Legal Structure and Governance of Healthcare Organizations(Ch. 4, 1/21/15)

DisclaimerThis presentation is similar to any other legal education materials designed to provide general information on pertinent legal topics. The statements made as part of the presentation are provided for educational purposes only. They do not constitute legal advice nor do they necessarily reflect the views of Holland & Hart LLP or any of its attorneys other than the speaker. This presentation is not intended to create an attorney-client relationship between you and Holland & Hart LLP. If you have specific questions as to the application of law to your activities, you should seek the advice of your legal counsel.

Healthcare Entities

Healthcare Facility

Public(govt owned)

Federal

State

Local

Private(privately owned)

nonprofit

For-Profit

• Hospital• Clinic• Long term care

facility• Ambulatory

surgery centers• Others

Types of Healthcare Facilities

Public(Govt

Owned)

Private nonprofit

Private For Profit

Public Facilities• Owned and operated by government

agencies– Federal

• Veterans Administration– State

• State Hospital South– County

• County hospitals– Taxing districts

• Hospital districts• Ambulance districts

Business Entities

• Sole proprietorship• Partnership– Limited liability partnership (“LLP”)– Professional limited liability partnership

(“PLLP”)• Corporation– Professional corporation (“PC”)– Limited liability company (“LLC”)– Professional limited liability company (“PLLC”)

• Unincorporated association

Sole Proprietorship

• Owner = business– No separate legal

business entity.– Owner keeps profits.– Owner has liability.

• Default form of business for individual if no corporate form established.

Marcus Welby, M.D.

Partnership• Owners = business, although

partnership recognized as separate entity.– Owners share profits– Owners share liability– Taxed at owner level

• Default form of business for joint ventures if no corporate form set up.– Individual owners– Corporate owners

• Governed by state partnership laws (e.g., Uniform Partnership Act)

Limited Partnership

• General partners–Manage the business.– Liable for partnership debts and

obligations.• Limited partners– Do not manage the business.– Not liable for partnership debts and

obligations.

Limited Liability Partnership

• Limited Liability Partnership (“LLP”)– Created by state law.– Partners have limited liability like a

corporation.– Taxed at individual level like a

partnership.• Professional limited liability

partnership (“PLLP”)– Comprised of professionals (e.g.,

doctors, lawyers, accountants, etc.).

Corporation (“Corp.” or “Inc.”)

Shareholder

Shareholder

Shareholder

• Shareholder owns share of the corporation.

• Shareholders may be an individual or other entity.

• Shareholder is not personally liable for corporate liabilities.

• Shareholder is paid through dividends.

Stock / Shares

• Corporation = separate legal entity.• May own property, contract, employ, sue,

be sued, be liable, taxed.

Liability

Corporation• Corporation = separate legal entity from its owners.

– Can own property, contract, employ persons, sue and be sued.

• Owners = shareholders/shareholders– Stock /shares = ownership of a share of the corporation.– No ownership of corporate assets.

• Shareholders are not liable for corporate liability.• Shareholders are paid through dividends.• Shareholders may generally transfer their shares.• Professional corporation (“PC”)

– Comprised of professionals (e.g., doctors, lawyers, accountants, etc.)

Establishing a Corporation

• File Articles of Incorporation with and pay fee to Secretary of State.

Establishing a Corporation

• Bylaws– Shareholder rights• Voting rights

–Directors–Officers–Meetings– Elections–Other operational issues

Maintaining a Corporation• Must observe corporate formalities to

maintain protection offered by corporate form.– Comply with bylaws– Corporate records– Adequate capitalization– Separate bank accounts and books–Meetings– Functioning officers and directors

• Board of directors• President, CEO, etc.

