an open and honest way how we thought additional distributions were possible and how they should be structured," Culbreth says. "We did initiate this conversation. We found the Columbia executives to be responsive, and we did about 30 days ago [in June 1998] receive $6.1 million."

Culbreth, O'Neil, and Grossman speak highly of Columbia as a partner. In addition to returning the hospital to sound financial footing, the company has met its obligation to provide $9 million in indigent care––the level agreed to in the joint venture agreement. It also has continued to provide $100,000 a year to subsidize the school-based clinic operated by the Foundation, and it sponsors the Foundation's two fundraising events. According to the Foundation when the Foundation has argued for increased partner distributions.

In addition to its agreement to support the Foundation's school-based clinic, Columbia defeased the hospital's $55 million in tax-exempt bonds. The purpose was to assure bondholders the rate of return they had been promised at the time they were sold the bonds. Columbia agreed to two other stipulations:

Although the local media has covered the federal government's investigation of Columbia's business practices, the company's relationship with the Foundation has not come under scrutiny, according to a review of five years of Miami Herald articles about the Foundation and an interview with Stephen Smith, a reporter for the Herald. Only an article in the New York Times (April 27, 1997) questioned O'Neil's wearing "two hats" as chairman of the boards of both institutions. The Times noted that "it can be hard to tell where Cedars stops and the foundation begins––and where the charity's responsibilities begin."

But O'Neil and Culbreth argue that the loyalties of the Foundation board members are with the Foundation, adding that board members representing the Foundation on the hospital board must always consider the needs of the Foundation first.

"We happen to define the benefit to us more directly as cash so we can give it away," Culbreth says. "And that's the way we negotiated our agreement."

The New Foundation

The Health Foundation was formally established in February 1993 with a number of members of the original hospital board at the helm, a fact that raised no comment when the Foundation began appearing in the press several months later.

Just after the conversion of Cedars Hospital, the new foundation was housed in the hospital's development office and was still known as the Cedars Foundation. The board realized that it needed a separate identity from that of the hospital and began to debate a name change. Grossman says the name change was seen as important because the nonprofit foundation would not be able to establish itself as an independent entity if it retained the Cedars name. Also, he adds, there was concern that in the future, public perceptions of the hospital could influence the Foundation's image and hurt the board's efforts to keep the for-profit hospital "at arm's length." The board ultimately chose a name that would embody the mission of the Foundation. Meanwhile, to further distance themselves from the hospital, board members voted to move the Foundation to a building on Brickell Key, a tiny island off downtown Miami that offers its tenants glorious views of Biscayne Bay.

The board interprets broadly the mission of the Foundation, which it defines as "a public charity which funds a range of community endeavors selected to have the greatest impact possible on the wellness of South Floridians. The Foundation concentrates on initiatives that promote personal health, focusing primarily on the uninsured and medically underserved––children, elderly, the disabled, and low-income residents. Health Foundation goes where the need is greatest."

The mission statement was written by O'Neil and Culbreth. An attorney reviewed the draft of the mission statement, and it was then adopted by the board. The board is not required to follow any written guidelines in approving grants, and health is defined in broad terms as anything that affects the physical or emotional well-being of the underserved of South Florida.

"We are comfortable with the breadth of action that broad definition allows us, and we recognize that a third party might think we are bumping up against a liberal definition of health care," Culbreth says. "You really have to walk someone through how a camera in a police car [to record domestic abuse] can end up related to health care."

To promote the Foundation and encourage grant applications, the board hired a public relations consultant in early 1993. The first awards, worth about $3 million, drew attention to the Foundation's activities in Dade County. Karen Buchsbaum, the consultant who was hired for three years, trained board and staff members to talk to the media about the Foundation's mission and its grant programs and convinced the board to keep a detailed record of the grant proposals that were funded.

"In the beginning, they were out giving money and were not keeping a good list of all their projects," says Buchsbaum. "One of the things we did was to try and get down everything they were spending money on, and where it was going."

