Religious Identity and the Health Care Market: Mergers and Acquisitions Involving Religiously Affiliated Providers

• Publication year: 1999
• Citation: Vol. 34

34 Creighton L. Rev. 927. RELIGIOUS IDENTITY AND THE HEALTH CARE MARKET: MERGERS AND ACQUISITIONS INVOLVING RELIGIOUSLY AFFILIATED PROVIDERS

Creighton Law Review

Vol. 34

DONALD H.J. HERMANN(fn+)

A. INTRODUCTION

Throughout the history of the United States, various religious groups have been involved in a broad range of health care activities. Religiously affiliated health care providers combine the objectives of for-profit health care institutions in delivering medical services in an economically efficient manner with those of nonprofit organizations that are concerned with the medical needs of the specific community being served. To this combination, the religiously affiliated health care provider adds the particular goals and mission of its own sponsoring religious group, such as charity care or provision of medical services to those who are financially indigent. While the vast majority of these religiously affiliated institutions serve the public at large without any restrictions on medical service based on religious belief, some sectarian health care entities make their services contingent upon their comporting with the teachings of the supporting religious institution.(fn1) Nevertheless, there is a general consensus among these organizations that their mission includes the assurance that all necessary services are offered, that all needy populations are provided with care, and that a refuge is provided for all those in need of care.(fn2) The objectives of universal access and provision of charity care in community-owned nonprofit hospitals have reflected Dr. Albert Schweitzer's formulation of the ideal care-giving tenet of religiously affiliated health care providers: "Here, at whatever hour you come, you will find light and help and human kindness."(fn3)

Today, all health care institutions face many economic pressures. Medicare and Medicaid payments comprise more than fifty percent of the income of many hospitals in the United States. In the past few years, particularly after passage of the Balanced Budget Act, Medicare and Medicaid payments to the hospitals have been greatly reduced. Commercial payers, as well as the Medicare and Medicaid Programs, have placed a number of controls and limitations on inpatient hospital visits, and have encouraged the use of office procedures and ambulatory surgery centers to reduce the number and length of inpatient hospital visits. At the same time, there have been many technological advances which require hospitals to invest large sums of money in equipment and the development of employee-intensive procedures to provide the best care to patients. Finally, there is strong competition for managed care contracts. With all of these economic pressures, many institutional health care providers have sought mergers and integration in order to create efficiency by combining departments offering certain services, thus avoiding duplication of programs. The resulting entities can create new services at one campus instead of two, further reduce costs through the consolidation of administrative staff, provide a greater range of services, and attract managed care contracts.

B. GOVERNING STRUCTURE

Until the middle of this century, most religiously affiliated health care facilities were not separately incorporated. Instead, they were part of the organizational structure of the sponsoring religious group, which often included the provision of charitable care as part of its stated purpose. In more recent years, however, various legal developments have produced a need for separate corporate structures for religiously affiliated health care organizations, which are usually created by articles of incorporation or a corporate charter that must comply with state laws governing corporations. The charter states the purposes of the organization, establishes the requirements for membership (or shareholder status), and sets out the constitution of the board. This charter also provides authority for adoption of bylaws, rules, and regulations. Federal law, particularly the Internal Revenue Code and Medicare/Medicaid statues, has had an important influ-ence in the establishment of separate legal initiatives to be administered in compliance with the requirements of the tax law and reimbursement law. Third-party reimbursement has created a need to establish which expenses can be included in the reimbursable cost basis. Creating a separate entity simplifies this process. Another important factor leading to the establishment of separate entities to provide health care services was state certificate-of-need laws which required proposed health care organizations to provide extensive financial disclosure, since many sponsoring organizations did not want to provide full access to their institution's financial records. Perhaps another early important factor leading to separate incorporation of religiously affiliated health care providers has been medical malpractice, which has created the need to isolate assets of the sponsoring group, the necessity of qualifying for malpractice insurance, and a desire to establish adequate risk-management monitoring.

Management of the health care organizations is usually overseen by a board of directors or trustees, many of which are either self-perpetuating or elected by the membership with requirements for members set out in the charter. Some religious sponsors have sought to maintain a level of control over the health care provider by establishing interlocking boards of directors between the provider and the sponsoring religious body or church. Another method of maintaining control uses the category of "membership" in the affiliate's corporate charter. In this process, control over the affiliate is ultimately held by a group designated "the members," constituted of individuals who usually belong to and represent the sponsoring religious organization. In some cases, the religious order sponsoring the health care entity is the sole corporate member. Control through use of powers reserved to the members facilitates significant ultimate decisional authority over matters involving fiduciary responsibility, including sale of corporate assets. Under this arrangement the members have the authority to appoint and remove board members, amend the health care provider's mission, and approve the purchase or sale of major assets. The members also select a board of directors to oversee the administrative responsibilities of the provider organization, and to develop and implement rules to promote the values of the sponsoring group. This board is usually composed of civic, business, and religious leaders along with physicians, ethicists, lawyers, and lay members of the community. Often there is an effort to select individuals for board membership who represent the social makeup of the group receiving services from the provider. The board's authority to govern the health care entity is established by the documents creating the entity and by the general principles of corporate law. The board has ultimate responsibility for the effective operations of the organization and mostoften appoints a chief executive officer and other high-level members of the management team who take responsibility for day-to-day management.

The board of directors acts as the governing body of the health care provider, and may ultimately approve or deny any specific proposed treatment protocol. Depending on the sponsoring religious organization, the hospital may or may not provide treatments that some members of the general community may deem essential for quality patient care: for example, abortion, sterilization, or withholding of treatment at the patient's request. It is in the provision of such medical services that there is most often a potential clash of policy when different religiously affiliated hospitals consider merging, or when a religiously affiliated provider becomes associated with a for-profit entity or with another nonprofit institution that lacks any religious affiliation.

Religiously-affiliated health care providers are most often not-for-profit, rather than for-profit or governmental, and private, rather than public, and are often organized as charitable entities in order to qualify for special tax treatment. The law has developed high standards for such charitable enterprises requiring scrupulous compliance with fiduciary standards. However, in some states directors are exculpated from ordinary negligence.

C. CHANGES IN THE HEALTH CARE ENVIRONMENT

Recent developments in the health care industry, as well as changes in demographics and the expressed needs of various social communities, have had a marked effect on the structure of health care institutions. These developments also have changed the way in which health care services are delivered and paid for. The central role that third-party payers have assumed in the provision of health care has compelled all health care providers, both institutions and associated physicians, to streamline services in order to cut costs and remain competitive.

Religiously affiliated hospitals must constantly seek "to adapt to the ever-changing needs of their communities and [to conditions in] the health care market," while struggling to maintain and continue promoting their unique religious identities.(fn4) This means that health care institutions have had to cope with demands for reform along with the...