Which of the following is not a required statement of a private not-for-profit hospital?

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NCBI Bookshelf. A service of the National Library of Medicine, National Institutes of Health.

Institute of Medicine (US); Gray BH, editor. The New Health Care for Profit: Doctors and Hospitals in a Competitive Environment. Washington (DC): National Academies Press (US); 1983.

John F. Horty and Daniel M. Mulholland III

In recent years there has been a substantial increase in the number of investor-owned enterprises in the health care field, particularly hospitals.1 This development has challenged some of the prevailing concepts and traditions of the field and of the professions engaged in it, particularly physicians. An increase in investor-owned enterprises in health care may have a number of political, economic, and social implications for the nation in general and the field in particular, but these implications cannot be adequately evaluated without an understanding of the basic legal differences between investor-owned and nonprofit health care institutions. This paper will examine these legal differences with respect to organization, finances, and miscellaneous factors.

Organizational Differences

With few exceptions, both investor-owned and nonprofit hospitals are organized as corporations. 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.

Investor-Owned Hospitals

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. Thus, the discussion that follows is equally applicable to freestanding investor-owned hospitals and those integrated into hospital chains. It should be noted that while a substantial majority of investor-owned hospitals are freestanding the vast majority of investor-owned beds are owned by chains. In short, the chain investor-owned hospitals are considerably larger than the freestanding hospitals in the number of beds and thus in operating expenses.

All investor-owned corporations, regardless of whether they operate hospitals, are governed by the business corporation laws of the state in which they are incorporated. They must also register with other states in which they do business. Because of the relatively unobtrusive provisions of the business corporation laws of some states, e.g., Delaware, with respect to internal corporate operations, many corporations doing business in more than one state are incorporated under the laws of a state other than where they conduct the bulk of their business. 3 Corporations that only do business within one state, however, are more often than not incorporated only under that state's business corporation law.

There are certain basic attributes shared by all business corporations. All business corporations are ultimately governed by their shareholders, i.e., individuals or corporations who possess a proprietary interest in the assets and income of the corporation that is signified by the ownership of stock. The shareholders, as owners of the corporation, elect a board of directors, which is responsible for the conduct of the corporation.

The board of directors in turn employs various individuals who are responsible for the day-to-day operations of the corporation. These individuals are referred to as officers or agents of the corporation. In most cases, at least with respect to investor-owned companies, the officers of the corporation also are members of the board of directors. This is most frequently true of the chief executive officer of the corporation. Beyond this, it is difficult to identify any other general patterns of organization because the titles, functions, and relationships of the various elements of corporations differ from state to state as well as from corporation to corporation.

The purpose of most state corporate laws is to protect the rights of the shareholders in relation to the corporation's board or management. These laws set forth rules governing corporate elections, require the board to render periodic financial statements to the shareholders, and provide mechanisms by which shareholders who dissent from certain actions taken by the corporation can receive compensation for their shares in lieu of continuing their association with the corporation. There are few, if any, restrictions on the kinds of business that can be conducted by business corporations, aside from general prohibitions against conducting criminal activities. Thus, the stated-purpose clause of many investor-owned companies, including hospitals, generally permits the corporation to engage in "any lawful activities permitted to be conducted by corporations" in the particular state. This allows easy diversification of investor-owned corporations into both related and unrelated business.

The general and specific purposes of the corporation are outlined in the articles of incorporation or charter, the document filed with the state to obtain the state's recognition of the corporation's existence as a separate legal entity. More detailed rules governing the organization and operation of the corporation can be found in the bylaws of the corporation. Although state laws generally require that certain minimal information be included in the articles of incorporation, the corporation is usually free to fashion its bylaws in whatever way it sees fit.

In the case of hospitals, however, there are a number of additional regulatory and accreditation requirements pertaining to the content of the corporate bylaws that ultimately affect their organization, whether investor-owned or nonprofit. These include regulations promulgated by state departments of health or whatever state agency governs the conduct of hospitals. Such regulations traditionally dealt with "bricks and mortar" issues, such as safety standards and other public health concerns, but more recently they have begun to deal with the internal management of the hospital and to prescribe certain organizational requirements and restrictions. Likewise, the Joint Commission on Accreditation of Hospitals and the American Osteopathic Association, which together accredit almost all hospitals in the United States, have extensive standards pertaining to the internal organization and operation of the hospital board and management.4 Thus, both investor-owned and nonprofit hospitals are not as free to fashion some portions of their bylaws as other corporations may be.

