The Muhlenberg Independents: January 2009

NEW HAMPSHIRE ATTORNEY GENERAL'S REPORT

ON OPTIMA HEALTH

MARCH 10, 1998

EXCUTIVE SUMMARY I. INTRODUCTION II. DESCRIPTION OF THE REVIEW III. LEGAL PRINCIPLES GOVERNING CHARITABLE TRUSTS IV. HISTORY AND CHRONOLOGY V. LEGAL ANALYSIS AND FACTUAL FINDINGS VI. CONCLUSION
EXECUTIVE SUMMARY
This report is occasioned by profound concern within the Manchester community involving the conduct and ultimate fate of the City's two community hospitals -- Elliot Hospital ("Elliot") and the Catholic Medical Center ("CMC") -- under the control and stewardship of Optima Health, Inc., and Optima Healthcare ("Optima"). The report is issued pursuant to the common law and statutory authority of the New Hampshire Attorney General as the Director of Charitable Trusts to oversee New Hampshire charitable institutions and to preserve and protect New Hampshire charitable assets.
The Attorney General has intervened in this matter to review and address four central issues. First, we have examined the legality and practical effect, under New Hampshire charitable law, of Optima's decision to consolidate all acute care services previously performed at Elliot Hospital and CMC at the Elliot campus, effectively terminating the century-old charitable mission of CMC and its predecessors to serve as an acute care Catholic hospital within the City of Manchester.
Second, we have examined the legal and practical effect of the merger of a religious and a secular hospital into a single health care system. In particular, this review has focused on Optima's recent attempts to clarify the application of Catholic ethical requirements to the provision of services at facilities within the Optima system, a process which has engendered significant controversy within the medical establishment and the Manchester community.
Third, we have reviewed Optima's decision-making process, particularly with respect to its decision to consolidate at a single acute care facility and its decision to reorganize governance of the organization.
Fourth, we compared Optima's recent conduct to its commitments at the time of the 1994 merger, that it would publicly account for savings resulting from the merger, that it would return those savings to the local community, and that local control of the community's hospitals would be preserved.
Both CMC and Elliot are nonprofit charitable institutions and are bound by a social contract to the local community. Through their trustees and management, Elliot and CMC have a fiduciary duty to preserve and to protect their charitable assets and to ensure that those assets are used for purposes consistent with the fundamental charitable missions of the respective institutions.
The traditional reference point for the behavior of charitable trusts was articulated by New York's Judge Cardozo in 1929:
Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden by those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of the courts of equity when petitioned to undermine the rule of undivided loyalty.(1)
Judge Cardozo was speaking of the duties of a trustee in a commercial context, but his analysis has been applied to the management of a charitable corporation. The heightened duty of loyalty to the beneficiary community requires that the managers of charitable trusts be judged by a stricter standard of duty and care than the managers of ordinary for-profit corporations, who are accountable to the company's shareholders, not to the community as a whole.
More broadly, as public charities, both hospitals -- and any organization which purports to control them -- owe their served communities important duties of candor and inclusion. Stated simply, this means that a public charity must deal with its community honestly and is required to fully and completely disclose facts relevant to its charitable mission. A charitable institution may not properly exclude the community, or the Director of Charitable Trusts, either by design or inadvertence, from having a voice in fundamental decisions affecting the continuing capacity of the institution to fulfill its historic charitable mission.
Optima has received significant benefits from the Manchester community, including exemption from property taxes. As a not-for-profit corporation, it also has access to low-interest bond financing, and the ability to accept tax deductible charitable donations for activities in furtherance of its mission. In a letter to the Attorney General's Office discussing the future of Elliot Hospital and CMC after the proposed merger of their supporting organizations into a joint institution under the name of Optima Health, Inc., Elliot's counsel described the two hospitals as a "public servant to the community." As a public servant, Optima's actions must be judged by how they benefit the community that founded and continues to support it. Optima's mission must reflect the values of the community it serves.
It is the role and duty of the Attorney General and the Probate Court to enforce the fundamental duties of charitable institutions. This role is ordinarily carried out through the actions of cy pres, deviation or quo warranto, each of which involves a petition to the Probate Court to secure that Court's approval of changes in, or the termination of, a charitable trust's fundamental mission.
As a result of this review, the Attorney General makes the following findings:
* After the 1994 merger of the supporting organizations, Optima failed to provide notice to the Director of Charitable Trusts and/or to seek the approval of the Probate Court under the doctrines of cy pres or deviation for the following fundamental changes to the charitable missions of the respective community hospitals:
* The effective termination of CMC's historical charitable mission as an acute care religious hospital by the removal of all acute care services from CMC and the conversion of CMC to a psychiatric and rehabilitation facility.
* The effective termination of CMC and Elliot as community-based hospitals by the consolidation of all acute care services at a new integrated acute care facility controlled by Optima and Optima Healthcare.
* The effective termination of CMC and Elliot as distinct community-based hospitals by the evisceration of their independent boards of trustees and the substitution in their place of mirror boards controlled by Optima and Optima Healthcare.
* The restructuring of internal governance within Optima in a manner which effectively transferred governance from a local community-based entity to a regional organization.
* The record presented to our office does not demonstrate that the actions addressed in this report would merit approval by the Probate Court under the doctrine of cy pres. Under cy pres, a party seeking to radically alter or terminate the mission of a charitable trust must show (i) that it is impossible, impracticable, illegal, obsolete or ineffective, or prejudicial to the public interest to continue the mission of the charity; and (ii) that the successor organization or alternative use toward which the assets of the charity will be directed fulfills as nearly as practicable the mission of the original charitable trust.(2) Measured by these standards:
* Optima has not established that it is impossible or impracticable to continue providing acute care services at CMC. In fact, Optima performed no post-merger financial analysis to support its decision to consolidate all acute care services at the Elliot campus. The pre-merger financial analyses relied on by Optima as justification for the proposed consolidation do not support Optima's position that consolidation at a single acute care site is necessary to achieve the $150 million in savings projected at the time of the merger.
* Optima has not demonstrated that it is necessary, or consistent with the distinct charitable missions of the hospitals, to cede all or virtually all of the hospitals' and/or Optima's corporate powers to Optima Healthcare, a regional joint operating company.
* Optima has not defined the fundamental mission and attributes of the regional health care system into which it seeks to merge both CMC and Elliot. This failure is most clearly demonstrated by Optima's unsuccessful attempt to delineate the application of Catholic moral doctrine to the provision of health care services in its integrated hospital system -- either in terms of continuing CMC's traditional commitment to the indigent or concerning any restraints dictated by Catholic moral doctrine on health care services outside CMC.
* Optima has not fulfilled its duty of candor to the community and its duty of inclusion of the Director of Charitable Trusts and the community. This failure has occurred in the following ways:
* Optima failed to include the community in its decision-making process regarding its plan to consolidate all acute care services within both hospitals at a single campus. This plan existed as an option prior to the 1994 supporting organizations merger and was proposed, without additional post-merger financial analysis, within months of the consummation of the merger.
* Optima officials have maintained in public comments that consolidation of acute care services at a single site was not actively considered prior to the merger, and was only adopted after compelling post-merger analysis. The Ernst & Young pre-merger study evaluated consolidation at a single site as an option. Optima did not conduct any additional post-merger financial analysis of this option before submitting its Certificate of Need application to the New Hampshire Health Services Planning and Review Board seeking approval to consolidate all acute care at a single site.
* Optima adopted a corporate structure which stripped both Elliot and CMC of independent corporate authority by transferring that authority to itself, and subsequently ceding it to Optima Healthcare, a regional joint operating company. This action constitutes a repudiation of prior statements and promises by Optima representatives that, after the 1994 supporting organizations merger, the hospitals would remain as vital, locally controlled institutions.
* Optima did not fully inform the community of the impact of the joint operating agreement on corporate governance and control of the hospitals. Optima currently maintains that, notwithstanding the effect of its corporate structure on the charitable missions of the respective hospitals, the specifics of this corporate structure and organization remain a confidential business matter.
* Prior to the 1994 supporting organizations merger, the management of Elliot Hospital failed to disclose to the public, to the Diocese of Manchester and to the trustees of each institution readily available facts which demonstrated that Elliot's practices with respect to termination of pregnancy were not consistent with Catholic moral doctrine. As a result, the merger went forward on the assumption that Elliot and CMC had identical practices and policies regarding abortion. This was not, and had never been, the case.
* Optima's application of Catholic moral doctrine to hospital operations through a recently announced policy is unfocused, incomplete and confusing. While the policy purports to address terminations of pregnancy, it does not specify affected procedures, and does not address sensitive issues concerning the scope of the policy with respect to victims of rape or persons suffering from extrauterine pregnancies. The policy also leaves unaddressed the fundamental issue of whether Catholic moral and ethical doctrines will be applied, directly or by implication, to other health care services traditionally available at Elliot Hospital. These include, at a minimum, family planning counseling and elective sterilization procedures.
* Optima failed to include the community in a candid discussion of the clinical and ethical implications of the merger of a traditionally religious institution with a secular institution, the practices of which are in many cases not consistent with Catholic doctrine. This has led to the formation -- without any public examination -- of a successor entity whose attributes are defined on an ad hoc basis, without consideration of the fundamental and distinct charitable missions of either hospital.
* Optima represented that it would establish a public accountability system to document the success of the merger and then failed to do so. Optima has maintained that information required to measure its success is a confidential business matter.
* Significant legal questions exist relative to the corporate documentation and procedures used to effect the 1994 merger of Elliot Health Systems and Fidelity Health Alliance, supporting organizations for the two hospitals. The questions are so fundamental as to call into issue whether the 1994 supporting organizations merger effectively vested Optima Health, Inc. (or its current "parent" Optima Healthcare, Inc.) with ownership of, or authority over, the assets and internal governance of the hospitals.
* Actions taken by Optima which have affected the fundamental charitable missions of the hospitals, including in particular the change in corporate governance and the decision to terminate acute care services at CMC, may be ultra vires and without legal effect.
Optima is and continues to be an institution which provides a broad range of quality health services to the citizens of Manchester and surrounding communities. However, this is not the sole standard by which a charitable health care institution must be measured.
Optima appears to have developed a corporate culture, led by management and acquiesced in by its trustees, which assumes that the delivery of health care is best left exclusively to the sole judgment of management. The fundamental error in this assumption is amply demonstrated by the broad loss of faith within the Manchester community in Optima and its constituent institutions.
This situation is not sustainable. Optima's decision to consolidate acute care services at Elliot Hospital and its decision to effectively terminate local community governance through regionalization must be reviewed in and by the public -- including the Probate Court -- which is by law vested with jurisdiction to review such actions.
I. INTRODUCTION
In 1994, Fidelity Health Alliance ("Fidelity") and Elliot Health Systems ("Elliot Health"), supporting organizations that provided administrative and operational assistance respectively to Catholic Medical Center and Elliot Hospital, merged into Optima Health, Inc. ("Optima"). At the time of the merger, Optima stated that the consolidation of these two supporting organizations would improve the cost effectiveness of health care in the Manchester community by eliminating duplication in services and costs.
Sylvio Dupuis, CEO and President of Catholic Medical Center, and Scott Goodspeed, CEO and President of Elliot Hospital, assured the Manchester community that the two acute care hospitals would continue to operate after the merger. So confident was Optima that the merger of the two supporting institutions, in conjunction with the operation of the two acute care hospitals, would produce cost savings for the community, that it pledged as a "public servant to the community" to institute through the two hospitals "an annual public written reporting responsibility comparing the hospitals' efforts with other comparable institutions across a wide variety of indicators, national benchmarks, and standards." Optima would measure its success by "cost efficiency, quality indicators, patient satisfaction, and outcome measures as well as broad indicators of the health status of the communities."(3)
In the four years since the merger, Optima has instituted radical changes in Manchester's health care delivery system. In so doing, it stripped CMC and Elliot of their separate corporate identities, eliminated the community-based governance structure of these charities, changed the essential core mission of CMC, and transferred control over these hospitals to a regional conglomerate, Optima Healthcare, Inc. ("Optima Healthcare").
The actions taken by Optima following the 1994 merger of the supporting organizations reflect its belief that the merger conferred unbridled authority upon it to institute whatever organizational changes it believed would produce the anticipated or projected cost savings. Notwithstanding its public statements to the contrary,(4) immediately after the 1994 merger, Optima submitted change of ownership forms to the Department of Health and Human Services in which CMC and Elliot were designated "dba's" for Optima Health. Optima referred to CMC and Elliot as "Optima East Campus" and "Optima West Campus."(5) Optima claims that its treatment of CMC and Elliot as a single combined hospital is justified because it could not achieve the cost efficiencies and quality improvements promised at the time of the merger without consolidating the two hospitals into one. Peter Davis, the interim CEO of Optima, put it this way, "We needed to squeeze the fat out of the system."
Economic efficacy is not dispositive of the question of legality. Proof of convenience, or even a good faith belief in economic "efficiencies," does not resolve the legal question of Optima's authority to merge two charities. That Optima management may have had a good faith belief in the economic wisdom of its decisions is not dispositive of the question of whether the merger of Fidelity and Elliot Health in 1994 authorized Optima to assume ownership and control of CMC and Elliot Hospital, and whether the changes in the mission and governance of CMC and Elliot were so significant as to require notice to the Director of Charitable Trusts and approval by the Probate Court.
As a matter of corporate law, we conclude that significant questions exist as to whether the merger of the supporting organizations, Fidelity and Elliot Health, transferred ownership or control of the hospitals to Optima. We find that the aggregate of actions taken by Optima so significantly changed the missions and governance of CMC and Elliot as to require notice to the Director of Charitable Trusts and the Probate Court. New Hampshire law does not allow two distinct charitable trusts to be effectively terminated by combining them into a third secular organization with mixed religious attributes without (i) proof of impossibility, illegality, or impracticability; (ii) a clear showing that the merged organization has or will have a charitable mission that fulfills as nearly as possible the charitable missions of the hospitals; and (iii) appropriate -- and public -- legal process.
Finally, we conclude that, notwithstanding its promise at the time of the 1994 supporting organizations merger, Optima has failed to establish a system of public accountability by which to measure the success of the merger in producing the projected cost savings and has failed to produce evidence that the Manchester community has benefited through Optima's return of the cost savings to the community.
II. DESCRIPTION OF THE REVIEW
In preparing this report, we have reviewed extensive documentation submitted at our request by Optima or derived from public sources and have taken statements and sworn testimony from a wide variety of individuals associated with or opposed to Optima.(6) Documents reviewed include corporate records establishing the history, corporate organization and charitable missions of Optima Healthcare, Optima Health, Inc., Elliot Hospital, CMC and its predecessor institutions. We examined records of submissions by Optima to regulatory bodies charged with oversight of various activities, including the Federal Trade Commission, the United States Department of Justice, the Health Services Planning and Review Board, the Internal Revenue Service and the Consumer Protection and Antitrust Bureau and Charitable Trusts Unit of this office.(7) We reviewed testimony and affidavits submitted in recent litigation involving Optima, and examined press reports regarding public statements made by Optima and hospital officials with respect to the matters addressed in this report.
We have also taken statements and testimony from 17 individuals. These included senior management of the hospitals at the time of the 1994 merger, present and former senior management of Optima, Inc. and Optima Healthcare, members of the Board of Trustees of Optima and its constituent institutions, Optima staff physicians, a representative of the Diocese of Manchester, a Canon Law consultant involved in the 1994 merger discussions, members of the Save CMC Coalition, and the Coalition For Live Free or Die Healthcare in Greater Manchester.
In addition, we retained financial consultants from the firm of Arthur Andersen & Company to assist us in evaluating Optima's financial structure, the savings projected to result from the 1994 merger and the community accountability system consisting of "report cards" and other records developed to demonstrate realization of such savings.
III. LEGAL PRINCIPLES GOVERNING CHARITABLE TRUSTS
A. What Is A Charitable Trust? New Hampshire's definition of the term "charitable trust" is very broad, including virtually all nonprofit and charitable organizations that operate or hold property within the state.(8) Traditionally, a trust is defined as a fiduciary relationship in which one person or entity manages property for the benefit of another person or entity, known as the beneficiary. Generally speaking, a charitable trust is a trust intended to benefit the community at large, or some specified portion of the community. A charitable trust creates a social contract between the charity and the public beneficiaries. Under New Hampshire law, a charity is not required to be organized as a trust. Many charitable trusts are organized as voluntary or nonprofit corporations.(9) Thus, the term "charitable trust" applies to any organization or entity which holds property for charitable, nonprofit, educational or community purposes. The social benefits that a charitable corporation is expected to provide to the community are defined by its articles of agreement. Although a charitable corporation may not be governed as a trust in every respect, courts have held that the assets of a charitable corporation are impressed with a charitable trust that restricts the use of the assets to the defined purposes of the corporation.(10) While there is some diversity in approach among the cases with regard to the application of trust principles to the assets of charitable corporations, ordinarily the rules that apply to charitable trusts also apply to charitable corporations.(11)
B. Who Owns The Assets Of A Charitable Trust? As with any trust, the assets of a charitable trust must be managed for the benefit of the trust's intended beneficiaries. Charitable trusts, as nonprofit corporations, are generally subject to the "nondistribution constraint." The nondistribution constraint precludes nonprofit corporations from distributing "profits" to their owners, and also precludes the distribution of the assets to the member upon dissolution. "Profits" of a charitable corporation must be applied in strict conformity with the stated charitable objects and purposes.(12) Membership in a charitable corporation does not confer on the member the right to realize economic gain from the operations of the corporation, the right to transfer the membership for value, or the right to dissolve or terminate the corporation and receive the assets upon dissolution.(13)
C. What Benefits Do Charitable Trusts Receive? Most charitable trusts are exempt from local, state and federal taxation. In New Hampshire, the principal tax benefit to a charitable trust is exemption from local property taxation. Annually, Optima and Optima Healthcare receive over $4.5 million in exemptions from local property valuation.(14) To the extent the operations of a charity would otherwise result in assessment of state business enterprise taxes, charitable trusts are exempt from state taxation. In addition, New Hampshire charities may, under certain circumstances, qualify for low-interest bond financing programs offered by the state and may receive and retain tax-deductible gifts and contributions.
