Business Entities: Proprietorships, Partnerships, & Corporations
Module 7a
Forms of Organizational Ownership
- Sole proprietorship
- One owner
- Partnership
- Two or more owners
- Corporation
- A legal entity
Proprietorship
- Advantage: Autonomy, flexibility, and control
- Disadvantage: Unlimited liability
- Personal assets are vulnerable if business assets and insurance coverage fails or is insufficient to cover damages from liability claims. Can lose the house, boat, & dog!
Partnerships
- General partnerships share joint unlimited liability for partners
- Each partner can act for the partnership (unless agreements otherwise)
- Typically equally share income and liability
- Limited Partnership: May vary roles of partners in management & finances
- May have limited partner whose liability is limited to that partner’s investment
- Managing partners may have unlimited liability
Corporation
- Chartered with a state
- Separates ownership and management
- Has perpetual life
- Ownership changes hands via stock
- Income distributed to owners, stockholders as dividends
Corporation’s major advantage
- Limited personal liability for principals
- Stockholders, boards of directors, management
- Why are corporate principals protected from liability, but not unincorporated business owners and managers?
- Answer: Corporation is a legal entity under law, like a person, so entity is sued, not individuals
- Can sue and be sued
- Can buy and sell property
- But corporation not a real person, cannot marry, vote.
Corporations (con’d)
- Formed by submitting Articles of Incorporation which become initial governing rules
- Bylaws are additional governing rules set by the board of directors after initial incorporation.
Not-for-profit organizations
- If incorporated in a state as a corporation, then can apply to Internal Revenue Service for 501 (c)(3) not for profit status and be exempt from federal income taxes.
- Must be organized and operated exclusively for religious, charitable, scientific, or educational purposes as determined by Internal Revenue Service
Not-for-profit organizations
- Also referred to as ‘non-profit,’ Can earn a profit, just not its primary goal.
- Surplus must be reinvested in organization, not distributed to principals, except as reasonable compensation
- Governing board members cannot be paid for services as board member.
Non-profits (con’d)
- Non-profit members cannot benefit from assets if corporation is dissolved. Must give assets to only another non-profit, even when dissolving
- Non-profits are exempt from federal income tax, but not automatically exempt from other taxes
- One conglomerate can be composed of a mix of for-profit and not-for-profit organizations, using each to its legal and business advantage
Special Issues for Non-profits and Federal Income Tax Exemption
- Hospitals can be charitable or “promote health for general benefit to the community” and be exempt
- IRS looks for entities offering free or subsidized benefits to qualify for and maintain exemption
Special Federal income tax exemption issues for non-profits
- Revenues are not to be used for private purposes
- No benefit can “inure” or be allocated to “insiders” except as reasonable compensation
- Tax-exempt activities are limited to those related to approved charitable purposes
- Non-profit cannot unfairly compete with for profit businesses
- Hospital gift shop and parking lot revenue is tax-exempt, but selling pharmacology and lab services to non-patients is not
- Penalty is lose exemption andpay back taxes
Other legal benefits of corporate form of ownership
- Allows corporation, not the individual or partners, to be the employer in case of lawsuit tort liability
- Corporate hospitals as employer of physicians has not been held vicariously responsible for physician’s malpractice, but has for practices like insufficient staff
Administrative Agencies
Module 7b
What is an Administrative Agency?
- Created by a state legislature or Congress
- Typically under administrative branch, but can be under Congress like CBO (Congressional Budget Office), GAO (Government Accounting Office)
- Examples: DHHS, OSHA, FDA, FTC, GSA, HUD, CMS under Executive Branch
- Known as fourth branch of government, bureaucracy, or ‘deep state’ by critics
Authority of administrative agency and rules depends on legislation that enacted the authority
- Administrative agencies make rules and regulations based on legislation that created the agency. Legislation may have been broadly written as Congress intends agencies will provide details in form of own rules and regulations to make laws work.
- Agencies must follow their own rules or use the Administrative Procedures Act for creating and interpreting regulations involving rulings and appeals.
Courts can invalidate rules
- Agencies must operate within law that created it. “Arbitrary and capricious” rules can be overturned or invalidated by courts
- Rules need substantial evidence to support them, must be consistent with original law, and based on original legislation.
- Courts are ultimate determining jurisdiction
- Agency must follow its own procedures
- Individual who sues must exhaust administrative appeals or remedies within the agency before appealing to courts
Applications: OSHA as example
- 1970 Federal Statute created OSHA to provide safe, healthful employment and develop standards so no employee suffers material impairment.