Board member Walter J. Stanton, a Miami attorney, saw the Foundation's agreement to provide $3.3 million for a health clinic for the homeless in Dade County's Homeless Assistance Center as a turning point in helping the Foundation develop an identity. The resulting press received on February 10, 1994, gave board members a chance to promote the Foundation's mission. Smith, the reporter for the Miami Herald, and members of the Foundation community note that many local residents suddenly became aware that the Health Foundation could have a dramatic impact on the region. The head of the Broward Community Foundation said that she and her colleagues were struck by the amount of some of the Health Foundation's awards––they were large enough to "actually make a difference."

In early 1997, the Foundation board fired the organization's executive director and named O'Neil CEO, with an annual salary of $150,000. O'Neil, who remains as chairman of the boards of both the hospital and the Foundation, says the executive director was fired for "organizational disagreements" and for interfering in the board's grant-making agenda.

A tall man with a jovial face, O'Neil is known for being "the soft touch on the board" and for being willing to use discretionary funds to help a program in trouble. He is also thought to be responsible for the board's occasional disregard of the recommendations of its grants review committee.

"I sometimes think that political considerations and being nice take precedence over other criteria and standards for decision making," says Linda Quick, president of the South Florida Hospital and Healthcare Association and a grants committee member for approximately two years. Quick could think of two occasions on which the committee's recommendation had been ignored. But the Foundation's Executive Vice President Cheryl Wade argues that the programs met the qualifications for funding, although they had not made it onto the committee's list of recommended programs.

Vital Facts and Figures

Before discussing the Health Foundation's history as a grantmaker, it might be interesting to review its finances, its corporate structure and policies, and the funding environment in which it operates.

The Foundation started with about $18 million in cash and the promise of a quarterly distribution from its partnership with Columbia. Income from the Partnership has ranged from $3.3 million in the first year to a high of $11 million in 1997. The board invests approximately 25 percent of the Foundation's income from the Partnership and its investments and, after deducting administrative costs, distributes the remainder in grants. One board member estimates the Foundation's current market value at $125 million, with $40 million invested and the rest representing the value of its interest in the Partnership.

In 1997, the Foundation gave away about $7 million and spent $1.8 million on administrative costs. O'Neil says the administrative costs are high in part because the Foundation pays the operating expenses and the salaries and benefits of eight staff members who work in its two clinics. The Foundation also sponsors the fund-raising efforts of other charitable organizations and has expenses relating to its public relations activities.

Other than the informal decision to reinvest 25 percent of its yearly income and a commitment to using the funds to fulfill its mission, the Foundation has no restrictions on how it spends its funds. Early in the life of the Foundation, the board chose three money managers: Northern Trust Bank of Chicago; and Chase Manhattan Private Bank and Wood, Struthers & Winthrop, both of New York. According to the Foundation chairman, the money managers were chosen on the basis of personal relationships their representatives had with members of the board and on their reputation for providing good returns on investments. Approximately $40 million is divided almost equally among the three money managers, who follow a strategy of investing 60 percent in equities and 40 percent in fixed-income securities. In 1996, the Foundation's investments averaged a return of 30 percent, according to the Foundation chairman.

The 12 members of the board of the new foundation, all of whom had served on the board of either the hospital or the hospital foundation, put no limits on how the funds would be spent, as long as a proposal fell within the bounds of the Foundation's mission. Care would be taken, however, to carefully avoid "back-door connections" with the hospital among any of the grantees. In addition to committing $1.5 million to the school-based clinic, the board's first awards funded 40 nursing scholarships and $500,000 in research projects funded through the University of Miami.

"The amount of money we give out has varied year in and year out, based on what we thought the needs were," says Culbreth. "We wanted to respond extraordinarily if the needs were extraordinary. We did not want to frivolously grant money."

The Health Foundation puts on a gala event every spring and a golf tournament in the fall. Between the two events, the Foundation raises approximately $200,000, which is donated to a chosen nonprofit organization. By doing this, the Foundation is able to meet the public support test, which requires it to raise one third of its income from the community.

Unlike most foundations, the Health Foundation does not issue an annual report, which board members have seen as an unnecessary expense. Board members will reconsider their decision at an annual retreat in the fall, O'Neil says. Two times a year, a newsletter is sent out to donors, policymakers, grantees, and the media, listing recent grants and promoting the work of funded programs as well as the Foundation's fund-raising activities. The Foundation has no other mechanism for reporting its activities to the community it serves.

