PRINTER'S NO. 237
No. 208 Session of 2003
INTRODUCED BY MUNDY, BEBKO-JONES, BELFANTI, BROWNE, CAWLEY,
DeLUCA, EACHUS, FRANKEL, FREEMAN, GEORGE, GOODMAN, GORDNER,
HARHAI, HORSEY, KIRKLAND, LEACH, MANDERINO, McCALL, MELIO,
PISTELLA, PRESTON, TANGRETTI, THOMAS, TIGUE, WALKO, WANSACZ,
WASHINGTON AND YOUNGBLOOD, FEBRUARY 11, 2003
REFERRED TO COMMITTEE ON INSURANCE, FEBRUARY 11, 2003
AN ACT
1 Amending Titles 15 (Corporations and Unincorporated
2 Associations) and 40 (Insurance) of the Pennsylvania
3 Consolidated Statutes, adding provisions relating to
4 fundamental changes to nonprofit hospitals, hospital plan
5 corporations and professional health service corporations;
6 providing for certain conversions from nonprofit to for-
7 profit status; and further providing for judicial supervision
8 of certain proceedings.
9 The General Assembly of the Commonwealth of Pennsylvania
10 hereby enacts as follows:
11 Section 1. Title 15 of the Pennsylvania Consolidated
12 Statutes is amended by adding a section to read:
13 § 5906. Charitable nonprofit corporations.
14 (a) General rule.--Where any provision of this subchapter or
15 Subchapter C (relating to merger, consolidation and sale of
16 assets), D (relating to division), E (relating to conversion), F
17 (relating to voluntary dissolution and winding up), G (relating
18 to involuntary liquidation and dissolution) or H (relating to
19 postdissolution provision for liabilities) relates to a
1 nonprofit hospital, or a hospital plan corporation or a
2 professional health service corporation, incorporated for
3 purposes defined under 40 Pa.C.S. § 6101 (relating to
4 definitions) or 6301 (relating to application of chapter):
5 (1) No action shall take effect unless, after notice to
6 and review by the Attorney General as provided herein, an
7 order approving the proposed transaction has been issued by
8 the court.
9 (2) No conversion transaction involving a nonprofit
10 hospital or a hospital plan corporation or a professional
11 health service corporation, incorporated for purposes defined
12 under 40 Pa.C.S. §§ 6101 and 6301, respectively, shall take
13 effect unless, after notice to and review by the Attorney
14 General, as provided herein, an order approving the proposed
15 transaction has been issued by the court.
16 (b) Notice to Attorney General.--
17 (1) At least 120 days' advance written notice of any
18 proceeding in a court concerning the proposed transaction
19 shall be provided to the Attorney General at his principal
20 office in Harrisburg, Pennsylvania. The notice shall include
21 or be accompanied by the following items and any other
22 documents or information the Attorney General may request:
23 (i) The purposes of the proposed transaction.
24 (ii) The benefits of the proposed transaction to the
25 citizens of this Commonwealth.
26 (iii) The articles of incorporation and bylaws of
27 all corporations party to the proposed transaction.
28 (iv) A detailed summary of the proposed transaction.
29 (v) A detailed description of the assets involved in
30 the proposed transaction and the intended use of the
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1 assets after the closing of the proposed transaction.
2 (vi) A detailed summary of all collateral
3 transactions that relate to the proposed transaction.
4 (vii) Information indicating the financial stability
5 of each new corporation and its financial and management
6 capacity to operate.
7 (viii) The nature and expenditures of public benefit
8 or charitable activities undertaken by the corporation
9 over the past five years.
10 (ix) Names, addresses and telephone numbers of all
11 parties to the proposed transaction and all parties to
12 any collateral transactions.
13 (x) Name, address, telephone number and occupation
14 of all officers, members of the board of directors,
15 trustees, executive and senior level management of the
16 corporation, including, for each position, current
17 persons and persons holding position during the past
18 three years.
19 (xi) The names of persons currently holding any
20 position as an officer, director or senior level
21 management with the corporation or any of its
22 subsidiaries who will maintain any position with any new
23 corporation, and whether the person will receive any
24 salary, severance, stock offering or any financial gain,
25 current or deferred, as a result of or in relation to the
26 proposed transaction.
27 (xii) Organizational structure for the corporation
28 and each partner, affiliate, parent, subsidiary or
29 related corporate entity in which the converting entity
30 had a 20% or greater ownership interest.
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1 (xiii) Names, addresses and telephone numbers of
2 attorneys or other professional consultants engaged in
3 connection with the proposed transaction.
4 (xiv) Copies of independently audited income
5 statements, balance sheets and other financial statements
6 for the past three years for each of the parties to the
7 proposed transaction, together with a detailed
8 description of the financing structure applicable to the
9 proposed transaction, including equity contribution, debt
10 restructuring, stock issuance, partnership interests,
11 stock offerings and the like.
12 (xv) A detailed description as to how each of the
13 following relates to the proposed transaction:
14 (A) Equipment leases.
15 (B) Insurance.
16 (C) Regulatory compliance.
17 (D) Tax status.
18 (E) Pending litigation.
19 (F) Pending regulatory citations.
20 (G) Pension plan descriptions.
21 (H) Employee benefits.
22 (I) Assessments.
23 (J) Organizational goals.
24 (xvi) Copies of reports analyzing the proposed
25 transaction prepared by or for the corporation or any
26 entity to which the corporation is successor in interest,
27 including, but not limited to, reports by appraisers,
28 accountants, investment bankers, actuaries and other
29 experts.
30 (xvii) A description of the manner in which the
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1 prices and valuations associated with the proposed
2 transaction were determined, including which methods of
3 valuation and what dates were used, and the names and
4 addresses of persons who prepared the documents.
5 (xviii) A detailed description of real estate
6 pertaining to the proposed transaction, whether owned or
7 leased, including title reports.
