In a ruling with potentially far-reaching repercussions, the South Dakota Supreme Court has determined that a not-for- profit hospital system may be forced to forfeit part of the proceeds from the sale or transfer of its operations.
While the case involves a single hospital system-Phoenix-based Banner Health, which sold eight of its facilities in South Dakota last year-the court ruling could lead to tough new legal restrictions on the business decisions of not-for-profit healthcare facilities across the country.
The case now returns to U.S. District Court in Rapid City, where Banner could be forced to leave "millions of dollars" in South Dakota if the state's argument that it is subject to charitable trust laws is upheld, said Barbara Gorham, an attorney with Consumers Union in San Francisco, which has closely followed the case.
"This sets a very important precedent nationwide," she said, "because this is the first high court that has affirmed what lower courts and attorneys general have been doing across the nation for 25 years, which is saying that these assets of a not-for-profit belong to the community."
The American Hospital Association also has taken an interest in the case. "There's no precedent for this," said Richard Wade, a spokesman for the AHA. "This is the first (decision) of its kind. Whatever happens in this case sets a precedent for everyone."
The AHA is so concerned about the potential impact that it is now considering a request by Peter Fine, Banner's president and chief executive officer, to join the legal challenge in South Dakota. Fine's request, delivered last week in Chicago at a meeting of the AHA's 20-member governing council on healthcare systems, is under consideration, Wade said. He said the AHA would probably file an amicus curiae brief within about six months if it decides to join the case.
The governing council, Wade said, is "very nervous about the AHA entering the suit without a thorough examination of all the issues and arguments."
"If you go in and you lose the suit, there are very tough implications for systems," he said.
Banner's legal struggle highlights a growing activism by many state officials who want to protect the homegrown assets of not-for-profit hospital systems by restricting their freedom to sell assets, move money or transfer operations. Two other states also have challenged divestitures by Banner, which operates 20 hospitals and other medical facilities in the West and Midwest.
Several states have used charitable trust laws to challenge the transactions of not-for-profit hospitals, often contesting the sale of operations to investor-owned corporations. In one recent example of aggressive oversight even when the assets remain within a not-for-profit system, Menninger Clinic last month agreed to create a foundation in Kansas with assets of at least $22 million after relocating from Topeka, where it enjoyed tax-exempt status for 78 years, to Texas.
The high court's decision in South Dakota represents a jarring "wake-up call" for not-for-profit health systems, said Michael Peregrine, whose Chicago-based law firm, Gardner Carton & Douglas, represents Banner.
"What I'm telling my system clients is this: You're now forewarned," Peregrine said. "The (Supreme Court) decision moves the whole question of this community-asset controversy to the absolute front burner."
In the Banner case, the state Supreme Court ruled late last month that the state's charitable trust law "would subject the assets of a nonprofit corporation or proceeds from the sale of those assets to an implied or constructive charitable trust." The ruling eventually could force Banner to pour at least part of the proceeds from the sale into a new charitable trust.
The ruling stems from a lawsuit Banner filed in March 2002 against South Dakota Attorney General Mark Barnett. Banner's civil suit sought an injunction preventing the state's top legal officer from interfering with the proceeds of the sale. U.S. District Court Judge Karen Schreier asked the Supreme Court to interpret state law on charitable trusts.
In a statement, Banner said the "sale did serve the communities' best interests, and that when the legal process has run its course, that will be proven to be the case."