The only oversight of foundations in Florida is provided by the state Department of Agriculture's Division of Consumer Services (DCS), which must each year receive a report that includes the Foundation's federal 990 Form and provides information on income, money raised in the community, expenses, and amount of grant money distributed. A representative of the DCS said there had been no complaints lodged against the Health Foundation during its years of operation.

The Foundation board placed no restrictions on who could serve on the board, nor on the number of terms a member could serve. The Foundation chairman explained that membership involved an inordinate level of commitment and that hardworking board members were difficult to find. If a board member doesn't do what's expected, the Foundation chairman can ask him or her to resign.

"You need people who are going to show up and contribute their expertise," says O'Neil. "You say good-bye if they are no good."

Board members are required to sign a conflict-of-interest statement when they join the board and must amend the statement if a conflict arises. There are currently five board members of the Foundation who were on the original hospital board. Among them are two physicians who are investors in the hospital. One of them represents the Foundation on the current hospital board. Another board member represents the hospital as its attorney.

New board members usually start out on the boards of one of the two supporting foundations––the Health Foundation of South Florida Support Services or the Health Foundation of South Florida Research and Education. There are currently two lawyers, two physicians, and one certified public accountant among the people serving on the boards of the three foundations. The nine board members of the parent foundation serve on one of the two supporting foundations, and there are two "floaters"––new board members who serve only on the boards of the supporting foundations. The Foundation chairman serves on all three boards.

The Foundation's bylaws had originally been used by the hospital parent board, but the Foundation chairman says that he is in the process of changing them. The bylaws also established a committee structure that is followed by the board. Committees have been formed to address issues relating to personnel, finance, and audits. In addition, two grant committees and an executive committee have been established.

Foundation board members say that their role on the hospital board is both to protect the Foundation's interest in the Partnership and to make sure the hospital continues to fulfill its obligations to maintain quality of care and to serve the indigent. O'Neil says that no member serving on both boards has ever encountered a situation in which the aims of the two organizations have been at odds.

Although most of the programs it funds are in Dade County (75 percent), the Foundation also supports programs in three neighboring southeast Florida counties––Palm Beach, Broward, and Monroe. The Foundation has a staff of 18, 10 of whom work in the Foundation office and eight in clinics operated by the Foundation––one at a school and one in a homeless shelter.

South Florida had a tradition of corporate philanthropy that suffered during the 1990s as a number of corporations left the area (Miami Herald, February 2, 1998). The new conversion foundations have therefore been particularly welcomed by the health and social service agencies and the school system. The local grant-makers organization, the Donors Forum, reports that foundations in the region have assets worth $2 billion and distribute $100 million annually. Substantial grants for health-related programs are provided by the United Way of Dade County, the Peacock Foundation, Inc., the Foundation of Jewish Philanthropies of Greater Miami Jewish Federation, and the John S. & James L. Knight Foundation. In 1996, two local community foundations in the region awarded $7 million to projects that target the same population as the Health Foundation. The grants awarded by these organizations are generally small, ranging from $500 to $25,000.

In addition to the Health Foundation, there are two other conversion foundations in Dade County that fund health care programs––the Dr. John T. MacDonald Foundation in Coral Gables and the North Dade Medical Foundation in North Dade, each of which has approximately $30 million in assets. In Palm Beach County to the north, is the Quantum Foundation, with $160 million in assets.

Florida is one of three states with the greatest number of conversion foundations. The Health Foundation is the fourth largest of seven conversion foundations in Florida. It is one of two that have chosen to become public charities.

Five of the conversion foundations in Florida restrict their grants to health-related activities, although health is usually interpreted broadly to include emotional well-being and education. Two foundations also fund the arts and cultural development.