8 (xix) Copies of all National Committee on Quality
9 Assurance (NCQA) reports and profiles and all National
10 Association of Insurance Commissioners (NAIC) reports
11 issued during the past five years for, or related to, the
12 corporation or its subsidiaries, as applicable.
13 (xx) Copies of all Joint Commission on Accreditation
14 of Healthcare Organizations (JCAHO) reports issued during
15 the past five years for, or related to, the corporation
16 or its subsidiaries, as applicable.
17 (xxi) Conflict of interest statements, policies and
18 procedures.
19 (xxii) The name and mailing address of all
20 facilities in which the acquirer maintains an ownership
21 interest or controlling interest or operating authority.
22 (xxiii) A list of pending or adjudicated citations,
23 violations or charges against the facilities pursuant to
24 (xxii) brought by any governmental agency within the past
25 three years and the status or disposition of each matter
26 with regard to its operation.
27 (xxiv) Current, signed original conflict of interest
28 forms from all officers, directors, trustees, senior
29 management, chairpersons or department chairpersons on a
30 form acceptable to the Attorney General.
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1 (xxv) Copies of all documents related to
2 identification of all charitable assets, accounting of
3 all charitable assets for the past three years and
4 distribution of the charitable assets including, but not
5 limited to, endowments, restricted, unrestricted and
6 specific purpose funds as each relates to the proposed
7 transaction.
8 (xxvi) A description of the plan as to how the new
9 corporation will provide community benefits and improved
10 access to health insurance during the first three years
11 of operation.
12 (xxvii) Copies of documents or description of any
13 proposed plan for any entity to be created for charitable
14 assets, including, but not limited to, endowments,
15 restricted, unrestricted and specific purpose funds, the
16 proposed articles of incorporation, bylaws, mission
17 statement, program agenda, method of appointment of board
18 members, qualifications of board members, duties of board
19 members, and conflict of interest policies.
20 (xxviii) A complete statement of performance during
21 the preceding year with regard to the terms and
22 conditions of approval of conversion and each projection,
23 plan or description submitted as part of the application
24 for any conversion completed under any application.
25 (xxix) Any other material that the Attorney General
26 deems relevant to its investigation.
27 (2) Within 60 days after receipt of the notice required
28 by this section, the Attorney General shall notify the
29 corporation in writing whether the application is complete
30 and if not, shall specify what additional information is
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1 required.
2 (3) The Attorney General shall, upon receipt of any
3 information requested in paragraph (2), notify the
4 corporation in writing of the date of completion of the
5 application.
6 (4) Within five working days after presenting a plan of
7 agreement or transaction to the Attorney General and
8 Commissioner, the corporation proposing the transaction must
9 publish notice of the proposed transaction in a form approved
10 by the Attorney General once per week for three weeks in
11 newspapers of general circulation where the corporation does
12 business. In addition to the general public, the Attorney
13 General shall notify any person that has requested in writing
14 a notice of the filing of all applications.
15 (c) Scope of Attorney General's review.--After a signed and
16 completed application has been filed with the Attorney General,
17 the Attorney General shall review the application and supporting
18 documents. The Attorney General shall not approve the proposed
19 transaction unless the Attorney General finds all of the
20 following:
21 (1) The terms and conditions of the proposed transaction
22 are fair and reasonable to the residents of this Commonwealth
23 and to recipients and potential recipients of services of the
24 corporation and the proposed transaction is likely to expand
25 the availability of safe, high quality, accessible and
26 affordable health care services to all of the residents of
27 the Commonwealth.
28 (2) The proposed transaction is in the public interest.
29 A proposed transaction shall not be in the public interest
30 unless appropriate steps have been taken to safeguard the
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1 value of charitable assets and ensure that proceeds of the
2 transaction are irrevocably dedicated to charitable heath
3 purposes.
4 (3) The fair market value of the corporation or of the
5 assets being acquired, as determined by an independent
6 valuation satisfactory to the Attorney General:
7 (i) has been maximized for charitable purposes;
8 (ii) has not been manipulated in a manner that
9 causes the fair market value of the assets to decline;
10 (iii) was derived with due care and diligence by the
11 board of the corporation being acquired;
12 (iv) was derived based on appropriate and reasonable
13 formulas and valuation methods;
14 (v) is appropriate and reasonable; and
15 (vi) has not been negatively impacted by a
16 deliberate action or failure to act by officers, board
17 members, directors or senior management.
18 (4) The fiduciary responsibilities of trustees, officers
19 and directors, particularly relative to the exercise of due
20 diligence, have been appropriately discharged.
21 (5) The nonprofit hospital, hospital plan corporation or
22 professional health service corporation will receive fair
23 market value for its charitable assets. If the proposed
24 transaction includes the conversion of a hospital plan
25 corporation or a professional service corporation to a for-
26 profit corporation or other for-profit entity, the Attorney
27 General shall authorize the conversion only if the proposed
28 transaction provides that consideration, determined by the
29 Attorney General to be equal to 100% of the fair market value
30 of the corporation, will be conveyed or issued by the
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1 corporation to the foundation or foundations provided for in
2 subsection (j) at the time the new corporation or
3 corporations file their articles of incorporation. The
4 Attorney General may permit all or a portion of the
5 consideration conveyed to the foundation or foundations to
6 consist of stock in the for-profit corporation or other for-
7 profit entity. The nonprofit hospital, hospital plan
8 corporation or professional health service corporation shall
9 be required to conduct an independent valuation of its
10 assets. The Attorney General shall utilize an independent
11 expert to review the valuation conducted by the nonprofit
12 hospital, hospital plan corporation or professional health
13 service corporation and conduct a separate independent
14 valuation.
15 (6) Any management contract under the proposed
16 transaction will be for fair market value.
17 (7) The transaction is at arm's length and will not
18 result in private inurement to any person or entity.
19 (8) No conflict of interest exists concerning the
20 proposed transaction relative to the officers, directors,
21 senior management, experts or consultants engaged in
22 connection with the proposed transaction, including, but not
23 limited to, attorneys, accountants, investment bankers,
24 actuaries, health care experts or industry analysts.