D. What Legal Mechanisms Regulate Charitable Trusts And Protect The Public? The Attorney General and the Probate Court have authority to protect the public interest by insuring that charitable trusts conform their acts to their Articles of agreement. The Attorney General's Office, through its Office of Charitable Trusts, is charged with the duty, power and responsibility to supervise, administer and enforce charitable trusts.(15) By statute and under the common law, the Attorney General has standing to bring a judicial proceeding to enforce a charitable trust or to supervise the actions taken by a charitable trust.(16) In general, these proceedings take place in Probate Court, through cy pres, deviation, or quo warranto.
1. Cy Pres
Cy pres is a traditional equitable power exercised by the Probate Court. When property is given in trust for a charitable purpose, and the specified purpose of the trust has become impossible, impracticable or illegal, cy pres allows the property to be applied to another charitable purpose as similar as possible to the purpose of the trust.(17) A charitable trust may be terminated only if the continuance of the trust is impracticable or infeasible, and only with approval from the Probate Court.(18) The purpose of a cy pres proceeding is to allow the Probate Court to determine what the original purpose of the charitable trust is, whether that purpose has become impracticable or infeasible, and if so, what other purpose would be the most closely comparable. The Attorney General is authorized by statute to petition for cy pres.(19)
It is well established that the doctrine of cy pres applies to charitable hospitals, without regard to their form of organization. Cy pres has been applied to prevent an acute care hospital from changing its essential purpose or core mission. In a California case, the Queen of Angels Hospital sought court review of a proposal to lease its main hospital facility, with the exception of the outpatient clinic, and apply the proceeds to establish and operate additional medical clinics in Los Angeles for the needy.(20) After reviewing the hospital's governing documents, the court concluded that the proposal would be inconsistent with the organization's central purpose of maintaining and operating a hospital.(21) The court held that the hospital could not, "consistent with the trust imposed upon it, abandon the operation of the hospital business in favor of clinics" and was bound to its primary purpose of operating a hospital using the assets under its control.(22) As the court explained, "the issue is not whether the new and different purpose is equal to or better than the original purpose, but whether that purpose is authorized by the articles [of incorporation].(23)
In Connecticut, the Attorney General intervened in a situation involving an acute care hospital facility abandoning its historic core mission as an acute-care hospital to become an ambulatory care facility with an emergency room. There, the Hospital trustees voted to close in-patient care and lay off related medical support staff. The Connecticut Attorney General's Office contended that such a fundamental transformation required cy pres action, and the court agreed.(24)
2. Deviation
RSA 547:3-d requires that a charitable trust seek approval from the Probate Court before property is applied to a different charitable purpose. Under the doctrine of deviation, the Court may alter the administration of a trust, if it appears that strict compliance with the terms of the trust "is impossible or illegal, or that owing to circumstances not known to the settlor and not anticipated by him, compliance would defeat or substantially impair the accomplishment of the purposes of the trust.(25) Chief Justice Brock of the New Hampshire Supreme Court has described the doctrine as follows:
Where the dominant objective of a trust remains capable of fulfillment, but its method of accomplishment has been stalled due to a hitch in the administrative machinery, the doctrine of deviation permits a reworking or repair of the administrative mechanism so that the trust purposes may be accomplished effectively. The doctrine of deviation permits changes in the management of all trusts, and in the case of charitable trusts, may be employed to substitute trustees as well as to alter trust conditions.(26)
3. Quo Warranto
The common law writ of quo warranto applies generally to prevent an entity from unlawfully usurping, abusing or misusing corporate powers, and has been used successfully in other states to prevent nonprofit hospitals from merging with for profit entities. The Director of Charitable Trusts may, in addition to other statutory actions, such as declaratory judgment, cy pres and deviation, bring a writ of quo warranto to challenge the lawfulness of a business practice. The New Hampshire Supreme Court has recognized the continued existence of the writ of quo warranto to protect the interests of the public.(27) A writ of quo warranto may also be used to challenge the authority of a corporation to act without proper regulatory and legal approvals.
IV. HISTORY AND CHRONOLOGY
A. Elliot Hospital And Catholic Medical Center
For more than a century, Elliot Hospital, Catholic Medical Center, and its predecessors, Notre Dame Hospital and Sacred Heart Hospital, have ministered to the health care needs of Manchester's various and varying populations as public charitable institutions. In accordance with a grant in the will of Mary Elizabeth Elliot, Elliot Hospital was established in 1881 by a special act of the New Hampshire Legislature.(28) The legislature chartered Elliot Hospital as a "public charity" and tied that charitable status to an exemption from property taxes.(29) In subsequent amendments to the charter of the hospital, successive generations of New Hampshire legislators have reaffirmed the hospital's "public charity" status and tax exemption.(30) While Elliot Hospital has historically had close ties with a number of Protestant denominations, including mandatory representation by certain churches on its board of trustees, the hospital has always been a secular organization.
Catholic Medical Center was established in 1974 as a 501(c)(3) not-for-profit corporation, intended to continue the missions of two predecessor Catholic acute care hospitals, Sacred Heart Hospital and Notre Dame Hospital. These hospitals had served the Catholic and immigrant populations of Manchester and surrounding communities for nearly a century. In its Articles of Agreement, CMC established as its first and primary purpose the establishment and operation of "a hospital in the City of Manchester, State of New Hampshire, without pecuniary gain and without distinction as to race, color, creed, sex or ability to pay." (31) In keeping with its charitable purpose and the nondistribution constraint, CMC's Articles of Agreement provide that [n]o part or portion of the assets or earnings of this Corporation shall ever be distributed to or divided among any individuals, including any member, officer, director, trustee, or other organizer of this corporation .(32)
Under its Articles of Agreement, another aspect of CMC's essential mission is [t]o maintain its identity as a Catholic Hospital.(33) Although Catholic Medical Center has never been under the direct sponsorship of the Diocese of Manchester, its Articles of Agreement expressly identify it as an "official agency of the Roman Catholic Church." Such status, the articles continue: is indicated ... philosophically by the guiding tenets under which it operates: namely, the teachings of the Roman Catholic Church. These tenets are expressed in specific regulations of the Holy See, and the teachings of the Bishops of the United States of America, more precisely in the latter instance, in the ETHICAL AND RELIGIOUS DIRECTIVES OF THE CATHOLIC HEALTH FACILITIES as promulgated by the National Conference of Catholic Bishops.(34) Consistent with its essential Catholic mission, CMC has committed itself to a specific set of religious tenets by incorporating these theological directives into its Articles of Agreement.(35)
B. The 1994 Merger Of Elliot Health Systems And Fidelity Health Alliance
In late 1992, following a period of bitter competition between the two hospitals, management began to discuss the possibility of a merger between Elliot Health Systems and Fidelity Health Alliance, the supporting organizations for Elliot Hospital and CMC. In the spring of 1993, the supporting organizations retained the accounting firm Ernst & Young to perform a theoretical study of the savings that might be achieved through different levels of consolidation and integration. At the same time, the two companies undertook an internal "feasibility study" with respect to a possible merger.(36) On June 25, 1993, the supporting organizations signed a memorandum of understanding outlining the steps they would take to consummate the merger. On February 24, 1994, after receiving federal and state anti-trust approvals, Elliot Health Systems and Fidelity Health Alliance merged to form a new supporting organization, Optima Health, Inc.(37)
The express purpose of the merger was to continue the charitable purposes of the two hospitals and related institutions.(38) Prior to the merger, representatives of Elliot Hospital and CMC were quoted in the Manchester Union Leader and other media outlets as anticipating approximately $150 million in projected savings from an operating plan in which the two hospitals would maintain separate identities, with some unspecified level of consolidated services. Such savings, it was stated, would permit both hospitals to maintain their viability as community-based, locally-governed health care institutions committed to serving the Manchester community in an era of increasing competition and change in health care.
Optima actively sought, and widely received, the support of Manchester's and New Hampshire's business and political communities for the merger.(39) In September 1993, Philip Ryan, CEO and President of Elliot Health Systems and Robert Cholette, CEO and President of Fidelity Health Alliance, appeared before the Manchester Mayor and the Board of Aldermen to explain the rationale and possible long-term consequences of the proposed merger, explicitly citing the savings goal of $150 million in the context of a limited consolidation of services.(40) Hospital presidents Scott Goodspeed and Sylvio Dupuis were quoted in Union Leader articles as stating that Elliot Hospital and CMC would remain independently viable -- and locally managed -- centers of excellence into the foreseeable future after the proposed merger.(41)
In their communications with the public, the proponents of the merger stressed their continued commitment to remain accountable to the community. In a 1993 letter to the Attorney General's Office regarding the proposed merger, Elliot Hospital's counsel acknowledged and promised that the two hospitals were and would continue to be a "public servant to the community.(42) Before the Mayor and Aldermen, CEOs Ryan and Cholette committed to instituting an ongoing mechanism to ensure public input and accountability following the merger.(43)
C. Key Post-Merger Decision Points
Beginning immediately after the 1994 merger of Fidelity and Elliot Health, the management of Optima Health, Inc. embarked on a series of decisions which run counter to Optima's commitment to the Manchester community to continue to operate two community-based acute care hospitals, and to involve the local community in the governance and management of Elliot Hospital and CMC. Optima's decisions, and the processes by which they were made, are the primary focus of this report. The decision points are listed in chronological order.
1. Decision To Exercise Complete Control Over CMC And Elliot
Legally, the merger joined the two supporting organizations, Fidelity Health Alliance and Elliot Health Systems. The hospitals existed separately, with their own independent governance structure as specified in the Articles of Agreement on file with the Secretary of State. Nevertheless, in the merger agreement Optima expressed its intention to exert complete control over the hospitals, which it viewed as its "subsidiaries." The merger agreement provided that [t]he By-Laws of OPTIMA and all of its subsidiaries ¼ shall provide that the OPTIMA Board of Trustees shall appoint two-thirds (2/3's) of the Trustees of each subsidiary's Board of Trustees and the OPTIMA Board of Trustees shall be solely authorized to amend the By-Laws of each subsidiary of OPTIMA.(44) Immediately after the merger, Optima implemented these provisions by altering the bylaws of CMC and Elliot Hospital.
2. Decision To Move To A Single Acute Care Site
Within months of the merger and without post-merger financial analysis, Optima decided to consolidate all acute care services delivered by both hospitals at the Elliot campus, reducing CMC to a rehabilitative and psychiatric unit within a larger hospital organization. In conjunction with the acute care consolidation, Optima applied in April of 1995 to the state Health Services Planning and Review Board for a Certificate of Need ("CON") authorizing Optima to institute a construction program on the Elliot campus costing more than $35 million. On September 26, 1996, the CON application was granted. The New Hampshire Supreme Court declined to hear an appeal taken by opponents of the consolidation.
3. Decision To Restructure Optima, Elliot And CMC's Governing Boards
Following a board retreat in the summer of 1995, Optima hired Cambridge Associates, Inc., to oversee a restructuring of the governing bodies of Optima and its affiliated organizations. Pursuant to the consultant's recommendations, in November of 1995 Optima voted to reduce the membership of its board from thirty-six to sixteen trustees, and to eliminate the requirement that seventy percent of board members come from the community. At the same time, Optima instituted a structure of "mirror boards" for its subsidiaries, meaning that Elliot Hospital and CMC would now be governed by identical boards, with essentially all decision-making authority delegated to the Optima board.
4. Decision To Establish A Single Acute Care Hospital As A Successor To CMC And Elliot
Optima's decisions to reorganize the governance of the hospitals and to consolidate their acute care services at a single site are properly characterized as a decision to establish a single acute care facility as a successor to CMC and Elliot. Necessarily, the integration of secular and religious health care institutions raises difficult issues concerning the applicability of religious doctrine within the consolidated institution.
Although Optima itself is a secular entity, its Articles of Agreement include an express requirement to maintain CMC's identity as a Catholic institution, subject to the Ethical Directives.(45) The merger agreement attempts to reconcile this conflict between the secular and religious elements in its expression of "shared values" which describes certain generally stated principles which "shall continue to be principles upon which OPTIMA, Elliot Hospital and Catholic Medical Center shall conduct their affairs.(46)
In practice, however, the "shared values" which supposedly unify Optima, Elliot and CMC have not been fully defined in the years following the 1994 supporting organizations merger. This is a critical failure. Under cy pres, the Probate Court must determine that a successor organization or alternative use toward which the assets of a charity will be applied fulfills as nearly as practicable the mission of the original trust. Essentially, through cy pres, the Probate Court enforces the social contract that binds the charitable trust to the community.
Optima's post-merger conduct has been marked by confusion in governance and policies. This confusion is reflected in interviews of Optima management, and raises serious questions as to whether any judgment can be made that the mission and identity of the successor hospital fulfills as nearly as practicable those of CMC and Elliot.
This confusion over religious doctrine and over the missions and identities of the two community-based hospitals is most evident in the debate over abortion and the apparent disagreements among Optima's management about the applicability of the Ethical Directives at the single acute care facility. The merger of the supporting organizations was based in part on specific representations made by Elliot Health Systems management to the management of Fidelity Health Alliance, to physicians at both institutions, to the public, to trustees of both institutions and to representatives of the Diocese of Manchester, that termination of pregnancy policies at Elliot Hospital were consistent with practices at CMC. Disclosure in 1996 that certain abortion procedures, banned under Catholic doctrine, had historically been performed at Elliot Hospital led to the promulgation by the Elliot Hospital Board of Trustees of a policy that purports to ban all terminations of pregnancies which are not consistent with Catholic moral doctrine at any Optima Hospital. Adoption of this policy has caused widespread protest among affected physicians, and has resulted in a resolution adopted by 160 members of Optima's combined hospital staffs requesting reconsideration of the announced policy.(47) Due to Optima's original failure to articulate specifically the policies, attributes, and governance of the successor integrated hospital to CMC and Elliot, it is likely that similar issues will continue to arise.
5. Decision To Affiliate With Covenant Health Systems, Creating Optima Healthcare
In January 1997, Optima entered into a Joint Operating Agreement ("JOA") with Covenant Health Systems, a Catholic health service organization which operates Saint Joseph's Hospital in Nashua and other facilities outside New Hampshire. Under the JOA a newly created nonprofit corporation, Optima Healthcare, Inc. ("Optima Healthcare"), manages and operates all services provided by its "Network Members".(48) In contrast with Optima's Articles of Agreement, Optima Healthcare's corporate documents focus extensively on St. Joseph's Hospital as a Catholic institution.(49) Although CMC is identified as a Catholic institution, it falls under the secular "Optima" category within the Optima Healthcare organization.
The organizational structure created by the JOA gives Optima Healthcare the power to develop and implement strategic plans for the Network, develop and approve operating and capital budgets for the Network, select other Network Members, select management and personnel, develop mission statements, and negotiate payor contracts.(50) The Network Members retain authority to implement programs approved by Optima Healthcare, to conduct credentialing for their medical staff, and to approve the expenditure of their restricted funds. Optima and Covenant are empowered to elect and remove the governing boards of the Network Members, and to take any and all actions that they deem appropriate to discontinue or change the actions or operations of the Network Members, provided that the changes do not violate the religious requirements applicable to the Network Members, or the will of Mary Elliot.
Under the JOA, the boards of trustees of Optima, and indirectly Elliot and CMC, have been stripped of most independent authority. Executive management of the hospitals has been removed from the hospitals to Optima Healthcare, and hospital financial matters are now being addressed at the joint operating level rather than within the hospitals.
V. LEGAL ANALYSIS AND FACTUAL FINDINGS
The Attorney General has intervened in this matter to review and address the legality and practical effect, under New Hampshire charitable law, of Optima's decision to consolidate all acute care services previously performed at Elliot Hospital and CMC at the Elliot campus and to create a single integrated facility, effectively terminating the century-old charitable mission of CMC and its predecessors to serve as an acute care Catholic hospital within the City of Manchester. In our review, we also have examined the legal and practical effect of the merger of a secular and a non-secular institution into a single health care system.
A. The 1994 Merger Of Fidelity Health Alliance And Elliot Health Systems May Not Have Transferred To Optima Health, Inc. Ownership Of Elliot and CMC
As an initial matter, this office reviewed the structure and legality of the 1994 merger of Fidelity Health Alliance and Elliot Health Systems into Optima Health, Inc. In conducting this review, we examined all corporate and legal documents provided by Optima, all documents on file with the New Hampshire Secretary of State, and all documents filed with the Office of Charitable Trusts. Based upon our review of the corporate documents and records, a serious question exists as to whether the 1994 supporting organizations merger transferred legal ownership of Catholic Medical Center or Elliot Hospital to Optima Health, Inc. and whether Optima Health, Inc. obtained the legal right to control or restructure those entities.
1. Legal Principles
It is a fundamental principle of corporate law that a corporation has no powers beyond those set forth in its governing documents. Trustees of Dartmouth College v. Woodward, 17 U.S. 518 (1819). The powers of a voluntary corporation arise out of and must be consistent with its Articles of agreement, which must be filed with the Secretary of State in order to be valid.
CMC, Fidelity Health Alliance, Elliot Health Systems and Optima Health, Inc. are all voluntary corporations governed by New Hampshire's Voluntary Corporations and Associations Act, RSA Chapter 292.(51) A voluntary corporation may take action only in accordance with chapter 292, the corporation's articles of agreement, and the corporation's bylaws. The articles of agreement must be recorded with the Secretary of State in order for formation of the corporation to take effect. RSA 292:4. The corporation's bylaws need not be recorded, but they must be consistent with the articles of agreement. RSA 292:6.
Certain actions by voluntary corporations, including name changes, increases or decreases in capital stock or membership certificates, mergers and acquisitions, are not effective unless they are recorded with the Secretary of State. RSA 292:7. "[T]he provisions for establishing membership and participation in the corporation," and "the number of shares or membership certificates, if any, and provision for retirement, reaquisition and redemption of those shares or certificates" must be included in the articles of agreement. A non-profit corporation's articles of agreement must be filed with the Secretary of State to be legally valid. RSA 292:2, II-a and V.