The Health Foundation's decision to become a public charity rather than a private foundation was based on the board's desire to operate at least one health care clinic and to maintain financial flexibility. A private foundation is required to pay a 2 percent federal excise on investment income and must distribute annually at least 5 percent of the value of its capital in grants. Board members said that as long as the hospital and the market performed well, they planned to award more than 5 percent a year, but they wanted to be prepared if there were an economic downturn. Because most of the Foundation's assets are placed in two supporting nonprofit organizations––about $33 million in one and $3 million in the other––the Health Foundation itself earns only about $450,000 annually on its investments and is therefore required to raise only $150,000 to meet the public support test as a public charity. The two 509(a)(1) supporting foundations, which are not required to meet the public support test, were formed from two other entities associated with the hospital.

After the joint venture had been entered into, the Foundation sought confirmation from the IRS that neither the Foundation nor its two supporting organizations had lost their nonprofit status as a result of the transaction. Until this year, the IRS had made no rulings on the status of nonprofits created from joint ventures, according to Howard Levenson, a partner at Ernst & Young accounting firm. The ruling, which was issued in March 1998, is retroactive and suggests that nonprofits that cede control to for-profit partners risk losing their tax-exempt status. Twenty-seven nonprofit conversion foundations nationwide are involved in joint ventures with Columbia/HCA. The partners split $2 billion in revenue in 1997 (Tennessean, March 19, 1998).

The Foundation, which lists its IRS tax-exempt status as "pending," has joined a coalition made up of nonprofit partners of Columbia and other hospital chains in an effort to influence the IRS and the U.S. Treasury Department to at least allow the nonprofits a transition period in which to "unwind" themselves from the joint ventures without penalty. The Foundation chairman says he believes that the Foundation will be able to show that it should not be affected by the ruling because of the way the joint venture was structured. For example, although the Foundation does not control the Partnership as the IRS ruling would require, it must approve a change in services or the sale or closing of the hospital.

But the IRS ruling would seem to argue that the Foundation must show an ability to set the hospital's agenda. What would happen, suggests an attorney familiar with the case, if there were a typhoid epidemic in Miami? Would the Foundation have the power to make the hospital set aside 20 percent of its beds for typhoid patients, which might result in economic loss to the hospital? The attorney noted that the IRS would probably also consider how much money the Partnership was earning and whether the proper disbursement was being made.

Levenson, whose firm is employed by Columbia and other health corporations, says that most of the nonprofits are hoping to fall into "a gray area" with respect to the new ruling. Representatives of the coalition met in Washington, D.C., on August 7, 1998, to set an agenda. If they obtain no relief from the IRS, they plan to turn to Congress for help.

"We're going to let Congress know that the IRS had the opportunity to question the decisions these nonprofits were making, and they chose not to do that," adds Levenson. "It's a question of fairness."

The Foundation's Developing Role as a Grant-maker

On its application form, the Foundation makes the following statement about the people applicants should serve: "Grant proposals will be required to include indigent, medically underserved individuals in the targeted populations with special emphasis being placed on the inclusion of minorities, women, and children in studies of diseases and conditions that disproportionately affect these groups. The composition of the proposed study population must be described in the proposal in terms of gender, age, and racial/ethnic group."

The information available about the population of Dade County explains the reasoning that guides the Foundation's grant-making strategies. (Unless otherwise noted, the data were provided by the South Florida Regional Planning Council.)

Almost 12 percent (200,000) of the residents of Dade County under the age of 65 are underinsured or have no insurance coverage. The poverty rate has been estimated at more than 25 percent, according to revised U.S. Census data (January 1998). Minorities predominate in Dade County, where 20.5 percent of the population is African American and almost 50 percent is Hispanic. More than 9 percent of the county's 2.1 million residents are unemployed. Infant mortality among non-whites in Dade County was 8.78 per 1,000 in 1995, compared to 4.08 per 1,000 among whites.

The $25 million distributed by the Foundation since 1993 has funded a broad range of programs that focus on health services, education, and research. The board operates two clinics for indigents and has awarded grants to fund other clinics and health services in underserved areas that reach low-income women and children. Education efforts have focused on nursing programs in local colleges and universities, starting with 40 scholarships for two-year degrees and recently moving into scholarships for bachelor's and master's degrees. Research grants have paid for studies of juvenile diabetes, for tests of the efficacy of a vaccine therapy for breast cancer, and for efforts to find a better way to care for infants who have been exposed to alcohol and drugs in utero. The Foundation has taken an interest in funding research into two rare medical conditions, in part because of the difficulty researchers have had obtaining funds from traditional sources such as the National Institutes of Health.