25 (9) No individuals described in paragraph (8) were
26 provided with contracts or consulting agreements or
27 arrangements which included pecuniary rewards based in whole
28 or in part on the contingency of the completion of the
29 proposed transaction.
30 (10) The proceeds from the transaction will be
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1 controlled as charitable funds independently of the acquiring
2 person or parties to the acquisition and will be used for
3 charitable health purposes consistent with the nonprofit
4 corporations's original purpose, including providing health
5 care to the disadvantaged, the uninsured and the underinsured
6 and providing benefits to promote improved health in the
7 affected community.
8 (11) The parties to the transaction have petitioned the
9 court under subsection (i) for an appropriate cy pres
10 proceeding as to the application of the charitable assets
11 after the transaction is completed.
12 (12) The solvency of the remaining or successor
13 charitable organization after the transaction is complete.
14 (13) The trustees, board of directors, officers and
15 management of the nonprofit corporation exercised reasonable
16 care and due diligence in conducting the proposed
17 transaction, including, but not limited to, establishing
18 appropriate criteria for deciding whether to pursue a
19 disposition of assets in relation to the fulfillment of the
20 hospital's mission and purposes, formulating and issuing
21 appropriate requests for proposals in pursuing an
22 acquisition, deciding to dispose of the nonprofit
23 corporation's assets, considering alternative measures,
24 selecting the acquiring entity and negotiating the terms and
25 conditions of the transaction.
26 (14) The procedures used by the board of trustees and
27 the officers of the nonprofit corporation being acquired
28 fulfilled their fiduciary duties in making their decision,
29 the board and officers were sufficiently informed about the
30 proposed transaction and possible alternatives and they
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1 engaged the assistance of experts with appropriate levels of
2 independence, education and experience in similar
3 transactions.
4 (15) Charitable funds will not be placed at unreasonable
5 risk if the proposed transaction is financed in part by the
6 nonprofit corporation.
7 (16) The transacting parties have committed to assuring
8 the continuation of existing employee contracts pending
9 negotiation of new contracts.
10 (17) Procedures are in place for addressing the needs of
11 any employee who may be displaced by the proposed
12 transaction, including timely notice of the proposed
13 transaction and access to training and employment resources.
14 (18) Procedures and safeguards are in place to insure
15 that ownership interests are not used as incentives for
16 decisions adversely affecting individuals seeking health
17 services.
18 (19) The proposed transaction will not jeopardize the
19 tax status of the existing nonprofit corporation, if it will
20 not become entirely owned or governed by a for-profit entity.
21 (20) Any additional requirement imposed by the Attorney
22 General.
23 (d) Attorney General's recommendations.--
24 (1) Following the Attorney Generals' review of the
25 transaction, including the factors set forth in subsection
26 (c) and, after consulting with the Insurance Commissioner or
27 secretary, the Attorney General shall make recommendations to
28 the court as to whether the transaction should be approved
29 and what conditions, if any, should be imposed on its
30 approval.
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1 (2) If, as a result of the review under subsection
2 (c)(7), the Attorney General determines that there have been
3 self-dealing transactions between the entity or entities
4 proposing to engage in the transaction and any of its or
5 their officers, directors, senior management, experts or
6 consultants engaged in connection with the proposed
7 transaction, other than in the course of their employment or
8 in the ordinary course of business, the Attorney General
9 shall recommend to the court that the transactions be voided
10 and any assets conveyed to any such individuals be returned
11 to the entity from which the assets were transferred.
12 (e) Public hearings; notice of time and place.--
13 (1) No later than 45 days after the receipt of an
14 application from a person or entity seeking approval of a
15 proposed transaction under this section, the Attorney General
16 shall conduct one or more public hearings, one of which must
17 be held in the county where the nonprofit charitable
18 corporation affected by the proposed transaction is located.
19 The number of public hearings that the Attorney General shall
20 hold shall correspond to the size of the community served by
21 the nonprofit charitable corporation and the nature and value
22 of the proposed transaction to ensure that the community
23 affected by the proposed transaction has an opportunity to
24 contribute in a hearing process. Any person may file written
25 comments or exhibits for the hearing or may appear and make a
26 statement at the hearing. Each party to the proposed
27 transaction must assure that at least one person representing
28 the party is present at any public hearing that the Attorney
29 General convenes.
30 (2) At least 21 days prior to the public hearing, the
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1 Attorney General shall provide written notice of the time and
2 place of the hearing through publication in one or more
3 newspapers of general circulation in the affected
4 communities, to the board of county commissioners of the
5 county in which the facility is located and to all those who
6 have requested notice of the proposed transaction.
7 (3) The Attorney General shall establish and maintain a
8 summary of written and oral comments made in presentation for
9 and at the public hearing, including all questions posed and
10 shall require answers of the appropriate parties. The summary
11 and answers and all records concerning the proposed
12 transaction shall be filed in the office of the Attorney
13 General and in the public library of the public library
14 system for the community served by the nonprofit charitable
15 corporation, and a copy shall be made available upon request.
16 Where possible, the Attorney General shall make all records
17 available on the World Wide Web site of the Attorney General.
18 (4) As part of the public hearing process, the Attorney
19 General shall solicit comments and input regarding the
20 potential risks and benefits of the proposed transaction on
21 health access, service and coverage, the potential impact of
22 the transaction on charitable assets and the proposed
23 distribution and application of the assets of the nonprofit
24 charitable corporation.
25 (5) The Attorney General shall have the power to
26 subpoena additional information or witnesses, require and
27 administer oaths and require statements and shall require
28 sworn statements on pertinent issues from representatives of
29 the parties to the proposed transaction at any time prior to
30 making a decision on an application.
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1 (f) Cost of Attorney General's review.--
2 (1) The Attorney General shall contract with independent
3 experts and consultants in evaluating the fair market value
4 of the corporation as well as the propriety and effects of
5 the proposed transaction in accordance with subsection (h)
6 and shall be reimbursed for all reasonable costs and expenses
7 incurred by the identified parties, regardless of the
8 Attorney General's position concerning the proposed
9 transaction or the court's ultimate disposition of it.
