Caution: attorneys general are watching your M&A activities

State AGs have been paying close attention to not-for-profit health care mergers and acquisitions. This article gives you advice on how to protect your organization from a lawsuit.

Why we need the independent sector: the behavior, law, and ethics of not-for-profit hospitals

Among the major forms of corporate ownership, the not-for-profit ownership form is distinct in its behavior, legal constraints, and moral obligations. A new empirical analysis of the American Hospital industry, using eleven years of data for all urban general hospitals in the country, shows that corporate form accounts for large differences in the provision of specific medical services. Not-for-profit hospitals systematically provide both private and public goods that are in the public interest, and that other forms fail to provide. Two hypotheses are proposed to account for the findings, one legal and one moral. While no causal claims are made, not-for-profit hospital behavior is consistent with the behavior required by law and morality. The moral argument, developed as a preliminary theory of not-for-profit ethics, also provides a potential reason to prefer not-for-profit hospitals. The findings provide a new justification for the not-for-profit tax exemption for hospitals, and also suggest new uses for ownership categories as regulatory tools.

Managing board relationships in tough times

Scandals have dominated newspaper headlines, bringing corporate directors under increasing scrutiny. These issues continue to elicit public outrage about wrongdoing and ultimately resulted in standards for for-profit corporate board members through the enactment of the Sarbanes Oxley Act in 2002. Although all board members must address corporate responsibility issues, directors of health care organizations also have responsibilities unique to the health care industry that must be met in relation to corporate compliance requirements.

Legal and regulatory issues in hospital laboratory outreach and partnering arrangements

An independent laboratory's joint venture with a chain of five nonprofit hospitals unraveled in 1999. Despite substantial management control over the joint venture and 3 years spent investing in and managing a massive consolidation project, the laboratory operator was ousted by the hospital group in favor of a national laboratory competitor. In the process, it lost the $6 million commercial laboratory business it brought to the joint venture. The laboratory operator sued the hospital group for destroying its business. Were the hospital's actions legal? Could the laboratory operator have protected itself better? Although by no means the only causes of this disaster, regulatory restrictions and uncertain contract terms contributed to the problems experienced by the laboratory operator.

Providers issue brief: change in nonprofit entities: year end report-2002

Heightened competition in the health care industry has prompted a growing number of nonprofit hospitals to merge with or sell to for-profit firms, in the hope of alleviating their financial concerns. The conversion trend, which has many public officials concerned about the fate of the charitable assets and care to indigent population that nonprofit hospitals have traditionally provided the communities in which they are located, has, in turn, led to an overall decline in the number of hospitals still in business. To protect the public's investment and ensure continued access to care, a growing number of states are thus exploring legislation that would open the conversion process to the public; strengthen oversight authority, typically through the attorney general; and make certain that the proceeds from such transactions are used appropriately.

Pharmaceutical company sponsored disease management programs: an alternative for tax-exempt MCOs and hospitals

On April 25, 2002, the Internal Revenue Service finalized the proposed Corporate Sponsorship regulations. The changes made in the final regulations pertain to the proposed $79 ceiling on disregarded benefits, the 2 percent threshold for disregarded benefits, the scope of disregarded benefits, Web site hyperlinks, the inclusion of certain electronic publications in the definition of periodicals, the valuation date for substantial return benefits, and the scope of use or acknowledgement. The proposed regulations were discussed in the Winter 2002 issue of Managed Care Quarterly in an article titled the same as this one. This article is based on the final IRS regulations and therefore supersedes the original article published in the Winter 2002 issue.

Under siege. The proposed sale of Health Midwest has landed the not-for-profit in the fight of its life. At stake--control of an $800 million foundation

Two state attorneys general, one goal. Kansas' and Missouri's top lawyers are teaming up against the board of directors of Health Midwest, which is battling to survive and control an estimated $800 million foundation that would result from the sale of its assets to HCA. Kansas Attorney General Carla Stovall (left) and her Missouri counterpart have asked the courts to dissolve Health Midwest and oust its board.

FTC will reevaluate hospital consolidations

Hospitals should take steps to ensure their recent consolidations can withstand renewed FTC antitrust scrutiny. The FTC will likely focus its attention on: Virtual mergers, in which "merging" organizations have combined operations while maintaining a degree of managerial independence; Mergers that were originally justified on the basis of projected efficiencies or lower prices; and Mergers of not-for-profit and for-profit organizations.

Sarbanes-Oxley raises red flag for not-for-profits

In the near future, not-for-profits likely will feel the effects of these Sarbanes-Oxley directives: Establish audit committees with independent membership (precluding senior managers from being members) and make corresponding changes to corporate bylaws; Meet a higher standard for financial reporting, including increased disclosure and system certification representations as part of annual audits; Adopt a code of ethics for senior financial officers; Avoid senior executive compensation packages involving personal loans from the corporation; Ensure that board members are appropriately qualified and free of conflicts of interest.l

Intermediate sanctions for healthcare organizations

Intermediate sanctions legislation requires that tax-exempt providers take steps to ensure that their senior staff members are compensated at fair-market value. A first-time violation could subject an individual to an excise tax of 25 percent of the compensation amount deemed to be excess benefit. Failure to correct the violation could subject the individual to an excise tax of 200 percent of the excess benefit. Tax-exempt organizations may invoke a rebuttable presumption of reasonableness that compensation levels are appropriate. Tax-exempt providers should refer to IRS guidance regarding steps to ensuring compliance.