In addition to general regulations under state corporate statutes, business corporations that make their shares available for purchase by the public are subject to federal regulation under the federal securities laws, such as the Securities Act of 19335 and the Securities Exchange Act of 1934.6 Corporations whose shares are available only to a limited number of shareholders and are not offered to the public are not subject to this regulation.

One of the major advantages of the chain holding company model for operating hospitals is that removing central management of the corporation from the local sites of the hospital allows major fiscal and operating decisions to be made free of local pressure, either from the community or from physicians. Thus, the local hospital is more likely to conform to the corporate fiscal plan with greater efficiency. In effect, local management has less discretion and is less likely to be manipulated by local community or physician interests through the board, because management is effectively employed and evaluated by the holding company. These are significant differences between the legal operation of the chain investor-owned hospital and the locally owned and operated nonprofit hospital.

Nonprofit Hospitals

The majority of hospitals (which represents the majority of hospital beds) are organized and operated as nonprofit corporations. They are subject to the nonprofit corporation laws of the states in which they are incorporated. Compared with business corporation laws, nonprofit corporation laws are far more varied through the country. Some general observations can nevertheless be made. There are two basic types of nonprofit corporations: membership and nonmembership.7

A membership corporation is more closely analogous to the investor-owned corporation in terms of its organization. A body of individuals known as the members is given the authority to elect a board of directors (or trustees as they are frequently called). In the case of a hospital the members may-include individuals from the local community, representatives of a religious group affiliated with the hospital, physicians on the medical staff, or even other corporations. The board is responsible for the conduct of the corporation. The board in turn employs officers and agents to run the day-to-day affairs of the corporation. These individuals are known as either management or administration of the corporation.

The very use of the term administration instead of the generic corporate term management denotes the tradition in the nonprofit hospital corporation of giving the administrator—the individual who is the equivalent of the chief executive officer in a business corporation—less authority than his business counterpart. This tradition is changing, and the nonprofit manager now has greater authority, in part as a result of the growth of chain investor-owned hospitals.

State nonprofit corporation laws usually grant some degree of protection to the rights of members with respect to actions taken by the board or corporate management, e.g., prohibiting the board from unilaterally adopting any bylaws, amendments, or fundamental corporate changes that would affect the rights of the members8 or requiring that the books and records of the corporation be open for inspection by the members9

In most states, however, nonprofit corporations do not have to be organized as membership organizations, and, even where they are, it is permissible to have the membership and the board of trustees com posed of the same individuals.10 Thus, nonprofit corporations can be governed by self-perpetuating boards answerable only to themselves (and to state law) with respect to the internal affairs of the corporation. Although it would seem that a board and management of a corporation without members would have a far freer hand than their investor-owned counterparts in operating the corporation, generally there is little practical difference. Shareholders in business corporations seldom care about or exercise their prerogatives to change or restrict managements, as long 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. This is especially true in the health care field. For example, hospitals located in areas with a strong tradition of community involvement by means of membership in the corporation will often have boards and management that are reluctant to embark on aggressive new or nontraditional hospital ventures for fear of up setting some elements of the community, particularly the physicians. In such a situation the hospital corporation can become almost as highly politicized as a unit of local government. Other hospitals have corporate memberships composed completely or partially of the physicians on its medical staff.11 This places the board in the rather peculiar position of having to answer to the same group whose medical quality it is responsible for overseeing.12

Corporate membership bodies can also provide a vehicle for certain factions within the hospital to wrest control from boards or management that they are displeased with. In many instances, anyone can become a member of the corporation upon payment of token dues, often as little as $5.00 per year. Thus, a group that is interested or astute enough can gather a substantial following and attempt a coup.13 Some states even provide for derivative suits by members.14 Fortunately for boards and management, this threat is largely diminished by the usual inertia of the membership, and it can be further blunted by carefully crafted bylaws that provide for more stringent member ship requirements or that allow the board to approve new members or remove current ones.15

The courts generally have protected the rights of boards and management in such situations. 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 by laws did not permit that action.16 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.