2. Apparent Deficiencies In The 1994 Supporting Organizations Merger
Based on our review of the corporate histories of Elliot and CMC, as well as the documentation supplied by Optima regarding the 1994 supporting organizations merger, we conclude that the merger may not have conferred on Optima ownership or control of the two hospitals. First, both the corporate documentation and the sequence of corporate actions by which CMC sought to transfer its corporate authority and assets through Fidelity Health Alliance to Optima Health, Inc. appear to be deficient, due to CMC's failure to include membership provisions in its articles, and Fidelity Health's elimination of CMC's Board of Trustees. Second, no document recorded with the Secretary of State prior to the merger made Elliot Health Systems, Inc., or any other corporate entity, a "member" of Elliot Hospital, let alone the "sole member," with power to transfer any assets, or to otherwise control the governance, of Elliot Hospital. As a result, subsequent actions by Optima Health, Inc. to control or dispose of the assets of CMC and Elliot may be without authority, and therefore, without legal effect.(52)
a. Catholic Medical Center
CMC's corporate filings may not have properly transferred ownership of CMC to Optima. According to CMC's Articles of Agreement on file with the Secretary of State, CMC was established in 1974 as a Chapter 292 voluntary corporation and 501(c)(3) organization. Between 1974 and 1994, CMC's Board of Trustees consisted of 24 public members, a representative of the Catholic Church, 6 members of the medical staff, the CEO, and the President of the Senior Associates.(53) Under CMC's Articles of Agreement, the trustees had authority to provide hospital services, control the corporation's money, property and affairs, maintain accredited status, ensure patient safety, grant privileges to the medical staff -- in short, to control all affairs of the hospital.
There is no public record of any attempt to transfer control, by "membership" or any other mechanism, of CMC's assets and governance to Fidelity Health Alliance until one day before the 1994 supporting organizations merger. Prior to the 1994 merger, five members of CMC sat on the nine member Board of Fidelity Health Alliance.(54) CMC maintained control over its supporting organization through its majority representation on Fidelity's Board.
In an amendment recorded with the Secretary of State on February 22, 1994, the day before the merger, the CMC trustees voted to delete, in their entirety, the provisions establishing its Board of Trustees and Board of Incorporators, as well as the provisions giving the Board the power to control the affairs of the hospital. In place of these provisions, CMC reserved authority to revise the bylaws to its "sole member, Fidelity Health Alliance." Then, on February 23, 1994 -- one day after the documents establishing the abolition of its Board of Trustees had been filed with the Secretary of State -- CMC, purportedly by vote of its trustees, amended its Articles of Agreement by substituting "Optima Health, Inc." for "Fidelity Health Alliance," and added a new article stating that "The sole member of the corporation is Optima Health, Inc." This document was filed with the Secretary of State on March 19, 1994.
Optima's creation, then use, of corporate memberships to effectuate the 1994 merger of Fidelity Health Alliance into Optima Health, Inc. raises serious questions regarding the extent of Optima's authority to own and control CMC and Elliot. Although CMC's amended Articles purport to establish Fidelity Health Alliance and, subsequently, Optima Health, Inc. as its "sole member," the standards for "membership" or for issuance or redemption of membership certificates are not contained within CMC's Articles of Agreement, as required under RSA 292:2, II-a. Thus, the "membership" status purportedly conferred on Fidelity Health Alliance and Optima Health, Inc. by the February 1994 amendments to CMC's Articles does not appear to comply with the statute.(55)
Additionally, the purported transfer of "sole membership" status from Fidelity to Optima Health, Inc. also is problematic because the trustees voted to approve the change only after the board had abolished itself and all of its authority, and documents to that effect had already been placed on public record by filing with the Secretary of State.(56)
As a result of these apparent defects in corporate documentation, and the sequence of events which led to a vote approving transfer of sole membership status in CMC by a legally non-existent board of trustees, CMC may have been left with no legally valid member and no board of trustees. Optima Health, Inc.'s control over the assets and governance of CMC since 1994 may, therefore, lack legal foundation.
b. Elliot Hospital
Elliot Hospital's corporate existence was originally established by statute in 1881, in accordance with the will of Mary Elizabeth Elliot. The act creating Elliot Hospital appointed trustees, as specified in Mary Elliot's will. These included the Mayor of Manchester and persons chosen by each of six Protestant churches in Manchester.
The only recorded filing with the Secretary of State for Elliot Hospital (other than mandatory reports, and statements reflecting increases in the total value of property the hospital can hold) is an amended Constitution and Bylaws which dates from 1958. This filing uses the term "members" to denote trustees, and provides that there will be "not less than sixteen." The purposes section of the Constitution is expanded from the original statutory language, and includes the determination of the policies of the institution with relation to community needs, maintenance of proper professional standards, directing administrative personnel, and adequate financing and business-like control of expenditure. Other than mandatory reports, no documents have been filed with the Secretary of State with respect to Elliot Hospital since 1974.
Elliot Health Systems was established in 1983 (under the name Health Northeast, Inc.) as a 501(c)(3) supporting institution for Elliot Hospital. Conspicuously missing from the public record, however, is any document which purports to effectively cede control of the governance or assets of Elliot Hospital to Elliot Health Systems. Indeed, there is nothing in the recorded filings of either Elliot Hospital or of Elliot Health Systems which indicates that Elliot Health Systems owned or controlled Elliot Hospital or that Optima presently holds such authority.
Certain documents, not publicly filed, but provided to us for purposes of this review, do suggest that Elliot Health Systems had a substantial degree of control over Elliot at the time of the merger and that the Elliot Board may have voted to accept Optima as its "sole member." A 1993 constitution and bylaws for Elliot Hospital indicate that while prior to the merger, Elliot Health Systems was not designated as a "member," it did have authority to appoint, and to remove without cause, 3/4 of Elliot Hospital's board members.(57) Under the 1993 constitution, amendments to Elliot's constitution or bylaws required the approval of Elliot Health Systems.(58) On the day of the merger, the Elliot trustees voted to amend Elliot Hospital's constitution to make Optima Health, Inc. the sole member of Elliot Hospital, and to substitute Optima Health, Inc. for all references to Elliot Health Systems. None of these documents are on file with the Secretary of State, nor did the copies reviewed by this office include a certification of adoption. Further, as with the amendments to CMC's Articles of Agreement, the Elliot amendments shed no light on the duties or responsibilities of Optima as the "sole member" of Elliot Hospital.
c. Implications For Optima
The above defects in corporate organization and Optima's failure to place all relevant corporate documents on record with the Secretary of State(59) raise significant questions regarding the capacity of Optima Health, Inc. to control the governance, and to control or dispose of the assets of either Elliot or CMC. Accordingly, the 1994 transfer of corporate powers from the hospitals to Optima Health, Inc. and the 1995 transformation of the hospitals' respective boards of trustees into "mirror boards" of limited authority are also subject to question. Finally, Optima Health, Inc.'s participation as a member of the Optima Healthcare regional joint operating company presents similar legal issues concerning the transfer of operational control of the hospitals or their assets to that entity.
B. Optima Has Effectively Terminated The Charitable Trusts Of Elliot And CMC By Merging Their Governance Structures And Operations Into A Regional System
These corporate issues are eclipsed in importance by Optima's post-1994 actions regarding the stewardship of the assets and charitable missions of Manchester's two hospitals. These issues fall into two categories:
First, Optima failed to include the community and the Director of Charitable Trusts in crucial decisions, including substantial changes in the governance and organization of the two community hospitals and consolidation of both hospitals' acute care services at a single site. Indeed, Optima representatives have not fully informed the public or the Director of Charitable Trusts regarding its plans, nor have they provided financial or other supporting analysis for its decisions. Optima's failure to communicate with and to involve the public has resulted in an apparent repudiation of promises and commitments made at the time of the 1994 supporting organizations merger. Such promises include:
* Optima's public commitment to maintain CMC and Elliot as distinct, community-governed acute care hospitals;
* Optima's public commitment to preserve local control and governance of both Elliot and CMC;
* Optima's public commitment to preserve the distinct charitable and religious identities of both Elliot and CMC as separate elements of a unified health care system; and
* Optima's public commitment to establish a system of accountability to the community to ensure that savings achieved from the 1994 merger would be redirected back into the community.
Second, through the aggregate of its actions, including relocating services, expansion of facilities, changes in the use of facilities, changes in governance and structure, and corporate reorganization into a regional holding company, Optima has at a minimum substantially altered, if not effectively terminated, the distinct charitable identities of Elliot Hospital and CMC. It has done so without seeking the approval of the Probate Court through an action for cy pres or deviation, which are the appropriate legal processes for review of such action. Based on our review of the documents submitted to this office, Optima does not appear to have met the legal standard for cy pres, termination of, or deviation from a charitable trust with respect to either Elliot or CMC. This is so because:
* Optima has made no showing based upon financial analysis that it is illegal, impossible or impracticable to continue the distinct charitable mission of CMC as an acute care community hospital serving the Manchester community. Despite its statement that Manchester is too small a community to support two acute care hospitals, Optima's own financial analysis projects that $150 million of cost savings could be achieved by consolidating certain services while still operating two acute care hospitals. Indeed, Optima did not conduct a post-merger financial analysis of the option of continuing operation of CMC as an acute care hospital, but rather treated consolidation of acute services at a single site as the sole option available after the merger to achieve the projected savings.(60)
* Optima has not defined a clear charitable mission or other identifiable attributes for the successor integrated acute care hospital. Optima's failure at the time of the 1994 merger to forthrightly address the divergence between the hospitals in practices concerning pregnancy termination has led to profound confusion within and outside of Optima regarding the religious and ethical tenets affecting the availability of health care services for the Manchester community.
* This tension has been particularly acute with respect to abortion and reproductive services, where statements made by Optima representatives at the time of the merger that Elliot's practices were consistent with Catholic ethical doctrine have led to the promulgation -- three years later -- of a vague, ad hoc policy regarding abortion and the application of religious doctrine to health services within Optima's integrated acute care facility. The confused and often unclear policies of the consolidated acute care facility appear in many instances to be inconsistent with the established identities of both Elliot and CMC.
1. Optima Has Failed To Inform And Include The Community And The Director Of Charitable Trusts Regarding The Charitable Identities Of CMC And Elliot
It is a fundamental tenet of charitable trust law that a charitable institution may not radically alter or terminate its charitable mission without notification to the Director of Charitable Trusts, and without seeking approval of the change in mission from the Probate Court by an action for cy pres or deviation. It is equally fundamental that the social contract that binds a charitable trust to its served community includes a duty of candor and accuracy. We conclude that Optima, by integrating the hospitals into a single acute care facility and substantively changing the governance and character of the hospitals, effectively terminated the distinct charitable missions of CMC and the distinct charitable identities of CMC and Elliot as community hospitals. Optima did this without appropriate legal process and, most disturbingly, without informing its served community with candor and accuracy of its plans and actions.
a. Consolidation Of Acute Care Services At A Single Site
i. Pre-Merger Public Statements
It is clear from both the public and regulatory record that the 1994 supporting organizations merger was permitted to go forward, and received broad public support, based in large part on the common public assumption that the merger would preserve the distinct operations and identities of CMC and Elliot Hospital.(61) Widely reported pre-merger statements by Sylvio Dupuis and Scott Goodspeed, presidents of CMC and Elliot Hospital, respectively, focused on developing the distinct missions and characters of each hospital under unified holding company management, as "centers of excellence," each emphasizing particular specialties.(62) Indeed, the pre-merger Memorandum of Understanding between Fidelity Health Alliance and Elliot Health Systems identifies as one purpose of the merger "[t]o" reflect in the policies and practices of a new integrated health care system the merger of two equals who respect the standards and principles by which each is presently governed.(63)
This message was communicated in a variety of forums. At a September 1993 public hearing before the Manchester Board of Aldermen, Phillip Ryan, President and CEO of Elliot Health Systems, and Robert Cholette, President and CEO of Fidelity Health Alliance, made a joint presentation regarding the proposed merger. At one point, Mr. Cholette described the proposed merger as follows:
Here we are considering bringing the two holding companies together to form one systems corporation and this systems corporation, this holding company would be the parent company to not only the Elliot Hospital and the Catholic Medical Center, but to Hillcrest Terrace, to the One-Day Surgery Center, the Convenient Med-Care and the NH Medical Lab, all of the companies that are owned by both organizations and there are probably 17 or 18 such companies. This holding company, this new systems corporation, would be non-profit and it would be a partnership of equals. We would come together with equal representation to govern this new heath care system for greater Manchester.(64)
Later in the same presentation, Mr. Cholette responded to Alderman Buckley's question of whether there would continue to be two acute care centers after the merger by stating only that, "some of the major service areas will be unified." Mr. Ryan immediately emphasized this point, stating that "a lot of these savings [from the proposed merger] come from equipment savings as well as avoiding the need to purchase duplicate equipment, so if you have all of obstetrics in one area and all of cancer care in one area you can do some things from a cost as well as a quality point of view by unifying. Those would be tougher for two separate operations to do.(65)
In statements to the public press, the FTC, and the Board of Aldermen, Optima officials repeatedly represented that the projected merger would result in savings of $150 million over a ten year period.(66) This estimate appears to have been based on a pre-merger financial analysis conducted by Ernst & Young to analyze the potential financial benefits resulting from different levels of consolidation and integration.
Ernst & Young designed its study around three different options and compared the expected range of potential cost savings from each option:
* Option 1 - consolidation of the supporting organizations and certain overhead;
* Option 2 - service consolidation, while still operating two acute care sites; and
* Option 3 - full consolidation of acute care at one site with no new construction.
Significantly, Ernst & Young estimated that the second option, service consolidation while still operating two acute care sites, would produce approximately $150 million in savings over ten years. In fact, in a 1993 meeting with the U.S. Department of Justice Staff, Optima's attorney identified the specific acute care services which each hospital would provide.
During 1993, Fidelity Health Alliance and Elliot Health Systems management actively solicited members of the medical staffs of the two hospitals to submit letters of support for the merger to the Federal Trade Commission. To elicit physician support, management personally assured the physicians that Optima would continue to operate two acute care hospitals after the merger.(67)
It is apparent that public support for the 1994 supporting organizations merger hinged in large part on the common public understanding that the merger would result in significant savings while still preserving the distinct and independent identities of both Elliot Hospital and CMC. In his letter of support for the 1994 merger, U.S. Senator Judd Gregg wrote:
The new corporation will be governed by members of the local community, just as the separate entities are now. This will ensure continued responsiveness to community needs.
Joseph McCarron, President of Healthcare Concepts, Inc. wrote:
The merger will further enhance the two health care systems which are already largely complementary in the services they provide yet will preserve the valued identities and reputations of the two hospital institutions ... [The] continuity of the extensive community oversight and participation in the governance of the merged system will assure that savings are passed on to the community.
Numerous other letters from physicians and community members, which Optima included in submissions to the U.S. Department of Justice and the New Hampshire Attorney General's Office in connection with these agencies' antitrust reviews of the proposed merger, offer support to the concept of local governance and elimination of duplicative costs, while still preserving the essential identity and missions of the two hospitals.(68)
ii. Post-Merger Decision To Consolidate Acute Care Services At A Single Site
Notwithstanding the public's understanding of the nature and effect of the supporting organizations merger, Optima has acted with the apparent belief that the 1994 merger gave it authority not only to consolidate the supporting organizations, and to amend the corporate governance structure of the charitable hospitals, but also to change the core mission of CMC, and to relocate services and facilities at will.
Although the 1993 Memorandum of Understanding and the 1994 merger documents acknowledge the separateness of the Catholic elements of the system and speak of their preservation, Optima management took steps immediately after the merger to reduce the separate hospitals to subsidiary elements within the Optima Health system.(69) Optima internally renamed CMC and Elliot as "Optima West Side" and "Optima East Side," with the traditional names for the hospitals retained publicly for the hospitals as "dba's" for Optima. In 1996, Optima registered the trade names "CMC" and "Elliot Hospital" with the Secretary of State.(70)
On August 17, 1994, less than six months after the supporting organizations merger, Optima management outlined and presented a facilities work plan which set January 1, 1995 as the deadline for the identification of a single acute care site.(71) In post-merger submissions to governmental agencies, and in statements to the public, Optima represented that the decision to consolidate all acute care services at a single site occurred as a result of extensive financial analysis and clinical analysis by physician and other employee work groups.(72) In interviews with this office, Optima representatives said that its physicians made the decision to consolidate acute care services at a single site through their work on systems consolidation subcommittees.(73) The facts suggest otherwise.
Optima's attribution of the consolidation decision to its physicians does not accurately reflect the actual components or sequence of Optima's decision-making process as reflected in its board minutes and subcommittee minutes. Although Optima did form systems consolidation subcommittees, the decision to consolidate services at a single acute care site was made before the systems consolidation subcommittees completed their work. The record indicates that Optima's systems consolidation committees were in fact charged, not with determining whether to consolidate all acute care services at a single site, but with how to implement management's decision to do so.(74)
In light of Optima's assertion that merger savings could not be achieved without consolidation at a single acute care site, and in view of Optima's statement that its decision to consolidate was made in response to "rapid" changes in health care, Optima's election not to conduct any post-merger financial analysis of the effects of a proposed consolidation of acute care services at a single site is particularly significant. Optima relied on the same studies that before the merger showed cost savings of $150 million with two acute care sites to demonstrate, after the merger, that these cost savings could not be achieved without consolidation of acute care at a single site.(75)
In its CON application Optima states that compelling post-merger studies left it with no real choice but to consolidate acute care at a single site.(76) If Optima conducted such studies, they were not provided in connection with this review. Rather, Optima's contention that "only full integration of clinical services will result in $150 million of savings in operating expenses over a ten year period,(77) appears to be based solely upon the pre-merger financial analysis. However, this statement is not supported by the pre-merger Ernst & Young Study, which had predicted prior to the merger that $150 million could be saved from elimination of duplicative services between hospitals without consolidation at a single acute care site.
2. Optima Violated Its Commitment To Maintain Community Governance By Stripping The Hospitals' Boards Of Their Authority
In the wake of the 1994 supporting organizations merger, Optima has substantially changed the organizational structure of its hospital "subsidiaries," essentially stripping them of all independent authority, and conferring that authority on Optima Healthcare.
