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111
is a written record of all the board’s deliberations, including the votes of individual directors on transactions that involve personal interests. Any director
who dissents from majority actions of the board should make sure that his
dissent is part of the written record.
Individual directors and corporate officers have two means of protecting themselves: (1) purchasing liability insurance and (2) making sure that
the corporation has appropriate indemnification provisions to protect them
in the event they suffer personal loss as a result of exercising their (good faith)
board responsibilities.
Many not-for-profit corporations favor indemnification plans or a
combination of insurance and indemnity. Insurance for directors and officers
(D&O coverage) may exclude coverage for gross negligence, intentional
acts, and criminal activity. Indemnification is corporate reimbursement of a
trustee’s personal expenses in the event the trustee faces a civil suit or criminal
prosecution for alleged violation of fiduciary responsibilities. The trustee may
be reimbursed for attorneys’ fees and possibly for amounts paid as a result of
a judgment against the individual. The hospital may, in turn, purchase insurance covering the costs of indemnification. Careful legal advice is necessary
to ensure that directors understand the circumstances under which insurance
and indemnification can and cannot be provided. Drafting the corporate charter or bylaw provisions covering these issues with utmost care is imperative.
Responsibilities of Management
Under the overall guidance of the governing board, a group of people known
collectively as “management” (see Legal Brief) run the day-to-day operations
of the corporation. Management is an art,
and, like art, it is hard to define. From Adam
Smith and John Stuart Mill in the eighteenth
Legal Brief
and nineteenth centuries, to Frederick Winslow Taylor and Henri Fayol around the turn
The word management comes from the Latin manu
of the twentieth century, and through Peter
agere, meaning “to lead by the hand,” as in trainDrucker more recently, many have tried to
ing horses, for example. We prefer to think of
define management in scientific terms. All
enlightened leaders as people who set goals and
empower others to reach those goals, not as taskhave failed to some degree. No matter how
masters who pull employees along by the bridle.
one describes management, however, it is the
Regardless of the metaphor, the fact remains that
function of an organization that is concerned
the job of management (or leadership, if you prewith leadership: setting goals (strategy), crefer) is to enable people to get things done. Adminating an action plan to achieve those goals
istration is derived from the Latin administration,
(tactics), measuring outcomes, and reassessa compound of ad (“to”) and ministratio (“serve”).
The term is also the source of the verb to minister.
ing the strategy and tactics on the basis of
those outcomes.
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112
T h e Law of H e a l th c a re Ad mi n i stra ti o n
In a healthcare organization, management functions begin with senior
administrative positions, including those of CEO, vice president, and department director (or similar titles). Their responsibilities include the following:
• Supporting the governing board in its strategic planning and
policymaking activities
• Carrying out (implementing, administering, executing) the board’s
policies and strategic goals
• Communicating board policies and the strategic plan to employees and
the medical staff
• Overseeing day-to-day operations, including personnel functions and
personnel records
• Measuring the quality of patient care
• Managing operating funds
• Selecting qualified junior executives
• Conducting necessary business transactions
employment law
The collection of
laws and rules
that regulate
the employer–
employee
relationship.
Management must report regularly to the governing board on the
general status of these activities while maintaining a distinction between the
board’s governance role and management’s day-to-day operations.
Because corporations can act only through people, members of management find they spend large portions of their time dealing with personnel issues: recruitment, performance reviews, dispute resolution, discipline,
terminations, and myriad related subjects. All of these situations implicate
employment law, which covers such things as wages and overtime, nondiscrimination, sexual harassment, disabilities, relationships with unions,
workplace safety, and many others.18 Chapter 4 covers employment law in
some detail.
Piercing the Corporate Veil
A corporation is a legal entity that has rights and responsibilities separate
from those of its owners. It is a convenient legal fiction, and because it can
limit legal and financial liability, it has been an invaluable vehicle for encouraging investment in for-profit and not-for-profit activities. On the other
hand, if a corporation is used to “defeat public convenience, justify wrong,
protect fraud, or defend crime,” the law will disregard the corporate fiction
and place liability on the owners of the corporation.19 This action is known
as piercing the corporate veil. Most litigated cases in which the corporate veil
has been pierced have involved closely held corporations or parent–subsidiary
relationships.
