Conversion from Nonprofit to For-Profit Legal Status: Why Does It Happen and Should We Care?

If to behave commercially is to act like a for-profit firm, then the ultimate expression of commercialism for a nonprofit is to convert its legal status to the for-profit form. Conversion is increasingly common, most notably in health care, and is now attracting considerable public attention. Some observers believe that nonprofits and for-profits inevitably behave in fundamentally different ways, and question whether conversions can ever serve the public interest. Others are less concerned that conversions occur at all than about the terms at which they take place, arguing that it is essential that public assets remain devoted to the purpose for which nonprofit status was originally granted, and not redirected toward private gain. This paper seeks to advance understanding of nonprofit conversions and their public policy implications. To set the stage, we introduce some key issues through a brief review of conversion activity in health care. We then consider the concept of conversion more closely, concluding that transfers of control of nonprofit assets can be accomplished in various ways, so that it would be a mistake to define things too narrowly. Next we explore the possible motives for conversion, and speculate about the reasons for the flurry of conversion activity in health care. Finally, we discuss at some length some important public policy questions raised by conversions: (1) Under what circumstances is conversion appropriate? (2) How should the nonprofit s assets be valued? and (3) What should happen to the financial assets that remain after the conversion? We frequently raise issues that deserve greater attention, but which we do not as yet know how to resolve.