Optima accomplished this in several stages. After the merger, Optima made immediate efforts to exert control over its hospital "subsidiaries" through changes, some of which may have been legally ineffective, to CMC's and Elliot's governing documents. Then, in November, 1995, Optima Health, Inc. reorganized its own corporate structure and the corporate structure of the hospitals. It did so first by downsizing its own Board of Trustees -- which had previously consisted of all trustees of Fidelity Health Alliance and Elliot Health Systems -- from thirty-six to sixteen members and eliminating the prior requirement that seventy percent of its trustees come from the local community. At the same time, it restructured the hospital boards into identical "mirror boards," while retaining most authority for the conduct of hospital affairs and the control of the hospitals' assets in itself.(78)
Finally, in January 1997, Optima Health, Inc. affiliated with Covenant Health Systems to form Optima Healthcare, a regional joint operating company embracing the operations of St. Joseph's Hospital in Nashua, as well as Elliot and CMC.(79) Under the Joint Operating Agreement governing Optima Healthcare, most corporate powers of Optima Health, Inc. have been ceded to the regional institution. The two hospitals themselves retain almost no independent function beyond credentialing and a limited capacity to establish specific clinical policies and directives, which are subject to approval by the board of Optima Healthcare. Under the JOA, senior managers of the hospitals are to be employed not by the hospitals, but by Optima Healthcare.(80)
As amended, the current bylaws of Elliot and CMC are nearly identical; the two are governed by "mirror boards" of identical composition, selected and controlled by the board of Optima Health, Inc., which in turn is controlled by Optima Healthcare. The Optima Health, Inc. board members, all of whom under the bylaws are also members of the subsidiary boards, serve as the executive committee of the Elliot and CMC boards, and the Optima Health, Inc. officers serve as the officers of the subsidiary boards. The President of Optima Healthcare Corporation, ex-officio, is also the president of Elliot and CMC. The bylaws allow each of the Elliot and CMC boards to "delegate its authority with respect to the operation of the Corporation to another entity organized for the purpose of operating and managing the Corporation and other affiliated entities on an integrated basis¼." The JOA mandates that CMC and Elliot as "Network Members" implement the decisions reached by the Optima Healthcare board.
The "mirror board" governance structure deviates substantially from the pre-merger community-based corporate structure of the hospitals, and from the pre-merger guarantees of local control and governance.(81) Under the 1994 and 1995 amendments and the 1997 JOA, the hospitals are no longer controlled by boards chosen with any guarantee of meaningful local representation. Optima has ceded to Optima Healthcare control over the operating budgets of the hospitals, control over the strategic planning and location and type of services provided, and control of the disposition of profits.(82)
The changed bylaws and corporate structure of CMC appear to be inconsistent with that institution's charitable mission, as expressed in its Articles. Although the CMC bylaws state that CMC's purpose is to maintain the identity of CMC as a Catholic institution, CMC's governing board now includes equal numbers of Catholic and Protestant representatives.
Finally the "mirror bylaws" have also engendered confusion as to the applicability of Catholic Ethical doctrine to the delivery of health care services throughout the Optima network. On the one hand, the Elliot bylaws provide that the Network Ethics Committee, which serves the entire Optima and Optima Healthcare Networks, is responsible for acting "as an advisory group to the President on bioethical issues not previously covered in the Ethical and Religious Directives for Catholic Health Facilities." On the other hand, the bylaws provide that "in the case of the individual patient, the physician duly appointed to the Medical Staff shall have full authority and responsibility for the care of the patient subject only to such limitations as the Directors may formally impose and to the Bylaws, rules and regulations for the Medical Staff adopted by the Staff and Directors." Thus, neither the Elliot nor the CMC bylaws require -- as the CMC bylaws did before the merger -- that physicians practicing at CMC abide by the Ethical Directives.(83)
C. Optima Has Failed To Meet The Standard For Termination Of Or Deviation From The Charitable Missions Of Elliot And CMC
The legal processes of cy pres and deviation are public actions in which the Probate Court provides public oversight of decisions by trustees of a charity to terminate or radically change the charity's fundamental mission or identity. Despite fundamentally changing the organization and governance of Elliot and CMC, and the mission of CMC, Optima has not applied to the Probate Court for approval. As a result, Optima has not been required to demonstrate to the community it serves that these changes are necessary or appropriate under applicable legal standards.
Optima's failure to seek Court approval for its decisions regarding the charitable mission, organization and governance of the hospitals has led to a series of unexamined actions, which, on the basis of the materials submitted to and reviewed by this office, do not appear to be warranted under either the doctrines of cy pres or deviation. This is so for the following reasons:
* The only financial analysis conducted by Optima demonstrates that $150 million of cost savings could be achieved over a ten year period while still operating two acute care sites.
* No financial analysis supports the claim that cost savings can only be achieved by consolidation at a single acute care site.
* The pre-merger financial analysis does not establish that it is illegal, impracticable or impossible to preserve the distinct missions and operations of CMC and Elliot.
* Optima has yet to fully define the mission and attributes of the unified institution into which it seeks to merge Elliot and CMC, but rather appears to be defining those attributes on an ad hoc basis in response to perceived crises. It is, therefore, impossible to determine whether the unified institution has or will have a charitable mission or identity consistent with the missions and identities of either hospital. Optima has maintained that the specifics of governance of the successor organization are confidential business information.
1. Optima's Application For A Certificate Of Need For Consolidation Of Acute Care Services Of Elliot And CMC Did Not Address The Issue Of Whether Optima May Terminate Or Deviate From The Charitable Missions Of The Hospitals
In interviews with this office, Optima officials have consistently maintained that through the CON process at the Health Services Planning and Review Board, they received all necessary governmental approvals for the consolidation of acute care services of the two hospitals at a single site. This argument ignores the fundamental legal issues raised by the charitable status of the hospitals.
The CON analysis conducted by the Health Services Planning and Review Board was directed at, and limited to, the statutory criteria for approval of a certificate of need under RSA 151-C:7, and related administrative rules. In general, these criteria are applied to determine whether a proposed expenditure of health care resources meets a public need, and is consistent with quality health care for the affected community. The CON process does not distinguish between charitable and for-profit institutions and is not directed at issues relating to the charitable missions of health care institutions organized as charitable trusts. Under New Hampshire law, issues pertaining to the charitable mission of the hospitals are within the exclusive province of the Probate Court and the Director of Charitable trusts through actions for cy pres and deviation.
This office has reviewed the pre-merger Ernst & Young study, a pre-merger study conducted by the personnel of the two hospitals, and the Systems Consolidation Committee Reports generated between September 1994 and the March 1995 announcement of a decision to consolidate all acute care services of Elliot Hospital and CMC onto the Elliot campus. We have concluded that the documents provided to us -- which Optima has represented to this office and to the Health Services Planning and Review Board constituted the basis for its decision -- do not support termination or deviation from the charitable missions and identities of the community hospitals under the principles of cy pres and deviation.
2. Optima Has Not Demonstrated That It Is Impossible, Impracticable Or Illegal To Preserve The Distinct Missions And Operations Of Elliot And CMC As Charitable Trusts
Prior to the 1994 supporting organizations merger, Fidelity Health Alliance and Elliot Health Systems commissioned and relied on the Ernst & Young study of potential savings to estimate the opportunities for savings available from the proposed merger. As previously discussed, that study recognized $150 million in possible savings from an operational model which preserved the distinct operations and identities of both Elliot and CMC. This report appears to have been the basis of savings estimates which were repeatedly presented by Fidelity and Elliot Health Systems management to the Manchester Board of Aldermen and in other public forums.
Nevertheless, -- and despite public statements suggesting the contrary -- at no time after the merger did Optima conduct a financial analysis of the feasibility of preserving the distinct charitable missions and operations of the hospitals before deciding to consolidate the hospitals into a single institution.
The CON application constitutes Optima's most comprehensive public analysis of the financial basis for its decision to consolidate all acute care services of both hospitals at a single site. The Executive Summary to the CON application describes Optima's decision to consolidate services as arising from "compelling" post-merger analysis, including, in particular, the work of an internal Systems Consolidation Committee convened in September 1994 to analyze consolidation options. In the Executive Summary to its CON application, Optima asserted that "after carefully studying: (1) national and statewide trends; (2) conducting extensive financial feasibility studies; and (3) examining innovative and cutting-edge approaches to quality of care," it concluded that its plan for an integrated health care system in Manchester would achieve economies of scale, improve system efficiency, and produce optimal patient care.(84)
In fact, no post-merger financial analysis of consolidation options appears to have occurred. The Systems Consolidation Committee's work took place only after management had already arrived at the decision to consolidate all acute care services at a single hospital site, and only after management had already targeted January 1, 1995 as the deadline for identifying the acute care site.
Optima's reliance on its pre-merger financial feasibility studies and its Systems Consolidation Committee Reports to support its contentions that "consolidation of acute care services will achieve key economies of scale, resulting in tremendously increased system efficiency and optimal patient care,(85) is particularly troublesome, in that the Ernst & Young study supports the contrary conclusion -- that $150 million of cost savings could be achieved by consolidating certain services while still operating two acute care sites.
a. The Financial And Systems Analyses Relied On By Optima In Its CON Application To Justify Consolidation Of Acute Services Are Not Sufficient To Justify Termination Of Or Deviation From The Charitable Missions Of The Hospitals
The financial or systems analyses performed by Optima do not establish that it is impossible, impracticable or illegal to continue the distinct charitable missions of both Elliot Hospital and CMC through preserving their independent and distinct identities as acute care hospitals. The Ernst & Young study, for example, is nothing more than an estimate of potential savings, arrived at in 1993, several months before the merger of the supporting organizations. Because the proposed merger was under antitrust scrutiny, the parties to the transaction were not permitted to scrutinize each others' financial documentation, but rather relied on Ernst & Young to provide a general estimate of potential savings available from the transaction.(86)
Even so, the Ernst & Young study projected $150 million of cost savings over ten years by consolidating support and administrative services while still operating two acute care sites. Optima did not produce evidence of a post-merger study which contradicts this fundamental assumption on which the original merger of supporting organizations was based. Its description of the studies offered as "compelling" support for its decision to consolidate at a single site is unwarranted for the following reasons:
* Neither the Ernst & Young study nor any post merger systems analysis addresses the capital costs of implementing measures to achieve operating cost savings from consolidation at a single site. Cost savings projected to result from the consolidation of acute care at a single site do not factor in increased capital costs.
* Neither the Ernst & Young study nor any post merger systems analysis supports Optima's assertion in its CON application that over 70 percent of its projected savings are attributable to the consolidation of acute care services at one site. There is no statement or analysis in that study or any study provided by Optima that links 70 percent of the cost savings to consolidation of acute care at one site. To the contrary, the Ernst & Young study projects $150 million of savings with acute care at two sites. With consolidation of acute care at one site, and assuming no increased capital costs, the Ernst & Young study projects $250 million of savings. Thus, according to Ernst & Young, 60 percent of the maximum projected cost savings can be realized with acute care at two sites.
* The reports of the systems consolidation subcommittees do not contain any financial analysis to support possible cost savings. While information contained in the Systems Consolidation Committee materials is data that with other information and analysis could serve as a basis for a financial analysis, it is not itself a financial analysis. Neither the documents provided by Optima nor the documents submitted to the Health Services Planning and Review Board contain a focused report summarizing and analyzing the conclusions reached by the systems consolidation subcommittees.
* Neither the Ernst & Young study nor any post merger systems analysis addresses debt service for new construction and renovation as an offset against claimed savings from consolidation. The documents produced by Optima do not contain any financial analysis or data substantiating Optima's claim that the renovation of Elliot Hospital's campus will pay for itself in approximately five years with $42 million in net operating savings.
* In its CON application, Optima states that national and statewide trends support consolidation of acute care services at a single site. The documents submitted by Optima contain no evidence or analysis of "trends" which would establish the financial advantage of consolidation at a single site or the impossibility or impracticality of the continued operation of Catholic Medical Center.
Audited financial reports of Catholic Medical Center for 1992 and 1993 reveal revenues and gains in excess of expenses of approximately $5.9 million and $7.4 million, and positive cash flows of $8.7 and $10.1 million respectively. Audited financials for Elliot Hospital for 1992 show a positive cash flow of $5.5 million. This information suggests that the two hospitals were independently profitable in the years leading up to the merger. This trend appears to have continued through 1996 to the extent that Optima's financial reports continue to show each hospital generating operating surpluses. While some portion of such surplus may be attributable to post-merger savings resulting from systems consolidations, Optima has not demonstrated that the hospitals cannot maintain independent viability through operational or administrative consolidation short of its current plan to consolidate all acute care services on the Elliot campus.
b. Optima's Analysis Does Not Meet The Burden Necessary To Terminate Or Deviate From The Charitable Missions Of The Hospitals
The decision of the CON Board finds that the rationale for the consolidation of the inpatient acute care services is based on a study conducted by the two hospitals ¼ to determine the most appropriate location to consolidate all inpatient acute care services into one comprehensive hospital in the city of Manchester. The [Elliot Campus] site was chosen as the hospital of choice based on a number of inefficiencies associated with the site and spatial capabilities of the CMC facility and campus.
Finding No. 7. The criteria Optima applied in selecting the single acute care site included the size of the physical site, the availability of parking, the condition of the general facility, the ability of the site to accommodate physicians' offices, the renovation costs associated with consolidation at a single facility, and the carrying costs of the vacant site. Optima's site based criteria do not establish an appropriate rationale under the law of charitable trusts to justify the termination of Catholic Medical Center as an acute care facility. Simply put, a charitable hospital may not be terminated because another location may be more convenient or have access to better parking.
If a standard of convenience were applied to justify a substantial change in the purposes and mission of a charitable trust, no legal impediment would prevent Optima or Optima Healthcare from closing CMC at a later date and consolidating all services -- acute and non-acute -- at the Elliot campus. Indeed, this office has reviewed long-range planning documents which suggest complete consolidation of all hospital services, both acute and non-acute, at the Elliot Hospital campus as a long-term option.(87) The Joint Operating Agreement reposes full authority in Optima Healthcare to develop a strategic plan for the location of services and binds the "Network Members" to adhere to the strategic plan.(88)
Neither the Probate Court nor the Director of Charitable Trusts has ever accepted convenience as a legal standard to justify the termination of, or substantial change in the purposes of, a charitable trust. By ignoring the legal processes necessary to terminate or deviate from the distinct charitable missions and identities of the community-based hospitals, Optima has proceeded on the basis of inadequate financial analysis to transfer all acute care services from Catholic Medical Center, to reduce the licensed beds at CMC from 330 to 110, to strip the hospital boards of their authority, to sell property belonging to CMC,(89) and to exercise virtually complete legal authority over the finances and assets of CMC and Elliot Hospital.
We conclude that these actions constitute such a significant change of mission, governance and identity of both Elliot Hospital and CMC as to require the approval of the Director of Charitable Trusts and the Probate Court pursuant to RSA 547:3-d or RSA 547:3-h. Optima has not properly made the case that there is any legally cognizable justification for such changes.
3. Optima Has Not Demonstrated That The Unified Healthcare Institution It Seeks To Create Has A Charitable Identity Or Attributes Consistent With Either Elliot Or CMC
If a charity must be terminated or its mission fundamentally changed, under the doctrines of cy pres or deviation, the Probate Court is charged with determining that the charitable institution or substituted use to which the charity's assets are to be committed is as similar as possible to the purpose of the original trust. Optima has not demonstrated that the unified health care institution it seeks to substitute for the distinct community-based institutions of Elliot Hospital and CMC has a charitable mission or attributes consistent with either hospital.
In a sense, this failure is at the heart of the passionate concerns about Optima and the future of the hospitals which have been raised within the Manchester community by the Save CMC organization and others. In the years following the 1994 supporting organizations merger, this failure has manifested itself in:
* Optima's seeming disregard for the preservation of CMC's traditional commitment to religious health care; and
* Optima's vague and ad hoc application of Catholic ethical doctrines to the delivery of health care services -- including certain abortion procedures -- at Elliot Hospital.
a. Optima Has Fundamentally Altered The Nature Of CMC As A Religious Acute Care Hospital
The corporate structures adopted by Optima -- including, in particular, the establishment of mirror boards for Elliot and CMC and the ceding of virtually all independent authority from the hospital boards to Optima Health, Inc. and Optima Healthcare -- has had the effect of blurring traditional and important distinctions between the charitable missions of the two hospitals. In essence, CMC has been transformed into a non-acute care element of a larger secular hospital organization. This runs counter to the hospital's traditional mission. The 1974 CMC Articles of Agreement specifically describe CMC as an agency of the Roman Catholic Church and stress its unique spiritual mission to provide health care to those in need in a manner guided by and consistent with the tenets of the Roman Catholic Church as expressed in the Ethical Directives.
In testimony to the Attorney General's Office, Optima officials asserted, albeit with some confusion and with the notable exception of abortion policy, that the Directives themselves do not apply to the Elliot Hospital, but apply only within the CMC building. While this distinction might have merit in an organization in which CMC maintained independent viability as an acute care hospital, it has little meaning for a CMC whose health care mission has been reduced to a limited number of non-acute care functions.(90)
Optima has not provided this office with documents or evidence which indicate that the historical applicability of the Ethical Directives at CMC was ever actively considered by its constituent boards in connection with the consolidation of acute care services at a single site. Indeed, this issue appears to have gone unaddressed until the 1996 controversy regarding the availability of certain abortion procedures at Elliot Hospital led to promulgation of a controversial policy regarding religious principles and abortion procedures. This policy and statements made to this office by Optima management regarding the applicability of the Ethical Directives, appear to have been formulated as a defensive response to the recent controversy. Such a position betrays a fundamental lack of understanding and respect for the totality of the Ethical Directives as a guide to the religious underpinnings of Catholic health care.
This attitude is underscored by a conversation between Robert Cholette, CEO of Fidelity Health Alliance and later of Optima Health, Inc. and Optima Healthcare, and Dr. Maria Alicia Davila, a physician long associated with CMC. Dr. Davila testified that, prior to the 1994 merger, Mr. Cholette assured her that the proposed merger would not result in closure or termination of CMC. In the course of that conversation, Dr. Davila stated her conviction that Elliot Hospital and Catholic Medical Center could not be merged because of their different cultures. To which Mr. Cholette replied, "That's not true. These are just buildings." She in turn responded, "Excuse me? You mean an institution does not have a soul?"(91)
b. Optima Has Not Clarified Whether Health Care Services In The Merged Institutions Will Be Altered Or Curtailed To Conform With Religious Doctrine
The blurring of the distinct charitable identities of Elliot Hospital and CMC is equally troubling with respect to Elliot Hospital, a secular institution with roots in Manchester's Protestant Community. As the ongoing controversy regarding abortion procedures indicates, there is considerable concern within the medical and general communities of greater Manchester as to whether Catholic doctrine may come to control the provision of health care at Elliot Hospital. Necessarily, this issue is most acutely drawn in the area of reproductive services and abortion, though it may also have implications for other areas of health care, including care at the end of life.