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For a court to pierce the corporate veil, the party challenging the corporation normally must prove three elements:
1. The corporation’s owners dominated it completely.
2. The owners used their control of the corporation to commit fraud
or perpetrate a wrong, violate a statutory or other duty, or commit a
dishonest or unjust act.
3. Corporate control was the proximate cause of the injury that is the
subject of the suit.20
Although precedent for piercing the corporate veil is more than a century
old, courts are reluctant to look beyond the corporate form.21 Accordingly, as
a general rule, all three of these elements must be proven to the satisfaction
of the “trier of fact” (the judge or the jury).
Complete domination of the corporation means domination of finances,
business practices, and corporate policies to such an extent that the entity has
no mind or will of its own. Mere directorship of the corporation by a sole
shareholder entitled to corporate profits is not enough to justify piercing the
veil. Courts look, on a case-by-case basis, for unity of interest and ownership
sufficient to destroy the separate identities of the owner or owners and the
corporation. Evidence of this unity is found in such factors as the following:
• Mingling of corporate assets with the owner’s personal funds
• Neglect of business formalities, such as failure to file separate tax
returns, hold regular board meetings, and keep adequate corporate
minutes
• Having a mere “paper corporation” with nonfunctioning officers and
directors listed in the articles of incorporation
• Insufficient investment of capital in the corporation22
The decision whether to disregard the corporate fiction, however,
does not rest on a single factor. Courts most often look for several factors
suggesting that the corporation and owner should be treated as one and the
same.23 United States v. Healthwin-Midtown Convalescent Hospital is a good
example.24 Defendant Israel Zide owned half of the stock of Healthwin, a convalescent center that provided skilled nursing care in return for payments from
Medicare. Zide also had a 50 percent interest in a partnership that held title
to the real estate occupied by Healthwin and the furnishings of the nursing
home. Concluding that the nursing home had been overpaid, the government
brought suit against Healthwin and against Zide for the amount of the alleged
overpayment. Zide defended the claim against him on the basis that the debt
was solely the corporation’s and that he was entitled to limited liability.
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114
T h e Law of H e a l th c a re Ad mi n i stra ti o n
In rejecting Zide’s defense, the court noted these factors:
• He alone controlled the corporation’s affairs.
• He was a member of the board, the president of the corporation, and
the administrator of the nursing facility.
• He alone signed corporate checks without concurrence of another
corporate officer.
• The governing board did not meet regularly.
• He failed to maintain an arm’s-length relationship with the corporation
by permitting Healthwin’s funds to be “inextricably intertwined” with
his personal accounts and other business transactions.
• The corporation was seriously undercapitalized, having liabilities
consistently in excess of $150,000 and an initial capitalization of only
$10,000.
• He diverted corporate funds to the detriment of creditors.
In the court’s opinion, these facts demonstrated that Zide used the corporation to accommodate his personal business dealings. The court held that to
allow him to escape liability in these circumstances would be unfair to his
creditors (including Medicare). Accordingly, Zide was found personally liable
for the amount due the federal government because the corporation was a
mere alter ego of its principal shareholder.
In addition to the various factors showing a unity of interest and
ownership strong enough to outweigh the separate identity of the corporation, for the corporate veil to be pierced, limited liability must result in an
inequity. An inequitable result is often found when a statutory duty has been
violated or fraud or other wrongful action has been perpetrated (see The
Court Decides: Woodyard, Insurance Commissioner v. Arkansas Diversified
Insurance Co. at the end of this chapter for another case that illustrates judicial application of the doctrine of piercing the corporate veil).
Multi-institutional Systems and Corporate
Reorganization: The Independent Hospital as
Anachronism
For many years the hospital was a single legal entity, and its purpose was
merely to provide doctors with a building, equipment, and supplies so they
could treat their patients. Today, however, these former “doctors’ workshops” operate as multifaceted organizations with teams of people who work
toward a new vision: promoting health rather than merely treating illness.
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115
Achieving this organizational vision
(see Legal Brief) required restructuring
Legal Brief
stand-alone hospitals into multi-institutional systems that would permit them, for
The vision statement of the American Hospital
example, to add new service lines, partner
Association (AHA) reads: “The AHA vision is of a
with physicians or other organizations,
society of healthy communities, where all indiincrease market share, and improve the
viduals reach their highest potential for health.”
bottom line.
