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Corporate Reorganization: The Last Gasp or Last Clear Chance for The Tax-Exempt, Nonprofit Hospital?

Published online by Cambridge University Press:  24 February 2021

Melvin Horwitz
Melvin Horwitz*
Affiliation:
Harvard Medical School, 1949; Yale Law School, 1986.
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Abstract

The current revolution in health care organization and financing, increased competition, and a retrenching of industry from its commitments to expansion of health care benefits challenge the nonprofit hospital's existence as a viable entity. Hospital governing boards and administrators have turned to corporate reorganization in order to maintain their financial position and to continue to serve their communities.

This Article examines the not-for-profit concept and the problems facing nonprofit hospitals. It reviews the pros and cons of reorganization and the for-profit/nonprofit controversy. It questions whether the hybridization of the hospital results in a stronger or weaker species and discusses the possible effects of the newly structured entity on the quality and delivery of health care. Finally, the Article suggests that the nonprofit hospital may survive only by a continued commitment to societal and communal values, to service rather than to profit; that this commitment is adequate justificaton for the preservation of the nonprofit system, and its preservation will reinforce and strengthen the concept.

Type
Articles
Information
American Journal of Law & Medicine , Volume 13 , Issue 4 , 1988 , pp. 527 - 559
Copyright
Copyright © American Society of Law, Medicine and Ethics and Boston University 1988

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References

1 See Hansmann, , The Role of the Non-Profit Enterprise, 89 YALE L.J. 835, 867 (1980)CrossRefGoogle Scholar; Bradford, Caldwell, Goldsmith, The Hospital Capital Crisis: Issues for Trustees, HARV. BUS. REV., Sept.- Oct. 1982, at 56.

2 David, , Why Tax-exempt Hospitals Need Profit, HEALTHCARE FIN. MGMT. 46 (Sept. 1982)Google Scholar. Examination of the sources of funding for hospital construction demonstrates some of the changes that have occurred. During the period 1973 to 1981 government grants decreased from 21 percent to 12 percent. Philanthropic contributions were reduced from 10 percent to 4 percent. Id; Charhut, , Trends in Hospital Philanthropy, 58 HOSP. 70, 73 (1984)Google Scholar(In 1968, 21 percent of construction costs came from donations.).

3 For example, some of the many competitors are combined panels, birthing centers, diagnostic centers, dialysis centers, surgicenters, home health agencies, hospices, urgicenters, freestanding outpatient clinics, physician offices/clinics, and for-profit corporate chains.

4 Prior to the establishment of the prospective payment system, hospital reimbursement was cost based. This system encouraged expansion of the health care delivery system and the patient's access to it. Technological advances, increased demand, and inflation caused such an increase in health care expenditures that the government looked for some way to control rising costs. Prospective payment, using DRG's (Diagnosis Related Groups), was instituted to provide a financial incentive for hospitals to control costs. Under the DRG approach, the hospital patient was assigned to one of 468 diagnostic indices and the hospital was reimbursed according to a set formula based on the average cost of treating patients with that diagnosis. Other third party payers are moving to implement similar programs. There is some question whether the administrative costs of the program are worth the savings. For a general description and history of the program as it evolved, see P. GRIMALDI & J. MICHELETTI, DIAGNOSIS RELATED GROUPS: A PRACTICIONER's GUIDE (1982).

5 The terms corporate reorganization and corporate restructuring will be used interchangeably.

6 The nonprofit or not-for-profit hybrid is a nonprofit hospital which incorporates some of the characteristics of a for-profit hospital.

7 Not-for-Profit, and nonprofit will be used interchangeably. All institutions must have income at least equal to disbursements if they are to survive as economic entities. There are two major nonprofit/for-profit differentiating factors: (1) the mode of distribution of monetary surplus, and (2) the ostensible primary purpose of a nonprofit hospital. Nonprofit organizations cannot distribute profits to “indivduals who exercise control over it, such as members, officers, directors, or trustees,” Hansmann, supra note 1, at 838 (the author calls this the nondistribution requirement) and the primary purpose of the nonprofit hospital is to serve patients and the community rather than to seek monetary gain. Id.

8 For example, the introduction of antisepsis and anesthesia.

9 Bradford, Caldwell, Goldsmith, supra note 1, at 56.

10 For a detailed description of the metamorphasis of the hospital, see STARR, P., THE SOCIAL TRANSFORMATION OF AMERICAN MEDICINE 145 (1982)Google Scholar.

11 These for-profit hospitals, usually owned and operated by a few physicians, provided care for the wealthy at nominal cost.