Maintaining a Corporation• Court may “pierce the corporate veil”

and hold shareholders liable if they fail to observe corporate formalities.– Absence or inaccuracy of corporate

records.– Intermingling assets of corporation,

shareholder, and/or subsidiaries.– Non-functioning corporate officers and/or

directors.– Significant undercapitalization.– Siphoning off corporate funds by the

dominant shareholder(s).– Treating corporate assets as shareholder’s

own.

Using corporate shell to perpetuate fraud

or injustice

Corporate Board of Directors

Corporate Governance

Shareholders Board of Directors

Officers(CEO, CFO, etc.)

Corporate Organization

• Owns shares of corporation

• Elects/removes board• Votes per share• Shares may have

different rights

• Ultimate governing body of corporation

• Oversees operations • Sets plan and policy• Hires/fires officers

• Manages operations• Implements board’s

plans and policies• Reports to board

Corporate Board of Directors• Fiduciary duties to corporation/shareholders– Duty of care = exercise care that prudent person

would exercise over their own affairs.• Become informed• May rely on advice of qualified experts

– Duty of loyalty = act in the best interests of the organization.• Disclose and do not act with conflict of interest

– Duty obedience = act consistently with corporate bylaws and applicable laws

• Directors may be personally liable if they breach their fiduciary duties.

Corporate Board of Directors

• Generally, Board members are not personally liable for mistakes in judgment if they act:– in good faith belief that decision was made

in the best interest of the corporation; – with due diligence and upon adequate info;– without conflict of interest; and– within authority granted by statutes and

bylaws.

Corporate Board of DirectorsStern v. Lucy Webb Hosp. (DC 1974)

• Facts: hospital directors invested hospital assets in board member’s bank at very low interest rate. Hospital’s finance committee never met. Shareholders sued. Financial decisions received cursory review. Plaintiffs sued board.

• Holding: several board members breached fiduciary duties.

In re Caremark (Del. 1996)• Facts: Caremark had to

pay $250 million for violating federal fraud and abuse laws. Shareholders sued Caremark’s board.

• Held: Board acted reasonably.– Consulted experts.– Implemented compliance

plan and audits.– Received management

reports.

Corporate Practice of Medicine

• In some jurisdictions, corporations may not employ physicians and, perhaps, other practitioners.–Medical practice acts only allow

physicians to practice medicine, not other entities.

– Employers would unduly interfere with employed physician’s independent judgment.

Corporate Practice of Medicine

“It is well established that no unlicensed person or entity may engage in the practice of the medical profession through licensed employees; nor may a licensed physician practice as an employee of an unlicensed person or entity. Such practices are contrary to public policy.” (Worlton v. Davis, 73 Idaho 217, 249 P.2d 810 (1952))

Corporate Practice of Medicine

• Even when the CPOM doctrine does apply, most jurisdictions have exceptions. – Professional corporations or partnerships– Hospitals– Managed care organizations– Others

• Where it does apply, may need to structure relationships differently.– Independent contractor arrangements.– Foundation model

Subchapter S Corporation• Corporation that is taxed as a partnership.

– Pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.

– Taxed at individual level.• To qualify:

– Be a domestic corporation.– Have only allowable shareholders.

• May be individuals, certain trusts, and estates, and• Not partnerships, corporations or non-resident alien

shareholders.– Have no more than 100 shareholders.– Have only one class of stock.– Not be an ineligible corporation (i.e. certain financial

institutions, insurance companies, etc.).

Limited Liability Company• Limited Liability Company (“LLC”)– Created by state law.– Governed by an operating agreement.– “Members” instead of shareholders.– Members not liable for corporate debts and

obligations.– May be taxed at individual level like partnership.– Not required to maintain same corporate formalities.

• Professional Limited Liability Company (“PLLC”)– Comprised of professionals (e.g., doctors, lawyers,

accountants, etc.).– Individuals may establish their own PLLC.

