By: Cain S.B. No. 1264 Line and page numbers may not match official copy. Bill not drafted by TLC or Senate E&E. A BILL TO BE ENTITLED AN ACT 1-1 relating to certain nonprofit hospitals that provide health or 1-2 long-term care providing a penalty. 1-3 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-4 SECTION 1. PURPOSE AND FINDINGS. Nonprofit hospitals have 1-5 historically served the needs of their community, including the 1-6 needs of uninsured individuals in the community. Access to high 1-7 quality, affordable health care is a continuing need in a state 1-8 with over four million uninsured individuals and millions more 1-9 individuals who do not have adequate insurance. Changes in the 1-10 health care market have caused a substantial number of nonprofit 1-11 hospitals to consider transactions with for-profit ventures, 1-12 affecting hundreds of millions of charitable dollars. As these 1-13 changes in the health care system occur, it is in the best interest 1-14 of this state to ensure that these health care assets, which are 1-15 impressed with a constructive charitable trust for health care 1-16 purposes, continue to serve the public and the unmet health care 1-17 needs in this state. 1-18 SECTION 2. SHORT TITLE. This Act may be cited as the 1-19 Charitable Hospital Trust Act. 1-20 SECTION 3. DEFINITIONS. In this act: 1-21 (1) "Charitable health care organization" means an 2-1 organization that is: 2-2 (A) exempt from federal income tax under 2-3 Section 501(a) of the Internal Revenue Code of 1986 being listed as 2-4 an exempt organization in Section 501(c)(3) of the code; and 2-5 (B) dedicated to: 2-6 (i) serving unmet health care needs in 2-7 this state, including the health care needs of low-income uninsured 2-8 and underserved populations; or 2-9 (ii) promoting access to health care and 2-10 improving the quality of health care for the populations described 2-11 by Subparagraph (i) of this paragraph. 2-12 (2) "Charitable hospital trust" means a charitable 2-13 hospital trust established under Section 8 of this Act. 2-14 (3) "Designated charitable health care organization" 2-15 means a charitable health care organization receiving disbursements 2-16 from a charitable hospital trust under Section 9 of this Act. 2-17 (4) "Hospital system" means a system of local 2-18 nonprofit hospitals under the common governance of a single 2-19 corporate parent that are located within a radius of not more than 2-20 125 linear miles of the corporate parent. 2-21 (5) "Nonprofit hospital" means any entity exempt from 2-22 tax under Section 501(c)(3) of the Internal Revenue Code of 1986 2-23 that is: 2-24 (A) a general or special hospital licensed under 2-25 Chapter 241; 3-1 (B) a private mental hospital licensed under 3-2 Chapter 577; or 3-3 (C) a treatment facility licensed under Chapter 3-4 464. 3-5 (6) "Service area" means a geographical area of this 3-6 state served by a nonprofit hospital or a charitable health care 3-7 organization. 3-8 SECTION 4. DUTIES OF A NONPROFIT HOSPITAL. (a) A nonprofit 3-9 hospital shall comply with this Act before entering into any 3-10 agreement or transaction under which the nonprofit hospital 3-11 directly or indirectly: 3-12 (1) sells, transfers, leases, exchanges, provides an 3-13 option with respect to, or otherwise disposes of a material portion 3-14 of its assets in favor of an entity organized to generate a profit; 3-15 (2) restructures as or converts to an entity organized 3-16 to generate a profit, if a material portion of the assets of the 3-17 nonprofit hospital are involved in the restructuring or conversion; 3-18 or 3-19 (3) transfers control, responsibility, or governance 3-20 of a material amount of the assets, operations, or business of the 3-21 hospital in favor of an entity organized to generate a profit. 3-22 (b) In the case of a hospital system, this Act applies to 3-23 any transaction described in Subsections (1) through (3) above 3-24 which involves a nonprofit hospital that is a member of the 3-25 hospital system. 4-1 SECTION 5. REQUIREMENTS FOR AGREEMENT OR TRANSACTION. A 4-2 nonprofit hospital may not enter into an agreement or transaction 4-3 described by Section 4 of this Act unless the agreement or 4-4 transaction: 4-5 (1) is in the public interest; 4-6 (2) does not directly or indirectly benefit an 4-7 officer, director, or employee of the nonprofit hospital or another 4-8 private person or entity; 4-9 (3) is not likely to adversely affect the availability 4-10 of health care services to uninsured or underinsured individuals, 4-11 particularly uninsured or underinsured individuals with low 4-12 incomes, in the service area of the nonprofit hospital; 4-13 (4) includes sufficient safeguards to ensure that 4-14 uninsured and underinsured individuals have continued access to 4-15 affordable care in the service area; and 4-16 (5) will not reduce the amount of charity care 4-17 historically provided by the nonprofit hospital as required by 4-18 Chapter 311, Health and Safety Code. 4-19 SECTION 6. AGREEMENT IN PUBLIC INTEREST. (a) An agreement 4-20 or transaction is not in the public