Healthcare & Hospital Conversion

Summary:

... Protection and promotion of the public's health are typically thought of as governmental responsibilities. ... As discussed below, charitable trust law, and more recent nonprofit conversion statutes, provide a way to resolve this problem. ... While nonprofit conversions can be shoe-horned into the common law of charitable trust, the doctrine was not intended to regulate contemporary transactions involving complex commercial nonprofits such as those that dominate the health care industry. ... The following discussion provides an overview of nonprofit conversion legislation and discusses how these statutes are consistent with the principles underlying charitable trust law. ... In keeping with the notion that the assets of the nonprofit are held in charitable trust for the benefit of the public, nonprofit conversion statutes require an open process with full disclosure both to the Attorney General and to the public. ... General Chandler responded that the history of the Blue Cross/Blue Shield movement nationally as well as the specific history of the formation of Kentucky Blue indicated the founder's intent to organize Kentucky Blue as a nonprofit entity with its assets held in charitable trust. ...  

 

Citation:

Frost, Christopher W. "Financing Public Health Through Nonprofit Conversion Foundations."  90 Ky. L.J. 935, Kentucky Law Journal, 2001 / 2002

Summary:

The question becomes which governmental agencies would best oversee the activities of healthcare nonprofits. Attorneys general traditionally have the power to investigate the activities of nonprofits as protectors of the communities served by nonprofits, but they are not necessarily expert in the legal issues faced by nonprofits or the healthcare industry. Also, some scholars have questioned exactly whom the state attorney general is representing in actions taken against nonprofits; oftentimes the attorney general's focus on financial issues excludes the notion of fidelity to mission. Recent attorney general actions do not necessarily protect the community intended to be served by healthcare nonprofits; also, some unnecessary meddling in governance affairs post-action has become controversial. For instance, Attorney General Hatch named eight members to Medica's board of directors once the split between Allina and Medica occurred. The board members subsequently petitioned the court to terminate their settlement with Hatch, charging too much interference in corporate affairs. Attorney General Hatch undoubtedly had a difficult task in unwinding the underdeveloped and abandoned law in Minnesota regarding integrated service networks so that the development of Allina could be understood separately from the shortcomings of the state's failed legislative effort. Undoubtedly conflicts of interest existed at Allina, but perhaps the attorney general's findings could have been clarified, and thus more informative for directors of other integrated healthcare entities, if the expertise of the relevant regulating agencies had been utilized. Drawing on the ongoing example of Allina and its continued fallout, it appears that other state agencies would help to round out the oversight of healthcare entities and their boards.

 

Citation:

Huberfeld, Nicole. "Tackling the Evils of Interlocking Directorates in Healthcare Nonprofits". Nebraska Law Review, March 2007

Summary:

This Note proposes that this "third way" is the little-used procedural statute. As is discussed in detail below, such a statute would provide the Secretary of State and the Attorney General with the option to participate - as nonbinding consulting parties - in the closure or transformation of a nonprofit entity when such changes would have the potential to significantly and adversely affect the ability of government to perform its social welfare functions. By virtue of being solely procedural, nonadversarial, generally applicable, and content-neutral, such a statute would avoid potential First Amendment conflicts. Moreover, by being narrowly focused on the colorable concerns of government, such a statute would potentially prove less confrontational and more effective than a purely legislative or regulatory "legalistic" approach. In sum, a procedural statute, designed as described in detail below, would meld the legal and the diplomatic, create a framework for resolving future similar scenarios, and help lay the groundwork for improved relations between all parties involved. Finally, although this Note uses Massachusetts as an example due to the topical relevance of the Boston case study, this proposed statute is designed to be transferable to almost any other state with only minimal changes, particularly as state nonprofit law is fairly similar in respect to the structural and legal issues raised below. …  The executive authority for the provisions of the statute would rest with the Secretary of State and the Attorney General, who already hold the legal authority for overseeing the actions of Massachusetts nonprofit organizations. Under Massachusetts law, the Secretary of State has the responsibility to regulate the incorporation, consolidation, merger, and dissolution of nonprofit organizations. This power exists in order to ensure the Commonwealth that its nonprofit organizations are adhering to the requirement that nonprofits have a charitable purpose, and that the nonprofit form is not being compromised (in the case of reorganization) or abused (in the case of dissolution). The Attorney General has the responsibility for enforcing nonprofit law on behalf of the citizens of the Commonwealth, ensuring that nonprofits do not engage in activities that would be improper (either because of their nonprofit status or because the activities are illegal per se). For example, the Attorney General has the responsibility to review the conversion of hospitals from nonprofit to for-profit status, in order to ensure that due care was followed, conflicts of interest were avoided, and that the proposed transaction was "in the public interest."