- An agency enacted by Congress cannot exceed its authority as set by enacted or updated legislation.
Are there any limits on administrative agencies like OSHA?
- OSHA was overruled when OSHA withdrew a regulation, and did so not based on evidence as language of legislation said it was to do, but did it for political reasons. Politics was not a good reason the Court said, and overruled OSHA.
- When new administration changes rules of agency, must go through procedures to delete rules as did when adding rules.
OSHA ruled on by the Courts
- Standards on blood borne pathogens for medicine, nursing, and dentistry fields upheld as having substantial evidence to justify standards.
- But OSHA overstepped its legislation in applying its rules to workplaces not controlled by the employers, as in home health care.
- Homes visited by home health workers do not have to meet OSHA standards as not under control of home health care organization.
General rules on Administrative Agencies
- An administrative agency may set a standard that puts some provider organizations out of business.
- That may be constitutional if based on evidence and within the language of the statute that created that administrative agency.
- Providers have no fundamental right to be in business, so if using two tier test, state only has to be rational, not have a compelling interest to set rules on providers.
DHHS example
- How much authority does DHHS have in imposing cost limiting restrictions in Medicare reimbursement decisions?
- Moved from cost plus reimbursement to Prospective Payment System-Diagnosis Related Groups (PPS-DRG) and challenged in court by provider hospitals.
DHHS/ Good Samaritan Hospital v. Shalala
- DHHS changed its reimbursement system.
- CMS issued new financial regulations
- Six rural hospitals had costs exceeding reimbursement when new rules applied.
- Hospitals challenged rules by DHHS.
Good Samaritan Hosp. v. Shalala
- Supreme Court agreed with facts hospitals presented, but ruled for DHHS. Congress used broad language in original law, so the DHHS administrative agency could make its own rules based on legislation. Providers have no fundamental right to be in this business, so no close scrutiny applied by the courts and government did not need to show a compelling reason for changing the rules.
Regents Hospital (1986)
- Issue: Regents Hospital received 40% less reimbursement from DHHS than requested after new rules implemented.
- Court ruled legislation is silent on the issue, so action by administrative agency only has to be within the overall legislative language.
- May be more than one interpretation so administrative agency’s interpretation is as good as the one the hospital suggested, so constitutional and sides with DHHS.
Conclusions
- Appears that Court’s investigations into an administrative agency’s discretion has less to do with resulting impact on the people or institutions affected or even the technical or scientific evidence, and more to do with things like substantial evidence, gross misapplication, best available evidence.
- Regulations need not be good policy or science to be good law. Similarly statutes need not be wise social policy to be constitutional.
Appendix: Summary of General Rules Governing Administrative Agencies and Provider Organizations
- Administrative agencies must follow their own procedures.
- Administrative agencies’ rulings and decisions must be consistent with and/or based on extent and scope of the original legislation.
- Administrative agencies’ rulings and decisions must be constitutional.
- Original legislation on which administrative agencies’ rulings and decisions must be constitutional.
Rules Governing Administrative Agencies and Provider Organizations
- Provider organizations are voluntary participants. No fundamental right to be in the business.
- Administrative rules and regulations must be based on the legislation, have a rationale and purpose, and cannot be arbitrary and capricious.
- Provider organization must exhaust appeals with administrative agency before bringing complaint to courts.
- Administrative agency is political creature as it came from the legislative arena.
Government Regulation of Health Care Providers and Payers
Module 7c
Government regulation of providers
Governments routinely implement established, non-controversial regulations, including
- Certificate of need (CON) in some states to start or expand hospital
- Today all states require licenses of nursing homes and hospitals
- Utilization review required in Medicaid/Medicare
- Licensing of professions
- Setting of reimbursement rates
Constitutional Constraints on Government Regulation of Health Care
States allowed wide latitude in regulating where fundamental rights are not involved.
Licensing does not interfere with fundamental rights
Physician has no fundamental right to be a physician
Providers have no constitutionally protected property interest as a provider. No right to be in particular business or activity.
Police powers of states usually upheld.
Political Restraints on Government Regulation
of Health Care
- Some Americans want health care, but not big government, a dilemma!
- Early Tea Party Sign 2009: “Keep government out of my Medicare!”
- President Trump: “Who knew healthcare could be so complicated?”