In November 1997, in response to the disclosure that Elliot Hospital's practices with respect to abortion did not conform to Catholic doctrine or the Ethical Directives, the Trustees of the mirror boards, acting as Trustees of Elliot Hospital, adopted a policy which banned termination of pregnancy at Elliot Hospital for any reason except to save the life of the mother.(92) This policy was intended to conform Elliot's policies with the Ethical Directives regarding termination of pregnancies by banning certain procedures, rarely but consistently performed at Elliot, where pregnancies were terminated due to non-lethal fetal abnormalities.(93) The Elliot Trustees sought to address the larger issue of the impact of religious principles and directives on health care at the unified acute care hospital by including within the announced policy several statements purporting to limit the application and influence of religious doctrine to health care within the hospital.
Optima's failure to address the complex ethical issues raised by the merger of a religious and a secular hospital forthrightly, publicly and on the basis of accurate information regarding practices at both hospitals has led to the apparent compromise of the charitable identities and missions of both institutions, and has resulted in the invention of an ad hoc ethical and religious policy which does not fully address the issues raised. Indeed, the provisional nature of the policy was evident in interviews with Optima personnel in which no member of Optima's Board or present or past management appeared able to articulate the scope of the policy or the relation of the Ethical Directives to Elliot Hospital or to the unified acute care institution being formed on the Elliot campus.(94)
Similarly, members of Optima's management and boards of trustees interviewed in connection with this review demonstrated confusion concerning the effect of the recently announced policy on availability of specific procedures, such as routine administration of abortifacient drugs to rape victims.(95) At least two physicians interviewed expressed concern that the policy would affect the treatment options available for extrauterine or ectopic pregnancies in a manner they felt was inconsistent with proper medical treatment.(96) No member of Optima's boards or management interviewed by this office could define the effect of the policy on this issue.(97)
The 1994 supporting organizations merger agreement provides that "Optima will not be identified or operated under the auspices or control of any particular religious organization or group," and that Optima will "maintain the identity of Catholic Medical Center as a Catholic Institution." Optima's approach has been to treat Catholic Medical Center as a separate corporate entity for some purposes and as part of a single integrated hospital for other purposes.
By consolidating acute care at a single location, restructuring corporate governance, and transferring the authority of the local governing boards to a regional consortium, Optima has effectively terminated the separate existence of both Elliot and CMC as community-based charitable hospitals with distinct identities and missions. The mission of CMC as a Catholic hospital has not been maintained. The adoption of a termination of pregnancy policy that is consistent with Catholic doctrine for Elliot does not fulfill the obligation that Optima undertook to maintain the identity of CMC as a Catholic institution. It does, however, compromise Elliot's traditionally secular approach to medicine. The logical and legal incoherence of this approach is evident.
c. Optima Has Failed To Fulfill Its Promise That It Would Be Publicly Accountable For Its Claims That The Merger Of Elliot And CMC Would Produce Savings And That It Would Return Those Savings To The Community
Before the 1994 supporting organizations merger, Fidelity Health Alliance and Elliot Health Systems management repeatedly stated that the merger would result in savings of over $150 million in ten years. Optima said that integration would produce cost savings of over $3,600 for each household in Manchester and over $1,000 for each household in Hillsborough County,(98) and pledged to establish a program of public accountability to demonstrate that the "hospitals are vigorously pursuing cost efficiencies and are otherwise continuing their mission to be a public servant to the community."(99)
i. Optima Has Not Produced Evidence That Consolidation Of The Hospitals Has Produced Or Will Produce Cost Savings
In connection with this review, Optima provided no evidence that it has fulfilled its promise to institute a program of public accountability demonstrating cost efficiencies. When Optima was asked to produce the "public accountability" documents that would demonstrate savings from the merger, Optima provided copies of "merger report cards" prepared for and presented to its trustees on a quarterly basis. Until called for by this review, these "report cards" have been treated by Optima as confidential business information unavailable to the public.(100)
Our review of the "report cards," prepared by Optima for its Board of Trustees leads us to the conclusion that the report cards do not fulfill the pre-merger promise of a public accountability program. First, they have never been made available to the public until this review. Second, the report cards neither contain nor reflect contemporary financial analysis or data by which to evaluate the accuracy of any claimed savings.
Essentially, the report cards offer nothing other than the repeated conclusory assertion that because consolidations have taken place that were predicted by the 1993 Ernst & Young study as potential sources of savings, those savings have in fact been realized. Thus, purported cost savings are simply "reported" based on the same approach that was used to project anticipated cost savings: that is, to estimate gross savings achievable from consolidation of specified services without actual adjustments to reflect cost saved by unit of service actually delivered. While Optima's method of describing cost savings may be acceptable for estimating or projecting potential cost savings on a prospective basis, it is not a reliable or accurate method for documenting or reporting actual cost savings.(101)
Because the merger report cards are based solely on the pre-merger projections, they do not take into consideration a variety of independent factors which may relate or contribute to claimed savings. These include the reduced variable costs which may be attributable to a decline in patient census. In a hospital context, a decrease in patient census utilization may result in lower operating costs without corresponding efficiency gains. Stated simply, when a hospital has fewer patients, it may be able to recognize cost savings through consolidation or elimination of staff functions and other overhead costs. Because Optima's report cards do not account for other factors such as reductions in patient census from pre-merger levels, it cannot be determined whether Optima's claimed cost reductions result from cost efficiencies flowing from the merger and subsequent consolidations, from a lower patient census, or, alternatively, whether the claimed cost reductions are more properly attributable to managed care payor structures or other factors independent of the merger.
ii. Optima Has Not Established A Program Of Public Accountability
Before the merger, Optima represented to the Attorney General's Office and the Manchester Board of Aldermen that it would institute an accountability system so that the community could keep score of its successes. Mr. Cholette described the accountability system as a way of "report[ing] to the community number one what our plans were for the year." It would allow the community to determine "just how well we did," and provide evidence that the cost savings would be returned to the community.(102)
Instead of implementing the promised system of public accountability, Optima has refused to make its financial and corporate information available to the public. Not only has Optima not kept score for itself, it has also prevented the community from keeping an independent scorecard of its "successes."
In connection with this review, Optima has claimed that the corporate bylaws of Optima and its subsidiaries are confidential, that organizational materials reflecting its business organization and structure are confidential, that financial feasibility studies submitted to support its claims of cost savings from consolidation of acute care are confidential, that budgets are confidential, that the joint operating agreement with Optima Healthcare is confidential, and that project costs and construction related information pertaining to the ongoing construction at Elliot Hospital are confidential.
In light of this corporate culture of secrecy, it is all but impossible to determine whether Optima has either achieved cost savings or redirected those costs savings back to the community as promised.
VI. CONCLUSION
In 1993, Optima said that the merger of Fidelity and Elliot Health would benefit the Manchester community by redirecting health care dollars, wasted on competition between CMC and Elliot, back to the community. A member of the Catholic Medical Center Board described the purpose of the merger this way:
... the hospitals have worked collaboratively to sponsor the Manchester Community Health Center which provides family centered care regardless of ability to pay¼. Manchester needs more of these services. The dollars spent on competition should be redirected to accomplish benefits for the community.(103)
In letters of support for the merger, the Manchester community echoed this goal of improving health care in Manchester and surrounding communities by ending wasteful competition between its community hospitals.
It was the clear understanding of the community in 1994 that Optima would accomplish this goal by eliminating duplication in administrative and operational costs while still operating two acute care hospitals. Through its statements to the community, Optima fostered the belief that it was committed to investing in the health care of the Manchester community, improving health care services to the indigent, and maintaining a system of accountability to the citizens of Manchester.(104) To elicit broad public support for the merger, Optima acknowledged that it would be governed by its social responsibilities to the Manchester community and its indigent population. In essence, Optima promised the people of Manchester that it would honor the social contract between them and their hospitals, and the people trusted Optima to abide by that promise.
Optima is not a for-profit business accountable to its equity investors. Optima has no shareholders other than the people of the community that founded and support its constituent hospitals. In 1994, when Optima undertook the responsibility of managing two distinct charitable hospitals, each founded by and connected to different communities within the larger community of Manchester, Optima became accountable not only to the Manchester community, but also to the distinct communities which share the traditional values of CMC and Elliot.
By transferring corporate and financial control of Elliot and CMC to a regionally-based organization that is no longer governed by a Board of Trustees drawn exclusively, or even primarily, from the Manchester community, Optima failed to honor its social contract to both the Manchester community as a whole and to the distinct communities whose values are reflected and who are served by CMC and Elliot. It also severed the social contract between CMC and the community served by CMC and its predecessor hospitals by ending CMC's historical mission of ministering to the broad health care needs of its community in a traditionally Catholic setting. By failing to address forthrightly at the time of the original merger, or at any time thereafter, the complex moral and clinical issues involved in the merger of a religious with a secular health care institution, Optima violated the trust of the community that founded and is served by the Elliot Hospital.
Most troubling, Optima has taken all of these steps without engaging in the necessary legal process of cy pres or deviation to determine the legality and practical effect of its decisions on the charitable missions of Elliot and CMC. As a result, it has made a series of decisions that fundamentally alter the charitable identities, governance and missions of Elliot and CMC while effectively excluding from any meaningful dialogue the very populations those hospitals are pledged, and legally bound, to serve.
It is the conclusion of the Attorney General that Optima, as a charitable institution, must seek guidance from the community in developing its vision of quality health care. This cannot occur without dialogue and without inclusion. Unless changed as a result of that dialogue, Optima's decision to terminate or fundamentally alter the charitable missions and identities of CMC and Elliot by combining them into a single health care institution must be reviewed by the Probate Court in the context of a cy pres action.
________________________________________
Philip T. McLaughlin, Attorney General of the State of New Hampshire
Michael S. DeLucia, Director of Charitable Trusts
Leslie J. Ludtke, Associate Attorney General
Walter L. Maroney, Sr. Assistant Attorney General
Jennifer J. Patterson, Assistant Attorney General
1 Meinhard v. Salmon, 164 N.E. 545, 547 (N.Y. Ct. App. 1929) (emphasis added).
2 See RSA 547:3-d.
3 William Donovan letter to Assistant Attorney General Walter Maroney, November 29, 1993, Exhibit 19.
4 Union Leader, 3/20/93 "Cholette said it is unlikely that CMC and Elliot would ever merge."
5 See Hospital Licensing Documents and Summary, Exhibit 5.
6 A comprehensive list of documents reviewed and the witnesses from whom testimony was taken is included in Exhibit 1.
7 Optima asserts that many of the documents which it has submitted to the Attorney General's Office for review are privileged or confidential. See Confidentiality Agreement, Exhibit 26. Documents that Optima has labeled as confidential are identified in Exhibit 1 as confidential; however, other documents listed in Exhibit 1 may also be subject to a claim of privilege or confidentiality. It should be noted that some of the documents that Optima claims are privileged are required by law to be on file as public records. For example, RSA 292:7 requires that a nonprofit corporation file amendments to its articles of agreement with the Secretary of State and town or city clerk. To the extent certain corporate documents developed by Optima affect the Articles of Agreement currently on file, those documents must be filed with the Secretary of State. Optima claims that all corporate governance documents are confidential.
8 New Hampshire law defines a charitable trust as "any fiduciary relationship with respect to property arising as a result of a manifestation of an intention to create it, and subjecting the person by whom the property is held to fiduciary duties to deal with the property ¼ for any charitable, nonprofit, educational, or community purpose." RSA 7:21, II(a)(Supp. 1997). The most recent amendment to this provision became effective on January 1, 1998. The definition in effect between 1987 and 1997 was substantially identical to the quoted language.
9 See RSA 7:19, 7:20, 7:22, 7:24. See also Attorney General v. Rochester Trust Co., 115 N.H. 74 (1975); Souhegan National Bank v. Kenison, 92 N.H. 117 (1942).
10 See, e.g., Queen of Angels Hospital v. Younger, 66 Cal. App. 3d 359 (1977); Holt v. College of Osteopathic Physicians and Surgeons, 61 Cal.2d 750, 754 (1964); Attorney General v. Hahnemann Hospital, 494 N.E.2d 1018, 397 Mass. 820, 835-36 (1985) (charitable hospital could not amend its corporate charter to include additional new grant-making provisions and then devote assets given and amassed for hospital purposes to such grants); Greil Memorial Hospital v. First Alabama Bank of Montgomery, 387 So.2d 778, 781 (Ala. 1980) (gift to charitable organization which operated hospital for treatment of tuberculosis could not pass them to a successor hospital organization which had abandoned that charitable purpose); see generally Riverton Area Fire Protection District v. Riverton Volunteer Fire Dept., 566 N.E.2d 1015 (Ill. App. 1991); Bossen v. Women's Christian National Library Association, 225 S.W.2d 336 (Ark. 1949).
11 IV. A. A. Scott, The Law Of Trusts, sec 384.1 at 2778. See also Holt, 61 Cal.2d at 756-757.
12 See Henry B. Hansmann, Reforming Nonprofit Corporation Law, 129 U. Pa. L.R. 497 (1981).
13 RSA 292:2, III.
14 See Department of Revenue Administration Report on Tax Exempt Property, Exhibit 6.
15 See RSA 7:19, 7:20, 7:22, 7:24.
16 See Attorney General v. Rochester Trust Co., 113 N.H. 74, 76 (1975) ("it is well settled that the attorney general is a necessary party in any proceedings involving cy pres, or deviation or termination of charitable trusts ¼ we hold that the attorney general is not only a necessary party in such cases but may also be the initiating party").
17 See RSA 547:3-d.
18 RSA 547:3-h.
19 RSA 547:3-d.
20 Queen of Angels v. Younger, 66 Cal.3d 359 (1977).
21 The charter of Queen of Angels permitted it to "establish, ¼ own ¼ maintain ¼ and operate a hospital in the City of Los Angeles" and to educate nurses and medical students. The facts showed that from the date when the hospital was incorporated to the date of the lease, the corporation had continuously operated a hospital. In addition, the hospital had represented to the public that it was a hospital in soliciting donations and public support. In its review the court stated, "The articles of incorporation alone -- without resort to additional evidence -- compel the inference that although Queen is entitled to do many things besides operating a hospital, essential to all those other activities is the continued operation of a hospital." Id. at 368.
22 Id. at 368-69.
23 Id., citing Holt v. College of Osteopathic Physicians & Surgeons, 61 Cal.2d 750 (1964). In Holt, three trustees brought an action to enjoin a breach of charitable trust seeking injunctive relief to prevent the threatened change in corporate purpose. The college was incorporated in 1914 to establish and maintain a medical and surgical college in osteopathic medicine; in addition, by charter its members staffed the Los Angeles Osteopathic Hospital and ran clinics using that form of medical treatment. In 1961 the college trustees voted to amend the charter to run and accredit an allopathic medical school at the same facility, eliminating osteopathic medicine from its curriculum. Plaintiffs contended that the trustees' actions had the purpose and effect of abandoning the organization's main charitable purpose, which was to run an osteopathic medical school, and convert it into a school teaching non-osteopathic medicine. Id. at 761.
24 Attorney General v. Winsted Memorial Hospital, Conn. Superior Court, Judicial Dist. at Litchfield, No. CV-96-00711936-S (unreported decision).
25 Rest. 2d of Trusts, sec. 381; G.G. Bogert, The Law of Trusts and Trustees, (2d ed. rev.), sec. 561, at 225-277. IV. A. A. Scott, The Law Of Trusts, sec. 381, at 323-33.
26 In Re Certain Scholarship Funds, 133 N.H. 227, 240 (1990), Brock, C.J., dissenting, and citing Jacobs v. Bean, 99 N.H. 239, 241-42 (1954).
27 See Chwalek v. Dover School Comm., 120 N.H. 864 (1980).
28 1881 N.H. Laws ch. 178.
29 Id.
30 Id; 1909 N.H. Laws ch. 309; 1959 N.H. Laws ch. 357.
31 Articles of Agreement of Catholic Medical Center, Article II.A.
32 Id., Article II.F.
33 Id., Article II.C.
34 Id. (capitalization in original). A copy of the seventy specific "Ethical and Religious Directives of the Catholic Health Facilities," ("Ethical Directives") which integrate Catholic theology and Catholic health care, is attached as Exhibit 22.
35 See, e.g., Ethical Directive no. 3:
In accord with its mission, Catholic health care should distinguish itself by service to and advocacy for those people whose social condition puts them at the margins of our society and makes them particularly vulnerable to discrimination; the poor; the uninsured and the underinsured; children and the unborn; single parents; the elderly, those with incurable diseases and chemical dependencies; racial minorities; immigrants and refugees. In particular, the person with mental or physical disabilities, regardless of the cause or severity, must be treated as a unique person of incomparable worth, with the same right to life and to adequate health care as all other persons.
36 The pre-merger discussions were at arms-length to avoid violating the strict requirements of anti-trust law.
37 A copy of the Merger Agreement is attached as Exhibit 20.
38 Optima, CMC, Elliot Health Systems, and Fidelity Health Alliance were all incorporated as voluntary nonprofit corporations under RSA ch. 292.
39 See, e.g., Letter from Robert Cholette and Phillip Ryan to Representative Zeliff, July 27, 1993, Exhibit 18.
40 Board of Mayor and Aldermen Minutes of September 7, 1993, Exhibit 7.
41 Union Leader, 7/5/93, Scott Goodspeed "¼ we do know we will continue to operate two acute care sites." Sylvio Dupuis, "The fundamental decision has been arrived at to have two acute care sites. It's very important to patients and their families to have access to a wide array of services."
