Judge Rules for Physicians, Against Hospital

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Law Feature – March 2012

Tex Med. 2012;108(3):41-43.

By Crystal Conde
Associate Editor

The Texas Medical Association helped a group of Weslaco physicians win a preliminary victory for financial transparency at nonprofit hospitals in their ongoing legal battle with a local hospital.

Thanks in part to TMA's legal arguments, Judge Israel Ramon Jr. ordered Knapp Medical Center to release balance sheets; cash flow statements; management letters from the external auditor; compensation documentation for all employees; documentation of deferred executive compensation; Internal Revenue Service (IRS) Forms 990 for the years 2008-10; and other financial records.

Twenty-six physicians, who created the Trust of Weslaco, alleged financial improprieties at the medical center and reported quality-of-care concerns such as inadequate coverage by specialists, an insufficient number of nurses and support staff, and a high turnover of nurses and support staff.

TMA supported the physician trust in its efforts to obtain financial records from Knapp Medical Center, not in its concerns regarding the business decisions of hospital administrators.

The physicians hired Dallas attorney Jeffrey Grass, JD, after the hospital denied their request for financial records. Sandra Esquivel, MD, a general surgeon and Weslaco native who's a member of the trust, says the physicians wanted the records to determine whether the hospital administration's financial decisions meshed with the goal of improving patient care.

Mr. Grass asked Knapp for its financial records twice in February 2011. On his second attempt, he also requested copies of bylaws, minutes of the Executive Committee and Board of Directors meetings, federal tax returns dating back to 2006, travel expense reports, a number of IRS forms, and additional documents. The hospital responded to the second request by suing him and asking the court to rule that it didn't have to respond.

Mr. Grass made the request under a section of the Texas Business Organizations Code that requires nonprofit corporations to maintain financial books, records, and annual reports for three years and to make them available for public inspection and copying. The law exempts a nonprofit corporation that does not intend to solicit and receive and does not actually raise or receive contributions exceeding $10,000 from a source other than its membership during a fiscal year.

The medical center argues it is exempt because it established the Knapp Medical Center Foundation in 1981 to solicit donations from the public rather than seeking donations itself.  

TMA Supports Financial Accountability

TMA filed an amicus curiae brief in June to support Mr. Grass's request. In October, the district court judge ruled in his favor.

TMA argued in its brief that corporations like Knapp that seek public donations over $10,000 per year should be "held accountable to that same public by keeping and making available certain financial records." TMA also asserted the foundation is a "sham corporate entity, which exists solely for the purpose of funding the Knapp Medical Center."

Nonprofit hospitals like Knapp rely on public funding. In the brief, TMA says hospital medical staff physicians have an interest in a hospital's operations and in its prudent use of resources.

"This transparency promotes quality patient care and accountability. Every employee of and patient treated at a hospital is affected by the financial decisions made by those in charge. Financial misdeeds by hospital leadership are paid for by patients and employees. Patient safety is compromised when hospitals do not use their financial resources to further quality of care," TMA said in the brief.

Knapp attorney Richard Sheehy, JD, of Houston, says the ruling disappointed hospital officials because they have a different view of the application and scope of the Texas Business Organizations Code statute.

"Federal law requires the hospital, and other not-for-profit corporations, to disclose significant financial information that guarantees transparency about their operations, which the hospital has been doing in accordance with the law for years," Mr. Sheehy said.

He adds that the district court's order puts the hospital at a competitive disadvantage with nonprofit hospitals in the same geographic area as Knapp.

"This decision, if it stands, will have a significant and lasting impact on all not-for-profit organizations across the state of Texas, as it opens the floodgates to requests from competitors for otherwise confidential financial information. Therefore, we don't believe the court's order is consistent with the intent and purpose of the statute," Mr. Sheehy said.

At press time, Mr. Sheehy said the hospital was "seriously considering" an appeal. The hospital had 30 days from the Jan. 6 date of the court order to appeal, he said.

Mr. Grass hopes the court's decision prompts the hospital to exercise greater transparency in how it maintains and discloses financial records. He says disclosure of financial records by the hospital "marks the beginning of improvement of patient care in the community."

"The purpose of the law requiring disclosure is to ensure hospital administrators exercise proper fiduciary care and duty to patients by making the hospital's expenditures consistent with patient care improvement," he said.

Transparency Vital at Nonprofits

"If the hospital isn't doing anything wrong, it should just turn over the records," Mr. Grass said.

Of particular concern to Dr. Esquivel and her fellow physicians in the trust was the call schedule for the emergency department at Knapp. She says hospital executives decided in 2006 to stop paying specialists such as urologists, gastroenterologists, neurologists, and orthopedists to take call.

As a result, patients were transported to other hospitals in the region that did have these specialists available, according to Dr. Esquivel. 

She says this is one example of the hospital's administration prioritizing profits ahead of patient care.

"Taking specialists off the call schedule upset the physicians and hindered patients' access to care," she said.

Mr. Grass says Knapp's lack of critical care coverage in specialty areas concerned his clients because it has a significant impact on the community, which has many elderly residents.

Dr. Esquivel says the district judge's decision to require Knapp to disclose financial records is a "big victory."

"Knapp Medical Center is a nonprofit that's supposed to invest the money it makes in improving the hospital, not in making the administration wealthier," Dr. Esquivel said. "Patients will want to come back to the hospital if it's being managed properly."

Ernst Mitchell "Mitch" Martzen, JD, a Dallas attorney representing Mr. Grass, says the district court judge made the right decision.

"The Texas state statutes require all but the smallest nonprofits to keep and disclose virtually all of their financial records," he said. "Transparency is vital to maintaining public confidence in our nonprofit institutions, and I'm hopeful that the hospital in this case will have that moment of public accountability."

Widespread Ramifications

Mr. Martzen says TMA's support of financial accountability at Knapp was helpful. He adds TMA's efforts "showed me that this was but one battle in the ongoing war to help physicians find their voice in the increasingly secretive hospital administrative environment."

TMA's support of financial accountability at Knapp has been invaluable, Mr. Grass added.

"Representatives from the TMA Office of General Counsel attended hearings, invited us to TMA meetings, and provided financial support. More importantly, TMA communicated to the judge in district court that this isn't an isolated problem in Weslaco. The issue of financial disclosure by nonprofit hospitals has great significance to all hospitals in Texas. TMA was the voice of the public, advocating greater accountability," Mr. Grass said.

Hospital representatives and their attorneys hadn't released the financial documents outlined in the court order at press time.

Should Knapp appeal and the court of appeals affirm the district court's ruling, Mr. Grass says the decision will have significant ramifications on business operations for nonprofit hospitals in Texas.

"Other Texas hospitals won't be able to hide behind their foundations and avoid disclosing financial information. This decision will spur greater financial accountability at nonprofit hospitals, which will lead to transparency and good governance," he said.

Once Mr. Grass is able to obtain the records, a forensic accountant will review the hospital administration's financial conduct.

"We expect to establish that the decisions of the Knapp administration are improper. That will give us grounds to request that the attorney general intervene in the operation of the hospital and replace the current administration," Mr. Grass said.

Crystal Conde can be reached by telephone at (800) 880-1300, ext. 1385, or (512) 370-1385; by fax at (512) 370-1629; or by email.

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