12 Relman, , The New Medical-Industrial Complex, 303 NEW ENG. J. MED. 963, 963 (1980)CrossRefGoogle Scholar. In 1928 there were 2435 proprietary hospitals (36 percent of the total number of hospitals in operation); by 1968 only 769 proprietary hospitals remained (11 percent of the total). This decline has been ascribed to the rising complexity of medical care. Nonprofit institutions could more easily raise the necessary funds from charitable sources and tax-deductible donations. In addition, nonprofit hospitals were less subject to government regulation and exempt from anti-trust laws. Id.; see also W. NIRLDON, THE ENDANGERED SECTOR (1979). The number of proprietary hospitals, however, is increasing. In 1980 there were about 1000 in existence. Steinwald, & Neuhauser, , The Role of the Proprietary Hospital, 35 L. CONTEMP. PROB. 817-38 (1970)CrossRefGoogle Scholar, cited in Relman, supra.

13 For an extensive discussion of the for-profit/nonprofit controversy, see FOR PROFIT ENTERPRISE IN HEALTH CARE (Inst, of Med. ed. 1986). For a summary of the Academy publication, see Gray, & McNerney, , For-Profit Enterprise in Health Care: The Institute of Medicine Study, 314 NEW ENG. J. MED. 1523 (1985)Google Scholar.

14 Bottom line means the ratio of revenue over costs (i.e. profit).

15 Gray, & McNerney, , For Profit Enterprise In Health Care: The Institute of Medicine Study, 314 NEW ENG. J. MED. 1523, 1525 (1985)Google Scholar.

16 Majone, , Professionalism and Nonprofit Organizations, 8 J. HEALTH POL'Y, POL. & LAW 639, 641 (1984)CrossRefGoogle Scholar.

17 Hansmann, supra note 1, at 844; but see Clark, , Does the Nonprofit Form Fit the Hospital Industry?, 93 HARV. L. REV. 1417, 1434 (1980)CrossRefGoogle Scholar; Herzlinger, & Krasker, , Who Profits From Nonprofits, HARV. BUS. REV. 93 (Jan.-Feb. 1987)Google Scholar.

18 Hansmann, supra note 1, at 866-67 (the physician acts essentially as a sophisticated purchasing agent for the patient in the latter's dealings with the hospital. Thus the consumer appears to be in no greater danger of exploitation by a for-profit hospital than a for-profit manufacturer of prescription drugs). See also Newhouse, , Toward a Theory of Non-Profit Institutions: An Economic Model of a Hospital, 60 AM. ECON. REV. 64 (1970)Google Scholar.

19 Gray & McNerney, supra note 13, at 8.

20 Clark, supra note 17, at 1433-34.

21 Relman, supra note 12, at 963 (discussing the for-profit hospital industry as the “New Medical Industrial Complex“).

22 Pellegrino, , Academic Health Centers and the Medical Marketplace: A Faustian Compact Examined, PROCEEDINGS OF THE ASSOCIATION OF ACADEMIC HEALTH CENTERS 19, 26 (Sept. 1982)Google Scholar; see also Dolenc, & Dougherty, , DRG's: The Counterrevolution in Financing Health Care, 15 HASTINGS CTR. REP. 19, 28 (1985)CrossRefGoogle Scholar.

23 Clark, supra note 17, at 1417.

24 Id.; see also, Clark, , Why Does Health Care Regulation Fail?, 41 MD. L. REV. 1 (1981)Google Scholar.

25 Clark, supra note 14, at 1436 (quoting Pauly, & Redisch, , The Not-for-Profit Hospital as a Physicans’ Cooperative, 63 AM. ECON. REV. 87, 88 (1973)Google Scholar).

26 Id. at 1434.

27 Herzlinger & Krasker, Who Profits from Nonprofits?, HARV. BUS. REV., Jan.-Feb. 1987, at 93.

28 Id.

29 Id.

30 Id. at 96. Critics argued that the sample of nonprofits was small and unrepresentative; that because the authors believed that the years 1977-81 were the best “window through which to view the … two kinds of hospitals” the reported data was irrelevant and told only what “was”, but very little about what “is“; that the articles’ conclusions were dated, that the health care industry has undergone significant changes since 1981, and that the authors themselves agree that recent competitive trends make comparisons between nonprofit and forprofit hospitals “untenable” after 1981; that the author's claim of unequivalent prices in those for-profit and nonprofit hospitals studied was supported; that other studies showed 10 percent to 25 percent higher prices for comparable services in the for-profit sector; that nonprofit hospitals provide 25 percent more free care than for-profit hospitals; and that one cannot evaluate the attainment of social objectives by measuring return on capital. These responses were printed in the 1987 March-April and May-June issues of HARVARD BUSINESS REVIEW.

31 Landgraf, Needed: New Perspective on Health Services, HARV. BUS. REV., Sept.-Oct. 1967, at 75.

32 Platou & Rice, Multihospital Holding Companies, HARV. BUS. REV. May-June 1972, at 14.

33 Stocklman, , Premises for a Medical Marketplace, HEALTH AFF. 5 (Winter 1981)Google Scholar; see also A. ENTHOVEN, HEALTH PLAN: THE ONLY PRACTICAL SOLUTION TO THE SOARING COST OF MEDICAL CARE (1980)(Enthoven has been a forceful advocate of a competitive approach to the medical care cost problem); REPORT OF THE PRESIDENT's COMMISSION FOR A NATIONAL AGENDA FOR THE EIGHTIES 78-79 (1980).