10 (2) Within a reasonable time after notice is given to
11 the Attorney General under subsection (b), the Attorney
12 General shall notify the parties to the proposed transaction
13 of their obligations under this subsection.
14 (g) Public records.--The initial application and supporting
15 documentation submitted to the Attorney General under subsection
16 (b) in connection with the Attorney General's review of the
17 proposed conversion transaction shall be considered public
18 records under the act of June 21, 1957 (P.L.390, No.212),
19 referred to as the Right-to-Know Law, and shall be available
20 upon request. The Attorney General may withhold any confidential
21 or proprietary documents. This exception shall be narrowly
22 construed and shall not apply to any information that has
23 otherwise been disclosed in Medicare or Medicaid cost reports
24 and Federal tax form 990. The Attorney General shall maintain a
25 list of documents withheld, including a short description of
26 each document and the reason for withholding the document. The
27 parties to the transaction, including consumers or community
28 groups representing the citizens of this Commonwealth, may
29 appeal to the court the decision of the Attorney General to
30 withhold any document.
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1 (h) Health impact study.--
2 (1) In reviewing a proposed transaction, the Attorney
3 General shall determine the effect the proposed transaction
4 will have on the availability and accessibility of health
5 care services to the affected community and the corporation's
6 or new corporation's ability to improve health access,
7 quality of services and coverage.
8 (2) The Attorney General shall assess any change in
9 local representation in the corporation's or new
10 corporation's governance structure postconversion and shall
11 require that some measure of local governance be retained and
12 perpetuated.
13 (3) The parties to the proposed transaction must submit
14 a health impact plan that outlines how the corporation or new
15 corporation will ensure that health access, services and
16 coverage will not be harmed and how access to health care
17 will be expanded by the proposed transaction. At a minimum,
18 the plan shall include the following:
19 (i) A preliminary plan describing the financial
20 commitment and process for identification and provision
21 of benefits to the community.
22 (ii) A description of the governance structure of
23 the corporation or new corporation.
24 (4) The Attorney General shall review the health impact
25 plan submitted by the parties. To facilitate the review, the
26 Attorney General shall conduct an independent community
27 health impact study to ensure that the health impact plan
28 submitted by the parties meets the needs of the affected
29 community. The Attorney General's independent assessment
30 process must:
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1 (i) Involve, in a systematic fashion, affected
2 community members, their representatives and individuals
3 to assess community health needs. This process shall
4 include interviewing members of the community and their
5 representatives.
6 (ii) Determine the level, quality and importance to
7 the community of health services and coverage that the
8 corporation historically provided, including, but not
9 limited to, charity care, emergency room services,
10 outpatient services, community education and training,
11 prevention programs and innovative insurance programs.
12 (iii) Identify those specific services that the
13 corporation or new corporation is likely to eliminate or
14 reduce because it operates at a loss.
15 (5) As part of the public hearings conducted pursuant to
16 subsection (e), the Attorney General shall solicit comments
17 and input regarding the potential risks and benefits of the
18 conversion on health access, services and coverage. If a
19 public hearing has already been held prior to the completion
20 of the health impact study, the Attorney General shall hold a
21 subsequent hearing specifically to address the study.
22 (6) Before recommending approval of a proposed
23 transaction, the Attorney General, in consultation with the
24 independent expert responsible for the health impact study
25 process, shall require a written and legally enforceable
26 commitment from the corporation or new corporation to improve
27 the level of health services and coverage to the community
28 and the public as determined by the study and the public
29 hearing. The commitment must address any deficiencies or
30 shortcomings identified by the Attorney General through the
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1 independent health impact study process. Any recommendation
2 for approval submitted to the court shall include, but not be
3 limited to, the following conditions:
4 (i) A long-term commitment to maintain an increased
5 level of charity care services that the converting
6 nonprofit has provided on average over the past ten
7 years.
8 (ii) Commitments to preserve health services that
9 address the needs of the affected community and coverage
10 for otherwise uninsured or high-risk individuals.
11 (i) Court approval required.--
12 (1) No fundamental change or transaction subject to the
13 provisions of this section shall be effective unless and
14 until an order of court has been obtained approving the
15 transaction. The action for approval shall be brought in the
16 county or counties in which the registered office or offices
17 of the affected nonprofit hospital, hospital plan corporation
18 or professional health service corporation are located and
19 shall be published in at least two newspapers of general
20 circulation in each county involved.
21 (2) Any person who filed a written comment or exhibit or
22 appeared and made a statement in a public hearing held by the
23 Attorney General pursuant to subsection (e) shall be
24 considered a party to the action, including consumers or
25 community groups representing the citizens of this
26 Commonwealth.
27 (j) Certain conversions from nonprofit to for-profit
28 status.--If a transaction includes the conversion of a nonprofit
29 hospital, hospital service plan corporation or a professional
30 health service corporation from a nonprofit status under 40
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1 Pa.C.S. § 6103(b) (relating to exemptions applicable to
2 certified hospital plan corporations) or 6307(b) (relating to
3 exemptions applicable to certified professional health service
4 corporations), respectively, to a for-profit corporation or
5 other for-profit entity, assets equal to the fair market value
6 of the converting corporation shall be transferred to newly
7 formed foundations as follows:
8 (1) As part of the fair market value received, a
9 transferee foundation shall receive no less than 75% of
10 voting shares in its corresponding new corporation, in
11 addition to other stock or cash transfers. At least 25% of
12 the fair market value received by the foundation shall be in
13 the form of a cash transfer.
14 (2) The charitable purpose of each foundation shall be
15 to promote the health of the people of this Commonwealth.
16 Each foundation's purposes shall also include programs to
17 promote access to health care coverage with respect to
18 benefits not available to segments of the population.
