5.01(a) Health Organizations: Background and Creative Ways Non-Physicians Can Organize

Transcription

1 5.01(a) Health Organizations: Background and Creative Ways Non-Physicians Can Organize By: Hal S. Katz In today's health care climate, physicians, hospitals, and other managed care organizations ("MCOs") are searching for better ways of finding new partners, obtaining capital, and creating more efficient delivery systems. The 5.01(a) health organization is a potential answer for many of these issues. I. Introduction. The 5.01(a) health organization ("5.01(a) organization") is a corporation organized under the Texas Non-Profit Corporation Act, (1) but it is not necessarily tax exempt under the Internal Revenue Code. The 5.01(a) organization is created pursuant to Section 5.01(a) of the Texas Medical Practice Act ("Act") and must obtain certification by the Texas State Board of Medical Examiners ("TSBME"). (2) Section 5.01 of the Act has been on the books since the early 1970s. It was originally passed to allow physician organizations that were not owned by physicians to deliver services to the indigent without violating the Texas corporate practice of medicine prohibition. While the 5.01(a) organization went fairly unnoticed between 1971 and 1990 (only 36 were approved during that time), 172 were approved from 1991 to the end of April, (3) In its more recent manifestations, the 5.01(a) organization has been utilized to allow ownership of physician organizations by non-physicians. Therefore, hospitals, physician management companies, other medical groups, or practically anyone can be a member of, or the sole member of, the 5.01(a) organization. II. Non-Profit Corporation Considerations Since the 5.01(a) organization must be a non-profit corporation created pursuant to the Texas Non-Profit Corporation Act, consideration must be given to the rules governing non-profit corporations. For example, a non-profit corporation (i) need not have members; (4) (ii) must have a minimum of three directors; (5) and (iii) cannot pay dividends to its members. (6) III. Rules Governing 5.01(a) Organizations In order to better regulate the proliferation of 5.01(a) organizations, TSBME has adopted rules that must be followed to obtain certification. (7) The rules require the entity to be organized and incorporated by persons licensed by TSBME. (8) The Directors of the organization must be persons licensed by TSBME and actively engaged in the practice of medicine. (9) The bylaws must provide that they will be interpreted in a manner that reserves to the 5.01(a) organization, through its retained physicians, the sole authority to engage in the practice of medicine and reserves to the Board of Directors the sole authority to direct the medical, professional, and ethical aspects of the practice of medicine. (10) The termination of any physician providing medical services on behalf of the 5.01(a) organization during such physician's term of retention may be accomplished only by the Board of Directors or its physician designee(s), and such termination must be subject to due process procedures adopted by the Board of Directors or its physician designee(s) or provided by the agreement between the 5.01(a) organization and the physician. (11) Each Director is required to (i) disclose to the Members, the Board of Directors, and TSBME the identity of each "financial relationship" (12) which the Director has with any Member, other Director, supplier of the 5.01(a) organization, or any affiliate of any Member, Director, or supplier, and (ii) provide a concise explanation of the nature of each such financial relationship. (13) The 5.01(a) organization must pay an initial fee of $2,500 (14) upon filing its application for certification and a biennial fee of

2 $500 at the time it files the required biennial report to maintain certification. (15) While these are not all of the requirements to obtain certification, they give an adequate overview as to what is involved. IV. Special Requirements for Non-Physician Members. Additional requirements must be met if there are to be non-physician Members, or Members which are entities or organizations not wholly owned and controlled by physicians actively engaged in the practice of medicine. (16) The rules require the Board of Directors to make all policies and procedures pertaining to credentialing, quality assurance, utilization review, peer review, and the practice of medicine. (17) Non-physician Members may only nominate Directors, and all such nominations are subject to the approval of the existing Board of Directors. (18) Financial decisions, (19) e.g. decisions regarding capital and operating budgets, physician compensation, managed care contracts, and new members, (20) may be made by all Members. V. Creative Ways for Non-Physician Members to Organize. While at first glance it would appear that a non-physician Member would have a secondary role in the operation of the 5.01(a) organization, the entity can be organized and governed in a way that will give the non-physician Member equal, if not significant, control. Set forth below are creative ways of structuring a 5.01(a) organization formed with both physician and non-physician Members. A. Separate Classes First, when setting up a 5.01(a) organization which will have physician and non-physician Members, the organizing parties should contemplate creating separate membership classes (e.g., Class "A" Members would be physicians, and Class "B" Members would be non-physicians). (21) This would permit a greater flexibility for the governance of the 5.01(a) organization. B. Board of Directors Two main concerns expressed by potential non-physician Members about the 5.01(a) organization are (i) the requirement for physician Directors, and (ii) the limited ability of nonphysician Members to select those Directors. The non-physician Members will obviously desire some say in the selection of Directors. If separate membership classes exist as described above, Directors could be selected in one of three ways. Assume the Board consists of six Directors. One way would be for the Class "A" Members (i.e., the physicians) to directly elect three Directors and the Class "B" Members (i.e., the non-physicians) to nominate three Directors. Having separate classes permits the physicians to directly elect the Directors, even though the organization has non-physician Members. Another way would be for the Class "A" Members to nominate their three Directors and the Class "B" Members to nominate their three Directors. All six nominees then would be subject to the existing Board's approval. The last way, which would be the most likely if separate classes of Members were not established, would be for all the Members, both physician and non-physician, to vote on six individuals to be nominated to the Board. Again, such nomination would be subject to the existing Board's approval. C. Making Policies and Procedures Another concern for non-physician Members, such as hospitals or MCOs, is their limited role in creating policies and procedures relating to credentialing, peer review, quality assurance, and utilization management. A partial solution is the creation of a Member-elected committee that would be responsible for analyzing, investigating, reviewing, and recommending all proposed or existing policies or procedures pertaining to credentialing, peer review, quality assurance, and utilization management. If separate membership classes exist, the Class "A" Members could directly elect half of the committee members, who may or may not be Members of the 5.01(a), and the Class "B" Members could directly nominate the other half of the committee members

