Hi103 week 3 chpt 7

© 2017 American Health Information Management Association© 2017 American Health Information Management Association
Chapter 7: Corporations,
Contracts, and Antitrust
Fundamentals of Law for Health
Informatics and Information
Management, Third Edition

© 2017 American Health Information Management Association
Corporations:
Healthcare Corporations
• Corporation: An artificial “being” created
under authority of state statute
– Articles of incorporation
• State requirements
• Internal Revenue Service (IRS) requirements

Corporations: Other Healthcare
Organization Forms
• Partnerships
– General partnerships
– Limited partnerships
– Joint ventures
• Sole proprietorships

Corporations: Advantages of a
Corporation
• Legally separate entity
– Owners shielded from personal liability
– Taxed separately from the owners
• Continued existence despite death of an
owner
• Owners can transfer interests/shares
without permission (for-profit)

Corporations: Piercing the
Corporate Veil
• Liability protections offered by a
corporation to its owners are not
“absolute.”
– “Piercing the corporate veil”
• Protections can be pierced if corporation is used
by its owners to commit fraud or other crimes
• Owners may be directly liable for the bad acts

Corporations: Piercing the
Corporate Veil
• Elements of “piercing the corporate veil”
– Complete domination of the corporation by its
owners
– Such control was used to commit fraud or
perpetrate a wrong, violate a statutory or
other duty, or commit a dishonest or unjust act
– Corporate control was the proximate cause of
the injury that is the subject of the suit

Corporations: Types of
Corporations
• Privately held
– Privately owned
– Stock shares not offered for sale to general
public
– Relatively few shareholders
• Publicly held
– Ownership shares sold to the general public
– Thousands of shareholders-owners

Corporations (continued)
• For-profit
– Income may be distributed to shareholders,
directors, officers, or other individuals for their
private gain.
• Not-for-profit
– Profit is permitted, but is not the primary purpose.
• Income may not be distributed for individuals’ private
gain.
• Income must be used for the corporation’s purposes.
– Determined by state corporation laws

Corporations (continued)
• Not-for-profit (continued)
– Have specific social or beneficial purposes
– May pay reasonable salaries
– Receive preferred tax treatment if they also
are formed for a charitable purpose that
benefits the public or community (“community
benefit standard”)
• Charitable corporations are the most common for
US hospitals

Corporations: Community
Benefit Standard
• IRS requires that hospitals meet five criteria
(relating to purpose) to be tax exempt
– Whether it maintains a governing body that
includes community leaders (not just
organizational insiders)
– Whether the hospital has an “open” medical staff
that permits all qualified physicians to practice
there
– Whether the hospital has a full-time emergency
department that is open to all, regardless of ability
to pay

Benefit Standard (continued)
• Five IRS tax exempt criteria relating to
purpose (continued):
– Whether the hospital provides non-emergency
care to all personal able to pay (including
through Medicare and Medicaid)
– Whether the hospital uses its surplus money
to improve quality of care, expand its facilities,
and improve medical education and training
programs

Benefit Standard (continued)
• Five IRS tax exempt criteria relating to
purpose (continued):
– Whether, in the absence of the above five
factors, there are other favorable factors that
demonstrate benefit to the community; and
– Whether the hospital serves a broad cross-
section of its community through charitable
care or research

Corporations: Challenges to Tax
Exempt Status
• Charitable-purpose element of not-for-
profit hospitals (which allows for tax
exempt status) has been challenged
based on
– Aggressive and inflated billing practices
(especially vs. the uninsured)
– Amount of charity care provided

Corporations: Governing Board
• Ultimate legal authority of a corporation
• Governing board is governed by bylaws
– Internal rules that describe the governing
board’s powers and duties
– Describe the makeup of the governing body
(for example, numbers, type of members,
terms of service, qualifications, duties,
number of meetings, methods for making
decisions, compensation)

Corporations: Typical Hospital
Governing Board Duties
• Developing a
strategic plan
• Setting broad policy
• Appointing medical
staff members
• Delineating medical
staff clinical privileges
• Hiring and guiding the
CEO
• Overseeing overall
organizational
performance (clinical,
administrative,
financial)
• Fiduciary oversight

Corporations: Typical
Committees of a Hospital
Governing Board
• Executive committee
• Building and grounds
• Human resources
• Corporate compliance
• Finance
• Professional staff
relations
• Executive committee

Corporations: A Governing
Board’s Fiduciary Duty
• All governing board members have a
fiduciary duty to the corporation, its
members and shareholders, and (in not-
for-profit corporations) to the community at
large.
• Fiduciary duty consists of
– Duty of loyalty
– Duty of responsibility

Corporations: Fiduciary Duty
• Duty of loyalty
– Board members must put the corporation’s
interests ahead of their personal interests.
• Conflict-of-interest policies
• Duty of responsibility
– Board members must act with due care in
exercising their duties.
• Due diligence (a legally acceptable level of care)

Corporations: Governing Board
Member Liability
• Board members are generally protected
from personal liability if they fulfill their
duties of loyalty and responsibility.
• Personal liability may result from breach of
fiduciary duty.

