08/06/2014 06:36 am ET Updated Oct 05, 2014

A Benefit Corporation Steps Up to Purchase a Chicago Hospital

Community First Healthcare of Illinois ("Community First"), an Illinois benefit corporation, recently announced plans to purchase Our Lady of the Resurrection Medical Center (formerly Northwest Hospital) in Chicago from Presence Health. It is encouraging to see the benefit corporation structure used for a hospital. Advantages of doing this were discussed in my article published last summer in Bloomberg BNA Health Insurance Report.

The benefit corporation structure is a "natural" for a hospital providing community health care. In fact, authorizing statutes typically include a public benefit purpose of this nature. Illinois' statute, for example, speaks in terms of "improving public health."

The benefit corporation structure is a particularly good fit in this case because Resurrection Medical Center is mission-driven. The Sisters of the Holy Family of Nazareth and Sisters of the Resurrection sponsor the Medical Center, which has long been embedded with mission, and Presence, the largest Catholic health care system in Illinois, has set a pre-condition of the sale that the community service mission continue under the buyer.

Resurrection Medical Center and predecessor entities operated as Illinois nonprofits. Community First was incorporated in Illinois in June 2014, reportedly as a benefit corporation, so Community First's acquisition offers an opportunity to assess a benefit corporation hospital in operation. Benefit corporation status embeds community service in the new entity in a way that satisfies the pre-condition of the sale, and, conversely, benefit corporation status cannot be terminated without a two-thirds vote.

From a legal perspective, the benefit corporation structure enables directors to allocate resources to serve mission goals and stakeholder interests above and beyond traditional shareholder interests. In this case, providing quality community health care would be a priority. Preliminary indications are that Community First intends to make good on its name. The hospital, which experienced years of operating losses and anticipated a financial shortfall, will be improved and the emergency room modernized to the tune of $20 million over five years.

This contrasts with some nonprofit hospitals which may have a low ratio of community service relative to their high profitability and which spend large sums on administrative salaries, acquisitions, or infrastructure because the hospital holds large profits which cannot be distributed since there are no shareholders. Benefit corporation status has the additional advantage that owners retain the authority to insure mission through injunctive proceedings, whereas original donors to a nonprofit may be without meaningful recourse if the entity does not reflect their intent. (See BNA article.)

Of course, benefit corporations are a relatively new phenomena and do not go unquestioned. Concerns raised in other contexts question the wisdom of adopting a relatively new and untested model, as well as the feasibility of maintaining the primacy of patient care in a corporate setting. The succinct answer is that benefit corporations generally have received bipartisan support in the 26 states and the District of Columbia which have adopted authorizing statutes, and the model can operate with physicians in key positions as to patient care and operation of the business such that inappropriate corporate practice of medicine is not a concern. In addition to the specific benefit purpose of improving human health mentioned above, Illinois' benefit corporation statute expressly provides that professional service corporations (of physicians, for example) can be benefit corporations. Licensed hospitals employ physicians to provide health care as well.

Questions may arise, depending upon the location of the benefit corporation statute in a state's overall code system, as to whether a benefit corporation satisfies specific regulatory requirements for particular types of health care organizations. In this case, Illinois' Benefit Corporation Act happens to reside within the Corporations Code, as do the Professional Service Corporation Act and the Medical Corporation Act. However, if necessary, amendments can be enacted at the state level.

In terms of overall regulatory structure, this author's view is that innovators can drive regulatory change, particularly in times of budgetary constraints, and that regulators do well to rely on the good practices of mission-driven businesses in achieving goals.

Truth be told, benefit corporations may put the patient first and optimize outcomes in ways that raise the bar for the delivery of quality affordable health care to all patients. Given all the circumstances, Community First's experiment is worth watching and, if successful, modeling