42 Letter, dated November 29, 1993 from William Donovan to Walter L. Maroney.
43 Board of Mayor and Aldermen Minutes, September 7, 1993, Exhibit 7, at 7 (statement of Mr. Cholette).
44 Merger Agreement, Exhibit 20, ¶ 11.
45 Optima Health, Inc. Amended Articles of Agreement, Art. II, at 3. Under the Merger Agreement, Optima was to be "the head of a community based health care system ¼ which has both Catholic and non-Catholic elements. OPTIMA will not be identified as operated under the auspices or control of any particular religious denomination or any other group." Merger Agreement, at ¶ 10.
46 "FHA, EHS, Catholic Medical Center, and Elliot Hospital share a long tradition of appreciating the importance of spiritual, ethical, and moral support in caring for patients. They share a commitment of a respect for life in the delivery of health care services. They are committed to affording their patients the right to address issues of life and death with dignity, with the caring support of family and hospital, and with the best interests of the patient in mind." Id., at ¶ 10.
47 See Medical Staff Resolution of December 27, 1997, Exhibit 11.
48 The "Network Members" include Optima Healthcare and Covenant Health Systems and their tax exempt affiliates. The tax exempt affiliates include CMC, Elliot Hospital, Hillcrest Terrace, Inc., Alliance Resources, Inc., Visiting Nurse Association of Manchester and Southern N.H., Inc., Women's Aid Home, CMC Regional Cardiac Foundation, CMC Physician Practice Association, VNA Home Health and Hospice, VNA Management Service, Inc., VNA Personal Services, Inc., VNA Community Services, Inc., Covenant Health Systems, St. Joseph's Hospital, and the SurgiCenter at St. Joseph's Hospital.
49 See Optima Healthcare Documents, IRS Ruling Request, Exhibit 36, at 19. ("The structure and governance of OHC were largely influenced by the fact that SJH is a Catholic-sponsored organization.").
50 See Optima Healthcare Network; Boards and Management, Exhibit 35; and Joint Operating Agreement, Exhibit 36.c.
51 Elliot Hospital, a corporation created by statute, is not governed by RSA ch. 292, but remains subject to the general principles of corporate law and to the obligations of a charitable corporation. We do not address the legal question of whether, as a legislatively created entity, the Legislature retains the sole authority to amend the charter. Even were that the case, the public would be included in the process of revisions and would receive notice of the changes through the legislative process.
52 See Chronology of Corporate and Other Records, Exhibit 3, for a schematic review of the corporate history of all entities discussed in this Report.
53 Beginning in 1976, public members were nominated by a large Board of Incorporators.
54 Fidelity Health Alliance was a 501(c)(3) voluntary corporation established on May 9, 1985 under RSA ch. 292 for the purpose of furthering the programs of CMC. Originally called Catholic Medical Center (during a time when CMC's name was Catholic Medical Center Hospital), the supporting organization's name was changed to Catholic Health Alliance in January 1989, and to Fidelity Health Alliance in August of 1990. Fidelity Health Alliance's Articles of Incorporation provided that in the event of termination or dissolution, its remaining assets would revert to the Bishop of Manchester. Fidelity Health Alliance Articles of Incorporation, Exhibit 2.f, Article 4.
55 Although at the time of the merger CMC's Articles of Agreement did not name Fidelity Alliance as a member, the Articles of Alliance Resources, Inc., previously Catholic Medical Center Networks, did name Catholic Health Alliance, the predecessor to Fidelity Health Alliance, as a member. This suggests that the Catholic Health Alliance understood the requirements of RSA 292:2, II-a. When Catholic Health Alliance became a member of Alliance Resources, CMC may have elected not to name Catholic Health Alliance as its own member because CMC controlled Catholic Health Alliance through the participation of five of its board members on the nine member Catholic Health Alliance Board.
56 CMC's last-minute change to its Articles of Agreement appears to have been done to bring CMC's Articles into conformity with earlier changes in its bylaws. During our review, Optima provided copies of CMC bylaws as amended April 13, 1989 and October 24, 1990. Under these bylaws, first Catholic Health Alliance and later its successor Fidelity Health Alliance were designated as the sole member of CMC. The bylaws gave the sole member sole authority to amend CMC's bylaws, and provided that in the event of dissolution, CMC's remaining assets would revert to the sole member, if still existing as a nonprofit organization, and if not, to the Roman Catholic Diocese. The sole member was also given responsibility for choosing trustees and appointing officers, and at one point the bylaws provided that "[a]t all times the Board of Trustees of Catholic Medical Center shall include a simple majority of the individuals then serving as the Trustees of Catholic Health Alliance." CMC bylaws as amended 4/13/89, Article II, §1(2). All of these provisions are inconsistent with CMC's Articles of Agreement on file with the Secretary of State at the time of the bylaw amendments. In particular, the dissolution provisions directing distribution of the assets to the sole member upon termination may violate the "nondistribution constraint" and the requirement of CMC's articles of organization that any assets remaining upon dissolution would go to the Catholic Church.
57 Elliot Hospital constitution and bylaws as amended 1/27/93; Constitution, Art. III and IV.
58 Id.; Bylaws, Art. I and XV.
59 In correspondence with Dr. Wayne L. Goldner, dated September 30, 1997, Patrick Duffy, Chairman of the Board of Optima Health, Inc., stated that "The corporate documents pertaining to" the consolidation of Elliot Hospital and Catholic Medical Center "are on file at the Secretary of State's Office," and that "[o]ther files and records associated with these transactions are proprietary and, as such, are not available for distribution." See Goldner/Duffy Correspondence, Exhibit 12. As noted above, our review has determined that the publicly available file at the Secretary of State's Office does not disclose the full scope and extent of Optima's consolidation of the hospitals' governance and corporate structure. See Chronology of Corporate and Other Records, Exhibit 3.
60 Minutes of the February 23, 1995 meeting of the Optima Health System Consolidation Subcommittee reflect that management presented highlights from the 1993 pre-merger studies provided by Ernst and Young and Jones, Day that illustrated the potential savings which could be achieved if acute care services were consolidated at a single site. When one of the members of the systems consolidation subcommittee observed that all data was being driven by the fact that a single acute care site would be recommended and approved, and asked whether there was data that would inform Optima as to the impact of doing nothing or leaving a major service at the site that was not selected as the acute care site, the minutes do not reflect that Optima presented analysis of that option to its trustees. See Exhibit 29.
61 Union Leader, 4/15/93 "Last month officials of both holding companies denied a report by WMUR-TV, Channel 9, that the two hospitals wanted to merge. Yesterday, Phillip B. Ryan, president and CEO of Elliot Health System, again said the two hospitals are not about to merge." Union Leader, 6/26/93 Robert Cholette, "[The merger of the two hospitals] is not on the drawing board." "I don't see the two hospital organizations merging." "In the end, the combined non-profit holding company would have an annual operating budget of $225 million, employ 2,400 people, and oversee the administration of two hospitals ¼."
62 Scott Goodspeed Testimony, Exhibit 25, at 5-8, "We had the trauma center at the Elliot. ¼ CMC had one of the preeminent cardiac surgery programs in New England. And so you can envision, you know, based on evidence in clinical areas that's how the sites would be configured."
63 1993 Memorandum of Understanding, Exhibit 30, Section I, Paragraph J.
64 Board of Mayor and Aldermen Minutes, Exhibit 7, at 2.
65 Id. at 8.
66 Id. at 3 (statement by Mr. Cholette); 1993 FTC Memorandum, 9/9/93, Exhibit 32, "The merger of these two hospital systems into a single integrated network will result in savings of over $150 million in ten years." ¼ "$150 million [dollars] in savings over ten years that the hospitals have focused on represents what they have verified through their task forces can be achieved over ten years, with acute care services divided between the two sites in a manner that minimizes costs;" Union Leader, 6/26/93, "The companies estimate that the merger will save them $150 million over the first 10 years of affiliation, all of which would be passed on to consumers in the form of lower fees for service, better equipment and expanded services."
67 Testimony of Dr. Maria Alicia Davila, Exhibit 15, at 17-19.
68 See, e.g., Letter from Phillip Ryan and Robert Cholette to Representative Zeliff, July 27, 1993, Exhibit 18.
69 Hospital Licensing Documents and Summary, Exhibit 5.
70 Chronology of Corporate and Other Records, Exhibit 3.
71 The adoption of a timeline for identifying the acute care site occurred less than two weeks after a press report by Optima that it was "feeling the pressure of a rapidly changing health-care system" and "speeding up by at least a year its plans to combine the former Elliot and Fidelity Health companies." Union Leader, 8/4/94.
72 See Executive Summary to the CON Board of Optima Health, Inc. ("CON Executive Summary"), Exhibit 21.
73 Testimony of Robert Cholette, Exhibit 38, at 103-105; Testimony of Phillip Ryan, Exhibit 39, at 115-120.
74 Minutes of Optima Health System Consolidated Subcommittees, 2/9/95. "At this time all data is being driven by the fact that a single acute care site will be recommended and approved."
75 Optima's failure to undertake additional financial analysis after the merger is of particular concern given the antitrust constraints imposed upon any pre-merger financial analysis.
76 See CON Executive Summary, at 5 "No decision on the consolidation of acute care services was initially made, however, the studies completed post-merger were compelling on this issue."
77 See CON Application, at 79.
78 See Inventory of Documents, Exhibit 1. The documents reflect that Optima's trustees voted to make these changes to the composition of the hospitals' boards. Documentation of these changes has not been filed with the Secretary of State.
79 Wentworth Douglas Hospital in Dover also has entered into a limited affiliation with Optima Healthcare.
80 See Optima Healthcare Network, Exhibit 35; Testimony of Patrick Duffy, Exhibit 41, at 76-77; Tax Exempt Organizations Ruling Request, Summary, Exhibit 36.b, at 12.
81 See Board of Mayor and Aldermen Minutes, Exhibit 7, at 4, "Both of us are locally governed health care organizations, our Boards reflect people that live here, work here, pay the health care bills and get their services at one or both of our institutions and they said find out what the community thinks about this because ultimately if we are to redesign the health care system and come up with a better way it should reflect what the community thinks is the right thing to do."
82 Optima officials themselves appear confused over the respective roles of Optima Health, Inc. and Optima Healthcare. Thus, Harold Acres, Chairman of the Board of Optima Healthcare, described an annual budgeting process in which the Optima Healthcare board essentially approved budgets for the hospitals prepared by Optima Health, Inc. and its constituent hospitals. Testimony of Harold Acres, Exhibit 43, at 46-52. Patrick Duffy, Chairman of Board of Optima Health, Inc., described a process by which Optima Healthcare establishes an operating budget subject to approval by Optima Health, Inc. Duffy Testimony, at 74-75.
83 CMC's pre-merger credentialing criteria required that physicians practicing at CMC agree to abide by the Ethical Directives. The post-merger common credentialing criteria for Elliot and CMC does not require compliance with the Ethical Directives at either institution.
84 CON Executive Summary, Exhibit 21, at 3.
85 Id., at 3.
86 Ryan Testimony, at 13-14.
87 These documents -- which Optima has designated as confidential -- are at odds with Optima's consistent public statements that the consolidation of acute care at the Elliot campus and the non-acute care at the CMC campus does not indicate an intent to close Catholic Medical Center.
88 See Joint Operating Agreement, Exhibit 36.c.
89 In or about January, 1998, Optima sold the building, improvements and leasehold on land adjacent to the CMC hospital site owned by CMC or an affiliated entity. Documents reviewed by this office do not establish whether any portion of the proceeds of that sale have been reserved for, or directed to, the benefit of CMC.
90 Optima's internal confusion is evidenced by the conflicting statements of its board members and management. Thus, in sworn testimony to the Attorney General, Mr. Ryan stated that the Bishop of the Diocese may retain authority to determine which of the seventy Ethical Directives will apply to the acute care services provided at Elliot Hospital. Ryan Testimony at 51-56. By contrast, Mr. Cholette testified that the Ethical Directives do not apply to Elliot. Cholette Testimony at 18-20. Patrick Duffy, Chairman of the Board of Optima Health, Inc., first testified that the Directives do apply to all health care procedures at Elliot, then, after consultation with counsel, suggested that they only apply to abortion procedures. See Duffy Testimony at 107-109. Monsignor John Quinn, who served as the Diocesan representative on the boards of CMC and Fidelity Health Alliance and is now a Trustee of Optima Healthcare, testified to his understanding that, under appropriate circumstances, the Ethical Directives allow for the merger of a religious hospital with a secular institution which continues to perform procedures, such as elective sterilization, that are not permitted under Catholic doctrine. He concluded that the Ethical Directives do not apply at Elliot, except to abortion procedures by virtue of the recently announced policy. Testimony of Monsignor John Quinn, Exhibit 40, at 15-18.
91 Davila Testimony, Exhibit 15, at 11-13.
92 1997 Termination of Pregnancy Policy, Exhibit 10.b.
93 Before the merger, Philip Ryan, CEO of Elliot Health, advised Robert Cholette, CEO of Fidelity Health, and others that Elliot's policy with respect to termination of pregnancy mirrored that of CMC. Ryan Testimony at 33-39; Cholette Testimony at 20-24. Mr. Ryan made the same representation to the Manchester Board of Aldermen, Board of Mayor and Aldermen Minutes, at 2, 9. Critically, Elliot Health representatives also made this representation to Monsignor Quinn and Diocesan representatives. Monsignor Quinn Testimony, at 5-8; Affidavit of Monsignor Quinn in Moreau v. Optima Health, Exhibit 16.
In fact, clinical records of pregnancy terminations at Elliot that could not have been performed at CMC under the Ethical Directives were known to the OB/GYN staff and were readily accessible to Elliot's management. In 1994, the Chairman of the Obstetrics Department at Elliot Hospital, Dr. Robert B. Cervenka, informed Philip Ryan that physicians at Elliot Hospital performed terminations for Trisomy 21, or Down Syndrome, and questioned Mr. Ryan regarding whether the merger would affect the physicians' practices. According to Dr. Cervenka, Mr. Ryan informed him that after the merger, the Ethical Directives would apply only within the four walls of CMC, and would not affect the policies or practice at Elliot Hospital. Up to and even after the merger, Mr. Ryan assured Dr. Cervenka and other physicians that the practice of medicine at Elliot would not be altered by the merger. Testimony of Dr. Robert Cervenka, Exhibit 13, at 26-37.
Optima's former managing director for marketing also testified to Optima's continuing lack of candor over this issue in deposition testimony in a pending lawsuit involving Optima, Moreau v. Optima Health, No. C-97-329, Hillsborough County Superior Court, 1997. In sworn testimony in connection with a law suit against Optima by the employee whose disclosure of the abortion practices at Elliot may have resulted in his loss of employment, Ms. Laurie Storey-Manseau stated that, as recently as 1996, Optima management was still attempting to maintain the public fiction that no elective abortions were ever performed at Elliot. Excerpts from Deposition of Laurie Storey-Manseau, Exhibit 17, at 12-16.
94 See note 90, supra.
95 Compare, Duffy Testimony, Exhibit 41, at 112-116 (administration of abortifacients permitted) with Quinn Testimony, Exhibit 40, at 48-50 (treatment may depend on confirmation of pregnancy).
96 The physicians voiced a concern that Catholic doctrine forbids any form of treatment of tubal pregnancies which involve direct termination of the pregnancy, without removal of the affected organ. Cervenka Testimony, at 74-76; Testimony of Dr. Wayne Goldner, Exhibit 14, at 85-87.
97 Quinn Testimony, at 49-50 (Directives do not permit "direct attack on fetus"); Duffy Testimony, at 109-112 (Policy intended to mirror Ethical Directives with respect to extrauterine pregnancies).
98 1993 FTC Memorandum, Exhibit 32, at 3.
99 William Donovan Letter to Walter Maroney, November 29, 1997, Exhibit 27.
100 Optima has now agreed that these "merger report cards" may be produced to the public. See Exhibit 24.
101 When examining historical performance or reporting actual cost savings, the generally accepted accounting method is to examine actual cost reductions per unit of service actually delivered. It is necessary to adjust the analysis by considering savings per unit of service, as any gross analysis will fail to account for savings attributable to decreases in units of service delivered. This criticism of Optima's cost savings methodology was voiced by John Lynch, a Trustee of Optima Healthcare. See John Lynch Testimony, Exhibit 42, at 44-55.
102 Board of Mayor and Aldermen Minutes, Exhibit 7, at 7.
103 Support Letter by Adele B. Baker, Secretary, CMC Board of Trustees, August 27, 1993, Exhibit 28.
104 1993 FTC Memorandum: "Manchester has incurred an influx of residents with poverty or near-poverty level incomes, who have health care needs that are beyond their financial means. The consolidation will enable the combined facilities to redirect resources consumed by underutilized, duplicative equipment into meeting the current needs." 1993 FTC Memorandum, Exhibit 32, at 15.

NEW HAMPSHIRE ATTORNEY GENERAL'S REPORT ON OPTIMA HEALTH
MARCH 10, 1998
EXECUTIVE SUMMARY I. INTRODUCTION II. DESCRIPTION OF THE REVIEW III. LEGAL PRINCIPLES GOVERNING CHARITABLE TRUSTS IV. HISTORY AND CHRONOLOGY V. LEGAL ANALYSIS AND FACTUAL FINDINGS VI. CONCLUSION
EXECUTIVE SUMMARY
This report is occasioned by profound concern within the Manchester community involving the conduct and ultimate fate of the City's two community hospitals -- Elliot Hospital ("Elliot") and the Catholic Medical Center ("CMC") -- under the control and stewardship of Optima Health, Inc., and Optima Healthcare ("Optima"). The report is issued pursuant to the common law and statutory authority of the New Hampshire Attorney General as the Director of Charitable Trusts to oversee New Hampshire charitable institutions and to preserve and protect New Hampshire charitable assets.
The Attorney General has intervened in this matter to review and address four central issues. First, we have examined the legality and practical effect, under New Hampshire charitable law, of Optima's decision to consolidate all acute care services previously performed at Elliot Hospital and CMC at the Elliot campus, effectively terminating the century-old charitable mission of CMC and its predecessors to serve as an acute care Catholic hospital within the City of Manchester.
Second, we have examined the legal and practical effect of the merger of a religious and a secular hospital into a single health care system. In particular, this review has focused on Optima's recent attempts to clarify the application of Catholic ethical requirements to the provision of services at facilities within the Optima system, a process which has engendered significant controversy within the medical establishment and the Manchester community.