Stanton describes the underserved as the primary focus of the Foundation's grant programs. "This covers a broad spectrum," Stanton says. He cites in particular Miami's "huge immigrant population that has needs the government does not provide for."

Foundation staff point to six areas that have become the focus of Foundation's grant-making activities:

Executive Vice President Cheryl Wade says that board members initially took their grant-making cues from the small foundation that had raised money for Cedars Hospital. At the time of the conversion, there were several physicians' wives on the board of that foundation who had developed an interest in nursing scholarships and in school-based clinics. The Foundation used a model developed by the Robert Wood Johnson Foundation (RWJ) for its first school-based clinic, and it expanded the nursing scholarship program to include indigent students seeking bachelor's and master's degrees. Wade notes that a close look at the hospital foundation's scholarship program revealed several problems that the Health Foundation succeeded in overcoming.

"There was a high attrition rate and outcomes were not great," says Wade, who is trained as a nurse practitioner. "My suggestion was to target the program at the baccalaureate and master's levels." The graduate scholarship program requires students to work with the indigent, and Wade notes that many graduates are now seeking to continue working with the underserved.

Ideas about the funding of research initially came from Bernard Fogel, a former dean of the University of Miami Medical School. O'Neil tells the story of walking into Fogel's office after signing the letter of intent with Columbia to announce that the new foundation had $500,000 to invest in research.

"Who else should we have gone to?" O'Neil asks. "The University of Miami was the best game in town."

Other areas of funding, such as health services for women and the homeless, have resulted from links with other major funders. The latter include the Robert Wood Johnson Foundation and local funders, and important philanthropists such as Alvah Chapman, chairman of the Community Partnership for the Homeless.

"Our funding of the homeless center was certainly a milestone for the community, and for us," says Stanton. "We've received rave remarks in terms of what we've been able to do."

Each board member also has at least one particular area of interest that has an impact on the grant-making process. Culbreth, for example, is interested in the prevention of domestic violence, a focus that is reflected in a high-profile project that placed Polaroid cameras in the cars of police officers in communities throughout southeast Florida. "I saw a news show where police were talking about their inability to document incidents of abuse," Culbreth says. "The wife heals, the husband apologizes, and no one goes to court." Since 1996, in partnership with the Polaroid Corporation, the Foundation has distributed 2,000 cameras to police departments along the coast from Palm Beach County to Monroe County.

The head of The Donors Forum in Miami, a regional association of grantmakers, describes the role of the Health Foundation as "evolving." "I see them now tackling complicated issues and making sure that the grants are addressing the issues they are interested in," said executive director Jo Anne Chester Bander. "Early on, my sense was that if someone asked for a hunk of money and they smelled good, the Foundation gave it––with few controls built in that would allow one to know if there would be legitimate outcomes."

In the beginning, Bander said, the Foundation board lacked expertise in grantmaking, a problem that has been overcome in recent years with time and the hiring of more experienced staff. Guidance is also provided by two informal advisory committees that include board members as well as community experts in the areas of health, research, education, and social services.

Following are examples of several of the programs the Foundation has funded in the last five years:

Miami Hope Health Center

In February 1994, the Foundation announced it would fund and operate a medical clinic in the Dade County's Homeless Assistance Center. Since the clinic opened in October 1995, it has served an average of 45 patients a day. The Foundation committed $3.3 million to the project over five years. Health care is interpreted to include parenting classes and classes in disease prevention and personal hygiene. Among the services offered are dental care and screening for vision and mental health problems.

Miami Edison Adolescent Health Center

Based on a successful model developed by the Robert Wood Johnson Foundation, the health center offers dental and physical examinations, family planning counseling and services, diagnosis and treatment of sexually transmitted disease, counseling and evaluation of substance abuse problems, and referrals for further treatment. Clinic staff have recorded more than 12,000 visits from students since the clinic opened and have occasionally addressed serious conditions such as hypertension and meningitis. The Foundation committed $1.5 million toward supporting the center for five years.