 

Citation:

Heuer, Ted.  "Faith Accompli?: Using Nonprofit Law to Protect Social Services When Faith-Based Providers Close." 25 Yale L. & Pol'y Rev. 177, Yale Law and Policy Review, Fall 2006

Summary:

... Managers and boards of nonprofit hospitals understandably feel themselves under siege today. ... Moreover, in recognizing that business considerations were ineluctably linked with clinical judgments, Darling seemed to supply the impetus for uniting the parts of the so-called "three legged stool" of nonprofit hospital governance-the board of directors, the physician staff, and management - that has long operated to allocate responsibilities regarding quality. ... This newfound interest can be traced to a variety of factors, including financial and management scandals in both the for-profit and nonprofit sectors, the increased need for charity care in the wake of governmental cutbacks, and the changing economics of health care. ... What, then, are implications of the evolving governance environment for quality of care in nonprofit hospitals? As discussed above, corporate liability, ushered in by Darling, held out the promise that hospitals would be incentivized to monitor and coordinate staffs, physicians, and technology to assure maximum patient safety. ... With the thrust of many of the changes heralded by the new nonprofit governance paradigm to shift board attention to the bottom line and to the performance of mission objectives, it is likely that costly quality improvements will be placed on the back burner. ...

 

Citation:

Greaney, Thomas L. "Oh, Darling! 40 Years Later: The Legacy of Darling v. Charleston Community Memorial Hospital and the Evolution of Hospital Liability: New Governance Norms and Quality of Care in Nonprofit Hospitals."  14 Ann. Health L. 421, Loyola University Chicago - Annals of Health Law, Summer 2005

Summary:

Appellate Division Decision Limits New York Attorney General's Right to Notice of Some Types of Nonprofit Hospital Transactions  …  The authority of the New York Attorney General over nonprofit hospital mergers and affiliations was questioned by the Third Department's decision in Nathan Littauer Hospital Ass'n v. Spitzer. … N.Y.2d 247 N. X., Appellant, v. Cabrini Medical Center, Respondent, et al., Defendant. ...This case represents a significant limitation on the oversight powers of the Attorney General over nonprofit corporations. Specifically, the court called into doubt the ability of the Attorney General to object to nonprofit hospital common parent affiliation/mergers, because it limits the Attorney General's right to notice of these sorts of transactions. An important check on closed-door hospital arrangements that affect the public's access to health care was thereby removed. The decision could also lead to a further erosion of the Attorney General's charitable oversight powers, because other nonprofits could be emboldened to challenge the Attorney General's jurisdiction. One commentator noted that the case has national implications "because it represents one of the very few instances in recent years where a court has rejected the efforts of an "activist' attorney general to require judicial review of a nonprofit health care affiliation transaction." The Court of Appeals denied the Attorney General's motion to appeal.

