Healthcare: Existing for-profit HMO

To seek shelter from the competitive storm, Marcus Welby Hospital (MWH) is considering forming a joint venture with an existing for-profit HMO. MWH would be given 30 percent ownership of the privately held HMO, and each of its five board of trustees members would be given 1 percent ownership, in exchange for MWH contributing $10 million in capital funds, which is 35 percent of the HMO’s appraised net worth. Since the HMO already owns its own nursing home, MWH will raise the capital by selling its nursing home. MWH will receive 30 percent of whatever profit distributions the HMO board chooses to make from time to time and the trustees will receive their 1 percent shares. MWH also hopes to increase its patient base for hospital admissions and to secure a better bargaining position for reimbursements from the HMO, but the HMO is making no promises about where its subscribers will be sent for hospital care, nor how it will pay MWH for hospital services to its subscribers.

Assume that MWH has articles of incorporation similar to Queen of Angels’ only covering nursing home as well as hospital services, and that it has received only general, unrestricted gifts from donors. Also, assume there is no other management or personal connection between MWH and the HMO.

What issues would you want to alert the hospital board to concerning whether this is a permissible venture, and how the HMO can use its capital funds?

Would these parties be advised to have the HMO pledge some portion of its revenues to pay for charity care services at MWH

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