This is typical of most healthcare organizations
today (American Hospital Association, Mission and
A multiorganizational system can
Vision
[accessed Feb. 20, 2019], at https://www.
diversify operations and engage in a wide
aha.org/about/mission-vision).
range of activities that a single institution
cannot. Subsidiary entities can provide
special services or perform functions not
related to healthcare without being hampered by hospital-focused regulations, restrictive corporation laws, and third-party reimbursement regulations.
Multi-institutional system and corporate reorganization are generic
terms, and no single definition, model, or form exists that describes either
concept. The AHA defines multihospital systems as “two or more acute care
hospitals that are owned, leased, sponsored, or contract-managed by a central
organization,” and it distinguishes them from networks, which are “group[s]
of hospitals, physicians, other providers, insurers and/or community agencies
that work together to coordinate and deliver a broad spectrum of services
to their community.”25 This distinction reminds us that healthcare systems
now include skilled nursing facilities, extended care facilities, ambulatory
care centers, outpatient surgical centers, hospital-owned physician practices,
home health agencies, managed care plans, and various other health-related
organizations (see exhibit 3.1 for an example of a multi-institutional healthcare system).
Systems may comprise both not-for-profit and for-profit (proprietary)
entities. For example, a not-for-profit system corporation may own not-forprofit and for-profit subsidiaries. A system may also be owned and managed
by state or local government. Whether consisting of multiple corporate entities or a single corporation with multiple divisions, all multi-institutional systems have a corporate office responsible for activities that are best performed
centrally, thus providing efficiency and economies of scale. Some functions
commonly managed at the corporate level include the following:
•
•
•
•
•
Finance and billing
Legal and risk management
Quality assurance
Compliance
Legislative advocacy
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Practice C
Practice D
Practice A
Practice B
ACO
(physician
practices)
Home Health
Agency
Land Development,
Inc.
Hospice A
Hospice B
Nursing home A
Nursing home B
Long-Term
Care, Inc.
Note: ACO = accountable care organization; PAC = political action committee.
Retail
pharmacy
Medical home
Health education
Children’s Hospital
XYZ PAC
= Not-for-profit
company
For-profit
=
company
Noncontrol
=
relationship
No shape = Unincorporated
Hospice Care, Inc.
Child protection team
Mobile care team
Ambulatory surgery center
Cancer Institute
Other nonhospital
services
Health screenings
Hospital B
Fundraising
XYZ Health
Foundation, Inc.
Freestanding ED
Hospital A
XYZ Regional Health
System, Inc.
Physician referral service
Wellness programs
Community Services, Inc.
EXHIBIT 3.1
XYZ Regional Health System Organization Chart
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T h e Law of H e a l th c a re Ad mi n i stra ti o n
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•
•
•
•
117
Human resources and benefits administration
Health information management
Strategic planning
In-service education
Alternative Corporate Strategies
Sale of Assets
For various reasons, corporations sometimes sell all or a substantial portion
of their assets to another corporation. This transaction is relatively straightforward, except that local law must be followed carefully when the seller is
a charitable corporation. Normally, the stockholders or members and the
governing boards of both the buyer and the seller must approve the terms of
the sale. If the seller is a charitable corporation, state laws may require that a
designated state officer approve the final arrangement because the state has
the ultimate responsibility to enforce the terms of charitable trusts. After the
sale is completed, the selling corporation may dissolve or may continue to
operate on a restricted scale.
Merger and Consolidation
Corporations also sometimes wish to join forces with others. They can do so
in various ways, including merger, consolidation, and joint venture.
In a merger or acquisition, two or more corporations are joined,
whereby one or more of the organizations transfers assets to another (the
survivor) and then is dissolved. A consolidation, in contrast, is a transaction
in which two or more organizations combine to form a new corporation,
thereby dissolving the predecessor companies. The terms are often used
interchangeably in casual conversation, but keeping this distinction in mind is
advisable: In a merger or acquisition, one company survives after taking over
one or more other corporations; in a consolidation, two companies blend
into a completely new entity.