 

Citation:

Building and Maintaining Strong Foundations: Creating Community Responsive Philanthropy in Nonprofit Conversions: www.communitycatalyst.org ,

Summary:

Another substantial body of empirical evidence indicates that tax-exempt nonprofit hospitals provide little more in the way of uncompensated care for the uninsured poor than for-profit hospitals do, except to call it by a different name (for-profits refer to it as bad debt; nonprofits refer to it as charity care), and that many tax-exempt hospitals do not provide charity care in an amount equivalent to the value of their tax exemptions. ... In particular, I suggest that those who favor enacting strict charity care requirements for tax exemption might instead want to consider a "provider tax" that would generate funds to be used by local governments to provide a wider range of health care options for the poor. ... Horror stories in the general press regarding medical billing, failure to treat the poor, and high CEO compensation may have created a climate that makes it possible for legislators to enact charity care legislation, although in Illinois, at least, the proposed charity care legislation was pulled by Attorney General Lisa Madigan for discussions with the state's nonprofit hospital lobby after an outcry from nonprofit hospitals. ... My second observation is that in formulating a test for tax exemption for health care providers, I believe that a somewhat more flexible system that still provides significant accountability for nonprofit hospitals is a better policy option than a mandatory charity care standard....

 

Citation:

Summary:

In recent years, nonprofit health care entities have experienced increased and highly publicized state attorney general scrutiny of, and sometimes interference with, the sales of facilities, use of assets and other health care transactions. Traditionally, state attorney general review of corporate health care transactions has been reserved for nonprofit-to-for-profit asset conversions and instances of regulatory oversight of transactions involving outright self-dealing or ultra vires conduct. Of late, however, the nonprofit health care transactions that have drawn fire from state officials involve straightforward asset transfers to other nonprofit corporations and, in particular, transactions where a nonprofit health care corporation seeks to close a struggling local hospital, merge facilities, exit a community or entirely divest of a portfolio of in-state holdings. Even more recently, state attorneys general have objected to specific expenditures by nonprofit corporations (including fees for hiring bankruptcy professionals) and have suggested that nonprofit corporation funds may need to be expended in accordance with charitable mission objectives rather than made available for creditor recoveries.

 

Citation:

Kaplan, Harold L. et al. "The 'Charitable Trust' Doctrine: Lessons and the Aftermath of Banner Health." 23-4 ABIJ 28, American Bankruptcy Institute Journal, 5/1/2004

Summary:

Although several states have enacted legislation regulating the sale and conversion of nonprofit hospitals, the legal structure governing hospital conversions in most states is unclear and left to judicial interpretation. Historically, the Attorney General is the government official charged with the oversight responsibility of charitable assets. In nearly all of the states with conversion legislation, the Attorney General is designated to oversee the conversion process. In states without conversion laws, the Attorney General claims the authority to review hospital conversions through charitable trust law and common law. Opponents to Attorney General review assert that Attorneys General have no such common law authority because hospital conversions are a matter of corporate law, not trust law. The conflict between corporate law and charitable trust law was present in the litigation between Health Midwest and the Kansas Attorney General and will be present in future hospital conversions unless states enact hospital conversion statutes.

 

Citation:

Kline, Phill et al. "Protecting Charitable Assets in Hospital Conversions: An Important Role for the Attorney General." 13 Kan. J.L. & Pub. Pol'y 351, Kansas Journal of Law and Public Policy Spring, 2004

Summary:

... "[T]he broad interests of the Attorney General necessarily entail protecting the public against any social and economic disadvantages which may be occasioned by the activities and functioning of public charities . . . ." ... The duties of a trustee and the Attorney General are concomitant in so far as assuring that the benefits of a charitable trust are delivered in accordance with the Settlor's intent; but because the socio-economic benefits of a charitable trust extend beyond the designated beneficiaries to the public itself, although ordinarily compatible with each other, the Attorney General has an added responsibility of assuring that compatibility. ... "If that were the case, then the Attorney General could become fully involved in the decisionmaking process of every charitable trust or, for that matter, in every charity in Pennsylvania. ... Neither Missouri nor Kansas has adopted hospital conversion legislation, forcing both attorneys general in the Health Midwest matter to assert their common-law and general corporate jurisdiction over the nonprofit corporations. ...  