34 FOR-PROFIT ENTERPRISE IN HEALTH CARE, supra note 11, at 12; see also T. MARMOR, infra note 106, at 242.

35 FOR-PROFIT ENTERPRISE IN HEALTH CARE, supra note 13, at 222.

36 One cannot deny that for-profit administrators and trustees also examine the bottom line. Even though these individuals may not benefit economically from a profitable operation, there are secondary gains such as greater prestige within the institution or the community, creation of a larger organization, and salary increases for administrators. The delivery of quality health care, however, remains the primary purpose for having a profitable operation.

37 FOR-PROFIT ENTERPRISE IN HEALTH CARE, supra note 11, at 222. In an illuminating exchange of letters on for-profit health care between Dr. Arnold Relman, editor of the NEW ENGLAND JOURNAL OF MEDICINE and Uwe Reinhardt, Professor of Economics and Public Affairs at Princeton University debate many of the for-profit/nonprofit issues and the question of whether health care delivery is merely another economic good.

38 Rome, , Medicine and Public Policy: Let Us Look Before We Leap Again, 42 MD. L. REV. 46, 48 (1981)Google Scholar.

39 Id.

40 Services provided by therapists, patient advocates, social workers and other nonmedical support workers improve the quality of patients’ lives but often are not cost-effective. Patients may lose the benefits of these services and these care-givers may lose their jobs when the emphasis shifts from the need for care to cost-effectiveness.

41 Rome, supra note 38, at 48.

42 Bermel, Letter to the Editor, N.Y. Times, Dec. 23, 1985, at A16, col. 5. Bermel wonders whether nonprofessional decisions by third-party payers as to the “necessity” of health care will adversely affect the quality of care.

43 Id.

44 T. MARMOR, infra note 106, at 5; see also FOR-PROFIT ENTERPRISE IN HEALTH CARE, supra note 13, at 182-201 (an analysis by the Institute of Medicine strongly recommends retention of the nonprofit section).

45 Clark, supra note 17, at 1442.

46 Id. at 1472-73.

47 This statement may no longer hold. The teaching hospital, often the paradigm of a fiduciary agency, is faced with the same stresses as all other nonprofit health care institutions. During a meeting of 250 for-profit hospital executives, medical school deans and teaching hospital administrators, much of the discussion seemed centered around how a medical center might be sold to a hospital chain. Little was said about the ethical problems that might arise. There were those, however, who questioned whether these “marriages of convenience” might survive the rigors of unprofitable times. What might happen if a chain decides to divest itself of an unprofitable teaching hospital and then that hospital had difficulty acquiring the capital to “buy itself back?” One speaker cautioned that for-profit chains might be acquiring academic centers as “flagships” and would be willing to run them at a loss for the public-relations value. The nonprofit hospitals were told to deal with these new situations, with great care; that while teaching hospitals may have to relate to the for-profits because of the for-profit's advantages of capital management, the centers should try and protect themselves with contracts that would ensure against circumstances that “haven't been imagined.” Lefton, American Medical News, Mar. 8, 1985, at 1, 1, 8-13.

48 Medicare Act, Pub. L. No. 89-97, 79 Stat. 286 (July 30, 1965).

49 H. ECKSTEIN, THE ENGLISH HEALTH SERVICE (1958), quoted in Halberstam, , Professionalism and Health Care, ETHICS OF HEALTH CARE 241 (L., Tancred 1974)Google Scholar(Eckstein calls third party insurers OPMs — other people's money).

50 See PPS, supra note 48.

51 Dolenc & Dougherty, supra note 22, at 19 (calling DRGs the “counterrevolution” in financing health care). The 1965 Medicare/Medicaid federal initiative, in the view of Dolenc and Dougherty, was the “revolution” that provided equitable access to quality medical care. DRG's now threaten to reverse that trend. For a discussion of DRGs, see AMERICAN MED. ASS'N, DRG's AND THE PROSPECTIVE PAYMENT SYSTEM: A GUIDE FOR PHYSICIANS (Feb. 1984); Yoder, & Connor, , Diagnosis-Related Groups and Management, TOPICS HEALTH CARE FINANCING 29 (1982)Google Scholar; Davies, & Westfall, , Reimbursement Under DRG's: Implementation in N.J. (pt. 1), 18 HEALTH SERV. RES. 223 (1983)Google Scholar.

52 Real costs of services include supplies and consumption of capital, equipment and provider time. Monetary costs, differentiated from real costs, are the amounts of money paid to providers for the services.

53 As the health care industry struggled to stay solvent and improve efficiency, quality issues emerged. On Feb. 21, 1985, the GAO reported to a Senate Special Committee on Aging, that Medicare patients’ post-hospital needs had changed and were not being met; patients were having difficulty gaining access to long term care facilities; and long term-care costs were high and not being met under existing programs. Dolenc & Dougherty, supra note 22, at 23.

