2. Chapter 7
Corporate Structure
and Legal Issues
2

3. Authority of Corporations
• Express
– Authority designated by statute . . . .
• Implied
– Authority not expressed by written words
• Ultra Vires Acts
– Acting beyond scope of authority
3

4. Executive Committee
• Liaison between management & full board
• Review & make recommendations on mgm’t
proposals
• Performing special assignments as may be delegated
by full board
• Business transacted reported at regular sessions of the
governing body & ratified
• Powers of the governing body
4

5. Bylaws Committee
• Reviews & recommend bylaw changes to the
governing body
• Bylaws generally are amended or rescinded by
a majority vote of the governing body
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6. Finance Committee
• Overseeing financial affairs of the org.
• Direct & review preparation of financial
statements, operating budgets, major capital
requests . . . .
6

7. Joint Conference Committee
• Committee often consisting of an equal # of
representatives from
– governing body
– medical staff
– administration & nursing
• Committee acts as a forum for discussion of
matters of policy & practice pertaining to
patient care
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8. Nominating Committee
• Develop & recommend criteria for governing
body membership
• Recommend appointments for new board
members.
8

9. Planning Committee – I
• Periodic review of organization’s mission &
vision statements
• Conduct of community health needs
assessments
• Develop strategic plans & ongoing monitoring
• Develop of short-term & long-range goals
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10. Planning Committee – II
• Maintenance of the organization's physical
facilities
• Preparation of capital budgets
• Oversight of expansion programs
• Acquisition of major equipment
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11. Planning Committee – III
• Addition of new services based on identified
community need
• Downsizing & closing services
• Planning progress reports to the full board
• Program development
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12. Patient Care Committee
• Corporate development
• Identify patient & family needs & expectations.
• Determine methodology for reviewing data
• Identify patterns of concern
• Forward information to those responsible for
implementing change in the organization
• Review, evaluate, & implement plans for improving
organizational performance
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13. Audit Committee Responsibilities – I
• Develop corporate auditing policies & procedures
• Recommend independent auditors (IA)
• Review credentials of IAs & facilitating change in
auditors as appropriate
• Review with IAs scope & extent of their audit duties
& responsibilities
• Review scope & results of annual audit with IAs &
organizations management
• Set, oversee, review, & act on recommendations of
internal audit staff
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14. Audit Committee Responsibilities – II
• Review internal accounting practices of corporation
• Reviewing & evaluate financial statements
• Promote prevent, detect, deter, & report fraud
• Review means for safeguarding assets
• Ensure financial reporting functions comply with
accepted accounting principles
• Review reliability & integrity of financial &
operating information
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15. Safety Committee Responsibilities
• Responsible for overseeing organization’s
safety management program
• Review & act on reports involving
organization’s emergency
preparedness, equipment management, fire
safety, risk management & utilities
management programs
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16. Corporate Ethics – Outline
• Purpose of Code of Ethics
• Developing Code of Ethics
• Corporate Conduct Under Scrutiny
• Sarbanes-Oxley Act
• Build and Restore Trust
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17. Corporate Ethics – Purpose
• Provide guidelines for behavior
– that help carry out an organization’s mission
vision, and values
• Build trust
• Increase awareness of ethical issues
• Guide decision making
• Encourage staff to seek advice
• Report misconduct
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18. Developing a Code of Ethics
1. Compliance with the organization’s code of ethics
− compassionate care; understanding and acceptance
of organization’s mission, vision, & values; &
adherence to one’s professional code of conduct
2. Honesty & fair in dealings with employees
3. Develop & maintain high ethical-legal standards
4. Employers & employees impartial when personal
interests conflict with those of others . . .
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19. Corporate Conduct Under Scrutiny
• False advertisements
• Knowingly using flawed data
• Schemes designed to deny patients insurance benefits
• Accepting kickbacks
• Entering into financial arrangements that are clearly a
conflict of interest
• Covering up wrongdoing
• Falsification of records
• Fraudulent activities (e.g., reimbursement schemes)
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20. Sarbanes-Oxley Act
• Sarbanes-Oxley Act was signed into law by President
Bush on July 30, 2002 in response to the Enron
debacle & high profile cases of corporate
mismanagement.
• The Act contains 11 titles, or sections, ranging from
add’l Corporate Board responsibilities to criminal
penalties, & requires Securities & Exchange
Commission to implement rulings on requirements to
comply with SOX.
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21. Major provisions of SOX – I
• Certification of financial reports .
• Ban on personal loans to exec officer & director.
• Accelerated reporting of trades by insiders.
• Prohibition on insider trades during pension fund
blackout periods.
• Public reporting of CEO & CFO compensation &
profits.
• Inside audit board independence.
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22. Major provisions of SOX – II
• Criminal & civil penalties for securities violations.
• Obligation to have an internal audit function, which
will need to be certified by external auditors.
• Significantly longer jail sentences & larger fines for
corporate executives who knowingly misstate