Third, we have reviewed Optima's decision-making process, particularly with respect to its decision to consolidate at a single acute care facility and its decision to reorganize governance of the organization.
Fourth, we compared Optima's recent conduct to its commitments at the time of the 1994 merger, that it would publicly account for savings resulting from the merger, that it would return those savings to the local community, and that local control of the community's hospitals would be preserved.
Both CMC and Elliot are nonprofit charitable institutions and are bound by a social contract to the local community. Through their trustees and management, Elliot and CMC have a fiduciary duty to preserve and to protect their charitable assets and to ensure that those assets are used for purposes consistent with the fundamental charitable missions of the respective institutions.
The traditional reference point for the behavior of charitable trusts was articulated by New York's Judge Cardozo in 1929:
Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden by those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of the courts of equity when petitioned to undermine the rule of undivided loyalty.(1)
Judge Cardozo was speaking of the duties of a trustee in a commercial context, but his analysis has been applied to the management of a charitable corporation. The heightened duty of loyalty to the beneficiary community requires that the managers of charitable trusts be judged by a stricter standard of duty and care than the managers of ordinary for-profit corporations, who are accountable to the company's shareholders, not to the community as a whole.
More broadly, as public charities, both hospitals -- and any organization which purports to control them -- owe their served communities important duties of candor and inclusion. Stated simply, this means that a public charity must deal with its community honestly and is required to fully and completely disclose facts relevant to its charitable mission. A charitable institution may not properly exclude the community, or the Director of Charitable Trusts, either by design or inadvertence, from having a voice in fundamental decisions affecting the continuing capacity of the institution to fulfill its historic charitable mission.
Optima has received significant benefits from the Manchester community, including exemption from property taxes. As a not-for-profit corporation, it also has access to low-interest bond financing, and the ability to accept tax deductible charitable donations for activities in furtherance of its mission. In a letter to the Attorney General's Office discussing the future of Elliot Hospital and CMC after the proposed merger of their supporting organizations into a joint institution under the name of Optima Health, Inc., Elliot's counsel described the two hospitals as a "public servant to the community." As a public servant, Optima's actions must be judged by how they benefit the community that founded and continues to support it. Optima's mission must reflect the values of the community it serves.
It is the role and duty of the Attorney General and the Probate Court to enforce the fundamental duties of charitable institutions. This role is ordinarily carried out through the actions of cy pres, deviation or quo warranto, each of which involves a petition to the Probate Court to secure that Court's approval of changes in, or the termination of, a charitable trust's fundamental mission.
As a result of this review, the Attorney General makes the following findings:
* After the 1994 merger of the supporting organizations, Optima failed to provide notice to the Director of Charitable Trusts and/or to seek the approval of the Probate Court under the doctrines of cy pres or deviation for the following fundamental changes to the charitable missions of the respective community hospitals:
* The effective termination of CMC's historical charitable mission as an acute care religious hospital by the removal of all acute care services from CMC and the conversion of CMC to a psychiatric and rehabilitation facility.
* The effective termination of CMC and Elliot as community-based hospitals by the consolidation of all acute care services at a new integrated acute care facility controlled by Optima and Optima Healthcare.
* The effective termination of CMC and Elliot as distinct community-based hospitals by the evisceration of their independent boards of trustees and the substitution in their place of mirror boards controlled by Optima and Optima Healthcare.
* The restructuring of internal governance within Optima in a manner which effectively transferred governance from a local community-based entity to a regional organization.
* The record presented to our office does not demonstrate that the actions addressed in this report would merit approval by the Probate Court under the doctrine of cy pres. Under cy pres, a party seeking to radically alter or terminate the mission of a charitable trust must show (i) that it is impossible, impracticable, illegal, obsolete or ineffective, or prejudicial to the public interest to continue the mission of the charity; and (ii) that the successor organization or alternative use toward which the assets of the charity will be directed fulfills as nearly as practicable the mission of the original charitable trust.(2) Measured by these standards:
* Optima has not established that it is impossible or impracticable to continue providing acute care services at CMC. In fact, Optima performed no post-merger financial analysis to support its decision to consolidate all acute care services at the Elliot campus. The pre-merger financial analyses relied on by Optima as justification for the proposed consolidation do not support Optima's position that consolidation at a single acute care site is necessary to achieve the $150 million in savings projected at the time of the merger.
* Optima has not demonstrated that it is necessary, or consistent with the distinct charitable missions of the hospitals, to cede all or virtually all of the hospitals' and/or Optima's corporate powers to Optima Healthcare, a regional joint operating company.
* Optima has not defined the fundamental mission and attributes of the regional health care system into which it seeks to merge both CMC and Elliot. This failure is most clearly demonstrated by Optima's unsuccessful attempt to delineate the application of Catholic moral doctrine to the provision of health care services in its integrated hospital system -- either in terms of continuing CMC's traditional commitment to the indigent or concerning any restraints dictated by Catholic moral doctrine on health care services outside CMC.
* Optima has not fulfilled its duty of candor to the community and its duty of inclusion of the Director of Charitable Trusts and the community. This failure has occurred in the following ways:
* Optima failed to include the community in its decision-making process regarding its plan to consolidate all acute care services within both hospitals at a single campus. This plan existed as an option prior to the 1994 supporting organizations merger and was proposed, without additional post-merger financial analysis, within months of the consummation of the merger.
* Optima officials have maintained in public comments that consolidation of acute care services at a single site was not actively considered prior to the merger, and was only adopted after compelling post-merger analysis. The Ernst & Young pre-merger study evaluated consolidation at a single site as an option. Optima did not conduct any additional post-merger financial analysis of this option before submitting its Certificate of Need application to the New Hampshire Health Services Planning and Review Board seeking approval to consolidate all acute care at a single site.
* Optima adopted a corporate structure which stripped both Elliot and CMC of independent corporate authority by transferring that authority to itself, and subsequently ceding it to Optima Healthcare, a regional joint operating company. This action constitutes a repudiation of prior statements and promises by Optima representatives that, after the 1994 supporting organizations merger, the hospitals would remain as vital, locally controlled institutions.
* Optima did not fully inform the community of the impact of the joint operating agreement on corporate governance and control of the hospitals. Optima currently maintains that, notwithstanding the effect of its corporate structure on the charitable missions of the respective hospitals, the specifics of this corporate structure and organization remain a confidential business matter.
* Prior to the 1994 supporting organizations merger, the management of Elliot Hospital failed to disclose to the public, to the Diocese of Manchester and to the trustees of each institution readily available facts which demonstrated that Elliot's practices with respect to termination of pregnancy were not consistent with Catholic moral doctrine. As a result, the merger went forward on the assumption that Elliot and CMC had identical practices and policies regarding abortion. This was not, and had never been, the case.
* Optima's application of Catholic moral doctrine to hospital operations through a recently announced policy is unfocused, incomplete and confusing. While the policy purports to address terminations of pregnancy, it does not specify affected procedures, and does not address sensitive issues concerning the scope of the policy with respect to victims of rape or persons suffering from extrauterine pregnancies. The policy also leaves unaddressed the fundamental issue of whether Catholic moral and ethical doctrines will be applied, directly or by implication, to other health care services traditionally available at Elliot Hospital. These include, at a minimum, family planning counseling and elective sterilization procedures.
* Optima failed to include the community in a candid discussion of the clinical and ethical implications of the merger of a traditionally religious institution with a secular institution, the practices of which are in many cases not consistent with Catholic doctrine. This has led to the formation -- without any public examination -- of a successor entity whose attributes are defined on an ad hoc basis, without consideration of the fundamental and distinct charitable missions of either hospital.
* Optima represented that it would establish a public accountability system to document the success of the merger and then failed to do so. Optima has maintained that information required to measure its success is a confidential business matter.
* Significant legal questions exist relative to the corporate documentation and procedures used to effect the 1994 merger of Elliot Health Systems and Fidelity Health Alliance, supporting organizations for the two hospitals. The questions are so fundamental as to call into issue whether the 1994 supporting organizations merger effectively vested Optima Health, Inc. (or its current "parent" Optima Healthcare, Inc.) with ownership of, or authority over, the assets and internal governance of the hospitals.
* Actions taken by Optima which have affected the fundamental charitable missions of the hospitals, including in particular the change in corporate governance and the decision to terminate acute care services at CMC, may be ultra vires and without legal effect.
Optima is and continues to be an institution which provides a broad range of quality health services to the citizens of Manchester and surrounding communities. However, this is not the sole standard by which a charitable health care institution must be measured.
Optima appears to have developed a corporate culture, led by management and acquiesced in by its trustees, which assumes that the delivery of health care is best left exclusively to the sole judgment of management. The fundamental error in this assumption is amply demonstrated by the broad loss of faith within the Manchester community in Optima and its constituent institutions.
This situation is not sustainable. Optima's decision to consolidate acute care services at Elliot Hospital and its decision to effectively terminate local community governance through regionalization must be reviewed in and by the public -- including the Probate Court -- which is by law vested with jurisdiction to review such actions.
I. INTRODUCTION
In 1994, Fidelity Health Alliance ("Fidelity") and Elliot Health Systems ("Elliot Health"), supporting organizations that provided administrative and operational assistance respectively to Catholic Medical Center and Elliot Hospital, merged into Optima Health, Inc. ("Optima"). At the time of the merger, Optima stated that the consolidation of these two supporting organizations would improve the cost effectiveness of health care in the Manchester community by eliminating duplication in services and costs.
Sylvio Dupuis, CEO and President of Catholic Medical Center, and Scott Goodspeed, CEO and President of Elliot Hospital, assured the Manchester community that the two acute care hospitals would continue to operate after the merger. So confident was Optima that the merger of the two supporting institutions, in conjunction with the operation of the two acute care hospitals, would produce cost savings for the community, that it pledged as a "public servant to the community" to institute through the two hospitals "an annual public written reporting responsibility comparing the hospitals' efforts with other comparable institutions across a wide variety of indicators, national benchmarks, and standards." Optima would measure its success by "cost efficiency, quality indicators, patient satisfaction, and outcome measures as well as broad indicators of the health status of the communities."(3)
In the four years since the merger, Optima has instituted radical changes in Manchester's health care delivery system. In so doing, it stripped CMC and Elliot of their separate corporate identities, eliminated the community-based governance structure of these charities, changed the essential core mission of CMC, and transferred control over these hospitals to a regional conglomerate, Optima Healthcare, Inc. ("Optima Healthcare").
The actions taken by Optima following the 1994 merger of the supporting organizations reflect its belief that the merger conferred unbridled authority upon it to institute whatever organizational changes it believed would produce the anticipated or projected cost savings. Notwithstanding its public statements to the contrary,(4) immediately after the 1994 merger, Optima submitted change of ownership forms to the Department of Health and Human Services in which CMC and Elliot were designated "dba's" for Optima Health. Optima referred to CMC and Elliot as "Optima East Campus" and "Optima West Campus."(5) Optima claims that its treatment of CMC and Elliot as a single combined hospital is justified because it could not achieve the cost efficiencies and quality improvements promised at the time of the merger without consolidating the two hospitals into one. Peter Davis, the interim CEO of Optima, put it this way, "We needed to squeeze the fat out of the system."
Economic efficacy is not dispositive of the question of legality. Proof of convenience, or even a good faith belief in economic "efficiencies," does not resolve the legal question of Optima's authority to merge two charities. That Optima management may have had a good faith belief in the economic wisdom of its decisions is not dispositive of the question of whether the merger of Fidelity and Elliot Health in 1994 authorized Optima to assume ownership and control of CMC and Elliot Hospital, and whether the changes in the mission and governance of CMC and Elliot were so significant as to require notice to the Director of Charitable Trusts and approval by the Probate Court.
As a matter of corporate law, we conclude that significant questions exist as to whether the merger of the supporting organizations, Fidelity and Elliot Health, transferred ownership or control of the hospitals to Optima. We find that the aggregate of actions taken by Optima so significantly changed the missions and governance of CMC and Elliot as to require notice to the Director of Charitable Trusts and the Probate Court. New Hampshire law does not allow two distinct charitable trusts to be effectively terminated by combining them into a third secular organization with mixed religious attributes without (i) proof of impossibility, illegality, or impracticability; (ii) a clear showing that the merged organization has or will have a charitable mission that fulfills as nearly as possible the charitable missions of the hospitals; and (iii) appropriate -- and public -- legal process.
Finally, we conclude that, notwithstanding its promise at the time of the 1994 supporting organizations merger, Optima has failed to establish a system of public accountability by which to measure the success of the merger in producing the projected cost savings and has failed to produce evidence that the Manchester community has benefited through Optima's return of the cost savings to the community.
II. DESCRIPTION OF THE REVIEW
In preparing this report, we have reviewed extensive documentation submitted at our request by Optima or derived from public sources and have taken statements and sworn testimony from a wide variety of individuals associated with or opposed to Optima.(6) Documents reviewed include corporate records establishing the history, corporate organization and charitable missions of Optima Healthcare, Optima Health, Inc., Elliot Hospital, CMC and its predecessor institutions. We examined records of submissions by Optima to regulatory bodies charged with oversight of various activities, including the Federal Trade Commission, the United States Department of Justice, the Health Services Planning and Review Board, the Internal Revenue Service and the Consumer Protection and Antitrust Bureau and Charitable Trusts Unit of this office.(7) We reviewed testimony and affidavits submitted in recent litigation involving Optima, and examined press reports regarding public statements made by Optima and hospital officials with respect to the matters addressed in this report.
We have also taken statements and testimony from 17 individuals. These included senior management of the hospitals at the time of the 1994 merger, present and former senior management of Optima, Inc. and Optima Healthcare, members of the Board of Trustees of Optima and its constituent institutions, Optima staff physicians, a representative of the Diocese of Manchester, a Canon Law consultant involved in the 1994 merger discussions, members of the Save CMC Coalition, and the Coalition For Live Free or Die Healthcare in Greater Manchester.
In addition, we retained financial consultants from the firm of Arthur Andersen & Company to assist us in evaluating Optima's financial structure, the savings projected to result from the 1994 merger and the community accountability system consisting of "report cards" and other records developed to demonstrate realization of such savings.
III. LEGAL PRINCIPLES GOVERNING CHARITABLE TRUSTS
A. What Is A Charitable Trust? New Hampshire's definition of the term "charitable trust" is very broad, including virtually all nonprofit and charitable organizations that operate or hold property within the state.(8) Traditionally, a trust is defined as a fiduciary relationship in which one person or entity manages property for the benefit of another person or entity, known as the beneficiary. Generally speaking, a charitable trust is a trust intended to benefit the community at large, or some specified portion of the community. A charitable trust creates a social contract between the charity and the public beneficiaries. Under New Hampshire law, a charity is not required to be organized as a trust. Many charitable trusts are organized as voluntary or nonprofit corporations.(9) Thus, the term "charitable trust" applies to any organization or entity which holds property for charitable, nonprofit, educational or community purposes. The social benefits that a charitable corporation is expected to provide to the community are defined by its articles of agreement. Although a charitable corporation may not be governed as a trust in every respect, courts have held that the assets of a charitable corporation are impressed with a charitable trust that restricts the use of the assets to the defined purposes of the corporation.(10) While there is some diversity in approach among the cases with regard to the application of trust principles to the assets of charitable corporations, ordinarily the rules that apply to charitable trusts also apply to charitable corporations.(11)
B. Who Owns The Assets Of A Charitable Trust? As with any trust, the assets of a charitable trust must be managed for the benefit of the trust's intended beneficiaries. Charitable trusts, as nonprofit corporations, are generally subject to the "nondistribution constraint." The nondistribution constraint precludes nonprofit corporations from distributing "profits" to their owners, and also precludes the distribution of the assets to the member upon dissolution. "Profits" of a charitable corporation must be applied in strict conformity with the stated charitable objects and purposes.(12) Membership in a charitable corporation does not confer on the member the right to realize economic gain from the operations of the corporation, the right to transfer the membership for value, or the right to dissolve or terminate the corporation and receive the assets upon dissolution.(13)
C. What Benefits Do Charitable Trusts Receive? Most charitable trusts are exempt from local, state and federal taxation. In New Hampshire, the principal tax benefit to a charitable trust is exemption from local property taxation. Annually, Optima and Optima Healthcare receive over $4.5 million in exemptions from local property valuation.(14) To the extent the operations of a charity would otherwise result in assessment of state business enterprise taxes, charitable trusts are exempt from state taxation. In addition, New Hampshire charities may, under certain circumstances, qualify for low-interest bond financing programs offered by the state and may receive and retain tax-deductible gifts and contributions.
D. What Legal Mechanisms Regulate Charitable Trusts And Protect The Public? The Attorney General and the Probate Court have authority to protect the public interest by insuring that charitable trusts conform their acts to their Articles of agreement. The Attorney General's Office, through its Office of Charitable Trusts, is charged with the duty, power and responsibility to supervise, administer and enforce charitable trusts.(15) By statute and under the common law, the Attorney General has standing to bring a judicial proceeding to enforce a charitable trust or to supervise the actions taken by a charitable trust.(16) In general, these proceedings take place in Probate Court, through cy pres, deviation, or quo warranto.