interest for purposes of 4-21 Section 5(a) of this Act unless the nonprofit hospital has taken 4-22 appropriate steps to: 4-23 (1) safeguard the value of assets held by the 4-24 nonprofit hospital for a charitable health care purpose; and 4-25 (2) ensure that the proceeds of any transaction are 5-1 dedicated to a charitable health care purpose in the nonprofit 5-2 hospital's service area. 5-3 (b) For purposes of this section, "charitable health care 5-4 purpose" means those activities described as community benefits in 5-5 Section 311.042, Health and Safety Code. 5-6 SECTION 7. DUE DILIGENCE REQUIRED. In entering into an 5-7 agreement or transaction described by Section 4 of this Act, a 5-8 nonprofit hospital shall use due diligence in: 5-9 (1) selecting the entity with which the agreement or 5-10 transaction is being made; and 5-11 (2) negotiating the terms of the agreement or 5-12 transaction. 5-13 SECTION 8. CHARITABLE HOSPITAL TRUST. (a) A nonprofit 5-14 hospital that enters into an agreement or transaction described by 5-15 Section 4 of this Act may be required by the Attorney General to 5-16 establish a charitable hospital trust equal to the fair market 5-17 value of the assets of the nonprofit hospital where such a trust is 5-18 necessary to ensure that the requirements of Section 6 are 5-19 fulfilled. Hospital systems shall be deemed to satisfy the 5-20 requirements of Section 6 where the fair market value of assets 5-21 received from a transaction are contributed to a related nonprofit 5-22 hospital that provides hospital services in the same service area. 5-23 Distributions from the charitable hospital trust must be dedicated 5-24 to an existing or newly created charitable health care organization 5-25 that will operate in the service area of the nonprofit hospital. 6-1 (b) An assessor who is not an employee of the nonprofit 6-2 hospital and who is otherwise independent of the nonprofit provider 6-3 and of the entity with which the agreement of transaction is being 6-4 made shall determine the fair market value of the assets of the 6-5 nonprofit hospital. In determining the fair market value, the 6-6 assessor shall consider market value, investment or earnings value, 6-7 net asset value, and a control premium, if any. The nonprofit 6-8 hospital shall pay for the assessment conducted under this 6-9 subsection. The nonprofit hospital and the entity with which the 6-10 agreement or transaction is being made shall make the report of the 6-11 assessor available to any person on request. 6-12 (c) A portion of the consideration conveyed to the 6-13 charitable hospital trust may consist of stock of an entity 6-14 organized for profit. Stock conveyed to the charitable trust in 6-15 accordance with this subsection may not be subject to unreasonable 6-16 restrictions prohibiting the sale of the stock by the charitable 6-17 hospital trust or a charitable health care organization for a 6-18 period of time. In addition, the agreement or transaction may not 6-19 otherwise place unreasonable restrictions on the transfer of the 6-20 stock. 6-21 SECTION 9. DESIGNATED CHARITABLE HEALTH CARE ORGANIZATION. 6-22 (a) A designated charitable health care organization that receives 6-23 distributions from the charitable hospital trust under Section 8 of 6-24 this Act, and each director, officer, and employee of the 6-25 charitable health care organization, must be independent of the 7-1 entity with which the agreement or transaction described by Section 7-2 4 of this Act is made and any affiliate of that entity. A person 7-3 who is an officer, director, or employee of the nonprofit provider 7-4 at the time of an agreement or transaction described by Section 4 7-5 of this Act is under consideration may not serve as an officer, 7-6 director, or employee of the charitable health care organization 7-7 for a period of three years. 7-8 (b) A designated charitable health care organization shall 7-9 implement procedures to: 7-10 (1) avoid conflicts of interest; 7-11 (2) prohibit grants benefiting an officer, director, 7-12 or employee of the charitable health care organization or 7-13 benefiting the entity with which the agreement or transaction 7-14 described by Section 4 of this Act is made; and 7-15 (3) ensure that the members of the governing body of 7-16 the charitable health care organization are representative of the 7-17 service area. 7-18 (c) The charitable health care organization shall: 7-19 (1) publish notice of: 7-20 (A) the designation of the charitable health 7-21 care organization to receive the assets and the amount of assets to 7-22 be received; 7-23 (B) the proposed mission and purpose of the 7-24 charitable health care organization; 7-25 (C) the governing structure of the charitable 8-1 health care organization; and 8-2 (D) the time, date, and place of the public 8-3 hearing to be held under Subdivision (2) of this subsection; and 8-4 (2) hold at least one public hearing to obtain public 8-5 comment in the service area relating to the mission and purpose. 