54 Horwitz, Survey of Seven Connecticut Hospitals. (Oct. 1985)(unpublished survey). Connecticut has an active and aggressive cost-commission. Hospital rates are calculated by collating out-patient and in-patient volume costs and multiplying by an inflationary factor. If these costs are within the regulatory commission's guidelines, the budget is approved without further review. Until recently, revenue was not included in the calculation. Thus, hospitals could increase their revenue by increased operating efficiency and creative accounting procedures. These devices, however, have not escaped the attention of regulators.

Nonprofit hospitals, particularly in Connecticut, are not extremely profitable. They normally break even or have a 1 percent profit. This is below most nonregulated states, (food markets operate with approximately a 2 percent profit margin). Under DRG's, some hospitals reported a 3 to 4 percent profit-margin, but all stated that it would not last because of the ratcheting down effect of DRG's. With an all-payer DRG system in place in Connecticut, it remains to be seen how far the ratcheting down process will go.

55 According to Mary McCarthy, president of the American Hospital Association, over 40% of the country's 5,728 hospitals now lose money when treating Medicare patients. She went on to report that last year, hospitals lost $7 billion on services to poor people, causing many hospitals to avoid or transfer needy patients to other institutions, a practice called “dumping.” In addition, 79 community hospitals closed in 1987, many in rural or inner city areas. Malcom, In Health Care Policy, The Last Word Is Fiscal, N.Y. TIMES, Oct. 23, 1988, at E3, col. 1.

56 The resulting question, always asked and as yet unanswerable, is whether for-profit institutions, with their emphasis on the “bottom line,” will restrict services more than nonprofit's, even though nonprofit institutions are equally sensitive to that same bottom line.

57 This author believes that cost-based reimbursement may also lead to overtreatment since the provider of the service decides on the need for the service. Without controls, providers rationalize overtreatment, believing consciously or unconsciously that, “more medical care equals better medical care.” As a result, cost-based schemes may foster inefficiency.

58 Computer programs are available which allow the physician or admitting officer to assign the most profitable DRG index to the patient's set of symptoms or diagnoses. Telephone interview with Dr. Edward Kamens, Executive Director, CPRO (Oct. 1985).

59 While hospital association spokespersons acknowledged the continued surplus of beds, recent hospital closings in rural and innercity areas did not necessarily occur where surpluses exist, causing problems of access to medical care for millions of persons. Malcom, supra note 55, at E3.

60 Coddington, Palmquist & Trollinger, Strategies for Survival in the Hospital Industry, HARV. Bus. REV., May-June 1985, at 129, 132.

61 Malcom, supra note 55, at E3.

62 CONN. STATE IPA ACTION NEWSLETTER (Oct. 26, 1987)(commenting on statistics reported by Interstudy of Minneapolis).

63 Id.

64 For example, the North Central Development Comany in Minneapolis joined two hospitals and several hundred physicians in 24 cooperative programs that ranged from a high technology diagnostic center to a home health care plan. Coddington, Palmquist & Trollinger, supra note 60, at 132.

65 Institute of Medicine, Financial Capital and Health Care Growth Trends, in FOR PROFIT ENTERPRISE IN HEALTH CARE 47 (B., Gray ed. 1986)Google Scholar.

66 Id.

67 Id. at 64; see also AMERICAN HEALTH ASS'N, REPORT OF THE SPECIAL COMMITTEE ON EQUITY OF PAYMENT FOR NOT-FOR-PROFIT AND INVESTOR OWNED HOSPITALS (1983).

68 There is some irony, perhaps, in the fact that for-profit institutions purchase nonprofit tax-free bonds for investment purposes while nonprofit institutions purchase shares of stock in for-profit national health care corporations (the dividends and capital gains of which are tax-free to the nonprofits), since for-profit securities often yield a greater return than nonprofit bonds.

69 Institute of Medicine, supra note 65, at 64.

70 Id.

71 Id.

72 For example, a change in societal needs and desires, conflicts between advances in modern technology and economic reality, a decline in the prestige of authority, an increase in competition, a change in the composition of health care providers (for profit/nonprofit), and an increase in regulation by government and third party payers.

73 By 1980, the health care market had become a buyer's market.

74 After the imposition of DRGs an immediate reduction in hospital revenue was expected. This reduction did not occur, however, principally because all hospitals improved efficiency and reduced patient length of stay thereby effecting further cost-reduction. In addition, DRG payments initially were set at a relatively high level. At first, for-profit hospitals, with entrepreneurially oriented administrators, were more profitable than nonprofit hospitals. The for-profits had leaner staffs, tended to provide only well compensated services, and often limited services to the indigent and non-insured. More recently, the nonprofit sector has overtaken the for-profit sector in profitability. Analysts thus far have no satisfactory explanation. Regulatory agencies and legislators, however, continue to press for health care costreduction and hospital administrators anticipate a future revenue squeeze. McNeil-Lehrer Report (PBS television broadcast, Oct. 12, 1987).