financial statements .
• Code of ethics & standards of conduct for executive
officers and board members.
– Most companies have expanded code of ethics to
include all employees.
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23. Sarbanes-Oxley Act of 2002 – II
Promoting Due Diligence
• SOX is not about regulation; its about self-regulation.
• Selecting a leader with morals & core values.
• Examining incentives.
• Monitoring the organization’s culture.
• Build a strong knowledgeable governing body.
• Searching for conflicts of interest.
• Focusing attention on the right things.
• Having courage to speak out.
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24. Sarbanes-Oxley Act of 2002 – III
Know your Moral Values
• Be willing to stand up for them
• Be prepared to pay the cost
“the tragedy of society is not the noisiness of
the so-called bad people, but the appalling
silence of the so-called good people.”
- Martin Luther King, Jr.
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25. Build and Restore Trust - I
• Conduct business in compliance with applicable
laws, rules, and regulations.
• Adhere to the highest of ethical standards.
• Provide cost-effective care.
• Fairly and accurately represent the organization’s
capabilities when treating a patient’s ailments.
• organization, regardless of a person’s ability to
pay, race, creed, color, and/or national origin.
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26. Build and Restore Trust - II
• Consider patient values and preferences as part of
recognizing the organization’s legal responsibilities
• Inform patients of their rights and responsibilities
• Develop and recommend guidelines that assist and
support patients and their families in exercising their
rights
• Describe the process to patients by which hospital
staff interact and care for them
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27. Doctrine of Respondeat Superior
• Respondeaat Superior: “let the master
respond”
• Legal doctrine holding employers liable for the
wrongful acts of their employees.
• Also referred to as vicarious liability, whereby
an employer is answerable for the torts
committed by employees
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28. Respondeat Superior – II
• To impute liability to the employer:
– Master-servant relationship between employer &
employee must exist
– Wrongful act of employee must occur within scope
of employment
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29. Independent Contractors
• Responsible for their own negligent acts
• Principal must not have right to control agent’s
work
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30. Corporate Officer/Director
An officer or a director of a corporation is not
personally liable for the torts of corporate
employees. To incur liability, the officer or the
director ordinarily must be shown to have in
some way authorized, directed, or participated
in a tortious act.
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31. Corporate Negligence
• Doctrine under which hospital is liable if it
fails to uphold proper standard of care owed
the patient
• Theory of liability creates a non-delegable
duty which the health care corporation owes
the patient
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32. Benchmark Case Facts - I
Darling v. Charleston Comm. Mem. Hosp.
• 18 Yr. Old Football Player injured
• Fracture of tibia & fibula
• Leg casted by General Practitioner in ED
• Patient complains of pain
• No specialist called for consultation
• Two weeks later - student transferred
• Eventually leg amputated
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33. Benchmark Case Trial - II
• No expert testimony presented
• Documentary Evidence included
– Medical records
– Hospital’s bylaws, rules & regulations
– Illinois Hospital Licensing Act
– JCAHO standards
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34. Benchmark Case – III
• Hospital, as a corporate entity, liable for:
– Negligent act of nurses
– Negligent acts of physicians
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35. Benchmark Case Lessons- IV
• Provide competent staff
– Verify licensure, as appropriate
– Verify training & experience
– Provide procedures for credential & privileging
– Monitor quality of care
– Require consultations
– Alert supervisor of care concerns
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36. Corporate Responsibility and
Physician Competency
Healthcare organizations have a responsibility to
ensure the competency of their medical staffs
and to evaluate the quality of medical
treatment rendered on their premises.
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37. Joint Liability
• All joint or concurrent tort-feasors are
independently at fault for their own wrongful
acts.
• Both hospital & its physicians can be held
jointly liable for damages suffered by patients.
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38. Governing Responsibilities - I
• CEO Selection
– Administrator Licensure
• Comply with the law
• Comply with Standards of Accrediting Bodies
• Provide timely treatment
• Avoid Conflicts of Interest
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39. Corporate Duties - II
• Provide adequate staff
– Deficient Nursing Care
– Timely Response to Patient Calls
– Postoperative Care
– Nursing Facility Staffing
– Deficient Care Given
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40. Corporate Duties - III
• Provide adequate facilities & equipment
• Provide adequate insurance
• Be financially scrupulous
• Require competitive bidding
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41. Corporate Duties - IV
• Provide a safe environment
– Hospital Created Unsafe Conditions
– Chemical Hazards
– Medical equipment
– Failure to Educate Staff
– Construction Hazards
– Fire Hazards
– Failure to Properly Maintain Equipment
– Contracted Preventative Maintenance
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42. Corporate Duties - V
• Duty to prevent falls
– Parking lot safety
– Hospital Lobby Safety
– Stretcher safety
– Safe use of restraints
– Window safety
– Slippery floors
– Loading dock safety
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43. Corporate Duties - VI
• Safeguard patient valuables
43