8-6 (d) The notice required under Subsection (c)(1) of this 8-7 section must be published not later than the fifth day after the 8-8 date the charitable health care organization is designated to 8-9 receive the assets from the charitable health care trust under 8-10 Section 8 of this Act. The hearing required under Subsection 8-11 (c)(2) of this section must be held not later than the 30th day 8-12 after the date the charitable health care organization is 8-13 designated to receive the assets from the charitable hospital trust 8-14 under Section 8 of this Act. 8-15 (e) A designated charitable health care organization shall 8-16 publish an annual report of its activities related to the use of 8-17 the assets received from the charitable hospital trust. The report 8-18 must include, at minimum, a statement of the amount of money 8-19 distributed by the charitable health care organization, the 8-20 identity of each entity that received the money and a statement of 8-21 the purpose for which the money was distributed to each entity, and 8-22 any report required to be filed with the Internal Revenue Service 8-23 that is a public document under state or federal law. The report 8-24 shall be made available to the public at the office of the 8-25 organization. The organization shall publish notice of the 9-1 availability of the report. 9-2 SECTION 10. NOTICE OF AGREEMENT. (a) A nonprofit hospital 9-3 that intends to enter into an agreement or transaction described by 9-4 Section 4 of this Act shall notify the attorney general and shall 9-5 publish notice of that fact. 9-6 (b) The notice to the attorney general must: 9-7 (1) be made in writing as soon as practicable after 9-8 the nonprofit hospital becomes aware that it intends to consider 9-9 the agreement or transaction and in any event not later than the 9-10 90th day before the date on which the agreement or transaction is 9-11 to become effective; and 9-12 (2) disclose the conditions under which the agreement 9-13 or transaction will be made according to the best information 9-14 available to the nonprofit hospital. 9-15 (c) The notice provided to the attorney general under 9-16 Subsection (b) of this section must state: 9-17 (1) the identity of the nonprofit hospital and any 9-18 nonprofit entity that owns or controls the nonprofit hospital; 9-19 (2) the identity of the entity with which the proposed 9-20 agreement or transaction is to be made; 9-21 (3) the identity of any other party to the proposed 9-22 agreement or transaction; 9-23 (4) the terms of the proposed agreement or 9-24 transaction; 9-25 (5) the value of consideration to be provided in 10-1 connection with the proposed agreement or transaction and the basis 10-2 on which this valuation is made; 10-3 (6) the identity of any individual or entity who is an 10-4 officer, director, or affiliate of the nonprofit hospital and a 10-5 statement as to whether each named individual or entity: 10-6 (A) has been promised future employment as a 10-7 result of the proposed agreement or transaction; 10-8 (B) has been a party to discussions relating to 10-9 future employment as a result of the proposed agreement or 10-10 transaction; or 10-11 (C) has any other direct or indirect economic 10-12 interest in the proposed agreement or transaction; 10-13 (7) the identify and credentials of the assessor or 10-14 proposed assessor to be appointed under Section 8(b) of this Act 10-15 and a statement as to whether the assessor has contracted with or 10-16 performed services for the entity with which the proposed agreement 10-17 or transaction is to be made; and 10-18 (8) the date on which the proposed agreement or 10-19 transaction is to become effective. 10-20 (d) In addition to the information provided to the attorney 10-21 general under Subsections (b) and (c) of this section, the 10-22 nonprofit hospital shall provide to the attorney general a copy of 10-23 the report of the assessor appointed under Section 8(b) of this 10-24 Act. The report must be provided to the attorney general not later 10-25 than the later of: 11-1 (1) the date notice is made to the attorney general 11-2 under Subsection (b) of this section; or 11-3 (2) the fifth day after the date the assessor 11-4 completes the report. 11-5 (e) In addition to the notice required under Subsection (b) 11-6 of this section, the nonprofit hospital shall notify the attorney 11-7 general of any material change in the agreement or transaction or 11-8 any of the information required by Subsection (c) of this section 11-9 not later than the 45th day before the date the agreement or 11-10 transaction becomes effective. 11-11 (f) The notice submitted to the attorney general under this 11-12 section and any materials submitted with the notice are public 11-13 information. On the request of any person, the nonprofit hospital 11-14 shall make the information available at the business office of the 11-15 nonprofit provider in each affected service area. 11-16 (g) The first publication of notice under this section must 11-17 be made not later than the 90th day before the date the agreement 11-18 or transaction would become effective and must state the address of 11-19 the business office of the nonprofit hospital in each affected 11-20 service area and state that more detailed information concerning 11-21 the proposed agreement or transaction is available at the business 11-22 office. 