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Legal Differences between Investor-Owned and Nonprofit Health Care Institutions
Pages 17-34

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From page 17...
... A handful of investor-owned hospitals may still be set up as general or limited partnerships (mostly those owned by a few physicians) , and a few nonprofit hospitals may be organized as unincorporated associations, but the corporate form is so overwhelmingly prevalent in the field that this paper will address only the legal issues arising out of the use of the corporate form.
From page 18...
... HORTY and DANIEL M MULHOLLAND III Investor-owned hospitals are generally operated as either a separate proprietary "business" corporation or as subsidiaries of multihospital systems.2 Even among the hospitals that are subsidiaries of holding company chains, however, many individual hospitals are separate corporations and responsible to a certain degree for their own affairs, subject to the ultimate control of the holding company.
From page 19...
... Legal Aspects of Nonprofit Status 19
From page 20...
... Nonprofit Hospitals The majority of hospitals (which represents the majority of hospital beds) are organized and operated as nonprofit corporations.
From page 21...
... Shareholders in business corporations seldom care about or exercise their prerogatives to change or restrict managements, as Tong as profits continue at an expected rate. Where members are present, the board and management may possess less freedom, depending on the environment in which the corporation finds itself.
From page 22...
... For instance, in one case where a segment of the corporate membership of a hospital, during a dispute with the board, attempted to call a meeting on their own to remove the current board and elect a new one, an Illinois court invalidated that action and ruled in favor of the existing board, emphasizing that the hospital's bylaws did not permit that action. The court went on to rule that members of nonprofit corporations have no constitutional right to elect or remove board members because, unlike shareholders in business corporations, they possess no property interest in the corporation.
From page 23...
... First of all, almost all nonprofit corporation statutes require that the corporation be for a limited number of purposes, generally charitable, scientific, educational, benevolent, religious, etc.22 Second, and this is probably the most fundamental difference between investor-owned and nonprofit corporations, the income and assets of the nonprofit corporation are not permitted to inure to the benefit of any private individual.23 This does not mean the corporation's board and management must serve without pay. It simply means that no private individuals, including the board and members, can exercise "ownership rights" in the corporation's assets as shareholders would with respect to the assets of a business corporation.24 Other provisions in nonprofit corporation statutes can require judicial supervision of the dissolution of nonprofit corporations.25 These statutes effectively prevent a whole range of entrepreneurial partnership arrangements that could bring equity capital into the corporation and that are routinely open to investor-owned hospitals.
From page 24...
... HORTY and DANIEL M MULHOLLAND III strains against private inurement, nonprofit corporations are not appendages of state or local governments.
From page 25...
... While there also seem to be some statistical differences in the efficiency with which the two types of hospitals conduct their operations that favor the investor-owned form, it is not clear that these differences can be causally linked to the legal differences between the two forms except where the corporate decision mak
From page 26...
... Traditionally, the most important of these are property tax exemptions, which are usually available to nonprofit corporations organized for charitable purposes in general or for hospitals in particular. Recently, however, tax exemptions for hospitals in a few states have been successfully attacked by local taxing authorities using the theory that because hospitals receive reimbursement from third parties for almost all the care they provide they are no longer "charitable" operations.37 Other state tax provisions of significance to nonprofit hospitals include exemptions from state sales taxes (for hospital purchases)
From page 27...
... Many nonprofit hospitals are reluctant or unable to do this, either because of their historical mission to serve the poor, their location in predominantly poor or aging neighborhoods, or legal requirements that they render a certain percentage of their services without compensation in return for having received federal construction funds under the Hill-Burton Act.40 Investor-owned hospitals, on the other hand, are in most cases under no obligation to provide charity care and are more likely to accept only patients for which they will be reimbursed in full. Furthermore, investor-owned hospitals are entitled to third-party payments that nonprofits are not.
From page 28...
... Restrictions on Transfers of Property Many state laws governing nonprofit corporations prohibit the transfer of funds restricted for specific charitable purposes without judicial
From page 29...
... They could also give rise to significant problems when hospitals needing to convert dormant assets, such as real estate, into ready cash face restrictions that were attached to the use of the asset when it was donated. Some states have laws that permit the state attorney general to institute investigation and enforcement actions concerning alleged misuse of charitable gifts by nonprofit corporations, presumably even where there are no explicit restrictions imposed by the donor.54 Others require membership approval before transfers of property can be made.55 Such statutes have the potential of hindering the financial conduct of nonprofit corporations, although in practice they may not be strictly enforced.56 Moreover, because the majority of nonprofit hospitals are small, independent, local corporations, they lack the ability of the investor-owned chains to transfer assets between hospital units as needed and to guarantee large loans and bond issues, very important fiscal tools in today's financial market.
From page 30...
... Trustees of Rex Hospital,59 the Supreme Court ruled for the first time that the activities of a nonprofit hospital had enough impact on interstate commerce to bring the hospital under the jurisdiction of the Sherman Act.60 In another case that same year,6i the Court ruled that the Robinson-Patman Act, which forbids price discrimination in favor of large buyers over smaller ones, applied to nonprofit hospitals under certain circumstances despite a provision of the act that exempted sales to charitable institutions.62 About the only antitrust law that has not been applied to nonprofit hospitals is the Federal Trade Commission Act, which by its terms applies only to investor-owned institutions.63 This has not prevented the FTC from successfully attacking certain actions of health-related trade groups, such as the American Medical Association,64 or from aggressively challenging certain acquisitions made by investor-owned hospital chains.65 Conclusion As this paper has shown, there are a number of differences in the way the law treats investor-owned and nonprofit hospitals. While many of these differences can reasonably be expected to influence the operations of hospitals, as well as their finances, it is impossible to identify
From page 31...
... Moreover, as stated earlier, it is relatively easy to transfer assets between parent and subsidiary business corporations. Nonprofit corporations, however, are not technically owned by anyone, so the holding company idea is somewhat foreign to them.
From page 32...
... See, generally, Jane L Davis, "Membership Rights in Nonprofit Corporations: A Need for Increased Legal Rec
From page 33...
... , p. 747; Robin Dimieri and Stephen Weiner, "The Public Interest and Governing Boards of Nonprofit Health Care Institutions," Vanderbilt Law Review 34 (May 1981)
From page 34...
... 51. New York and Pennsylvania, however, permit nonprofit corporations to issue a form of security known as "subvention certificates," which closely resemble preferred stock to members or nonmembers, and to accept capital contributions from members.


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