- Political ideology, anti-government attitudes, and complexity of healthcare limits laws and policies.
Constitutional Constraints on Government
- Federal government has little role in regulating providers unless Interstate Commerce or taxing power invoked as done in ACA rule to have insurance or pay tax.
- Involvement in Medicaid by states and providers is voluntary. Courts uphold federal government rules on funding and economic incentives, if they do not coerce or mandate participation.
- The Supreme Court in 2012 ruled unconstitutional the provision in ACA that would empower federal government to remove all Medicaid funding from states if they did not participate in Medicaid expansion.
Constitutional Constraints
- Providers contesting rate limits will likely lose in court if they voluntarily accepted the rates. Rates need only be reasonable.
- Governments can offer incentives, but not coerce providers. Federal Medicaid reimburses states $2 for every $3 spent, but cannot mandate state participation in Medicaid. All fifty states participate voluntarily in Medicaid.
Extent of Government Regulation of Providers
- Government can limit what provider charges other customers as condition of participation in a funded service. Provider can choose not to accept government funding, if that condition not acceptable.
- Government can set maximum charge rate on “private pay” services as condition of provider’s voluntary participation in funded service.
Constitutional Constraints
- Congress, although limited by Tenth Amendment, has authority to regulate interstate commerce.
- Congress has regulated employment practices of states and enacted legislation that prohibited discrimination against disabled.
Constitutional Constraints
- Private citizens cannot initiate lawsuits to enforce valid federal laws against individual states.
- States voluntarily participating in Medicaid are supposed to comply with rules. Individuals cannot sue to make states comply with those rules.
- Individuals can resort to negative publicity or political pressure on state.
Constitutional Constraints of Government Regulation
- If a provider disagrees with de-certification or fine, etc. can challenge through lengthy administrative procedures
- Process is expensive, time consuming and funding will be pending or denied until an outcome is determined.
- Must “exhaust administrative remedies” before going to courts. Courts not likely to see provider as having fundamental right to stay in business
Constitutional Constraints
- Nursing homes, hospitals, can be decertified or closed due to life safety issues. Decertified is not same as closing a business but may have same result as it can mean no new admissions.
- Even if closing is likely to cause patients to transfer and experience trauma, courts have still upheld closings as not depriving life, liberty, or property.
Constitutional Constraints on government regulations
- In decertification case, provider not entitled to due process as decertification does not affect a patient interest.
- States might extend a due process for political or other reasons, but not required for constitutional purposes.
- Updated 7/10/20
(Slides developed using Wing’s The Law and the Public’s Health, 7th ed. 2007)
Antitrust Laws:
Government Enforcement of Competition
Module 7d
Federal Antitrust Legislation
- Protest of large corporations with excessive economic power run by “robber barons” in certain industries, like RR, oil, steel overpowering states resulted in federal ant-trust legislation:
- Interstate Commerce Act
- Sherman Antitrust Act
- Clayton Act
Interstate Commerce Act (1887)
- Originally passed by Congress to regulate railroads.
- Facilitates federal government constitutional right to regulate commercial activity when that activity crosses state lines.
- Activity can be in areas usually reserved for state authority as set out in Tenth amendment.
- Cannot be used to create or force commerce, like “require one to eat broccoli.”
Sherman Antitrust (1890)
- As much a declaration of economic policy as a law
- The Act has two sections:
Prohibited two or more organizations concerting to substantially place restraint on trade
Felony to monopolize using unfair competition
Clayton Act 1914
- Justice Department authorized to focus on four new specific prohibited trade practices:
- Price fixing
- Exclusive contracts
- Mergers among competitors
- Interlocking directorates
Judicial Recognition of Applicability of Antitrust Laws to Healthcare
- Broad jurisdiction through interstate commerce
- Any “unreasonable restraint of trade” applies to
- almost all institutional and individual providers and professional associations regardless of how local
- “learned professions” (may set ethical or quality standards of/by profession but not act to unfairly restrain trade)
Ruling on Violations of Sherman
- If monopoly is using properly competitive behavior to eliminate rivals legally, it is competitive, not antitrust violation
- More likely a violation if
- wrongfully accumulating market power
- misusing market power properly acquired
- hold 70% of market share
Mergers, con’d
Courts make no distinction whether “not for profit” or “for profit” or if a healthcare organization when determining antitrust violations in mergers.
Updated 7/10/20