19 (3) In approving the proposed operation of foundations,
20 the Attorney General shall review the articles of
21 incorporation and bylaws of each foundation, as well as all
22 proposed agreements between each new corporation and a
23 foundation, including stock voting or registration
24 agreements. The Attorney General may seek advice on these
25 matters from consultants, investment bankers and other
26 professional advisors engaged by the Attorney General
27 incident to review of the plan and shall hold at least one
28 public hearing to solicit public input on the articles of
29 incorporation and bylaws of the foundation. The Attorney
30 General shall not approve a plan for a transaction and
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1 creation of a new foundation unless the proposed articles of
2 incorporation and bylaws for each foundation states all of
3 the following:
4 (i) The foundation is organized and operated
5 exclusively for charitable purposes and for the promotion
6 of social welfare pursuant to subsection (j)(2).
7 (ii) No part of the net earnings of the foundation
8 shall inure to the benefit of any private shareholder or
9 individual.
10 (iii) The foundation shall not engage in any
11 political campaign activity or the making of political
12 contributions.
13 (iv) The foundation shall not pay or incur any
14 amount that, if paid by an organization classified as a
15 "private foundation" under section 509(a) of the Internal
16 Revenue Code, would constitute a "taxable expenditure"
17 under section 4945(d)(1) and (2) of the Internal Revenue
18 Code.
19 (v) The foundation shall not engage in any self-
20 dealing for the benefit of its directors, officers or
21 employees.
22 (vi) An ongoing community advisory committee shall
23 be established pursuant to paragraph (9), to nominate the
24 board of directors and to offer broad public input to the
25 foundation concerning its operations and activities.
26 (vii) The foundation, after its first three years of
27 operation, will pay out the lesser of:
28 (A) "qualifying distributions" of "distributable
29 amounts," as defined in section 4942 of the Internal
30 Revenue Code, as if the foundation were classified as
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1 a private foundation subject to the distribution
2 requirements, but not the taxes imposed, under that
3 section; or
4 (B) substantially all of its income, less
5 qualifying expenses.
6 (viii) In no event shall the foundation be required
7 to invade its corpus to meet the distribution
8 requirements under this paragraph.
9 (4) The articles of incorporation and bylaws that are
10 either required by this section or designated by the Attorney
11 General cannot be amended without the prior written approval
12 of the Attorney General.
13 (5) Within 120 days of the end of its fiscal year, the
14 foundation shall provide the Attorney General and the
15 Insurance Commissioner copies of its Federal and State tax
16 returns for the preceding fiscal year. The tax returns shall
17 be made available for public inspection.
18 (6) The members of the board and officers or employees
19 of a foundation are not liable personally, either jointly or
20 severally, for any debt or obligation created or incurred by
21 the foundation unless their conduct is deemed to be gross
22 misconduct or recklessness.
23 (7) (i) The Attorney General may take all steps
24 necessary to effectuate the purposes of this section, and
25 each board shall be appointed no more than 120 days after
26 completion of the transaction. Each board shall act
27 promptly to appoint an executive director, hire such
28 staff as necessary and acquire necessary facilities and
29 supplies to begin the operation of the foundation.
30 (ii) Each board shall conduct a public hearing to
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1 solicit comments on the proposed mission statement,
2 program agenda, corporate structure and strategic
3 planning. Each board shall hold a public hearing within
4 180 days of establishment of the board and on an annual
5 basis thereafter.
6 (8) The Attorney General shall require that the board of
7 directors of each new foundation meet the following
8 requirements:
9 (i) The board of directors of the foundation shall
10 consist of not less than nine nor more than 15 members,
11 all of whom shall be citizens and residents of this
12 Commonwealth and none of whom shall be members of the
13 General Assembly.
14 (ii) Directors shall be selected so that as a whole
15 they represent the geographic, ethnic, gender, age,
16 socioeconomic and other factors that the board considers
17 to represent the diversity of the region served by the
18 converting nonprofit and shall include at all times
19 public health professionals, consumer and public health
20 advocates, academic public health and health
21 practitioners, as well as patients/consumers of the
22 converting nonprofit. In addition, directors shall
23 possess expertise in health care policy, the delivery of
24 health care services, a demonstrated commitment to the
25 charitable mission of the foundation and the ability to
26 maintain objectivity and impartiality in their capacity
27 as directors.
28 (iii) The initial board of directors shall be
29 appointed by the Attorney General after receiving
30 nominations from the community advisory committee. The
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1 Attorney General shall appoint members of the initial
2 board of directors to serve as officers of the
3 corporation as specified until their successors are
4 elected pursuant to subsection (h)(8)(v). For purposes of
5 providing staggered terms of office only, the initial
6 board of directors shall be divided into three classes,
7 which will, as nearly as possible, result in one-third of
8 the terms of directors expiring in each year.
9 (iv) Each director shall serve for the term of
10 office specified in the vote by which such director was
11 elected until his successor is duly elected and
12 appointed, unless he sooner resigns. Approximately one-
13 third of the directors shall be elected each year at an
14 annual meeting, for a term of three years, beginning at
15 the close of said annual meeting. Directors shall be
16 limited to serving no more than three consecutive terms.
17 The staggered term of an initial director and the
18 remaining term of a director elected to fill a resigning
19 director's term shall be considered as terms for purposes
20 of calculating the three-term limit.
21 (v) Any vacancy occurring on the board of directors
22 may be filled by the affirmative vote of a majority of
23 the remaining directors, with 30 days' prior written
24 notice to the Attorney General. Board vacancies shall be
25 filled from a slate of three nominees provided by the
26 community advisory committee. A person appointed to fill
27 a vacancy which occurs other than by reason of an
28 increase in the number of directors shall serve until
29 expiration of the term that would have been served had
30 the vacancy not occurred.
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1 (vi) Any director may resign at any time by giving
2 written notice to the president of the corporation. The
3 resignation shall take effect on the date of receipt or
4 at any later time specified.
5 (vii) Directors shall not receive any salaries for
6 their services, but by resolution of the board of
7 directors the expenses of attendance and a modest per
8 diem may be allowed for attendance at each regular or
9 special meeting of the board.