Before completing any type of corporate integration, each party must
carefully scrutinize state corporation law; certificate-of-need legislation; the
state and federal statutes relevant to charitable organizations, if applicable;
and other regulatory requirements. Normally, the governing boards of the
corporations involved and the shareholders or members must approve the
plan. The terms of any bond documents may require approval of the bondholders. When the interested parties approve the plan, articles of merger
or consolidation are prepared and filed with the appropriate state officer
responsible for enforcing the relevant corporate law, who then issues a certificate authorizing the transaction. Once the certificate is issued, the new
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merger (or
acquisition)
The joining of
two or more
corporations,
whereby one
or more of the
organizations
transfers assets
to another (the
survivor) and then
is dissolved.
consolidation
A transaction in
which two or more
organizations
combine to form a
new corporation,
thereby dissolving
the predecessor
companies;
sometimes used
as a general term
inclusive of merger
and acquisition.
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118
T h e Law of H e a l th c a re Ad mi n i stra ti o n
corporation owns all the property of the former entities, has all their rights
and privileges, and is liable for all their debts.26
If the merger or consolidation significantly affects competition in the
relevant market, it may invite charges of antitrust law violation. (The antitrust aspects of asset acquisitions, consolidations, and mergers are thoroughly
discussed in chapter 13.) Most consolidations and mergers, however, benefit
the community at large and the institutions involved. Such arrangements not
only enhance competition but also enable the surviving corporation(s) to
provide a wider range of services, improve quality assurance and risk management, and have greater economies of scale. These arrangements are especially
beneficial when one or more of the corporations would have failed had they
not combined.
Joint Venture
joint venture
A mutual endeavor
by two or more
organizations for
a specific purpose
or for a limited
duration.
In contrast to a merger or consolidation, a joint venture is a mutual endeavor
by two or more organizations for a specific purpose or for a limited duration. This term is loosely applied to a variety of relationships (e.g., between
a hospital and a physician practice) for purposes such as
•
•
•
•
•
diversifying both parties’ activities,
providing new or additional services to the community,
seeking capital from interested investors,
maximizing revenues, or
gaining tax benefits.
Although the joint venture participants are not agents of each other,
other rules of a general partnership normally apply. That is to say, the property
is jointly owned and the parties owe fiduciary duties to each other. Each has
a right to participate in management. They share profits and losses according
to their agreement. Each can be held liable to third parties for the negligence
and financial obligations of the venture. As discussed in the following sections,
outright employment of physicians is on the rise, but historically joint ventures have been the most common form of hospital–physician collaboration.
Collaborative Strategies with Physicians
Medicare as a Driver
At its inception, Medicare basically paid hospitals and physicians their usual
rates for the services they provided. Obviously, under such a system, the
more services you provide, the more you get paid. This arrangement was an
advantage for both hospital and physician providers, and Medicare spending
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119
rose at an annual rate more than twice that
of inflation during the 1970s and early
Legal Brief
1980s.27
Concerned about these sharply risMedicare Part A pays for medically necessary
ing costs, Congress replaced Medicare Part
hospitalization, hospice care, skilled nursing, and
A’s cost-based reimbursement system with
home health care. It is provided, without premia prospective payment system (PPS) in 1983.
ums, to individuals aged 65 or older.
(See Legal Brief for a summary of the
Medicare Part B functions as a health insurvarious “parts” of Medicare, which are also
ance plan, paying for physician visits, outpatient
care, medical supplies, and other necessary serdiscussed in chapter 2.) Under PPS, hospivices. Part B is funded by contributions from
tals were paid a fixed amount per diagnosis
the federal government and by monthly enrollee
as assigned to a diagnosis-related group,
premiums.
regardless of the length of the patient’s
Medicare Part C (also known as Medicare
stay or the complexity of the treatment
Advantage) is an alternative to the parts A and B
rendered. In theory this change would give
combination.
Medicare Part D covers prescription drugs.
hospitals reasons to provide services more
efficiently and shorten inpatient stays, but it
actually created an incentive to increase the
number of hospital admissions and diagnoses.
Furthermore, the theory of PPS overlooked certain basic principles.
First, physicians—not hospitals—determine most Medicare spending; only
physicians can decide when a patient will be admitted or discharged, and
only they can order the services the hospital will provide. Second, physicians
have traditionally been independent members of hospital medical staffs; they
have admitting privileges and may order services, but they are not under the
hospital’s direct control (see chapter 8).