75 A recent study of hospitals in New York State revealed that these hospitals were regulated by over 150 separate government agencies. The report estimated that regulatory compliance costs added 25 percent to the patient's bill. MEMEL, JACOBS, PIERNO & GERSH, NEW LEGAL ORGANIZATIONAL STRUCTURES FOR THE 1980's 5 (1981).

76 See David, , Why Tax-Exempt Hospitals Need Profit, HEALTHCARE FIN. MGMT. 46 (Sept. 1982)Google Scholar; Bradford, Caldwell, Goldsmith, The Hospital Capital Crisis, HARV. BUS. REV., Sept.-Oct. 1982, at 5; Young, Non-Profits Need Surplus Too, HARV. BUS. REV. at 124, Jan-Feb. 1982.

77 Bradford, Caldwell, Goldsmith, supra note 76, at 5.

78 Adaptation has been described as the process through which adjustment to the surrounding world is accomplished. It involves physical (structural) as well as behavioral changes. M. KONNER, THE TANGLED WING: BIOLOGICAL CONSTRAINTS ON THE HUMAN SPIRIT (1982).

79 Coddington, Palmquist & Tollinger, supra note 60, at 134. The number of employees per bed in this country has increased from 1.9 to 3.3 during the years 1965-1983, an increase of 78 percent. Humana, a for-profit hospital chain operates with 2.7 employees per bed. In European countries the average ratio is 1.0 to 1.3.

80 Id.

81 MacDonald, A Life Ends Before it Begins, The Day, May 1, 1983, at D1, col. 1.

82 Between 1976 and 1987 the IRS issued over 600 private letter rulings to reorganized hospitals. Three-quarters of these rulings were given out during the years 1983, 1984, and 1985. McGovern, , Restructured Nonprofit Hospitals, 35 TAX NOTES 405, 406 (1987)Google Scholar; see also ERNST & WHINNEY, CORPORATE REORGANIZATION: A SURVEY OF HOSPITALS THAT HAVE REORGANIZED (1982).

83 Hospitals which had reorganized were asked the following questions: (1) Why did you reorganize?; (2) How did your hospital expect to benefit from reorganization?; (3) What obstacles were encountered in the reorganization process?; (4) What form did the new corporate structure take?; (5) What degree of control was retained over newly formed entities?; (6) What human resource issues were addressed?; (7) What accounting and financial reporting considerations were addressed?; (8) What reimbursement issues were considered?; (9) What tax considerations did your hospital address.

84 ERNST & WHINNEY, supra note 82, at 14. Many hospitals believed that direct involvement in new ventures would yield greater financial and organizational gains than investment in the securities of these ventures.

85 Morrisey, & Brooks, , Hospital-Physician Joint Ventures: Who's Doing What, 59 HOSP. 74 (1985)Google Scholar. Joint ventures that involve physicians often create problems related to control, division of profits, and conflicts of interest.

86 Hereinafter called parent as parent corporation.

87 See generally MEMEL, JACOBS, PIERNO & GERSH, CORPORATE REORGANIZATION BROCHURE 10 (1981).

88 ERNST & WHINNEY, supra note 59, at 29; but see infra notes 114-17 and accompanying text. See also, J. Norris, Comments at the Corporate Reorganization Conference of the Massachusetts Chapter of the HFMA (Oct. 22, 1982)(summarized in a letter to the Manchester Memorial Hospital, Manchester, CT (Nov. 23, 1982)).

89 Maraniss, NonProfit Hospitals Venture Into New Lines of Business, Wash. Post, Feb. 15, 1987, at Al; Madden, For Hospitals, New Ventures and New Profits, N.Y. Times, Jan. 25, 1987, at 1, col.l; see also Gupta, Hospitals Enlist Profit-Minded Partners for Ventures to Generate New Business, Wall St. J., Jan. 23, 1987, at 25, col. 3.

90 Reed, & Herman, , Reorganization Can Revitalize, 35 HOSP. FIN. MGMT. 30, 32 (Jan. 1981)Google Scholar.

91 Inattention to this type of detail may result in a breach of fiduciary duty. See, e.g., Denckla v. Independence Found., 193 A.2d 538 (Del. 1963).

92 Interview with Robert Cavanaugh of Wiggin & Dana, in New Haven, Connecticut (Sept. 1985). As the parent's or hospital's unrelated business income increases, however, philanthropic or government support also may have to increase in order to meet the “support” tests of I.R.C. §§ 170(b)(1)(a) (6), 509(a)(1&2) & 501(c)(3).

93 For a more complete discussion of the problems associated with the public charity status of nonprofit hospitals, see Bromberg, , Public Charity Status: Can the Organization Pass the Test?, 40 HEALTHCARE FIN. MGMT. 70, 71 (Nov. 1986)Google Scholar; McGovern, supra note 82, at 407.