Corporations: Ultra Vires Acts
• Ultra vires act: Governing board or corporate
executive decision-making that goes beyond
the express or implied powers of the
corporation
– These acts are usually void
– Governing board members and corporate
executives can be personally liable for an ultra
vires act that causes the corporation to suffer
financial loss if the act was
• Taken with knowledge that it was beyond their power
• Made in bad faith

Corporations: Restructuring an
Organization
• Merger: One corporation absorbs another
– Corporations are similar in size and agree to the
merger.
• Acquisition: One corporation is subsumed by
another
– Often involves the takeover of a smaller
organization by a larger organization
• Consolidation: Creation of a new corporation
made up of two or more organization that
previously existed but dissolved

Contracts
• A contract is a legally enforceable oral or
written agreement.
• Contracts can be express (written or
spoken) or implied (by one’s action).
• Parties to a contract must be competent
(legal and mental capacity).

Contracts: Elements of a
Contract
• A contract describes an agreement between
two or more persons or entities.
• Elements of a contract include:
– A valid offer (promise to do/not do something if
the other party agrees to do/not do something)
– Acceptance of the offer (reflects meeting of the
minds)
– Consideration (what each party will receive from
the other in return for performing the obligations
in the contract)

Contracts: Breach of Contract
• Breach of contract: Basis of a lawsuit in
which one or more terms of a contract
is/are violated
• Breach of contract lawsuits must be filed
within the applicable statute of limitations.

Contracts: Defenses for
Nonperformance
• Defenses for nonperformance of a contract
– Fraud: Based on misleading information
– Mistake of fact: If both parties relied on a mistake
– Duress: If unlawful threats or pressure was used
to force a contract to be executed
– Illegality: If a contract was for illegal purpose or
against public policy
– Impossibility: If the contract required acts that
were impossible to perform

Contracts: Illegality
• Contracts that may be deemed illegal include
– Exculpatory contracts: Contain clauses that seek
to excuse a party, in advance, for potential liability
(parties waive their right to sue in advance of an
event)
– Adhesion contracts: Include unequal bargaining
power, where the weaker party is forced to agree
to unfavorable terms because it depends on the
stronger party’s services

Contracts: Remedies
• Remedies are designed to make the injured
party whole and include
– Monetary (compensatory) damages
• Injured party must mitigate (reduce) the damages
caused by the breach
– Specific performance
• Breaching party is required to honors its contractual
obligations (injunction)
– Arbitration
• Neutral party resolves dispute apart from a lawsuit

Contracts: Common Provisions
• Hold harmless/indemnification clauses
may provide that either:
1. Indemnitor (party assuming liability) agrees to hold
the other party harmless for the indemnitor’s own
actions or inactions.
–If indemnitor’s actions or inactions harm the other party, the indemnitor
will make the other party whole (through compensation);
or
2. Parties agree to hold each other harmless for each
others’ actions or inactions.

Contracts: Common Provisions
• Warranties
– Representations that induce a party to enter
into a contract
– Relate to the quality of goods or services
purchased or leased
– May be express (in the contract) or implied by
law
– May be disclaimed (in the contract)

Health Information Technology
Contracts
• Significant as healthcare organizations adopt
EHRs
• Boilerplate language: Standard terms
– Often in vendor-written terms, thus favoring the HIT
vendor
• Learned intermediary: Defense doctrine that
companies have a duty to warn physicians directly
about potential adverse effects of their products.
Physicians must interpret this information and
advise patients appropriately as learned
intermediaries

Physician-Patient Relationship
as a Contract
• This relationship is a form of contract.
– Physician agrees to provide service in exchange
for payment
– May be express or implied
• Obligation to treat does not arise until there is
a physician-patient relationship
• A promise to a patient about the certainty of
an outcome (warranty) may lead to a breach
of contract lawsuit

as a Contract
• Termination of a physician-patient
relationship can occur by action of either
party:
– Patient ceases treatment or dies
– Parties mutually agree to end relationship
– Patient dismisses or “fires” physician
– Physician dismisses patient from his or her
care

as a Contract
• Physician can avoid claims of
abandonment by
– Avoiding abrupt termination
– Notifying patient in writing and giving the
patient time to secure another provider
– Agreeing to continue seeing the patient until
another provider is secured
– Cooperating in sharing relevant information
with the new provider

