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NEW YORK STATE DEPARTMENT OF HEALTH

INTEROFFICE MEMORANDUM

TO: Members of the Public Health Council
Members of the State Hospital Review and Planning Council

FROM: Susan Regan Esq.
Chair, PHC Establishment Committee

Thomas J. Sinatra, M. D.
Chair, SHRPC Planning Committee

SUBJECT: Representative Governance

DATE: March 7, 2001

This is to present the recommendations of the Workgroup on Representative Governance, a joint endeavor of the Establishment Committee of the Public Health Council and the Planning Committee of the State Hospital Review and Planing Council These recommendations are a product of the Workgroup's meetings, which began in April, 2000, and of background work by Department staff, especially in the area of renal dialysis. We present these recommendations for consideration as a policy to guide the councils and the Department in reviewing applications for representative governance for Article 28 providers.

Providers of Chronic Renal Dialysis Services

Because of the significant decline in real terms of Medicare reimbursement for ESRD services since the inception of the program in 1973: the access to capital and the efficiencies offered by the national and international firms can provide a positive benefit to the provision of quality dialysis services. Therefore, the Workgroup recommends that the SHRPC and the PHC continue to Consider, and where appropriate approve, applications for representative governance arrangements between dialysis providers and outside entities not eligible for establishment under Article 28, provided that any such arrangements are consistent with the principles set forth in the memorandum Of DOH General Counsel to the SHRPC and the PHC of September 21, 1999:

The established operator retains the ultimate authority over and responsibility for the facility's operations (the so-called "reserve powers")

The approved shareholder is-the sole beneficial owner of the stock

Any subsequent transfers of-stock or voting fights of 10 percent or more are approved by the PHC

The project does not involve an improper sharing of facility revenue.

Other Article 28 Providers

Unlike providers of chronic renal dialysis, other Article 28 facilities---hospitals, nursing homes, general D & T centers and ambulatory surgery centers (ASCs)--- are not dependent on an exclusive funding source, nor do they offer a single, discrete service to a population with a common diagnosis. Therefore, they are viewed differently for representative governance purposes. For example, the status of the voluntary general hospital as a resource to the local community may make the preservation of local control of the institution advisable.

The workgroup recommends that, for the immediate future, the Public Health Council and the State Hospital Review and Planning Council consider, on a case-by-case basis, applications that involve representative governance arrangements for types of Article 28 providers other than renal dialysis facilities, provided that such proposals are not inconsistent with the general principles set forth in the cited September 21, 1999 memorandum and also maintain, at a minimum:

Local control of the Article 28 provider and its operations
Accountability of the Article 28 provider to the community
Preservation of the use Of the assets of the Article 28 provider exclusively for the community it serves.

Local control and accountability of the provider shall mean:

Effective decision making authority and control over the operation and management of the facility, and the majority of the economic and ownership interest in the Article 28 operator, must be vested in persons not associated with or controlled by, either directly or indirectly, the outside entity. The activities over which the persons not affiliated with the outside entity must retain authority and control include.

appointment or dismissal of facility management level employees and medical staff;
approval of facility operating and capital budgets;
adoption or approval of facility operating and management policies and procedures;
the filing of certificate of need applications on behalf of the facility;
approval of facility debt necessary to finance the cost of compliance with operational or physical plant standards required by law;
approval of facility contracts for management or clinical services;
maintenance of the facility’s books and records;
authority over the disposition of assets and the incurring of liabilities associated with the operation of the facility;
approval of settlements of administrative proceedings or litigation to which the operator is a party;
patient billing activities and all receivables and facility bank accounts.

Preservation of the use of the assets of the Article 28 provider for the community shall mean:

All contracts between the Article 28 operator and the outside entity for goods or services must be at fair market value
Any lease or sale agreement between the Article 28 operator and outside entity relating to the facility real estate or equipment must be at fair market value;
No income or profits from the Article 28 facility may be distributed to any person affiliated with the outside entity in a percentage that exceeds the outside entity's representative's minority ownership interest in the facility.
Any change in the outside entity's representative's share of ownership interest in the Article 28 facility operator shall be subject to approval by the Public Health Council.

Short-Term and Long-Term Considerations

The Workgroup notes that non-dialysis Article 28 providers vary widely in their organization, financial needs, services offered and populations served. The approach we have recommended for review of local control, accountability and preservation of assets should therefore be applied on a case-by-case basis. We also suggest that the councils consider applying these criteria for an interim period. We further recommend that the councils appoint a new joint work group to evaluate whether to make the review criteria for local control, accountability and preservation of assets permanent, through regulation or legislation. The workgroup could also consider the question of whether representative governance should be restricted to certain categories of providers. At the end of the interim period, the full PHC and SHRPC could evaluate the impact of the recommended review criteria for local control, accountability and preservation of assets, in light of the types of representative governance applications brought before each council for consideration.