3 (again, who may or may not be 5.01(a) Members). While the committee would not have decisionmaking authority, it would have an active role in the policy and procedure-making process. D. Hiring and Firing Physicians The issue of hiring and firing physicians is also an important issue for non-physician Members. It is clear from the TSBME rules that the termination of a physician who provides medical services on behalf of the 5.01(a) organization may be accomplished only by the Board of Directors or its physician designee(s) and that such termination must be subject to due process procedures adopted by the Board of Directors or its physician designee(s) or provided by the agreement between the 5.01(a) organization and the physician. Here, too, while the nonphysician Member may not be permitted to make the ultimate decision, the authority to investigate and make recommendations regarding the hiring and firing of physicians can be delegated to a committee made up of non-physicians. Again, if nothing else, this is a means by which the non-physician Members can have an active role in a process from which they otherwise would be excluded. It should be noted that, regardless of whether the 5.01(a) organization consists solely of physicians or of physicians and non-physicians, TSBME has taken the informal position that a decision not to renew a physician's contract is subject to the due process requirement. E. Financial Decisions The next area that is a common concern for non-physician Members is the authority to make financial decisions. Financial decisions can include (i) approval of the annual budget, (ii) purchase of property, (iii) creation of a subsidiary, (iv) execution of any management, employment, or service contract (other than a physician employment contract), (v) execution, amendment, or termination of any managed care contract, (vi) compensation of and benefits for physicians, and (g) expenditures of monies, just to name a few. As indicated above, the Members must consult with the Board prior to making any financial decisions. TSBME has informally indicated that this can be done in a casual manner, and that so long as the Board is informed of a contemplated decision, the consultation requirement has been satisfied. Often, when creating a physician and non-physician 5.01(a) organization, the Members create a financial committee which may or may not be given the authority to make financial decisions. Where there are separate membership classes, each class nominates half of the members of the committee. The committee, if not vested with decision-making authority, will be responsible for analyzing, investigating, reviewing, and making recommendations to the Members on any financial decision to be put to the Members. VI. Ability to Capitate for All Health Care Services. One of the 5.01(a) organization's great advantages is that it is the only entity in Texas that can contract directly with an HMO to provide both physician and hospital services on a capitated basis. This was achieved by the 1995 state legislature passing, and the Governor signing, Senate Bill 1407 and House Bill Senate Bill 1407 related to contractual arrangements among HMOs, physicians, and other providers. The Bill amended Section 26(f) of the HMO Act to make clear that, among other things, the Act did not apply to any provider engaged in the delivery of health care services other than medical care as a part of an HMO delivery network. (22) A provider is defined as (i) any person other than a physician, including a licensed doctor of chiropractic, registered nurse, pharmacist, optometrist, pharmacy, hospital, or other institution or organization or person licensed or otherwise authorized to provide a health care service in this state; (ii) a person who is wholly owned or controlled by a provider or by a group of providers who are licensed to provide the same health care services; or (iii) a person who is wholly owned or controlled by one or more hospitals and physicians, including a physician-hospital organization. (23) An HMO delivery network is defined as a health care delivery system in which an HMO arranges for health care services directly or indirectly through contracts and subcontracts with providers and physicians. (24) It is