In hospitals, perhaps more than other nonprofit institutions, it is essential that the board and management retain real control of the hospital. This is so not only because the nature and size of the business demand tight entrepreneurial control but also because various regulatory and accreditation bodies, as well as the courts, have placed the responsibility for running the hospital squarely on the shoulders of the board. For example, the Joint Commission on Accreditation of Hospitals requires that each hospital have "an organized governing body... that has overall responsibility for the conduct of the hospital .... "17 Likewise, the Conditions of Participation for the federal Medicare program require that each hospital receiving reimbursement from the program have "an effective governing body legally responsible for the conduct of the hospital as an institution." 18 Many state licensing regulations have similar statements.19 While revocation of license or accreditation for these reasons is rare, the threat is there and is perceived as real.

Most compelling, however, is the increasing number of judicial decisions in recent years holding that a hospital board is responsible for the quality of medical and hospital care rendered in the institution, even by nonemployees,20 as well as for the fiscal integrity of the corporation.21 If a hospital board is to fulfill its responsibilities in this area, it must exercise the ultimate authority within the corporation. In light of these realities, corporate bylaws that dilute the authority of the board, in favor of corporate members who may not be concerned with profit or the dynamic future of the corporation, are a threat to the well-being of the institution.

In most multihospital systems (both investor-owned and nonprofit) the authority of the board of each individual hospital within the sys tem is necessarily circumscribed to some degree by the reserved powers of the controlling entity of the system. Nevertheless, the individual hospital boards will still be held legally responsible for the conduct of their respective institutions. Thus, in order to avoid an increased potential for liability, enough discretionary power to deal with internal concerns, especially medical staff affairs and quality assurance, must be given to the individual boards.

There are, however, some multihospital systems (mostly investor-owned) in which the individual hospitals are not separately incorporated. Rather, one corporation with one board owns all the hospitals collectively. This kind of arrangement, while possessing some tax advantages, has some serious drawbacks. The single corporate board will be held legally responsible for the conduct of each individual hospital, even though it is not as close to the day-to-day operations of the hospital as a local board would be. Also, creditors and tort claim ants who are awarded judgments against one of the hospitals in the system can satisfy those judgments by attaching the assets of some or all of the other hospitals. This generally would not be possible if each hospital were separately incorporated.

Another factor that creates an important organizational distinction between investor-owned and nonprofit hospitals are the strictures imposed on the purposes for which nonprofit corporations can be organized and operated. 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.

Despite the fact that nonprofit corporations are subject to this restraint against private inurement, nonprofit corporations are not appendages of state or local governments. They are private institutions created pursuant to a statute but with a separate legal existence of their own. Therefore, it is incorrect to characterize their assets or operations as "public" assets or operations. Although those assets or operations may be devoted to a generally public or charitable purpose, and private individuals are prohibited from "profiting" from them, they are owned by and are the responsibility of a private nonprofit corporation.

As previously implied, the restraint against private inurement has been said to be a primary source of operational differences between investor-owned and nonprofit health care institutions. Some observers have concluded that the absence of a profit motive in nonprofit corporations leads managers of such institutions to seek "prestige" among their peers in lieu of monetary reward.26 This may channel energies, for good or bad, into expanding the physical plant or adding sophisticated technological equipment, without the requirement of profitability. This may be good for the availability of health care to the community but may be a risk to the long-term financial viability of the corporation. It has also been asserted that the professional beneficiaries of nonprofit institutions (in the case of hospitals, the medical staff) often fill the vacuum left by an absence of shareholder proprietors and dictate policies of the institution.27 This is especially true where the board or management fails to exercise proper leadership.