Building on its success with its first school-based health center, the Foundation is now working in partnership with the University of Miami to place nurse practitioners in two other Dade County public schools.

Project Yes

In October 1996, the Foundation awarded $50,000 to Project Yes, a program that helps prevent violence against gay and lesbian adolescents and educates local agencies and institutions about the difficulties of growing up gay or lesbian. The seed money allowed Project Yes founders to move out of an extra bedroom in their home and into rented rooms in a church. It also gave the project credibility and allowed it to attract new funding. In the two years following the first Health Foundation grant, Project Yes has raised about $100,000 from other sources, and the Foundation has awarded it another $125,000. Project Yes staff have been invited to speak to teachers, clergy, and representatives of local social service agencies.

Sleep Apnea Research

In 1994, the Foundation funded a two-year clinical research project into the correlation between sleep position and SIDS (sudden infant death syndrome). The findings of this project and other concurrent projects have led to a change in how physicians recommend infants be placed when they are sleeping.

Many of the most ambitious programs funded by the Foundation have been entered into with other organizations and state and federal agencies. In 1996, for example, the Health Foundation joined the Robert Wood Johnson Foundation in funding the Good News Care Center, a health clinic in the South Dade community of Florida City. A local Baptist church raised the first $100,000 to obtain a site. It then received $300,000 from RWJ and $200,000 from the Health Foundation.

The Foundation has often jointly sponsored programs with the University of Miami. In one instance, the two institutions have split the cost of paying the salary of nurse practitioners at three local schools. The Foundation is able to further its investment in school-based health, and the University has a community-based site for training students. In a project that brought in funding from several sources, the Foundation has purchased a $300,000 van for the University of Miami that is equipped to provide on-site mammograms to women in low-income communities. The state Department of Health and Rehabilitative Services funds the technicians who operate the van, and the American Cancer Society provides funds for health education, gas, and van maintenance.

RWJ inspired the Health Foundation to award $1 million in 1996 to the Miami Coalition for a Safe and Drug-Free Community. The money was used to produce an assessment of the safety and drug issues that plague Miami's poorest neighborhoods. Although RWJ did not choose Miami as a site for its next round of grants, the Health Foundation intends to use the information to guide future grantmaking.

Advocacy is not usually one of the Foundation's program areas, but the board made an exception in the case of the Human Services Coalition of Dade County, Inc. IRS regulation stipulates that foundations have the right to spend as much as 15 percent of their grant-making funds on advocacy without jeopardizing their nonprofit status. The Health Foundation board awarded $68,500 to the Human Services Coalition to fund its efforts to persuade legislators to expand the state's "Growing Healthy" children's insurance program to include more children as well as to fund social and medical services.

Changes in Style and Direction

At the Foundation's annual meeting in 1996, a facilitator led a workshop on strategic planning, which focused on proactive grantmaking and resulted in the board's decision to begin developing requests for proposals (RFPs).

The Foundation subsequently developed an initial RFP and is working on a second. The first was in the area of early childhood development. The second RFP will focus on care of the elderly. The Foundation has convened two brainstorming sessions with academics and agency representatives to develop goals for the new RFP.

To solicit proposals for the early childhood RFP, Foundation staff produced a brochure outlining some of the findings on research about the importance of exposing very young children to intellectual and emotional stimulation and describing the grant application process and who would be eligible. The brochure was sent out to community groups that work with children and to newsletters whose readers might include representatives of relevant state and local agencies and directors of day-care and child-care centers. Foundation staff also telephoned agencies and organizations they thought might be interested in responding to the RFP. Eleven proposals were submitted for the first round, and two were funded, for a total of $200,000. In the second round, the Foundation awarded about $1.8 million to fund seven of the 10 proposals submitted. Foundation staff members note that almost 80 percent of those receiving grants in the second round had been turned down the first time. By redesigning their proposals, many applicants were now able to obtain funding.

Ideas for initiatives have sometimes come from reports in the national media of new research or of social problems that have become more prevalent. Wade describes a television program on early childhood education as having had a particularly strong impact on the board and staff, leading to the Foundation's first RFP. Other ideas have come from trends in philanthropy and health care that staff have learned of in seminars and through publications. "A major influence has been our contact with philanthropy in general," says Wade. "We get information from Grantmakers in Health and from the Council on Foundations, and we look at trends as they apply to our South Florida area."