44. CEO/Administrator’s Role &
Responsibility
• Tort Liability of the CEO
– CEO's Liability for the Acts of Others
• Regulatory Agencies
• Case Reviews
44

45. Medical Staff
• Gov body, ultimate responsibility for approving:
– medical staff bylaws
– application requirements for privileges
– process for granting emergency staff privileges
– requirements for medical staff consultations
– peer-review process
– process auditing medical records
– process for addressing disruptive physicians
– process for disciplinary action
45

46. Corporate Reorganization
• Hospitals, because of fewer revenues from
traditional sources (3rd party payors) have
restructured to set-up related business
enterprises in order to increase revenues to
support patient care operations
• Legal pressures present substantial
impediments
46

47. Regulatory Pressures
• Taxation
• Third-party reimbursement
• Certificate of need
• Financing
– Corporate Restructuring
– Parent Holding Company Model
– Controlled Foundation
– Independent Foundation
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48. Corporate Reorganization, con’t
• General Considerations
• Medical Staff Restructuring
• Fund-Raising
• Regulatory Authority Checklist
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49. Regulatory Authority Checklist – I
1. Not-for-profit corporations
– not-for-profit corporation law
– Internal Revenue Code (exemption and taxpayer
identification number)
– state and local tax laws on exemptions (including
real property)
– attorney general or similar charitable registration
requirements
– bylaws, organization minutes, & minutes of first
governing body meeting
– bank account
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50. Regulatory Authority Checklist – II
2. For-profit corporations
– business corporation law
– taxpayer identification number
– bylaws, organization minutes, minutes of first
governing body meeting, & issuance of stock
– bank account
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51. Regulatory Authority Checklist – III
3. Hospitals
– reimbursement regulations
– CON regulations
– governing body bylaws & relationship to
additional corporations
– fraud and abuse laws, rules, & regulations
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52. Competition & Restructuring
• Restructuring is an undertaking that requires
careful planning & legal & accounting advice
• Restructuring should be undertaken not
because it is "fashionable" but rather because it
will provide the hospital with opportunities not
available under its current structure
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53. Safe-Harbor Regulations
Safe-harbor regulations describe how health care
providers should structure financial
arrangements in order to be exempt from
prosecution by the DOJ & the FTC
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54. Antitrust Safety Zones
• DOJ & the FTC issued policy “statements” that
address antitrust safety zones
• Statements are designed to provide education &
instruction to the health care community on issues
related to mergers & joint ventures
• Statements give health care providers guidance in the
form of antitrust safety zones, which describe
circumstances under which agencies will not
challenge conduct as violative of antitrust law
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55. Review Questions –I
1. Describe the organization, responsibilities,
duties, & legal risks of a governing body.
2. List some of the major provisions of the
Sarbanes-Oxley Act, as presented in the text.
3. Describe the meaning of the legal doctrine
respondeat superior.
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56. Review Questions –II
4. Describe the term corporate negligence.
5. Why is the Darling case described as a
benchmark case?
6. Does the legal doctrine respondeat superior
apply to an independent contractor? Explain
your answer.
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57. Review Questions –III
7. What is meant by the parent holding
company model?
8. What does the Safe Harbor Act regulate?
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