94 Treas. Reg. § 1.509(a)-3 (1981).

95 Treas Reg. § 1.509(a)-4(f)-2 (1981).

96 Bromberg, supra note 88, at 71; McGovern, supra note 82, at 407.

97 Reed, supra note 85, at 36. While General Counsel Memoranda are legal opinions of the Office of the Chief Counsel of the IRS, they have little precedential value since they apply only to a specific case. These memoranda do, however, indicate the attitude of the IRS. McGovern comments that the use of General Counsel Memoranda may come under review. McGovern, supra note 86, at 412; see Filpi, , Problems in the Release of IRS Ruling Letters, GCMs, AODs and TMs: Impact on the IRS and On Tax Practitioners, 15 TAX NOTES 274, 276 (1982)Google Scholar. Additionally, as far back as 1983, the Congress heard suggestions for new legislation which would allow public charity status for parent holding corporations. See Tax Rules Governing Priv. Found.: Hearings Before the Subcomm. on Oversight of the House Ways & Means Comm,, 98th Cong., 1st Sess., 725 (1983)(statements of B.M. Broccolo, Esq. & W.H. Roach, Jr., Esq.).

98 This is particularly true for smaller institutions. Limited resources may not allow them the luxury of additional management personnel.

99 See generally Stonehill, & Ewell, , Constraints & Risks of Corporate Reorganization, HEALTHCARE FIN. MGMT. 26 (1982)Google Scholar.

100 Telephone interview with G. Wright, Connecticut Cost Comm'r, in Hartford, Connecticut (Sept. 1984).

101 Cf. 42 C.F.R. §§ 405, 427; see also MEMEL, JACOBS, PIERNO & GERSH, supra note 87, at 28.

102 The unbundling concept resembles another business organizational strategy called strategic business units (SBUs). SBUs are described by William K. Hall in his article, SBUs: Hot Topic in the Management of Diversification, BUSINESS HORIZONS 17, 21 (Feb. 1978) as follows:

The diversified firm should be managed as a portfolio of businesses, with each business serving a clearly defined product market segment with a clearly defined strategy. Each business unit in the portfolio should develop a strategy tailored to its capabilities and competitive needs but consistent with the overall corporate capabilities and needs …. In essence the portfolio should be designed and managed to achieve an overall corporate strategy.

Id. In the health field, Goldsmith calls SBUs strategic service units. A. CHANDLER, STRAGEGY AND STRUCTURE: CHAPTERS IN THE HISTORY OF THE AMERICAN INDUSTRIAL ENTERPRISE (1962), quoted in J. GOLDSMITH, CAN HOSPITALS SURVIVE? 98 (1982).

103 J. Gelman, Competition and Health Planning, F.T.C. ISSUES, April 1982, at 11.

104 OFFICE OF MGMT. & BUDGET, AMERICANS NEW BEGINNING: A PROGRAM FOR ECONOMIC RECOVERY 6 (Feb. 19, 1981).

105 See J. Paul McGrath, Ass't Attorney General, Antitrust Division, Remarks before the 33rd ABA Antitrust Spring Meeting, concerning Preferred Provider Organizations and the Antitrust Laws (Mar. 22, 1985); Havighurst, , Doctors and Hospitals: An Antitrust Perspective on Traditional Relationships, 1984 DUKE L.J. §§ 1071, 1092-97 (1984)CrossRefGoogle Scholar; Schramm, & Renn, , Hospital Mergers, Market Concentration and the Herfindahl-Hirschman Index, 33 EMORY L.J. 869, 870 (1984)Google Scholar; Havighurst, , Antitrust Enforcement in the Medical Service Industry: What Does It All Mean?, 58 MILLBANK MEM. FUND Q. 89 (1980)CrossRefGoogle Scholar; Drake, & Kozak, , A Primer on Antitrust and Hospital Regulation, 3 J. Health Pol. Pol'y & L. 328, 330 (1978)CrossRefGoogle Scholar.

106 T. MARMOR, POLITICAL ANALYSIS AND AMERICAN MEDICAL CARE 252-53 (1983).

107 Id. at 253.

108 Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975)(learned professions, including the medical profession were not exempt from the antiturst laws); Hospital Building Co. v. Trustees Rex Hosp., 425 U.S. 738 (1976), cert, denied, 464 U.S. 904, reh'g denied, 464 U.S. 1003 (1983) (hospitals were sufficiently involved in interstate trade to warrant federal application of antitrust laws).

109 See, e.g., Arizona v. Maricopa County Med. Soc'y, 457 U.S. 332, 349-51 (1982).

110 Miller, , Secondary Income from Recommended Treatment: Should Fiduciary Principles Constrain Physician Behavior?, in THE NEW HEALTH CARE FOR PROFIT 167 (B., Gray ed. 1983)Google Scholar.

111 See generally id.

112 593 F. Supp. 607 (D. Nev. 1984)(construing Poutius v. Children's Hosp., 552 F. Supp. 1352, 1369 (W.D. Pa. 1982)).