Antitrust
• Antitrust laws seek to protect the public
against trusts and monopolies so large that
they have the power to control a market
– Restrict free trade
– Restrict freedom of choice (restrict or eliminate
competition)
– Control pricing and other practices
– Potentially result in diminished quality

Antitrust
• Three major federal antitrust statutes
– Sherman Antitrust Act
– Clayton Act
– Federal Trade Commission Act

Antitrust: The Sherman Act
• In effect since 1890
• Section 1: Prevents restraint of trade
(among two or more parties)
• Section 2: Prevents monopolies (can apply
to a single organization)
• Civil and criminal penalties

Antitrust: The Sherman Act
• Restraints of trade:
– Vertical: Involves two or more entities at different
levels in a distribution change acting together to
restrain trade
• For example, a hospital collaborates with a supplier
– Horizontal: Competitors (for example, two
hospitals) agree to fix prices and divide the
market, or exclude others from competing in the
market

Antitrust: The Clayton Act
• Exempted union activities from antitrust
laws
• Prohibited discriminatory pricing practices
(with many exceptions), tying
arrangements, and mergers and
acquisitions that reduce competition
• Civil remedies

Antitrust: The Federal Trade
Commission Act
• Gives the Federal Trade Commission
(FTC) broad powers to act against
organizations that engage in unfair
methods of competition, or unfair or
deceptive acts affecting commerce
(including advertising)
• Enforced only by the FTC

Antitrust: The Federal Trade
Commission Act
• Practices that violate the FTC Act and may
apply to healthcare organizations include:
– Failing to reveal material facts about a product
– Making false claims and misrepresentations
– Offering misleading prices
– Disparaging a competitor’s product by making
misleading or untrue assertions
– Advertising to attract a customer, who is then
switched to a higher-priced product

Antitrust: Rule of Reason and
Per Se Violations
• Note: Not all actions that restrain trade are
antitrust violations.
– For example, a company may dominate a market
because it has a better product.
• Courts use a rule of reason analysis to
decide (on a case-by-case basis) if there is
an antitrust violation.
– It looks at geographic markets affected, the
product/service involved, the nature of the
industry, motivation for the alleged illegal activity,
and impact on the industry.

Antitrust: Rule of Reason and
Per Se Violations
• Per se violations are actions that are
automatically considered to be violations
of antitrust laws (for example, group
boycotts).

Antitrust: Applicability to
Healthcare
• Healthcare activities that may lead to antitrust
concerns include
– Health planning
– Shared services
– Utilization review
– Medical staff privileging/credentialing
– Third-party payer contracts or managed care
organizations
– Mergers and consolidations

Healthcare
• There are nine “safety zones” of
healthcare organization activity that won’t
usually be challenged as constituting
antitrust actions.

Healthcare
• Nine “safety zones”
– Mergers involving small hospitals (one has <100 beds and
average census of <40 patients)
– Joints venture for expensive or high-tech equipment
– Joint ventures to offer specialized services
– Efforts to provide medical data
– Provision of healthcare fee/price information to purchasers of
health services
– Surveys about prices, wages, and benefits
– Joint purchasing arrangements between healthcare
organizations
– Exclusive and nonexclusive joint ventures with physician
networks
– Multiprovider networks (evaluated under the rule of reason)

Medical Staff Contract and
Antitrust Issues
• Antitrust claims may result from denial of
medical staff privileges or restriction of
credentials, either for individuals or
categories or practitioners.
– Example: Bylaws exclude all chiropractors; if
found to be a group boycott, is a per se violation
of antitrust law.
– Example: Bylaws permit orthopedic surgeons to
be granted privileges, but the chief of the medical
staff (an orthopedic surgeon) blocks all such
applications.

Antitrust Issues
• Economic credentialing: Granting or
denying medical staff privileges based on
issues unrelated to clinical performance
– Examples: Volumes of cases; ownership
stake in competing facilities
• Patient Protection and Affordable Care Act
has limited ability of physicians to invest in
hospitals

Antitrust Issues
• Grant or denial of medical staff privileges
must
– Be fair
– Not violate rights of federally protected classes
– Not favor those already on staff
– Not restrain competition by keeping otherwise
qualified practitioners off the staff
– Include a fair hearing for challenges to adverse
decisions

Antitrust Issues
• Employed physicians and other healthcare
professionals may allege antitrust violations
based on non-compete agreements
– Individual agrees not to compete directly or work
for a competitor for a specified time period after
leaving employment
– If too broad, agreement may be subject to
antitrust litigation as too restrictive/an
unreasonable restraint of trade

Hi103 week 3 chpt 7

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