4 clear that a 5.01(a) organization falls within the meaning of "provider." Therefore, the Act does not apply to a 5.01(a) organization that contracts with an HMO to provide health care services to the HMO's members. House Bill 3111 related to the delivery of health care by 5.01(a) health organizations. The Bill amended Article 21.52F of the Insurance Code to provide, among other things, that the requirements contained in the Article do not apply to an activity exempt from regulation under Section 26(f) of the HMO Act. (25) Furthermore, the Article also provides that an approved nonprofit health corporation may arrange for or provide health care services on a risk-sharing or capitated risk arrangement on behalf of an HMO without obtaining a certificate of authority under this Article or under the HMO Act. (26) Based on this change to the Insurance Code, as well as the change to Section 26(f) of the HMO Act, it is clear that a 5.01(a) organization may provide all health care services, including medical care services, on a capitated basis, without obtaining a certificate of authority from the Texas Department of Insurance ("TDI"), if the 5.01(a) organization is contracting with an HMO. It should be noted that in March, 1996, TDI adopted final rules pertaining to 5.01(a) organizations. These final rules included a provision that states that a 5.01(a) organization is not required to obtain a certificate of authority if it is exempt from regulation under the Insurance Code pursuant to Article 21.52F(2). (27) VII. Advantages of the 5.01(a) Organization From the physician's perspective, the 5.01(a) organization can give physicians a built-in lever by which they can better balance the financial strength of any Member. The 5.01(a) organization guarantees substantially more control over the practice of medicine than that of other forms of affiliation. The physicians will have greater control over their practice patterns and can have an impact on the quality of care. The leverage they have through the Board of Directors will enable them to bargain more successfully to reduce their loss in revenue. It is by far the best vehicle to preserve a degree of independence and autonomy in their practices. From the non-physician's perspective, through ownership in the 5.01(a) organization, it can have substantial control over the physician organization without the use of a "friendly" PC or strong management agreement controls, thus limiting if not eliminating any risk of violating the Texas corporate practice of medicine prohibition. The non-physician's ability to own a physician group in Texas allows the non-physician Member to claim the physician group as a subsidiary and, therefore, "book" all revenues of the physician organization in a consolidated financial statement. The fact that the 5.01(a) organization is the only entity in Texas that can capitate for both physician and hospital services creates a substantial advantage for this type of organization and makes it the preferred vehicle for hospitals to use to purchase medical groups. VIII. Disadvantages of the 5.01(a) Organization. The 5.01(a) organization does not provide the perfect answer for an integrated delivery system by any means. As mentioned above, one of its greatest disadvantages is that in Texas a non-profit corporation cannot pay dividends to its Members. Therefore, any profits must be either extracted through a management agreement or paid out as compensation. IX. Conclusion. The 5.01(a) organization creates a balance that allows physicians to exercise some control over their practices while, at the same time, giving enough control to the non-physician owners to justify a substantial investment.

5 Hal S. Katz is an associate at Hilgers & Watkins, P.C., Austin, Texas, where he practices in the areas of health care and administrative law. Footnotes: 1. Tex. Rev. Civ. Stat. Ann. art (Vernon Supp. 1996) Tex. Admin. Code : 0; 1992: 5; 1993: 38; 1994: 50; 1995: 68; 1/96-4/96: Tex. Rev. Civ. Stat. Ann. art (Vernon Supp. 1996). 5. Tex. Rev. Civ. Stat. Ann. art A (Vernon Supp. 1996). 6. Tex. Rev. Civ. Stat. Ann. art (Vernon Supp. 1996) Tex. Admin. Code Tex. Admin. Code 177.1(a)(2)(C). 9. Id.; "Actively engaged in the practice of medicine" means the physician is engaged in diagnosing, treating, or offering to treat any mental or physical disease or disorder or any physical deformity or injury or performing such actions with respect to individual patients for compensation and shall include clinical medical research, the practice of clinical investigative medicine, the supervision and training of medical students or residents in a teaching facility or program approved by the Liaison Committee on Medical Education of the American Medical Association, the American Osteopathic Association, or the Accreditation Council for Graduate Medical Education, and professional managerial, administrative, or supervisory activities related to the practice of medicine or the delivery of health care services. 22 Tex. Admin. Code Tex. Admin. Code 177.4(2)(C) Tex. Admin. Code 177.4(2)(F). 12. TSBME has said informally that "financial relationship" should be defined very broadly and can include everything from an employment relationship with one of the Members to owning a deer lease with another Member or Director Tex. Admin. Code 177.4(2)(E) Tex. Admin. Code 177.7(1) Tex. Admin. Code 177.7(2) Tex. Admin. Code Tex. Admin. Code 177.5(1) Tex. Admin. Code 177.5(2); The rules do provide that a non-physician Member may directly elect individuals to the Board if required to obtain or maintain tax-exempt status. This will be essential in light of the informal position recently taken by the Internal Revenue Service that, in order to obtain tax-exempt status, the Members must be permitted to directly elect Directors and be able to remove them with or without cause.

6 Tex. Admin. Code 177.5(1); Here, too, if the organization is attempting to obtain or maintain tax-exempt status, the Members need not consult with the Board prior to making financial decisions Tex. Admin. Code 177.5(1). 21. Tex. Rev. Civ. Stat. Ann. art (Vernon Supp. 1996), permits the creation of one or more classes of Members. 22. Tex. Ins. Code. Ann. art. 20A.26(f) (Vernon Supp. 1996). 23. Tex. Ins. Code. Ann. art. 20A.26(f) (Vernon Supp. 1996). 24. Tex. Ins. Code Ann. art. 20A.02(n) (Vernon Supp. 1996). 25. Tex. Ins. Code Ann. art F, 2(b)(3) (Vernon Supp. 1996). 26. Tex. Ins. Code Ann. art F, 2(c) (Vernon Supp. 1996) Tex. Admin. Code (d).