113 Id. at 611 n.13; see also Robinson v. McGovern, 521 F. Supp. 842 (W.D. Pa. 1981), cert denied, 108 S. Ct. 1658 (1988); Trombetta, , Public Service and Ethical Norms: The Courts Are Speaking: Is the Medical Profession Listening? 50 CONN. MED. 185 (1986)Google ScholarPubMed.

114 800 F.2d 1498, 1505, rev'd, 800 F.2d 1498 (9th Cir. 1986), rev'd, 108 S. Ct. 1658 (1988) (Court affirmed district court's decision without deciding the issue of whether anti-trust law can be applied to defendant doctors).

115 Members of the Antitrust Division, Dep't of Justice, Remarks during the Nat. Health Lawyers Ass'n “Antitrust Update” meeting, Washington, D.C., (Jan. 1987).

116 Id

117 Bethel Conservative Mennonite Church v. Commissioner, 80 T.C. 11 (1983) (affirmed denial of exemption to a church which made 22 percent of its total disbursements in furtherance of a nonexempt activity). This court's decision may indicate a lowering of the level which triggers loss of tax exemption.

118 Bromberg, supra note 88 at 78; McGovern, supra note 59, at 412.

119 Except for reports from a few large medical institutions there is little empirical data to show that reorganization has accomplished the goals attributed to the process. For example, Yale-New Haven Medical Center has established a holding company form of organization with two subsidiary arms: (1) nonprofit health systems development agency with the hospital as the major element, and (2) for-profit capital generating subsidiaries. For the nonprofit health systems development agency affiliation with VHA is the corporation's attempt to be part of a vertically integrated system which includes an out-patient rehabilitation facility, a joint venture with another hospital, a child psychiatric treatment center, and a long-term care facility. The for-profit capital generating subsidiaries consist of an off-premises retail pharmacy which replaced the in-hospital pharmacy that had been started over 75 years ago and filled prescriptions for employees in addition to providing medication for hospitalized and clinic patients; Home-Care service, a joint venture with National Home Care Enterprises, part of National Medical Enterprises (NME); rental and sales of durable medical equipment, another joint venture with NME which rents space in the retail pharmacy; a real estate agency; and a collection agency operated jointly with the Bridgeport and Hartford Hospitals.

Only a few of these initiatives are profitable. Executive Director Tom Smith points out that the projects are new and that ventures such as these take time to develop into profitable undertakings. It follows that this fact also applies to the Medical Center's VHA affiliation. In view of the rapidly occuring changes in the industry, it is impossible to predict what the future will bring. Telephone interview with Tom Smith, Executive Director, Yale New Haven Medical Center (Oct. 1985).

120 The problem of “screening” is a formidable one. Karen Davis estimates that there are 30 million poor and uninsured persons in the U.S. Davis, Access to Health Care: A Matter of Fairness, 17 ALTERNATIVES FOR THE 1980's 45, 48 (Center for Nat'l Pol'y ed. 1985)(based on Medicare, Medicaid and Current Population Survey Data). Proprietary hospitals are reported to be two to three times as likely to screen out, or “dump”, unprofitable patients than the nonprofit hospital. Also, for-profit long term facilities (nursing homes, psychiatric or handicapped organizations) are less likely than nonprofits, to provide free or low cost services to these same patients. Schlesinger & Blumenthal, Ownership and Access to Health Care: New Evidence and Policy Implications, CENTER HEALTH POL'Y WORKING PAPER (1985).

121 SHELDON, A. & WINDHAM, S., COMPETITIVE STRATEGY FOR HEALTH CARE ORGANIZATIONS 164 (1983)Google Scholar.

122 Majone, , Professionalism and Nonprofit Organizations, 8 J . HEALTH POL., POL'Y & L. 639, 640 (1984)CrossRefGoogle Scholar.

123 Horwitz, Quality Medical Care: In the Eyes of the Perceiver?, INST. MED. NAT. ACAD. SCI . (1985)(unpublished background paper); see also Dolenc & Dougherty, supra note 22, at 19.

124 TAWNEY, R., THE ACQUISITIVE SOCIETY 94 (1984)Google Scholar.

125 Brook and Lohr have defined quality as “that component of the difference between efficacy and effectiveness that can be attributed to care of providers, taking account of the environment in which they work.” Brook, & Lohr, , Efficacy, Effectiveness, Variations and Quality, 23 MED. CARE 710, 711 (1985)CrossRefGoogle Scholar.

126 MediQual of Westborough, Massachusetts markets a computer-based quality assurance program. Among others, it considers severity of the illness, and monitors length of patient stay, whether the patients were better or worse after hospitalization and whether readmission for the same diagnosis was necessary. Pennsylvania has mandated its use and 140 other hospitals nationwide are using the program.

Recently, four Rochester, New York hospitals agreed to participate in an experimental test and are allowing the amount of money they receive for hospital care to be determined, in part, by the quality of care according to a set of quality standards which are to be determined by the parties involved. Hospitals with better than average outcomes will be rewarded economically. This approach creates an incentive for hospitals to avoid treatment of patients, like the indigent and elderly, who might be subject to complications. 4 Rochester Hospitals Tie Costs to Quality of Care, N.Y. Times, Nov. 15, 1987, at 51, col. 1.