At least one study has concluded that nonprofit hospitals are less efficient than their investor-owned counterparts in the ratio of personnel to the occupancy rate.28 Other studies support the conclusion that managers in investor-owned hospitals perform better than those in nonprofit institutions because of the latter's lack of proprietary incentives.29 Current statistics seem to bear this out, although the data unfortunately are not controlled for the mix and severity of cases. In 1981 investor-owned institutions had a lower average length of stay (6.5 days to 7.8) and lower full-time equivalent personnel per 100 adjusted census (322 to 348) than nonprofit hospitals.30 And, while average daily expenses were slightly higher in investor-owned hospitals than in nonprofits ($299.02 compared with $285.61), labor costs were significantly lower in investor-owned hospitals than in non-profits ($140.32 to $164.01 per inpatient day).31

These figures, which are commonly viewed as indices of efficiency in the health care field, would seem to indicate a marked advantage associated with the investor-owned form of organization. However, they must be viewed in light of the fact that many investor-owned institutions tend to have a higher proportion of "paying" patients as opposed to those whose bills are paid by third-party programs, such as Medicare, that reimburse at or below actual costs and that nonprofit hospitals are more likely to be engaged in costly teaching or training programs--programs whose costs center in the nonprofit field but whose benefits accrue to all.

Some investor-owned hospitals (as well as some nonprofits) have chosen not to participate in Medicare or accept charity patients at all or to set quotas (stated or unstated) on the number of such patients who will be treated. This had led to charges that some investor-owned hospitals have been "dumping" Medicare, Medicaid, and charity patients on their nonprofit neighbors, especially in areas such as southern Florida.32 A larger percentage of Medicare patients, who because of age or type of illness, generally stay in a hospital longer and require more intensive nursing care, could explain, at least in part, the difference in "efficiency" figures between investor-owned and nonprofit hospitals. Thus, the meaning and explanation of reported differences between different types of hospitals is not clear, and more empirical research is warranted.

Where dumping of Medicare, Medicaid, or charity patients has allegedly taken place, the medical staffs of the nonprofit and investor-owned hospitals involved often consist of virtually the same physicians. This means that for one reason or another, the physicians have made a conscious decision to treat one segment of their patients in one hospital and others in another. Where the physicians own a proprietary interest in the investor-owned hospital, the reason behind their decision to admit only paying patients there is rather obvious. However, where the hospitals are all nonprofit, or where an investor-owned hospital chain is involved, the physician's actions may be dictated by policies adopted by the hospitals or by the expressed feeling of one of the hospitals that it has a "duty" to receive and care for all patients regardless of their ability to pay. Once again, too little empirical data are available to make a definitive analysis of the subject, but clear anecdotal examples exist.

To summarize, there are a number of significant differences in the way the law treats investor-owned and nonprofit hospitals with respect to their organization. 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 making can be more ''objective'' when removed physically and organizationally from the local scene.

Financial Differences

Another set of possible determinants of different patterns of behavior between for-profit and nonprofit hospitals are the legal incentives and disincentives affecting their financial affairs. These factors, which include tax exemptions, reimbursement mechanisms, available sources of equity capital, and restrictions on certain transactions, are often the guiding force behind the major decisions made by health care institutions.

Tax Exemptions

The most significant factor affecting the financial affairs of nonprofit hospitals is the availability of an exemption from federal income tax under Section 501(c)(3) of the Internal Revenue Code. This exemption gives nonprofits an advantage by allowing them to devote more of their gross revenues to internal operations and expansion of the same. It also frees them from the necessity of basing decisions on tax implications, except where possible unrelated business taxable income may be involved.33

Even when the actual amount of tax would not be great (as is more and more the case with declining revenues and tax rates), an exemption under Section 501(c)(3) is important for other reasons. For one thing, it is a prerequisite to obtaining an exemption from federal Social Security taxes,34 which can result in tremendous savings for hospitals because they tend to be labor-intensive operations. Also, it provides access to sources of support that otherwise would not be available, i.e., tax-deductible donations35 and tax-exempt bond financing.36

Almost as valuable as federal tax exemptions are exemptions from state taxation. 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 par ties for almost all the care they provide they are no longer "charitable" operations37 Other state tax provisions of significance to nonprofit hospitals include exemptions from state sales taxes (for hospital purchases) and corporate income taxes.

