At the urging of one of its larger hospital system members, the American Hospital Association is considering whether to step into a growing fray over charitable trust challenges by state attorneys general.
Banner Health System, which is battling state attorneys general over the system's hospital sales, is asking the AHA to lobby against the state challenges, which the Phoenix-based system calls "bad public policy."
The attorneys general in three states are disputing Banner's sales by contesting the right of not-for-profit systems to sell assets and use the proceeds in other areas of system operations, Peter Fine, Banner president and chief executive officer, said in a March 24 letter to AHA President Richard Davidson.
Calling it a "fundamental issue for all not-for-profit systems," Fine said systems must be able to operate independently and make decisions based on the best interests of the communities they serve.
Davidson has not responded yet to Fine's letter but plans to do so promptly, an AHA spokesman said.
"The larger issue is the way multistate systems can move assets around," said David Bixby, senior vice president and general counsel at 20-hospital Banner. "There are substantial threats to not-for-profit healthcare systems if this issue gains traction."
The attorneys general contend that not-for-profit corporations hold hospitals and nursing homes in implied charitable trusts for the benefit of the communities where the facilities are located, Bixby said. By following charitable trust rulings, not-for-profit systems might be restricted in how they use revenue from one facility to support the system's mission in other locations, he said. Should charitable trusts be enforced by attorneys general, not-for-profit systems would effectively halt all debt-financed expansions in different communities, he said.
"Multistate systems need to have the ability to move revenue," he said.
In 2001, Banner announced plans to sell 10 of its 27 hospitals and 17 long-term-care facilities in seven states so it can concentrate on high-growth markets in Arizona and Colorado. Attorneys general in North Dakota, South Dakota and New Mexico challenged Banner's right to remove proceeds from its sales within those states to address system needs in other states. The transactions have been completed; attorneys general and Banner are involved in legal disputes concerning the proceeds of the sales.
Banner filed a civil lawsuit against South Dakota Attorney General Mark Barnett in U.S. District Court in Rapid City, S.D. (March 11, 2002, p. 4), seeking an injunction that would prohibit Barnett from interfering with Banner's property rights and business activities. The system sold most of its facilities in that state to Rapid City Regional Hospital, a not-for-profit hospital.
Banner is also involved in a legal dispute with North Dakota Attorney General Wayne Stenehjem, who contends the proceeds of Banner's sale of a hospital and five nursing homes in the state belong to the public. Both sides are waiting for rulings by judges who are reviewing the cases.
In New Mexico, Banner sold 47-bed Los Alamos Medical Center to Province Healthcare Co., a Brentwood, Tenn.-based for-profit company. Attorney General Patricia Madrid threatened a lawsuit for breach of trust, arguing that Banner had diverted net income from the hospital to support operations at other Banner facilities. Banner eventually paid a $4 million settlement to New Mexico.
When Stenehjem filed his lawsuit against Banner, he argued that Banner should be prohibited from diverting the proceeds of nursing home sales outside of North Dakota. Stenehjem, who was unavailable for comment, said at the time that a charitable trust would ensure that Banner kept sales proceeds in the state.
AHA spokesman Richard Wade said the association's legal counsel is studying the letter and the issue will be on the agenda of the AHA's 25-member governing council for health systems when it meets in June. Once the hospital association receives feedback from the council and legal team, it will decide on a course of action, he said.
"It is probably an issue we need to be more involved in," Wade said. "The issue he raises is very legitimate."