10 (viii) Each foundation and its directors, officers
11 and employees shall be and will remain independent of
12 each new corporation and its affiliates. No director,
13 officer or employee of the new corporation or any of its
14 affiliates shall serve as a director, officer or employee
15 of any other foundation formed as a result of the
16 transaction.
17 (9) Upon approval of the proposed operation of
18 foundations, the Attorney General shall take all steps
19 necessary to appoint the community advisory committee. The
20 following shall apply:
21 (i) The community advisory committee members shall
22 be selected from nominations solicited through a public
23 process and shall consist of not fewer than 15 members,
24 all of whom shall be citizens and residents of this
25 Commonwealth and none of whom shall be members of the
26 General Assembly.
27 (ii) Members shall be selected so that as a whole
28 they represent the geographic, ethnic, gender, age,
29 socioeconomic and other factors that represent the
30 diversity of the region served by the converting
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1 nonprofit. The community advisory committee shall include
2 at all times at least three persons representing the
3 interests of the medically uninsured and underserved
4 populations of this Commonwealth. In addition, members
5 shall possess expertise in health care policy, the
6 delivery of health care services, a demonstrated
7 commitment to the charitable mission of the foundation
8 and the ability to maintain objectivity and impartiality
9 in their capacity as directors.
10 (iii) For purposes of providing staggered terms of
11 office only, the initial community advisory committee
12 members shall be divided into three classes, which will,
13 as nearly as possible, result in one-third of the terms
14 of directors expiring in each year.
15 (iv) Each community advisory committee member shall
16 serve for the term of office specified in the vote by
17 which such member was elected until his successor is duly
18 elected and appointed, unless he sooner resigns. One-
19 third of the members shall be elected each year at an
20 annual meeting, for a term of three years, beginning at
21 the close of said annual meeting. Members shall be
22 limited to serving no more than three consecutive terms.
23 The staggered term of an initial member and the remaining
24 term of a member elected to fill a resigning member's
25 term shall be considered as terms for purposes of
26 calculating the three-term limit.
27 (v) Any vacancy occurring on the community advisory
28 committee may be filled by the affirmative vote of a
29 majority of the remaining members, with 30 days' prior
30 written notice to the Attorney General. Nominations for
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1 vacancies shall be solicited through a public process. A
2 person appointed to fill a vacancy which occurs other
3 than by reason of an increase in the number of directors
4 shall serve until expiration of the term that would have
5 been served had the vacancy not occurred.
6 (vi) Any community advisory committee member may
7 resign at any time by giving written notice to the
8 president of the corporation. Such resignation shall take
9 effect on the date of receipt or at any later time
10 specified.
11 (vii) Community advisory committee members shall not
12 receive any salaries for their services, but by
13 resolution of the board of directors the expenses of
14 attendance and a modest per diem may be allowed for
15 attendance at each regular or special meeting of the
16 committee.
17 (viii) Each community advisory committee shall be
18 and will remain independent of each new corporation and
19 its affiliates. No director, officer or employee of the
20 new corporation or any of its affiliates shall serve as a
21 community advisory committee member of any other
22 foundation formed as a result of the transaction.
23 (ix) Within 60 days of being appointed, the
24 community advisory committee shall submit nominations for
25 the initial board of directors to the Attorney General.
26 Once the initial board of directors has been appointed,
27 the community advisory committee will have the sole
28 authority for nominating candidates to fill board of
29 director vacancies.
30 (10) Each foundation and the corresponding new
20030H0208B0237 - 25 -
1 corporation shall operate under a voting agreement and a
2 stock registration agreement, approved by the commissioner
3 and the Attorney General, that provides at a minimum for the
4 following:
5 (i) The foundation will vote the common stock in the
6 new corporation to the extent provided by the terms of
7 the voting agreement.
8 (ii) The voting restrictions will not apply to
9 common stock of the new corporation sold by the
10 foundation.
11 (iii) The new corporation may take no action that
12 could result in dilution of the value of the stock owned
13 by the foundation.
14 (iv) The foundation shall have all rights necessary
15 to manage and dispose of its stock in a manner that
16 maximizes the value of the stock for the foundation.
17 (k) Submission of plan of conversion to commissioner.--In
18 the event that a hospital plan corporation, professional health
19 service corporation or nonprofit mutual insurance company shall
20 propose to engage in a conversion transaction, the hospital plan
21 corporation, professional health service corporation or
22 nonprofit mutual insurance company shall provide notice of the
23 proposal to the commissioner in the same form and manner
24 provided for notice to the Attorney General in subsection (b).
25 (l) Scope of commissioner's review.--In reviewing the
26 proposed plan of conversion by a hospital plan corporation, a
27 professional health service corporation or a nonprofit mutual
28 insurance company, the commissioner shall consider the factors
29 set forth in the applicable provisions of this title pertaining
30 to notice for dissolution of nonprofit corporations. The
20030H0208B0237 - 26 -
1 commissioner shall also review the amount of surplus held by the
2 entity submitting a plan of conversion, as reflected in its most
3 recent annual report to the Insurance Department, to determine
4 an appropriate amount of surplus for that entity following
5 completion of its conversion.
6 (m) Commissioner's recommendations.--Following the
7 commissioner's review of the plan of conversions, including the
8 factors set forth in the applicable provisions of this title
9 pertaining to notice for dissolution of nonprofit corporations,
10 the commissioner shall make recommendations to the Attorney
11 General as to whether the conversion should be approved and what
12 conditions, if any, should be imposed. To the extent that the
13 commissioner determines that the surplus of the converted entity
14 will exceed an appropriate amount, the commissioner shall
15 recommend to the Attorney General that, as a condition of
16 approving the plan of conversion, the court require the
17 converting entity to contribute the excess surplus to a newly
18 formed foundation in accordance with the provisions of
19 subsection (j).