At first, research was identified as a major program area for the Foundation, but the board has gradually begun to discourage most researchers from applying for grants. "Research can be so esoteric, and you have to have the expertise on board, and we don't," says Culbreth. Wade notes that research is still funded, but it usually has a social science focus.

The Foundation does not conduct independent evaluations of the programs it funds, which is not unusual for foundations in the Dade County area, according to Jo Anne Chester Bander. Only one local foundation, the John S. & James L. Knight Foundation, has hired someone to conduct evaluations of its programs. Although O'Neil says that the board has no plans to put money into evaluation, Wade says she expects the board to fund a pilot project within the next two years to evaluate the outcomes of a random sample of grants.

"At this point, I think the board is still trying to figure out how many resources we want to put into evaluation," Wade says. "That would be a mature step, and you do need money to do that."

Linda Quick, a Grants Committee member, argues that the Foundation has not gone far enough in "the programmatic and fiscal evaluation of their resources, which I encourage them to pursue. I have confidence that the majority of the Foundation's money goes to things that would not be funded elsewhere," Quick adds, "but their continued flaw is in the evaluation of the impact of their funding. They just trust people to write them a letter to tell them what they are doing with the Foundation's money."

There are currently no written standards for reviewing funding proposals. The standards are understood informally by both staff and board members, according to Wade. However, she can foresee a need for standards that would address topics such as what kind of research the Foundation will fund and whether or not it will give money to national and international organizations, such as the American Cancer Society and the Juvenile Diabetes Foundation. In 1998, the Foundation's annual meeting focused on welfare-to-work issues as well as how the Foundation can make strategic planning part of its mission.

Lessons Learned

In retrospect, board members are grateful for the legislative climate in Florida, which allowed them great freedom in entering into the joint venture with Columbia and in setting up the Foundation. Since the creation of the Foundation, O'Neil identifies his most difficult challenge as that posed by the Foundation's dealings with the IRS. Because of the IRS's ruling in March 1998 that disallows many of Columbia's joint ventures, the Foundation has been placed in a situation with an uncertain outcome.

Culbreth and Grossman point to the lessons learned as board members began to realize they did not have the expertise to evaluate the grant requests for research and that they would need to implement rigid reporting requirements.

"We could have started out with tighter structures and requirements in those two areas," says Culbreth. "But we have not had significant problems; we are blessed with a fair amount of money, and a board that is willing to work hard."

In the area of logistics, Culbreth points to the "almost unmanageable level of information provided as part of the grant-making process" and the need for a system to address it. The Foundation has hired a consultant who is working on a method for submitting grant proposals electronically. Another new system that is being tried out will provide board members with a summary of most of the proposals that have made it through the screening process. Each member will then be assigned three proposals to review completely. Board members will then each make a presentation to the full board of the proposals that have been assigned to them. In the past, each board member received copies of all proposals that looked promising.

Summary

The Health Foundation of South Florida came into being on February 13, 1993, with the conversion of the Cedars Medical Center to a for-profit institution. The Foundation entered into a joint venture with Columbia/HCA Healthcare Corporation, receiving $18 million in cash and a "put" that guaranteed the Foundation another $27 million if its board chose to dissolve the joint venture within seven years of the conversion. The Foundation, which retained a 46.5 percent noncontrolling interest in the hospital, now estimates that its assets are worth about $125 million, including $85 million for its interest in the joint venture. The Foundation received $11 million in income from the Partnership in 1997 and distributed about $7 million. In addition to Columbia and the Health Foundation, there is a third partner comprising a group of physicians who paid $15,000 for each share of a seven percent interest in the Partnership. The current hospital board is made up of four members of the Foundation board, four Columbia representatives, and four representatives of the physician investor group.