The fiduciary duties of healthcare directors in the "zone of insolvency"

Directors of healthcare organizations normally owe fiduciary duties to their shareholders or, in the case of nonprofits, to the charitable mission of the organization. As an organization descends to bankruptcy, however, the board's duties may shift. At some point, the board may be imposed with different and often conflicting obligations to the corporate enterprise as a whole, with a primary criterion being the interests of creditors. In this article, the authors analyze the murky areas of the Zone and give guidance as to when the board's duty may shift-and as to how directors should proceed both in determining their duties and in working to fulfill them.

Joint ventures win the draw. Judge's ruling to revive tax exemption for Texas system spells good news for investor-owned systems, not-for-profits seeking deals

A ruling by a federal judge reinstating the tax exemption of St. David's Health Care System in Austin, Texas, has taught the Internal Revenue Service a hard lesson about the toughness of Texas. No one was happier with the judge's decision than St. David's President and Chief Executive Officer.

Answers, at last. After three years of waiting, the IRS' merger financing guidelines provide a solution for the not-for-profit healthcare industry

The long wait is finally over for the not-for-profit hospital industry. After three years of intense scrutiny, the Internal Revenue Service has proposed rules for consolidating tax-exempt debt. For not-for-profits, this move means that merger refinancing can continue for many deals left on hold. IRS lawyer Bruce Serchuk (left) helped draft the new rules, which also provide a clear path to closure for mergers completed with acquisition financing.

One for you and two for me: revenue sharing arrangements in charitable healthcare organizations

Charitable healthcare organizations have often borrowed from the methods of their for-profit counterparts in compensating physicians and other business partners. This is done in order to provide needed services to their communities, and to protect their charitable assets by sharing risk and preserving limited capital. One of the most controversial compensation methods in use by such organizations is the revenue sharing arrangement. In use for over thirty years, these arrangements have received close scrutiny and inconsistent treatment by the Internal Revenue Service (IRS) and have been the subject of critics' ire as an impermissible transgression of the fundamental line between charities and commercial enterprises. The author, however, concludes that revenue sharing arrangements serve an important purpose in enabling charitable healthcare organizations to fulfill their missions, that the IRS and the Treasury have now made clear that there is not a higher standard governing their use, and that these arrangements are consistent with charitable operation when an appropriate process and safeguards are in place to prevent payment of unreasonable compensation.

A contemporary reexamination of revenue ruling 69-545 and the promotion of health rationale for exemption

In recent years, Revenue Ruling 69-545 has generated considerable discussion about what is necessary to satisfy the "promotion of health" standard of charitable exemption under Section 501(c)(3). This Article reviews the development of the standards of exemption applicable to nonprofit hospitals, including Revenue Ruling 56-185 and Revenue Ruling 83-157. It then provides a detailed discussion of Revenue Ruling 69-545 and sets forth the author's view on how the Ruling's factual elements should be interpreted. The author concludes that the promotion of health rationale should not be limited by treating the fact patterns of Revenue Ruling 69-545 as prescriptive of a multifaceted test of exemption, or by seeking to impose a mandatory charity care requirement as a precondition of exemption. Rather, a flexible approach to promotion of health should be embraced by the Internal Revenue Service (IRS), practitioners, and the courts.

"Must-know" legal issues for healthcare CFOS

Healthcare financial managers are finding that regulatory agencies' customary focus on Medicare and tax-exemption concerns is shifting to other issues directly related to financial management. Regulatory agencies, such as the Securities and Exchange Commission, are scrutinizing not-for-profit and charitable trust law matters. Because of this renewed attention to existing regulations, healthcare financial managers need to increase their diligence in ensuring their organizations' compliance with those laws governing areas for which they traditionally have been accountable, including auditor relationships, restricted gifts, consulting arrangements, investment management, and financial reporting.

Capacity considerations and community benefit expenditures of nonprofit hospitals

The United States Internal Revenue Service (IRS) and some states require nonprofit hospitals to demonstrate that they provide a substantial community benefit in order to get or maintain their tax-exempt status. This places every nonprofit hospital at risk. This article is about certain common factors that impact the management of all nonprofit hospitals and their ability to comply with such laws.

The IRS and the Internet: new issues for tax-exempt organizations

Tax-exempt healthcare organizations increasingly are using the Internet to provide an inexpensive, easily accessible forum for information exchange, organization publicity, and community-relations programs. A tax-exempt organization that engages in certain activities on its Web site, however, risks losing its tax-exempt status. Such activities may include political messages and lobbying, substantial advertising and other revenue-generating programs, and inappropriate solicitation of charitable contributions. Therefore, providers should carefully monitor all information on their Web sites, including hyperlinks to other Web sites, chat-room and bulletin-board content, and advertisements, to make certain they comply with IRS rules.

The collision of healthcare and corporate law in a hospital closure case

This Article analyzes potential conflicts that arise from both the judicial and administrative approval processes that govern the closure of charitable hospitals through a sale of all or substantially all of their assets. Examining the recent closure attempt by the Manhattan Eye, Ear & Throat Hospital as an example, the Article highlights the various public health and corporate law issues that are raised when a not-for-profit hospital seeks closure. The Article thoroughly discusses both the statutorily and judicially required approval schemes applicable to the closure of charitable hospitals. The Article also suggests ways in which these conflicts might be avoided or remedied, as well as gives advice regarding hospital board decisionmaking.

Let's make a deal. Exploring the world of hospital and physician arrangements within the law

Creating win-win relationships between hospitals and physicians is more important than ever. However, heeding the lessons from many deals that failed in the past, experience has taught us what works and what's legal.