Reimbursement Factors

Until recently, conventional wisdom held that nonprofit hospitals had a decided financial advantage over their investor-owned counterparts because of their tax exemptions. Lately though, it has been observed that certain factors involved in third-party reimbursement schemes, particularly Medicare, favor investor-owned hospitals and may counterbalance or even outweigh the tax advantages of nonprofits.38

As a result of repeated budget cuts, the Medicare program now reimburses all hospitals at less than their actual costs for treating Medicare patients. This is largely due to the reimbursement limits imposed on routine inpatient costs by Section 223 of the Medicare amendments of 1972 and the regulations thereunder39 If these limits are extended to ancillary services, this shortfall will be exacerbated. Faced with inadequate reimbursement from major third-party payers, hospitals are forced to make up the difference from paying patients or commercial insurance carriers. 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. The most prominent of these is reimbursement for a reasonable "return on equity" in addition to costs under the Medicare program41 This return on equity recently has been paid at rates up ward of 22 percent of net equity.42 Investor-owned hospitals are there fore guaranteed a "profit" that is denied nonprofit hospitals. In addition, many federal and state taxes are allowable costs under the Medicare program,43 so the tax advantage of the tax-exempt nonprofit hospital is further reduced.

Sources of Capital

At first glance, nonprofit hospitals would seem to have an advantage in attracting new capital because of the tax deductibility of contributions to them and the availability of tax-exempt bonds. Indeed, this latter category of financing has become almost crucial to the survival of the nonprofit side of the industry. As of 1981 it is estimated that over $5 billion worth of tax-exempt hospital bonds have been issued. 44 These bonds are the primary source of funding for hospital construction, financing 49.3 percent of such activity in 1978, compared with 6.2 percent from philanthropy and 8.6 percent from government funds.45 The tax-exempt feature enables nonprofit hospitals to issue bonds with higher ratings and lower interest rates than would otherwise be possible, thereby increasing their marketability and decreasing expenses.46 The concept of tax-exempt bonds is under increasing federal government scrutiny, and the future is uncertain.

Private charitable contributions to nonprofit hospitals have de creased in importance over the years, mostly as a result of the advent of Medicare and the consequent shifts of donor interest to other fields. This trend probably will accelerate, as recent tax code changes reduce the incentive for taxpayers to contribute to charities. The Economic Recovery Tax Act of 198147 reduced the maximum rates of both federal income and estate taxes, which could work to discourage some larger donors from contributing, because the value of the deduction they would receive is less. Also, the general economic downturn during 1982 can be expected to diminish charitable giving.

At the same time, investor-owned hospitals are not as disadvantaged by the lack of access to the tax-exempt bond market as one might expect. In the first place, tax-exempt financing is available under limited circumstances to investor-owned hospitals under the so-called small issue exemption.48 Moreover, third-party payers, including Medicare, usually reimburse hospitals for their borrowing costs.49 Some observers have even claimed this fact renders normal borrowing more beneficial to the hospital than tax-exempt borrowing since the savings realized from the tax exemption are passed on to the third-party payers.50

Investor-owned hospitals also can resort to the most traditional method of raising capital—issuing stock—which is unavailable to nonprofit hospitals in most states.51 However, some of the larger investor-owned chains have reduced their reliance on this method of financing in recent months, opting instead for bonds, debentures, and short-term notes, because of a downward trend in their stock prices caused by government indecision over reimbursement.52 This provides further support for the theory that debt financing is not as unattractive to investor-owned hospitals as was previously thought.

Restrictions On Transfers of Property

Many state laws governing nonprofit corporations prohibit the transfer of funds restricted for specific charitable purposes without judicial approval.53 For example, if a nonprofit hospital solicited and received donations that were earmarked by their terms for the construction of a new surgical suite and some of those funds were left over after the suite was constructed, the hospital would have to obtain a court order allowing it to use the excess funds for other purposes. These restrictions, which find their origins in the law of charitable trusts, can be burdensome in the sophisticated business environment in which hospitals find themselves. 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.