Although the board of the new Foundation originally included 12 people, all of whom had served on the board of the hospital or its fund-raising arm, the Foundation's mission and bylaws were written by hospital Chairman John H. O'Neil, Jr., and hospital CEO Thomas G. Culbreth. The two also decided the direction the Foundation would take initially in terms of grantmaking, according to O'Neil. Culbreth is now on the Foundation board, and O'Neil serves as chairman of both the hospital and Foundation boards. He is also CEO of the Foundation, for which he receives an annual salary of $150,000.

In the beginning, the Foundation board was influenced in its grant-making strategies by the experiences of some of the board members who had served on the board of the Cedars Foundation, the hospital's fund-raising arm. They were also guided by the former dean of the University of Miami Medical School, who interested them in funding the work of a number of the university's researchers. The board members therefore first focused their grant-making activities on medical research, nursing scholarships, and school-based health.

After that, the board allowed the content of the proposals they received to determine priorities, as long as the projects met the Foundation's broad interpretation of health care. Recently, however, board members have been influenced by their staff and by national and local trends in health care and philanthropy to consider a more proactive approach to grantmaking. They have issued one RFP in early childhood education and are working on a second that will target the elderly.

The Foundation has a relatively loose administrative structure. It has bylaws and a policy regarding conflicts of interest, but the board seems to operate with great flexibility and few guidelines for structuring the Foundation's activities. There are, for example, no written standards for evaluating grant requests. There are currently five board members of the Foundation who were on the original hospital board. Among them are two physicians who are investors in the hospital. One of them represents the Foundation on the current hospital board. Another board member represents the hospital as its attorney.

As part of the agreement with Columbia, four Foundation board members sit on the board of the hospital. O'Neil and his colleagues on the Foundation board argue that this allows them to ensure that Columbia adheres to its agreement to maintain quality and to serve the indigent. It also provides the Foundation board with information about the hospital's finances and, when appropriate, allows the board to press for more money from the Partnership.

But in allowing Columbia to become general partner in the joint venture, the Foundation in essence ceded control of the hospital, possibly making the venture subject to an IRS ruling that retroactively bans such agreements. The Foundation has joined a coalition of nonprofit partners of for-profit hospital chains to appeal the ruling.

There are no state laws in Florida that specifically address hospital conversions such as the one entered into by Cedars and Columbia. According to a review of articles published in the Miami Herald, the public voiced no complaints about how the conversion was structured. It is clear, however, that the Cedars conversion process adhered to few of the current "best practices" as defined in the literature.

In contrast to suggested best practices outlined in a special issue of Health Affairs on hospital conversions (March/April 1997), the Cedars board did not solicit competing bids and it conducted its negotiations in secret, inviting no public comment. In other states, such public comment has resulted in benefits to the public. In Portsmouth, New Hampshire, for example, Columbia was allowed to purchase Portsmouth Hospital only after public hearings and disclosure of the records. "The final agreement between Columbia/HCA and the hospital incorporated many of the concerns raised by the public, including limitations on the ability of the for-profit hospital to turn patients away, a promise to retain all current employees, and a commitment to build a new hospital in Portsmouth," wrote the authors of "The Preservation of Charitable Health Care Assets" (Health Affairs, March/April 1997). Also in contrast to suggested best practices, the Health Foundation's mission was written with no comment from the public, and every one of the board members of the new Foundation had been in some way affiliated with the hospital. It is not unusual for conversion foundations to be represented by board members who were also on the hospital board (Health Affairs, p. 234). The Health Foundation's board, however, has placed no limits on the number of three-year terms a board member can serve.

The state of Florida requires foundations to file annual reports on their fund-raising activites, but it does not actively oversee them. The form that is sent to the Division of Consumer Services also includes information on income, assets, and administrative costs. Action is taken only if there is a report of fraud or misuse of funds. In addition, the Health Foundation files an annual report with the IRS. Otherwise, the Foundation does not formally account for any of its grant-making activities. The Foundation does not produce an annual report, although the board is reconsidering this decision.

Board members say they do not regret having conducted the conversion process in secret. It gave them the flexibility to do what they thought was best for the community and the institution. If they made mistakes in the beginning, it was in not developing strict reporting requirements and in funding medical research that they lacked the expertise to evaluate. In retrospect, they might also have spent more time developing a system for processing the large amount of written materials they received as part of the application process.



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