Health System

St. Luke’s Health System

Parent

St. Luke’s Boise

Subsidiary

St. Luke’s Magic Valley

Subsidiary

St. Luke’s McCall

Subsidiary

St. Luke’s Mountain States Tumor Institute

Subsidiary

Nonprofit Corporation

• Corporation that has been determined to be exempt from federal taxation.– Charitable organizations (IRS 501(c)(3))– Churches and religious organizations– Political organizations– Private foundations– Others

Nonprofit Corporation• Charitable Corporation, IRS 501(c)(3)– No shareholders; may have members and/or board of

directors.– Operated exclusively for charitable purposes.

• Unrelated business income subject to tax.– No net earnings inure to private individuals or entities.

• No excess benefit transactions.• Govt may impose sanctions for private

inurement.– Terminate tax-exempt status.– Impose intermediate sanctions (excise tax) against:

• Persons who exercise substantial influence, and• Corporate manager involved in transaction.

Nonprofit Corporation

• Executive compensation– Excessive compensation = private inurement

• Physician transactions– Excessive compensation = private inurement

• Joint ventures– Deals with for profit entities may jeopardize tax-

exempt status unless:• Furthers charitable purpose• Nonprofit maintains control

• Unrelated business income– Subject to tax

Establishing a Nonprofit Corp.• File Articles of Incorporation and pay fee

to Secretary of State.– Specify exclusively exempt purpose.– Provide for disposition of assets upon

dissolution of corporation:• For exempt purpose (e.g., to another

charitable institution), or• To federal or state government.

• File Form 1023 with IRS.– Reviewed by IRS.– Can take many months for approval.

Nonprofit Governance (Members)

Members Board of Directors

Officers(CEO, CFO, etc.)

Corporate Organization

• Do not “own” nonprofit, and are not entitled to “profits”.

• Elects/removes board

• Ultimate governing body of corporation

• Oversees operations • Sets plan and policy• Hires/fires officers

• Manages operations• Implements board’s

plans and policies• Reports to board

Nonprofit Governance (No Members)

Board of Directors / Trustees

Officers(CEO, CFO, etc.)

Corporate Organization

• Ultimate governing body of corp.• Oversees operations • Sets plan and policy• Hires/fires officers• Chooses their successors.

• Manages operations• Implements board’s plans and

policies• Reports to board

Nonprofit Corporation• Nonprofits must provide charity care.• ACA Requirements, IRS 501(r)– Community health needs assessment.

• At least once every 3 years.• Adopt implementation strategy.

– Written financial assistance policy.• Criteria to determine eligibility for financial assistance.

– Limitations on charges for emergency and other necessary care for persons who meet financial assistance criteria.• Not more than lowest amounts charged to individuals who

have insurance covering such care.– Limitations on collection practices

• No extraordinary collection practices before determining if patient is eligible for financial assistance policy.

Unincorporated Nonprofit Association

• Authorized by state law.• Informal organization.– E.g., volunteer EMS provider; bowling

league; neighborhood association, etc.• Separate legal entity.–May sue or be sued, contract, own

property, etc.• Members are not personally liable.• May file for tax exempt status with

IRS.

Pros and Cons?• Ownership• Financing• Limits on

operations• Taxation• Charity care

obligations• Liability to

third parties• Others?

Trends in Change of Ownership

Health System Expansion

Healthcare Consolidation

• Hospitals purchasing physician practices.

• Larger hospitals acquiring smaller hospitals.

• Hospitals merging to join larger system.

• Hospitals and physician practices forming joint ventures.

• Physicians forming networks.

• Why?

Healthcare Consolidation• Acquisition: one entity buys the other.

– Stock– Assets

• Merger: two entities merge; one survives.• Joint venture: entities work together, but maintain

their separate entity.– Two entities create a new corporation– Contract to provide services.

• Management/services contracts: contract to provide services to the other entity.

• Network: providers affiliate through membership.• Accountable Care Organizations: entities join to

provide coordinated care and share risks.

Assignment

Assignment

• Activity 4.1 in Text, p.57-59.

• Please work independently.