127 Paul Starr writes:

The contradiction between professionalism and the rule of the market is longstanding and unadvoidable. Medicine and other professions have historically distinguished themselves from business and trade claiming to be above the market and pure commercialism. In the public's trust, professionals have set higher standards of conduct for themselves than the minimal rules governing the marketplace and maintained that they can be judged under those standards by each other, not by laymen.

P. STARR, supra note 10, at 145.

128 Clousson, Band Together or Lose Professional Freedom, Physicians Warned, American Medical News, June 21, 1985, at 2, col. 3.

129 Relman, & Reinhardt, , Debating For-Profit Health Care and the Ethics of Physicians, HEALTH AFF. 29 (1986)Google Scholar.

130 Pellegrino, supra note 19, at 24-25; see also Bayles, , Physicians as Body Mechanics, in CONCEPTS OF HEALTH AND DISEASE 665 (A., Caplan, H., Engelhardt & J., McCartney eds. 1981)Google Scholar.

131 Platou & Rice, Multihospital Holding Companies, HARV. BUS. REV., May-June 1972, at 14.

132 Clousson, supra note 127.

133 Comments by providers may validate that fear. “Eventually, we'll know exactly what it costs to produce an appendectomy, just like General Motors knows how much it costs to put rear tires on a car.” Smith, We Tightened Up, Still Lost a Bundle, MED. NEWS, Mar. 19, 1984, at 5; “Hospitals should manage themselves on a a product line basis.” Dunz, & Price, , Reviewing Hospital Operations is the Key, 62 HOSP. TOPICS 10 (July/Aug. 1984)Google Scholar; “Like other hospitals, university facilities will identify product lines’ of greatest profit to them — that is, the types of care that they can render competitively.” Bergen, & Roth, , Prospective Payment and the University Hospital, 310 NEW ENG. J. MED. 316 (1984)CrossRefGoogle Scholar; “Procedures such as coronary by-pass, carotid arterioplasty and gastero-intestinal endoscopy can be cost-accounted. Providers can then price and market those procedures to purchase (e.g. HMO's, PPO's, insurers, employers) whose organizations do not, or cannot, provide the services.” See generally R., ECDEHL & D., CHAPMAN, 2 COST MANAGEMENT AND MEDICAL PRACTICE PATTERNS (1985)Google Scholar; “When hospitals manufacture products, let the buyer beware.” Dolenc & Dougherty, supra note 22, at 24.

134 Clousson, supra note 127, at 26.

135 The image of the altruistic, paternalistic, beneficent physician, steeped in the Hippocratic tradition, is under assault, and often is replaced by a fat-cat doctor who drives a Cadillac (now a Mercedes), plays golf on Wednesdays, and often is unavailable. See also J. KATZ, THE SILENT WORLD OF DOCTOR AND PATIENT (1984).

136 MDs Say Hospitals Press For Early Patient Discharge, American Medical News, Dec. 13, 1985, at 1, col.4.

137 Several years ago, Tufts Medical Center in Boston experimented with cost-accounting several surgical procedures, such as coronary bypass and carotid endanterectomy. They planned to market these procedures by offering the purchaser (HMOs and third party payers) a specific price and a detailed list of what was included in the standard procedure. R. Egdahl & D. Chapman, 2 Health Cost Management and Medical Practice Patterns (1985).

138 The Health Care Quality Improvement Act of 1986, Pub. L. No. 99-660, 100 Stat. 3784 (1986), was designed to encourage peer review organization quality assessment by protecting members of such organizations from having to pay damages awarded to the plaintiff in a tort suit.

139 AARON, H. & SCHWARTZ, W., THE PAINFUL PRESCRIPTION 133 (1984)Google Scholar.

140 Interview with Robert Cavanaugh of Wiggin & Dana, located in New Haven, Connecticut. (Sept. 1985).

141 Uwe Reinhardt believes that this attitude will institutionalize a two tiered health care system. Relman & Reinhardt, supra note 128, at 300.

142 Some nonprofit administrators believe that the political strength of the for-profit sector will protect them against overly stringent economic and regulatory constraints. On the other hand, an executive of a large for-profit health organization expressed an alternative view. He believes that political pressures will prevent the government from exerting too much pressure since excessive duress would force some nonprofits out of business as well, and “ ‘[t]hat's not politically feasible.’ “ Teitleman, Selective Surgery, FORBES, Apr. 22, 1985, at 60 (quoting R. Ragsdale, Senior Executive Vice President, Republic Health Corp.).

143 FOR-PROFIT ENTERPRISE IN HEALTH CARE, supra note 13, at 28.

144 For an extensive discussion of corporate restructuring and adaptation to change, see A. KANTROW, THE CONSTRAINTS OF CORPORATE TRADITION (1987).