When Congress imposed PPS on hospitals, it made no fundamental changes to Medicare Part B (the physician payment system). It placed
some minor limitations on the physician fee schedule, but the net result of
the Medicare amendments of the early 1980s was a set of perverse incentives (see Legal Decision Point): Hospitals were encouraged to be more
efficient, but physicians had few reasons to limit—and many reasons to
increase—the number of services provided. As the Congressional Budget
Office noted in 1986:
Although part of the increased volume of services provided per enrollee that
has occurred since Medicare’s inception has been a desirable response to the
greater needs of an aging population, aided by remarkable improvements in
medical technology, some increases may have been motivated more by physicians’ attempts to maintain revenues in the face of fee constraints or insufficient patient-initiated demand for services than by expected benefits for
patients.28
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120
T h e Law of H e a l th c a re Ad mi n i stra ti o n
Congress attempted to address these
problems when, in the Balanced Budget
Legal Decision Point
Act of 1997, it mandated the sustainable
growth rate (SGR) method to control
Consider the unfairness (from a hospital’s perthe cost of physician services. Under
spective, at least) of the perverse incentives that
SGR, the physician fee schedule was to
resulted from the Medicare Part A reforms of the
be adjusted each year on the basis of the
early 1980s. What might have caused this outprevious year’s gross domestic product.
come? What political factors do you suppose were
involved?
If Medicare’s expenditures exceeded the
target amount, SGR mandated a corresponding decrease in payments for the
following year. Reductions in physician payments were predicted to occur
every year as a result.
Implementation of the SGR formula could be suspended by Congress,
and in fact, physician groups, including the American Medical Association,
successfully lobbied for its suspension and even a modest pay increase each
year from 1997 onward. This annual “doc fix,” as it was called, ultimately
led to the SGR being permanently repealed in 2015. In return, policymakers
hope that under the Affordable Care Act (ACA), accountable care organizations (more about this later in the chapter) will help reduce Medicare costs
by promoting prevention and primary care.
The First Wave of Hospital–Physician Integration
Recognizing the difficult situation they faced, and considering the increasingly competitive and cost-conscious environment of the late 1980s, many
healthcare institutions attempted to develop business arrangements with
groups of physicians to share risk and reap economic rewards. Most common,
hospitals integrated with members of their own medical staffs, but sometimes
hospitals acquired the practices of previously unrelated physicians—either by
contracted services or through direct employment. Typically, the goals of
these collaborative efforts were to
•
•
•
•
•
•
•
•
•
reduce costs,
provide a full range of services along the continuum of care,
provide practice management and administrative support,
negotiate contracts with payer organizations,
generate economies of scale,
provide access to capital,
improve quality,
conduct utilization reviews, and
provide staffing for particular hospital departments (e.g., radiology,
anesthesiology, emergency).
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The arrangements took different names, such as management services
organization, physician–hospital organization, integrated delivery system, and
health maintenance organization. They were sometimes organized as joint
ventures but were more commonly set up as corporations.
Regardless of their organizational form, many well-intentioned
hospital–physician collaborations met with limited success, if not outright
failure. Hospital executives discovered that managing a physician practice is
different from running a hospital, that salaried physicians sometimes do not
work as many hours as their contracts require, and that they may actually
increase the hospital’s costs. Physicians, on the other hand, discovered that
hospitals are large bureaucracies that can stifle their independence and limit
their autonomy. For various reasons, each side was often skeptical of the
other; thus, many of the arrangements fell apart.
To be successful, collaboration between physicians and hospitals
requires more than a written contract and a lofty mission statement. It
requires true congruence of interests. Both groups must have common values, shared governance and management, and common data systems. Full
openness and complete trust must exist. Physicians and hospitals learned this
lesson the hard way in the 1990s, and interest in hospital–physician collaboration waned for a time.
The Second Wave of Hospital–Physician Integration
However, the healthcare environment changed as the twenty-first century
approached, and for various reasons there was a second wave of interest in
hospital–physician cooperation. One reason was the Clinton administration’s
health reform initiative, which—despite its failure as public policy—spawned
a