20 (n) Issuance of certificate of authority.--Subject to the
21 court's approval of the transaction, as provided for in the
22 applicable provisions of this title pertaining to notice for
23 dissolution of nonprofit corporations, the commissioner shall
24 not issue a certificate of authority to a new corporation to
25 transact business in this Commonwealth unless the commissioner
26 finds all of the following:
27 (1) Upon conversion, each new corporation will meet the
28 applicable standards and conditions under this chapter,
29 including applicable minimum capital and surplus
30 requirements.
20030H0208B0237 - 27 -
1 (2) The plan of conversion adequately protects the
2 existing contractual rights of the corporation's subscribers
3 and members to medical or hospital services and payment of
4 claims for reimbursement for those services.
5 (3) The plan of conversion safeguards quality by
6 providing for adequate payments to the new corporation's
7 providers by covenanting to expend at least 85% of premium on
8 health care provider reimbursement as opposed to
9 administration and reserves.
10 (4) The plan of conversion is fair and equitable and not
11 prejudicial to the contractual rights of the policyholders
12 and certificate holders of new corporations.
13 (5) The plan of conversion is in the public interest. A
14 plan is in the public interest only if it provides a benefit
15 for the people of this Commonwealth exceeding the value of
16 the corporation at the time of conversion. In determining
17 whether the plan of conversion is in the public interest, the
18 commissioner shall consider other factors, including, but not
19 limited to, those relating to the accessibility and
20 affordability of health care coverage.
21 (6) The plan of conversion requires each new corporation
22 to establish pricing using an appropriate method which shall
23 include, but not be limited to, the use of appropriate
24 diagnostic case mix and cost of medical education criteria.
25 (7) A new corporation will not, as a condition of
26 participation or continuation on a provider panel for one
27 health benefit plan of the new corporation, require a
28 provider to serve on a provider panel of another health
29 benefit plan of the new corporation.
30 (8) The new corporation's premium rates will not impose
20030H0208B0237 - 28 -
1 a significant cost to policyholders or certificate holders of
2 the new corporation.
3 (9) Subscribers of the corporation, after the
4 transaction, will continue to have access to professional
5 health services that are in accordance with the best
6 professional health service in the community.
7 (10) That the transaction requires that, for the three
8 years following the conversion, each new corporation shall
9 submit, for review and approval by the Department of Health,
10 any provider reimbursement contracts to which it is a party.
11 (11) That all entities, including any newly formed
12 corporations, are properly licensed before commencing
13 operations following the conversion.
14 (12) That all health care delivery systems have
15 appropriate grievance resolution systems.
16 (13) That each new corporation utilizes fair terms in
17 contracts with providers of health care services, and that no
18 contracts include an "all products" provision.
19 (o) Submission of plan of conversion to the secretary.--In
20 the event that a nonprofit hospital shall propose to engage in a
21 conversion transaction, the nonprofit hospital shall provide
22 notice of the proposal to the secretary in the same form and
23 manner provided to the Attorney General in subsection (b). In
24 addition to the documents and information provided in accordance
25 with subsection (b), the nonprofit hospital shall also provide
26 to the secretary the following items:
27 (1) Patient statistics for the past three years and
28 patient projections for the next year, including patient
29 visits, admissions, emergency room visits, clinical visits
30 and visits to each department of the nonprofit hospital,
20030H0208B0237 - 29 -
1 admissions to nursing care or visits by affiliated home
2 health care entities.
3 (2) A list of bad debts and free care provided over the
4 past five years by every facility owned by or controlled by
5 the parties to the conversion transaction, including a dollar
6 amount and a description of services provided.
7 (p) Scope of secretary's review.--The secretary shall make
8 recommendations to the Attorney General as to whether a proposed
9 conversion transaction should be approved and what conditions,
10 if any, should be imposed. The secretary shall not recommend
11 that a proposed conversion transaction be approved unless the
12 secretary finds that the proposal meets all of the following
13 requirements:
14 (1) The transaction will not have an adverse effect on
15 the quality, accessibility or affordability of health care
16 services to the affected communities, and sufficient
17 safeguards are in place to ensure that the resulting hospital
18 will deliver all health care services which have been
19 provided by the entity to be acquired within the previous
20 three years, at the level necessary to fulfill the needs
21 identified in the community health needs assessment described
22 in subsection (h)(4), if and to the extent such needs are not
23 fulfilled with equivalent accessibility, affordability and
24 quality by an alternative provider in the community.
25 (2) The transaction is not likely to create an adverse
26 effect on the quality of or appropriate capacity for health
27 science research and health care provider education, where
28 such activities were previously performed, supported or
29 facilitated by the parties to the proposed transaction.
30 (3) Sufficient safeguards are in place to ensure that
20030H0208B0237 - 30 -
1 ownership interests will not be used as incentives for
2 hospital employees or physicians to refer patients to the
3 resulting entity.
4 (4) The acquirer has demonstrated that it has
5 satisfactorily met the terms and conditions of approval for
6 any previous transaction pursuant to an application submitted
7 under this section.
8 (5) The nonprofit hospital being acquired has not
9 reduced, eliminated or altered any health care services or
10 treatments solely or primarily in order to invite or
11 facilitate acquisition by another entity or in anticipation
12 of such acquisition.
13 (q) Prior approval for closings or significant reduction of
14 medical services for nonprofit hospitals.--
15 (1) No emergency department or primary care services
16 department which has existed for at least one year and which
17 has been owned or operated by a nonprofit hospital before it
18 was acquired by a for-profit entity within the previous five
19 years and which significantly serves uninsured or
20 underinsured individuals shall be eliminated or significantly
21 reduced without the prior approval of the secretary in
22 accordance with this section.
23 (2) Prior to the elimination or significant reduction of
24 an emergency department or primary care services department,
25 the hospital which controls or directs the department shall
26 provide a written plan to the secretary which shall describe
27 the impact of such proposal on:
28 (i) Access to health care services for traditionally
29 underserved population.
30 (ii) The delivery of those services in the affected
20030H0208B0237 - 31 -
1 community.