It is impossible to generalize whether the nonprofit or the investor-owned form is most advantageous for hospitals with respect to their financial transactions. While it is true that many advantages historically possessed by nonprofit institutions have eroded over the years, the tax exemptions that are usually available to nonprofits still pro vide a powerful incentive for them to retain that status. Only a careful analysis on an institution-specific basis can determine which form best suits a hospital from a financial point of view in light of current or forecast legislative or regulatory realities. In the end, given in adequate reimbursement for care of the elderly and poor, the major fiscal disadvantage of the nonprofit hospital may be community, state, and federal expectations of the role of such hospitals.

Other Legal Differences

Another set of legal differences between investor-owned and nonprofit hospitals are laws requiring a greater degree of public "accountability" from nonprofit hospital governing boards. West Virginia, for instance, has enacted a law requiring nonprofit hospital board meetings to be open to the public,57 much the same as board meetings of governmentally owned and operated institutions must be in a number of states. Investor-owned hospitals are excluded from this requirement, presumably to protect their business data and plans from competitors, which in most areas are nonprofit hospitals. In contrast, Pennsylvania requires all hospitals to provide "some opportunity for the general public to attend meetings of the governing body on occasion .... "58 The problem with such open-meeting requirements is not that board meetings will be overwhelmed by a flood of spectators; most people couldn't care less what goes on with a hospital board. Rather, the presence of reporters or possibly competitors—who are more likely to attend than the general public—will hamper the board if it has to discuss sensitive or confidential matters, such as financing options, legal positions, or medical staff credentialling.

Nonprofit hospitals previously enjoyed fairly broad exemptions from certain federal regulatory schemes, but these have been crumbling as of late. For example, in 1974 most federal labor laws, including the National Labor Relations Act and the wage and hour laws, were made applicable to nonprofit hospitals. Previously, only proprietary hospitals had been covered. Likewise, many federal antitrust laws have only recently been applied to nonprofit hospitals.

In Hospital Building Company v. 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,61 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 any general trends along these lines in the absence of empirical studies conducted on a large-scale, institution-specific basis.

The distinction between nonprofit and investor-owned hospitals has been blurred by the recent move toward corporate restructuring by many nonprofit hospitals. The usual corporate restructuring plan has a single-hospital corporation evolve into a holding company with a number of subsidiaries, one of which is the hospital. The other subsidiaries may be investor-owned or nonprofit, depending on the activity to be conducted. However, even in this area, nonprofit hospitals lag behind those that are investor-owned. Because business corporations are owned by shareholders, it is relatively easy to merge them into multicorporate systems under the umbrella of a holding company that owns all of their stock. 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 any one, so the holding company idea is somewhat foreign to them. Only quite recently have nonprofit hospitals ventured into the restructuring arena and even then with a good deal of reluctance. One fairly popular method of nonprofit restructuring—creating a nonprofit holding company and making it the sole member of the hospital corporation—will not work in those states discussed earlier that prohibit the transfer of nonprofit corporate income to corporate members. Thus, other, more unfamiliar methods must be employed. Nonprofits also have been far slower than investor-owned companies to establish hospital chains for the same reason.

Although the original impetus for restructuring was a desire to enhance reimbursement by spinning off nonreimbursible activities into sister corporations, many hospitals have begun to realize that even greater benefits can be obtained by restructuring to positioning themselves for competition with other hospitals, especially those affiliated with investor-owned chains or other multihospital systems.

Increased competition may ultimately break down many of the existing differences between investor-owned and nonprofit hospitals. If third-party reimbursement levels continue to decline, or if legislation mandating price competition between providers, such as the National Healthcare Reform Act of 1981,66 is adopted, hospitals of all stripes will be forced to act like business corporations if they are to survive. Under such circumstances, existing laws and regulations restricting the activities of nonprofit hospitals will become anachronisms, destined to fall in the wake of new realities.

References and Notes

Harris v. Board of Directors of Community Hospital of Evanston, 370 N.E.2d 1121 (Ill. App. 1977).

Stern v. Lucy Webb Hayes National Training School of Deaconesses and Missionaries, 381 F.Supp. 1003 (D.D.C. 1974).

Abbot Laboratories v. Portland Retail Druggist Association, 425 U.S. 1 (1976).

Copyright © 1983 by the National Academy of Sciences.

Bookshelf ID: NBK216759

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