 

Citation:

Brody, Evelyn, "Whose Public?:  Parochialism and Paternalism in State Charity Law Enforcement". Indiana Law Journal, Vol. 79, No. 4, pp. 937-1036, 2004

Summary:

... Recent enforcement efforts by state attorneys general have made it clear that nonprofit boards of directors will need to pay more than lip service to fiduciary duties set out in state statutes. Developments in the nonprofit, tax-exempt healthcare community that both predate and are eerily parallel to the Enron debacle of 2001 are generally credited with generating this attention. The Coalition for Nonprofit Healthcare published a "Corporate Responsibility Guidebook" in November 2002, which tracks the "corporate responsibility environment" as one informed by actions of Minnesota Attorney General Mike Hatch in pursuing the Allina organization in 2000-2001, but credits even before that (and outside of Minnesota): … The long-running saga of the bankruptcy and related litigation involving AHERF [Allegheny Health Education and Research Foundation], which began in 1998. At its core, this controversy involved alleged failures of oversight by corporate governance and lapses in the monitoring of the financial integrity of the health system and the actions of certain members of senior management. The bankruptcy, and ultimate settlement of ongoing litigation in 2002, result in the return of over $ 75 million to existing endowment funds ... . The high-profile AHERF failure (and resulting dissipation of charitable assets) has made state attorneys general increasingly sensitive to their obligation to monitor the degree of stewardship of charitable assets by governing boards.  … Not only has the current Minnesota Attorney General been one of the country's most proactive in pursuing organizations perceived to have lax board oversight and insider self-dealing, but his predecessor, Hubert H. Humphrey III, in office through the year 2000, led an investigation in 1998 which resulted in an agreement with one of Minnesota's most beloved charitable institutions, Minnesota Public Radio, to the end of ensuring the board's appropriate independent oversight in setting management compensation. … Drawing on the statutory definitions of duties of directors of nonprofit organizations in Minnesota Statutes sections 317A.251 and 317A.255, the Minnesota Attorney General's website displays a series of policies for nonprofits to consider when developing standards to govern their operations and the conduct of board members, officers, directors, and employees. According to the Attorney General's Office, its policies are offered as guides, and are based in part upon the policies adopted by Allina in connection with the Attorney General's recent compliance investigation of that organization. … With respect to conflicts of interest, the Minnesota Attorney General's sample policy emphasizes that board members, officers and management employees owe the public a fiduciary duty, "which carries with it a broad and unbending duty of loyalty and fidelity." The board, officers, and management employees have the responsibility to administer the affairs of the nonprofit tax-exempt organization they govern "honestly and prudently, and [to exercise] their best care, skill, and judgment for the sole benefit of" their organization. Directors, officers, and management employees "shall exercise the utmost good faith in all transactions involved in their duties, and they shall not use their positions with [the organization] or knowledge gained therefrom for their personal benefit. The interests of the organization must be the first priority in all decisions and actions."

 

Citation:

Summary:

Discusses examples of:

·        Minnesota – Allina

·        North Dakota – Banner

·        New Hampshire – Community Benefit Statutes

·        Indiana – Connor Prarie

·        Maryland - Carefirst

 

 

Summary:

In the midst of a national healthcare crisis, one of the largest nonprofit healthcare providers in the nation sold seven South Dakota facilities and plans on diverting the proceeds out-of-state. The South Dakota Attorney General alleges that all proceeds are subject to an implied charitable trust, and therefore must remain in the State of South Dakota. The South Dakota Supreme Court held that charitable trusts are recognized in the state, and that the sales proceeds may be subjected to the equitable devise that prevents unjust enrichment. Holding healthcare assets in charitable trust limits their alienability however, and this will detrimentally affect national nonprofit healthcare delivery. Developments in nonprofit corporation law also suggest that charitable trusts may no longer be applicable to nonprofit corporations.

 

Citation:

Frisbee, Allison.  "Banner Health Systems v. Long: A Case Study in the Ability of State Attorneys General to Apply Charitable Trust Principles in Order to Regulate the Activities of Nonprofit Corporations." 49 S.D. L. REV. 54, South Dakota Law Review, 2003 / 2004