2 (iii) Other licensed hospitals in the affected
3 community or in this Commonwealth.
4 (r) Decision by secretary.--Notwithstanding any other
5 provision of law, the secretary shall have the sole authority to
6 review all closure or reduction plans submitted under this
7 section, and the secretary shall issue a decision within 90 days
8 of receiving the written plan with the impact description or the
9 request shall be deemed approved. The secretary shall disapprove
10 a plan unless it is determined that the plan will not have a
11 negative impact on the quality, accessibility or affordability
12 of health care services in the affected community. The secretary
13 may, if deemed appropriate, issue public notice and allow a
14 written comment period within 60 days of receipt of the
15 proposal.
16 (s) Regulations.--The secretary shall issue regulations
17 implementing this section.
18 (t) Monitoring.--
19 (1) The corporation or new corporation resulting from a
20 transaction subject to this section shall provide all
21 necessary funds for the hiring by the Attorney General of an
22 independent health care monitor to monitor and report
23 quarterly to the Attorney General on community health care
24 quality and access by the corporation or new corporation,
25 including, but not limited to, levels of bad debt and free
26 care for indigent persons. This monitor shall be permitted
27 appropriate access to all necessary records and documents to
28 the extent access is compatible with confidentiality of
29 patient records.
30 (2) The Attorney General shall, upon receipt of evidence
20030H0208B0237 - 32 -
1 of noncompliance with the community health care quality and
2 access requirements of this section, hold public hearings to
3 solicit input to assess the performance of an entity or its
4 affiliates or subsidiaries in providing community benefits to
5 the affected community or this Commonwealth.
6 (3) The Attorney General, in consultation with the
7 commissioner or secretary, may deny a for-profit entity, its
8 affiliates, subsidiaries or successors permission for a
9 certificate of authority or license to operate a hospital, as
10 applicable, if the Attorney General determines that the
11 entity has violated any of the provisions of this section,
12 and, for good cause, including, but not limited to, a finding
13 that the entity has violated a provision of this section, may
14 prohibit the for-profit entity, its affiliates or
15 subsidiaries from filing an application under this section
16 for a period not to exceed ten years.
17 (u) Savings clause.--Nothing in this section shall be
18 construed to derogate from the authority of the Attorney
19 General, or the rights of others, provided by common law or
20 other statute or rule.
21 (v) Definitions.--As used in this section, the following
22 words and phrases shall have the meanings given to them in this
23 subsection:
24 "Attorney General." The Attorney General of the
25 Commonwealth.
26 "Commissioner." The Insurance Commissioner of the
27 Commonwealth.
28 "Conversion transaction." A transaction by which a
29 corporation acquires, whether by purchase, transfer, merger,
30 lease, gift, joint venture, affiliation, amendment of articles
20030H0208B0237 - 33 -
1 of incorporation, consolidation, partnership, conversion,
2 restructuring, division or otherwise, an interest in another
3 entity or its assets, or control thereof, or control or
4 governance of 20% or more of the assets, business or operations
5 thereof, or which results in attainment by an entity of control
6 or governance of 20% or more of the assets, business or
7 operations thereof. The Attorney General may consolidate
8 multiple transactions of the corporation over the past five
9 years in finding that a conversion transaction has occurred.
10 "Corporation." An entity which, directly or indirectly,
11 controls or operates or is organized as a hospital plan
12 corporation, a professional health services corporation under 40
13 Pa.C.S. Ch. 61 (relating to hospital plan corporations) or 63
14 (relating to professional health services plan corporations), or
15 a nonprofit mutual insurance company under 40 Pa.C.S. (relating
16 to insurance).
17 "Court." The court of common pleas, orphans' court division,
18 of the county in which the registered office or offices of the
19 affected charitable nonprofit corporations, hospital plan
20 corporations or professional health service corporations are
21 located.
22 "Foundation." A newly formed tax-exempt charitable social
23 welfare organization formed and operating under section
24 501(c)(3) or (4) of the Internal Revenue Code of 1986 (Public
25 Law 99-514, 26 U.S.C. §1 et seq.).
26 "Internal Revenue Code." The Internal Revenue Code of 1986
27 (Public Law 99-514, 26 U.S.C. § 1 et seq.).
28 "New corporation." A corporation originally governed under
29 this article that has had its plan of conversion to a for-profit
30 entity approved by the Insurance Commissioner, the Attorney
20030H0208B0237 - 34 -
1 General and the Secretary of Health under this article and has
2 converted to a stock accident and health insurance company, a
3 stock life insurance company or a for-profit mutual company or
4 is the recipient of assets of a corporation under such a plan of
5 conversion.
6 "Secretary." The Secretary of Health of the Commonwealth.
7 "Subscriber." A person covered under a health plan provided
8 by a corporation or new corporation or a subsidiary.
9 Section 2. Section 5976(b) of Title 15 is amended to read:
10 § 5976. Judicial supervision of proceedings.
11 * * *
12 (b) Distribution of property committed to charitable
13 purposes.--If the assets of the corporation include any property
14 committed to charitable purposes, the board of directors or
15 other body shall apply to the court for an order [pursuant to
16 section] under sections 5547(b) (relating to nondiversion of
17 certain property) and 5906 (relating to charitable nonprofit
18 corporations) specifying the disposition of the property.
19 * * *
20 Section 3. Title 40 is amended by adding a section to read:
21 § 6106.--Nonprofit health assets to be held in trust.
22 For purposes of the Attorney General's authority over the
23 transfer of the assets of nonprofit health service corporations
24 and nonprofit mutual corporations, nonprofit hospital plan
25 corporations, professional health service corporations and
26 nonprofit mutual insurance companies shall be deemed to hold all
27 of their assets in trust. The assets shall be deemed to be
28 dedicated to the specific charitable purposes set forth in the
29 articles of incorporation or other documents of the nonprofit
30 entities that hold them in trust. The public shall be the
20030H0208B0237 - 35 -
1 beneficiary of the trust.
2 Section 4. This act shall take effect in 60 days.
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