Article Archives >> Lead Stories >> October 16-November 15, 2008

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Court Approves Hospitals’
Withdrawal from Consortium
Exit allowed to protect charitable missions
and to redress breaches of fiduciary duty

An appellate court in Ohio has affirmed a trial court decision allowing two nonprofit hospitals to withdraw from the Health Alliance of Greater Cincinnati.  The hospitals claimed it was necessary to protect their charitable missions and that the Alliance had breached its fiduciary duties to them in operating the program.  (Health Alliance of Greater Cincinnati v. The Christ Hospital, Ct. of App., OH, First App. Dist., No. C-070426, 9/30/08.)

The Christ Hospital and the University of Cincinnati had entered into a Joint Operating Agreement and created the Alliance in 1995 to manage an integrated system of a number of independent nonprofit hospitals in the region.  The mission of the Alliance was to further the charitable missions of its members, and the JOA reserved to the members certain powers, such as retaining ownership of their properties, approving disposition of major assets, and the right to declare a default under the agreement and withdraw.  The JOA required the Alliance to operate at all times consistently with the mission of the participating hospitals.

In 2005, the Alliance was attempting to convince the participants to give up some of their reserved powers and the CEO of the Alliance made some remarks to the Board of Christ Hospital that gave the directors concern about the continuing viability of their hospital in its present location.  They believed that the Alliance was contemplating a closure of the existing facility and a move to the suburbs.

After obtaining a consultant’s report, the Board of Christ Hospital submitted a notice of withdrawal, based on several purported uncured events of default under the JOA.  It complained that the Alliance had not operated in accord with its stated mission and had impeded the Hospital’s ability to fulfill its mission and effectively compete in the marketplace.

Among the specific complaints, it said the Alliance was pursuing academic goals rather than clinical care, and was increasing competition among its own members.  It complained that the Alliance was withholding information needed for it to carry out its monitoring, and was seeking to use the Hospital’s assets as collateral for a $220 million bond issue to provide funds for other activities.

Without waiting for a mandatory 60-day cooling off period, the Alliance sued for a declaratory judgment that the Hospital could not withdraw.  A few months later, The St. Luke Hospitals also sought to withdraw.

The trial court found that the Hospital was justified in exercising its power to withdraw.  The Court of Appeals has affirmed.

The Alliance argued that the trial court had erred in finding that it had a fiduciary duty to the Hospital, but the Court of Appeals said the argument was “untenable.”  Under the JOA, the participating hospitals “allowed the Alliance to manage their affairs, enter contracts on their behalf, collect and allocate their revenues, maintain their business records, employ their operational staff, and ‘at all times operate … consistent with the charitable missions of … the participating entities.’  The hospitals surrendered to the Alliance control of their revenue streams, their power to incur debt, their right to transfer title to their property, and their right to amend their articles or regulations without consent of the Alliance.  The hospitals reposed special confidence and trust in the Alliance, which resulted in a position of superiority on the part of the Alliance, the very essence of a fiduciary relationship.”

The Court found that “the record is replete with evidence” that the Alliance had breached its fiduciary duties to the Hospital. Among the issues were constraint of the Hospital’s ability to compete by denying the Hospital access to its revenue stream and by restricting its operational control, while embarking on a campaign to pay bonuses to doctors who agreed to sign noncompetition agreements to restrict the Hospital’s access to those doctors in the future.  The Alliance also used Hospital funds to pay for the Alliance’s strategic planning while refusing to allow Hospital officers to engage in any strategic planning on its own behalf.

 The Court also found that the Alliance had breached its fiduciary duties to St. Luke and affirmed its right to withdraw as well.

YOU NEED TO KNOW

It is impossible to know the full story from the matter-of-fact recitation of the record in the Court’s opinion and there is obviously another point of view.  But the case suggests the huge difficulty in operating a consortium of institutions where each continues to exist but is asked to subordinate its interests to the interests of the whole.

Article Archives >> Lead Stories >> October 16-November 15, 2008