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Fiduciary Duties Within Hospital Systems

A version of this article was published in The Daily Record on April 18, 2008.

A recent trial court ruling in Ohio, although currently on appeal, provides a rare and interesting look at how one court viewed the relationship between an integrated health care system parent and its constituent hospitals.
The case, The Health Alliance of Greater Cincinnati v. The Christ Hospital, et. al., involves a system parent, The Health Alliance of Greater Cincinnati (Alliance), and two hospitals, The Christ Hospital (Christ Hospital) and The St. Luke Hospitals (St. Luke), both of which are seeking to withdraw from the system.
Alliance is an Ohio non-profit, tax-exempt corporation that functions as the system parent under a "joint operating agreement" with certain "Participating Entities," including Christ Hospital, St. Luke, four additional hospitals, and other provider and service entities. The joint operating agreement governs the rights, responsibilities and remedies of the various parties.
In its decision, the trial court went beyond the express terms of that contract, however, and found that Alliance also has an independent "fiduciary" duty to its Participating Entities. That means that Alliance must exercise Alliance's best efforts in the best interests of its constituent parts, including Christ Hospital and St. Luke.
The court also found that Alliance had, in fact, breached its fiduciary duty. Moreover, the court concluded that Alliance's breach of its fiduciary duty gave the hospitals independent withdrawal rights, in addition to the withdrawal rights specified in the joint operating agreement itself. 
A.  Grievances
Like Alliance, Christ Hospital and St. Luke are Ohio non-profit, tax-exempt corporations.  Christ Hospital generates roughly forty percent of Alliance's revenues, but Christ Hospital is relatively underfunded from a capital investment point of view. In fact, Christ Hospital has an average age of plant that is much older than normal, notwithstanding that Alliance is contemporaneously devoting hundreds of millions of dollars to build a new hospital elsewhere in Alliance's service area. Alliance also subjected Christ Hospital to significant additional joint and several debt
obligations, over the objections of Christ Hospital's board of directors. 
Based on these and other factors, and reliance on expert advice, the Christ Hospital board of directors determined that: continued participation with Alliance would be contrary to Christ Hospital's charitable mission; and Christ Hospital should withdraw from Alliance. 
St. Luke had similar and additional grievances, and its board of directors came to the same conclusion. The two boards of directors notified Alliance of their determinations to withdraw, and Alliance commenced litigation, seeking to prevent the withdrawals.
B.  Operating Agreement
First, the court found that Christ Hospital and St. Luke were permitted to withdraw under the terms of their joint operating agreement with Alliance. While Alliance was contractually obligated to operate Christ Hospital in a manner consistent with its mission, Alliance was not doing so because Alliance was unduly draining money from, and not reinvesting money into, Christ Hospital. Therefore, Christ Hospital had a termination right under its joint operating agreement with Alliance. 
Although the court found that Alliance had not defaulted on its obligation to operate St. Luke in accordance with St. Luke's mission, the court found that St. Luke still had a contractual termination right. The joint operating agreement allows any entity not in default to terminate its participation in the system based on any uncured default by Alliance. Thus, ironically, Alliance's default as to Christ Hospital provided the contractual basis for St. Luke's withdrawal.
C.  Fiduciary Duty
The court noted that the joint operating agreement establishes a very special relationship under which Alliance, subject to certain reserved powers, is to manage the affairs of the Participating Entities, hold the assets of the Participating Entities, enter into contracts on behalf of the Participating Entities, collect and allocate all revenues of the Participating Entities, maintain the business records of the Participating Entities, employ the operational staff of the Participating Entities, and "at all times operate...consistent with the charitable missions of...the Participating Entities." 
Further, the court observed that, under the joint operating agreement, the Participating Entities not only surrender all control of their revenue streams to Alliance, but the Participating Entities are also precluded from incurring debt on their own.
The court held that this sort of special relationship, coupled with the resulting imbalance of resources, creates precisely the sort of fiduciary relationship that Alliance disavowed. In so holding, the court stated that fiduciary duty arises from a "relationship in which special confidence and trust is reposed in the integrity and fidelity of another and there is a resulting position of superiority or influence, acquired by virtue of this special trust."
In light of the foregoing, the court found that Alliance owed a fiduciary duty to its Participating Entities (including the hospitals), contrary to Alliance's position that it was a mere agent without a fiduciary duty. Many agents are only required to meet their contractual obligations, while fiduciaries are held to a much higher standard of care.
Not only did the court find that a fiduciary duty exists, but the court also found that Alliance had breached that duty. Moreover, the court held that Alliance's breach of its fiduciary duty provided an independent basis for Christ Hospital's and St. Luke's withdrawal from the system.
D. Relevance to Other Health Systems
The Health Alliance of Greater Cincinnati holding is relevant to, and should be considered by, Maryland integrated health care systems - both those that are created by contract or affiliation agreement, and those that are created through ownership relationships.
In either case, when constituent entities of an integrated health care system retain their separate legal existence and their own boards of directors, those directors, like the directors of Christ Hospital and St. Luke, have a legal duty to protect the interests and mission of their separate legal entity. This is true, even if, and perhaps especially when, such interests and mission are in conflict with the interests and mission of the system parent.

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Date

09.23.07

Type

Publications

Authors

Cowan, Elliott

Teams

Health Care