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Health Care Organization & Finance
Wayne State University Law School
Rogers, David L.



FALL 2016


Traditionally: health care services delivered by solo practitioner or small group doctors, & by independent or simple system non-profit hospitals
Modernly: managed care and integrated delivery systems with physician-hospital organizations
Health care organizations = business entities

Horizontal link to providers: physicians combining with other physicians to form group practices; hospitals merging with other hospitals
Vertical link to providers: physicians and hospitals integrating by creating integrated delivery systems

Integrating Organizations

Independent Practice Association (IPA)

Physician organization (PO)/physician owned entity that contracts/negotiates with 3rd party payers (insurers, like BCBS) on behalf of its member physicians to pay them on FFS basis
All physicians in the PO are bound by the contract unless they opt out
Physicians invest a fee to join IPA – they join b/c the physicians in their practice are all competitors; when they negotiate jointly, there are many limits on how they can do that

Physician Hospital Organization (PHO)

Physicians and the hospital working together
Some PHOs negotiate and contract with third party payers on behalf of the hospital and its affiliated physicians for health plan contracts; others are just a relationship between physicians and the hospital negotiating payer contracts
Typically it is a hospital sponsored organization that centers around a single hospital and its medical staff

Group Practice

Stark definition: 2 or more physicians who are organized as a legal entity in which business, clinical facilities, records, and personnel are shared (1 tax ID number, bills as a group)
Internal agreement on how they divide up expenses/profit
Must be a separate entity, even if owned by a hospital

Group Practice Without Walls (GPWW)

Physicians in physically independent facilities who form a single legal entity to centralize business aspects of their organizations

Management Services Organization (MSO)

Separate entity that provides all of the administrative and practice management services to physician group/group practice; takes care of management for unorganized physician groups
Physician group provides patient care, MSO takes care of everything else; both profit

Hospital Owned Medical Practice

Hospitals can directly purchase medical practices as part of their outpatient department; physician practice with physicians employed by the hospital

Integrated Delivery System (IDS)

Physicians/physician groups employed by hospital systems
A hospital(s) and large multi-specialty group practices form an organization for care delivery, with all physician revenues coming through the organization

Non-Profit Statusà For-Profit Status

Non-profit = big entity, a lot of assets because of special treatment (tax-exemption)
For-profit = trust fund created where the hospital has to give back to the community for a period of time so that the money doesn’t go into the pockets of the people at the hospital; they’re getting a good deal, so they have to give back

Charitable Trust v. Non-Profit

Any non-profit can be considered a charity if its purpose is to benefit the public
Charities serve a larger population than non-profits do
Charitable trust = entrusted with assets that are to be used for a charitable purpose (public benefit à unascertained public)
In MI, if an organization chooses to incorporate & maintain itself as a charity, it must be a non-profit and all earnings of the entity must be used by the organization to help fulfill its charitable purpose

Workers are compensated, but no gifts or unreasonable money paid them

By being a nonprofit, a charity can dedicate more of its assets to its work and less to taxes, since nonprofits may be exempt under 501(c)(3)

Tax Exemption

Presumption is that you’re taxable unless you show why you’re not
Provena Covenant Medical Center v. Dept of Revenue

Provena was granted tax exemption by the federal government; it waived 1.7 million in charges, but only spent 800k on chartiable care to patients
IL law: taxation is the rule, exemption is the exception; burden of establishing entitlement to exemption rests upon the person seeking it, and it is a heavy burden (clear and convincing evidence)
CHARITY DEFINITION: a gift to be applied for the benefit of an indefinite number of persons for their general welfare – or in some way reducing the burdens of the government

1. It has no capital, stock, or shareholders
2. It earns no profits or dividends, but derives its funds mainly from private and public charity and holds them in trust
3. It dispenses charity to all who need it and apply for it
4. It does not provide gain or profit in a private sense to any person connected with it
5. It does not appear to place any obstacles in the way of those who need and would avail themselves of the charitable benefits it dispenses

Fails: 2, 3 à funds were generated by providing medical services for a fee; people were turned away

501(c)(3): Federal Tax Exemption for a Charitable Purpose

Today, most tax exempt hospitals are under 501(c)(3)
The exempt entity MUST be organized and operated EXCLUSIVELY for exempt purposes à IRC interprets this as requiring the exempt organization to engage primarily in activities that accomplish one or more exempt purposes

Thus, 501(c)(3) organizations may engage in business unrelated to their exempt purposes, but the income from the unrelated business is taxable & the activity must be insubstantial compared to the organization’s exempt activities

An exempt organization may engage in business activities jointly with for-profit organizations, and may even own for-profit organizations, AS LONG AS THE PURPOSE OF ITS INVOLVEMENT IN THE VENTURE IS IN FURTHERANCE OF ITS EXEMPT PURPOSE
Exempts: organized & operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster amateur sports competition or for the prevention of cruelty to animals
3 requirements to qualify:

1. No part of its net earnings may inure (to become of advantage) to the benefit of any private shareholder or individual

Inurement issue: must give value for value

2. No substantial part of its activities may consist of certain activities aimed at influencing legislation
3. It may not participate/intervene in any public campaign on behalf of any candidate for public office

IRS Close Scrutiny Test:

1. The exempt organization’s participation in the venture furthers a charitable purpose
2. The structure of the venture permits the exempt organization to act exclusively in furtherance of its charitable purpose and does not allow private inurement or private benefit to be conferred on private investors or other for-profit persons

A health care facility must meet:

Organizational test: the hospital’s documents limit its activities to exempt purposes
Operational test: the hospital must be operated primarily for exempt purposes (charitable, educational, religious)

Currently, the IRS has issued a new form 990 (annual form that most exempt hospitals must file)

Exempt organizations must submit a community benefit report that includes:

Reporting for charity care and community benefit
Assessment of community needs
Detailed information on billing and debt collection practices

501(c)(3) Hospital Recruiting Physicians

Hospital recruiting a physician for its medical staff to perform services on behalf of the organization à organization meets the operational test by showing that it is paying reasonable compensation for the services the physician is providing in return
Hospital recruiting a physician for its medical staff to provide services to members of the surrounding community, but not for/on behalf of the organization à a violation will result from failure to comply with requirement that the organization not engage in substantial activities that don’t further hospital’s exempt purposes
***The key to bringing someone in with incentives is community need; community need overrides the extra dollars being paid to the physician; a particular hospital can have community need even if it is in a city with multiple hospitals

International Revenue Code (IRC) 501(r)

Covers specific statutory requirements that hospitals must satisfy to qualify for 501(c)(3) exemption
Done on a hospital by hospital basis

1. Tax exempt hospitals must conduct a community health needs assessment once every 3 years and make it available to the public

Include: the community served, how it was determined, process, methods
Who is the community, and how is the hospital going to serve it?
You must satisfy community needs in order to remain tax exempt

2. Tax exempt hospitals must have written policies that address financial assistance and emergency medical care

Hospital’s emergency care poli

for an appropriate screening examination
2. Necessary stabilizing treatment for emergency medical conditions and labor à patient with emergency medical condition must be treated at the hospital or transferred to another medical facility in accordance with 3
3. A patient cannot be transferred if not yet stabilized unless:

The individual requests transfer in writing or the benefits of treatment at another facility outweigh the risks of transfer
Transfer is appropriate

4. A participating hospital that negligently violates will be penalized 50k for each violation

Barber v. Hospital Corporation of America


1. EMTALA does not permit private suits for damages against attending physicians
2. EMTALA requires that before transfer a patient be given an appropriate medical screening that comports with the hospital’s standard screening procedure given the condition of the patient
3. EMTALA requires a hospital to stabilize a patient before transfer only if it has actual knowledge of an emergency medical condition

FACTS: Barber went to hospital because she hit her head, had psych problems, doctors decided to transfer her to psych ward of another hospital. Barber asked for head x-ray, didn’t get it, was told of transfer but didn’t say anything and was transferred. She had a seizure because of head injury, comatose, died.

EMTALA does not require that an appropriate medical screening comport with national standards

The standards are those of the hospital; EMTALA only requires a hospital to provide screening exams that are ‘appropriate’ and ‘within the capability of the hospital’s emergency department’

A hospital does not violate EMTALA by transferring a patient when it should have known of the patient’s emergency medical condition, but did not have actual knowledge of such condition
Doctor’s actions did not differ from the standard set by the hospital; no evidence that the hospital had actual knowledge of the patient’s emergency medical condition

Corporate Practice of Medicine

Berlin v. Sarah Bush Lincoln Health Center (IL)

BLR: while the ‘corporate practice of medicine’ doctrine prevents corporations from providing medical services, it exempts licensed corporate hospitals

Corporate practice of medicine doctrine: corporations cannot provide medical care through agent physicians because the corporation itself has no medical license

FACTS: Health Center is a non-profit corporation licensed to operate a hospital, employed Berlin under a contract that prohibited him from working within 50 miles for 2 years after leaving. Berlin quit w/o notice, went to work 1 mile away. Health Center sued, Berlin said the employment contract & restrictive covenant were void — under it, Health Center, a corporation, was practicing medicine without a (personal) medical degree, making the contract illegal.

Distinction between corporation and licensed corporate hospital

A corporation cannot employ physicians to practice medicine because their acts would be attributable to the corporate employer, amounting to an unlicensed corporation practicing medicine
Doctrine prevents corporations from providing professional medical services, under the rationale that corporations cannot sustain the education, medical training, and character-screening to obtain a medical license, and thus cannot legally practice medicine

This court hasn’t decided whether to exempt licensed corporate hospitals, so we look to other JDs’ guidance

IL Hospital Licensing Act authorizes licensed hospital corporations to provide medical services