11-23 SECTION 11. PUBLIC HEARING. (a) Not later than the 45th 11-24 day after the date the attorney general receives the notice under 11-25 Section 10 of this Act, the nonprofit hospital shall: 12-1 (1) solicit written public comment; and 12-2 (2) hold at least one public hearing to obtain public 12-3 comment in the service area of the nonprofit hospital. 12-4 (b) Not later than the 21st day before the date of the 12-5 public hearing, the nonprofit hospital shall: 12-6 (1) publish notice of the request for written comment 12-7 and of the time and place of the hearing; and 12-8 (2) notify the county commissioners in each county in 12-9 the service area of the nonprofit hospital of the request for 12-10 written comment and of the time and place of the hearing. 12-11 (c) The notice provided under Subsection (b)(1) of this 12-12 section must state the address of the business office of the 12-13 nonprofit hospital in the service area and must state that more 12-14 detailed information concerning the proposed agreement or 12-15 transaction is available at the business office. 12-16 SECTION 12. PUBLICATION OF NOTICE. (a) In any case in 12-17 which a nonprofit hospital or a designated charitable health care 12-18 organization is required to publish notice under this Act, notice 12-19 must be published in: 12-20 (1) the Texas Register; and 12-21 (2) one or more newspapers in accordance with 12-22 Subsection (b) of this section. 12-23 (b) Notice published under Subsection (a)(2) of this section 12-24 must be published in a newspaper of general circulation in the 12-25 service area. The notice must be published at least once each week 13-1 for at least three weeks. If the service area includes more than 13-2 one county, the notice must be published in a newspaper of general 13-3 circulation in each county included in the service area. 13-4 (c) If a newspaper of general circulation does not exist in 13-5 a county in the service area, the nonprofit provider or charitable 13-6 health care organization shall post the notice at the courthouse 13-7 door and at five other public places in the county. Notice posted 13-8 under this subsection must be posted on the date publication of the 13-9 notice is required under this Act and must remain posted for at 13-10 least 30 days. 13-11 SECTION 13. ENFORCEMENT BY ATTORNEY GENERAL'S OFFICE. 13-12 (a) The attorney general may bring an action in a district court 13-13 of Travis County for: 13-14 (1) a temporary restraining order, a temporary 13-15 injunction, or a permanent injunction to prevent a nonprofit 13-16 hospital from entering into an agreement or transaction described 13-17 by Section 4 of this Act; 13-18 (2) a civil penalty in a amount not to exceed $10,000 13-19 for each day of a continuing violation of this Act; or 13-20 (3) any other relief authorized under a statute or the 13-21 common law for conduct that violates this Act. 13-22 (b) In an action brought under this section in which the 13-23 attorney general prevails, the court may aware to the attorney 13-24 general the costs of the suit and attorney's fees. 13-25 SECTION 14. PENALTIES UNDER LICENSING LAW. A nonprofit 14-1 hospital who fails to comply with this Act, the successor in 14-2 interest of a nonprofit hospital who fails to comply with this Act, 14-3 or a designated charitable health care organization that fails to 14-4 comply with this Act is subject to: 14-5 (1) revocation or suspension of the license or 14-6 certificate of authority of the hospital, successor in interest, or 14-7 organization, in accordance with the law regulating the entity; or 14-8 (2) administrative or civil penalties, to the extent 14-9 that the law regulating the entity authorizes those penalties for a 14-10 violation of that regulatory law. 14-11 SECTION 15. EFFECTIVE DATE. This Act takes effect 14-12 September 1, 1997. 14-13 SECTION 16. TRANSITION. (a) This Act applies only to: 14-14 (1) an agreement described by Section 4 of this Act 14-15 that is entered into on or after September 1, 1997; or 14-16 (2) a transaction described by Section 4 of this Act 14-17 that is made pursuant to an agreement entered into on or after 14-18 September 1, 1997. 14-19 (b) An agreement described by Section 4 of this Act that is 14-20 entered into before September 1, 1997, and a transaction described 14-21 by Section 4 of this Act that is made pursuant to an agreement 14-22 entered into before September 1, 1997, are governed by the law as 14-23 it existed immediately before the effective date of this Act and 14-24 that law is continued in effect for that purpose. 14-25 SECTION 17. EMERGENCY. The importance of this legislation 15-1 and the crowded condition of the calendars in both houses create an 15-2 emergency and an imperative public necessity that the 15-3 constitutional rule requiring bills to be read on three several 15-4 days in each house be suspended, and this rule is hereby suspended.