1. Cy Pres
Cy pres is a traditional equitable power exercised by the Probate Court. When property is given in trust for a charitable purpose, and the specified purpose of the trust has become impossible, impracticable or illegal, cy pres allows the property to be applied to another charitable purpose as similar as possible to the purpose of the trust.(17) A charitable trust may be terminated only if the continuance of the trust is impracticable or infeasible, and only with approval from the Probate Court.(18) The purpose of a cy pres proceeding is to allow the Probate Court to determine what the original purpose of the charitable trust is, whether that purpose has become impracticable or infeasible, and if so, what other purpose would be the most closely comparable. The Attorney General is authorized by statute to petition for cy pres.(19)
It is well established that the doctrine of cy pres applies to charitable hospitals, without regard to their form of organization. Cy pres has been applied to prevent an acute care hospital from changing its essential purpose or core mission. In a California case, the Queen of Angels Hospital sought court review of a proposal to lease its main hospital facility, with the exception of the outpatient clinic, and apply the proceeds to establish and operate additional medical clinics in Los Angeles for the needy.(20) After reviewing the hospital's governing documents, the court concluded that the proposal would be inconsistent with the organization's central purpose of maintaining and operating a hospital.(21) The court held that the hospital could not, "consistent with the trust imposed upon it, abandon the operation of the hospital business in favor of clinics" and was bound to its primary purpose of operating a hospital using the assets under its control.(22) As the court explained, "the issue is not whether the new and different purpose is equal to or better than the original purpose, but whether that purpose is authorized by the articles [of incorporation].(23)
In Connecticut, the Attorney General intervened in a situation involving an acute care hospital facility abandoning its historic core mission as an acute-care hospital to become an ambulatory care facility with an emergency room. There, the Hospital trustees voted to close in-patient care and lay off related medical support staff. The Connecticut Attorney General's Office contended that such a fundamental transformation required cy pres action, and the court agreed.(24)
2. Deviation
RSA 547:3-d requires that a charitable trust seek approval from the Probate Court before property is applied to a different charitable purpose. Under the doctrine of deviation, the Court may alter the administration of a trust, if it appears that strict compliance with the terms of the trust "is impossible or illegal, or that owing to circumstances not known to the settlor and not anticipated by him, compliance would defeat or substantially impair the accomplishment of the purposes of the trust.(25) Chief Justice Brock of the New Hampshire Supreme Court has described the doctrine as follows:
Where the dominant objective of a trust remains capable of fulfillment, but its method of accomplishment has been stalled due to a hitch in the administrative machinery, the doctrine of deviation permits a reworking or repair of the administrative mechanism so that the trust purposes may be accomplished effectively. The doctrine of deviation permits changes in the management of all trusts, and in the case of charitable trusts, may be employed to substitute trustees as well as to alter trust conditions.(26)
3. Quo Warranto
The common law writ of quo warranto applies generally to prevent an entity from unlawfully usurping, abusing or misusing corporate powers, and has been used successfully in other states to prevent nonprofit hospitals from merging with for profit entities. The Director of Charitable Trusts may, in addition to other statutory actions, such as declaratory judgment, cy pres and deviation, bring a writ of quo warranto to challenge the lawfulness of a business practice. The New Hampshire Supreme Court has recognized the continued existence of the writ of quo warranto to protect the interests of the public.(27) A writ of quo warranto may also be used to challenge the authority of a corporation to act without proper regulatory and legal approvals.
IV. HISTORY AND CHRONOLOGY
A. Elliot Hospital And Catholic Medical Center
For more than a century, Elliot Hospital, Catholic Medical Center, and its predecessors, Notre Dame Hospital and Sacred Heart Hospital, have ministered to the health care needs of Manchester's various and varying populations as public charitable institutions. In accordance with a grant in the will of Mary Elizabeth Elliot, Elliot Hospital was established in 1881 by a special act of the New Hampshire Legislature.(28) The legislature chartered Elliot Hospital as a "public charity" and tied that charitable status to an exemption from property taxes.(29) In subsequent amendments to the charter of the hospital, successive generations of New Hampshire legislators have reaffirmed the hospital's "public charity" status and tax exemption.(30) While Elliot Hospital has historically had close ties with a number of Protestant denominations, including mandatory representation by certain churches on its board of trustees, the hospital has always been a secular organization.
Catholic Medical Center was established in 1974 as a 501(c)(3) not-for-profit corporation, intended to continue the missions of two predecessor Catholic acute care hospitals, Sacred Heart Hospital and Notre Dame Hospital. These hospitals had served the Catholic and immigrant populations of Manchester and surrounding communities for nearly a century. In its Articles of Agreement, CMC established as its first and primary purpose the establishment and operation of "a hospital in the City of Manchester, State of New Hampshire, without pecuniary gain and without distinction as to race, color, creed, sex or ability to pay." (31) In keeping with its charitable purpose and the nondistribution constraint, CMC's Articles of Agreement provide that [n]o part or portion of the assets or earnings of this Corporation shall ever be distributed to or divided among any individuals, including any member, officer, director, trustee, or other organizer of this corporation .(32)
Under its Articles of Agreement, another aspect of CMC's essential mission is [t]o maintain its identity as a Catholic Hospital.(33) Although Catholic Medical Center has never been under the direct sponsorship of the Diocese of Manchester, its Articles of Agreement expressly identify it as an "official agency of the Roman Catholic Church." Such status, the articles continue: is indicated ... philosophically by the guiding tenets under which it operates: namely, the teachings of the Roman Catholic Church. These tenets are expressed in specific regulations of the Holy See, and the teachings of the Bishops of the United States of America, more precisely in the latter instance, in the ETHICAL AND RELIGIOUS DIRECTIVES OF THE CATHOLIC HEALTH FACILITIES as promulgated by the National Conference of Catholic Bishops.(34) Consistent with its essential Catholic mission, CMC has committed itself to a specific set of religious tenets by incorporating these theological directives into its Articles of Agreement.(35)
B. The 1994 Merger Of Elliot Health Systems And Fidelity Health Alliance
In late 1992, following a period of bitter competition between the two hospitals, management began to discuss the possibility of a merger between Elliot Health Systems and Fidelity Health Alliance, the supporting organizations for Elliot Hospital and CMC. In the spring of 1993, the supporting organizations retained the accounting firm Ernst & Young to perform a theoretical study of the savings that might be achieved through different levels of consolidation and integration. At the same time, the two companies undertook an internal "feasibility study" with respect to a possible merger.(36) On June 25, 1993, the supporting organizations signed a memorandum of understanding outlining the steps they would take to consummate the merger. On February 24, 1994, after receiving federal and state anti-trust approvals, Elliot Health Systems and Fidelity Health Alliance merged to form a new supporting organization, Optima Health, Inc.(37)
The express purpose of the merger was to continue the charitable purposes of the two hospitals and related institutions.(38) Prior to the merger, representatives of Elliot Hospital and CMC were quoted in the Manchester Union Leader and other media outlets as anticipating approximately $150 million in projected savings from an operating plan in which the two hospitals would maintain separate identities, with some unspecified level of consolidated services. Such savings, it was stated, would permit both hospitals to maintain their viability as community-based, locally-governed health care institutions committed to serving the Manchester community in an era of increasing competition and change in health care.
Optima actively sought, and widely received, the support of Manchester's and New Hampshire's business and political communities for the merger.(39) In September 1993, Philip Ryan, CEO and President of Elliot Health Systems and Robert Cholette, CEO and President of Fidelity Health Alliance, appeared before the Manchester Mayor and the Board of Aldermen to explain the rationale and possible long-term consequences of the proposed merger, explicitly citing the savings goal of $150 million in the context of a limited consolidation of services.(40) Hospital presidents Scott Goodspeed and Sylvio Dupuis were quoted in Union Leader articles as stating that Elliot Hospital and CMC would remain independently viable -- and locally managed -- centers of excellence into the foreseeable future after the proposed merger.(41)
In their communications with the public, the proponents of the merger stressed their continued commitment to remain accountable to the community. In a 1993 letter to the Attorney General's Office regarding the proposed merger, Elliot Hospital's counsel acknowledged and promised that the two hospitals were and would continue to be a "public servant to the community.(42) Before the Mayor and Aldermen, CEOs Ryan and Cholette committed to instituting an ongoing mechanism to ensure public input and accountability following the merger.(43)
C. Key Post-Merger Decision Points
Beginning immediately after the 1994 merger of Fidelity and Elliot Health, the management of Optima Health, Inc. embarked on a series of decisions which run counter to Optima's commitment to the Manchester community to continue to operate two community-based acute care hospitals, and to involve the local community in the governance and management of Elliot Hospital and CMC. Optima's decisions, and the processes by which they were made, are the primary focus of this report. The decision points are listed in chronological order.
1. Decision To Exercise Complete Control Over CMC And Elliot
Legally, the merger joined the two supporting organizations, Fidelity Health Alliance and Elliot Health Systems. The hospitals existed separately, with their own independent governance structure as specified in the Articles of Agreement on file with the Secretary of State. Nevertheless, in the merger agreement Optima expressed its intention to exert complete control over the hospitals, which it viewed as its "subsidiaries." The merger agreement provided that [t]he By-Laws of OPTIMA and all of its subsidiaries ¼ shall provide that the OPTIMA Board of Trustees shall appoint two-thirds (2/3's) of the Trustees of each subsidiary's Board of Trustees and the OPTIMA Board of Trustees shall be solely authorized to amend the By-Laws of each subsidiary of OPTIMA.(44) Immediately after the merger, Optima implemented these provisions by altering the bylaws of CMC and Elliot Hospital.
2. Decision To Move To A Single Acute Care Site
Within months of the merger and without post-merger financial analysis, Optima decided to consolidate all acute care services delivered by both hospitals at the Elliot campus, reducing CMC to a rehabilitative and psychiatric unit within a larger hospital organization. In conjunction with the acute care consolidation, Optima applied in April of 1995 to the state Health Services Planning and Review Board for a Certificate of Need ("CON") authorizing Optima to institute a construction program on the Elliot campus costing more than $35 million. On September 26, 1996, the CON application was granted. The New Hampshire Supreme Court declined to hear an appeal taken by opponents of the consolidation.
3. Decision To Restructure Optima, Elliot And CMC's Governing Boards
Following a board retreat in the summer of 1995, Optima hired Cambridge Associates, Inc., to oversee a restructuring of the governing bodies of Optima and its affiliated organizations. Pursuant to the consultant's recommendations, in November of 1995 Optima voted to reduce the membership of its board from thirty-six to sixteen trustees, and to eliminate the requirement that seventy percent of board members come from the community. At the same time, Optima instituted a structure of "mirror boards" for its subsidiaries, meaning that Elliot Hospital and CMC would now be governed by identical boards, with essentially all decision-making authority delegated to the Optima board.
4. Decision To Establish A Single Acute Care Hospital As A Successor To CMC And Elliot
Optima's decisions to reorganize the governance of the hospitals and to consolidate their acute care services at a single site are properly characterized as a decision to establish a single acute care facility as a successor to CMC and Elliot. Necessarily, the integration of secular and religious health care institutions raises difficult issues concerning the applicability of religious doctrine within the consolidated institution.
Although Optima itself is a secular entity, its Articles of Agreement include an express requirement to maintain CMC's identity as a Catholic institution, subject to the Ethical Directives.(45) The merger agreement attempts to reconcile this conflict between the secular and religious elements in its expression of "shared values" which describes certain generally stated principles which "shall continue to be principles upon which OPTIMA, Elliot Hospital and Catholic Medical Center shall conduct their affairs.(46)
In practice, however, the "shared values" which supposedly unify Optima, Elliot and CMC have not been fully defined in the years following the 1994 supporting organizations merger. This is a critical failure. Under cy pres, the Probate Court must determine that a successor organization or alternative use toward which the assets of a charity will be applied fulfills as nearly as practicable the mission of the original trust. Essentially, through cy pres, the Probate Court enforces the social contract that binds the charitable trust to the community.
Optima's post-merger conduct has been marked by confusion in governance and policies. This confusion is reflected in interviews of Optima management, and raises serious questions as to whether any judgment can be made that the mission and identity of the successor hospital fulfills as nearly as practicable those of CMC and Elliot.
This confusion over religious doctrine and over the missions and identities of the two community-based hospitals is most evident in the debate over abortion and the apparent disagreements among Optima's management about the applicability of the Ethical Directives at the single acute care facility. The merger of the supporting organizations was based in part on specific representations made by Elliot Health Systems management to the management of Fidelity Health Alliance, to physicians at both institutions, to the public, to trustees of both institutions and to representatives of the Diocese of Manchester, that termination of pregnancy policies at Elliot Hospital were consistent with practices at CMC. Disclosure in 1996 that certain abortion procedures, banned under Catholic doctrine, had historically been performed at Elliot Hospital led to the promulgation by the Elliot Hospital Board of Trustees of a policy that purports to ban all terminations of pregnancies which are not consistent with Catholic moral doctrine at any Optima Hospital. Adoption of this policy has caused widespread protest among affected physicians, and has resulted in a resolution adopted by 160 members of Optima's combined hospital staffs requesting reconsideration of the announced policy.(47) Due to Optima's original failure to articulate specifically the policies, attributes, and governance of the successor integrated hospital to CMC and Elliot, it is likely that similar issues will continue to arise.
5. Decision To Affiliate With Covenant Health Systems, Creating Optima Healthcare
In January 1997, Optima entered into a Joint Operating Agreement ("JOA") with Covenant Health Systems, a Catholic health service organization which operates Saint Joseph's Hospital in Nashua and other facilities outside New Hampshire. Under the JOA a newly created nonprofit corporation, Optima Healthcare, Inc. ("Optima Healthcare"), manages and operates all services provided by its "Network Members".(48) In contrast with Optima's Articles of Agreement, Optima Healthcare's corporate documents focus extensively on St. Joseph's Hospital as a Catholic institution.(49) Although CMC is identified as a Catholic institution, it falls under the secular "Optima" category within the Optima Healthcare organization.
The organizational structure created by the JOA gives Optima Healthcare the power to develop and implement strategic plans for the Network, develop and approve operating and capital budgets for the Network, select other Network Members, select management and personnel, develop mission statements, and negotiate payor contracts.(50) The Network Members retain authority to implement programs approved by Optima Healthcare, to conduct credentialing for their medical staff, and to approve the expenditure of their restricted funds. Optima and Covenant are empowered to elect and remove the governing boards of the Network Members, and to take any and all actions that they deem appropriate to discontinue or change the actions or operations of the Network Members, provided that the changes do not violate the religious requirements applicable to the Network Members, or the will of Mary Elliot.
Under the JOA, the boards of trustees of Optima, and indirectly Elliot and CMC, have been stripped of most independent authority. Executive management of the hospitals has been removed from the hospitals to Optima Healthcare, and hospital financial matters are now being addressed at the joint operating level rather than within the hospitals.
V. LEGAL ANALYSIS AND FACTUAL FINDINGS
The Attorney General has intervened in this matter to review and address the legality and practical effect, under New Hampshire charitable law, of Optima's decision to consolidate all acute care services previously performed at Elliot Hospital and CMC at the Elliot campus and to create a single integrated facility, effectively terminating the century-old charitable mission of CMC and its predecessors to serve as an acute care Catholic hospital within the City of Manchester. In our review, we also have examined the legal and practical effect of the merger of a secular and a non-secular institution into a single health care system.
A. The 1994 Merger Of Fidelity Health Alliance And Elliot Health Systems May Not Have Transferred To Optima Health, Inc. Ownership Of Elliot and CMC
As an initial matter, this office reviewed the structure and legality of the 1994 merger of Fidelity Health Alliance and Elliot Health Systems into Optima Health, Inc. In conducting this review, we examined all corporate and legal documents provided by Optima, all documents on file with the New Hampshire Secretary of State, and all documents filed with the Office of Charitable Trusts. Based upon our review of the corporate documents and records, a serious question exists as to whether the 1994 supporting organizations merger transferred legal ownership of Catholic Medical Center or Elliot Hospital to Optima Health, Inc. and whether Optima Health, Inc. obtained the legal right to control or restructure those entities.
1. Legal Principles
It is a fundamental principle of corporate law that a corporation has no powers beyond those set forth in its governing documents. Trustees of Dartmouth College v. Woodward, 17 U.S. 518 (1819). The powers of a voluntary corporation arise out of and must be consistent with its Articles of agreement, which must be filed with the Secretary of State in order to be valid.
CMC, Fidelity Health Alliance, Elliot Health Systems and Optima Health, Inc. are all voluntary corporations governed by New Hampshire's Voluntary Corporations and Associations Act, RSA Chapter 292.(51) A voluntary corporation may take action only in accordance with chapter 292, the corporation's articles of agreement, and the corporation's bylaws. The articles of agreement must be recorded with the Secretary of State in order for formation of the corporation to take effect. RSA 292:4. The corporation's bylaws need not be recorded, but they must be consistent with the articles of agreement. RSA 292:6.
Certain actions by voluntary corporations, including name changes, increases or decreases in capital stock or membership certificates, mergers and acquisitions, are not effective unless they are recorded with the Secretary of State. RSA 292:7. "[T]he provisions for establishing membership and participation in the corporation," and "the number of shares or membership certificates, if any, and provision for retirement, reaquisition and redemption of those shares or certificates" must be included in the articles of agreement. A non-profit corporation's articles of agreement must be filed with the Secretary of State to be legally valid. RSA 292:2, II-a and V.
2. Apparent Deficiencies In The 1994 Supporting Organizations Merger
Based on our review of the corporate histories of Elliot and CMC, as well as the documentation supplied by Optima regarding the 1994 supporting organizations merger, we conclude that the merger may not have conferred on Optima ownership or control of the two hospitals. First, both the corporate documentation and the sequence of corporate actions by which CMC sought to transfer its corporate authority and assets through Fidelity Health Alliance to Optima Health, Inc. appear to be deficient, due to CMC's failure to include membership provisions in its articles, and Fidelity Health's elimination of CMC's Board of Trustees. Second, no document recorded with the Secretary of State prior to the merger made Elliot Health Systems, Inc., or any other corporate entity, a "member" of Elliot Hospital, let alone the "sole member," with power to transfer any assets, or to otherwise control the governance, of Elliot Hospital. As a result, subsequent actions by Optima Health, Inc. to control or dispose of the assets of CMC and Elliot may be without authority, and therefore, without legal effect.(52)
a. Catholic Medical Center
CMC's corporate filings may not have properly transferred ownership of CMC to Optima. According to CMC's Articles of Agreement on file with the Secretary of State, CMC was established in 1974 as a Chapter 292 voluntary corporation and 501(c)(3) organization. Between 1974 and 1994, CMC's Board of Trustees consisted of 24 public members, a representative of the Catholic Church, 6 members of the medical staff, the CEO, and the President of the Senior Associates.(53) Under CMC's Articles of Agreement, the trustees had authority to provide hospital services, control the corporation's money, property and affairs, maintain accredited status, ensure patient safety, grant privileges to the medical staff -- in short, to control all affairs of the hospital.
There is no public record of any attempt to transfer control, by "membership" or any other mechanism, of CMC's assets and governance to Fidelity Health Alliance until one day before the 1994 supporting organizations merger. Prior to the 1994 merger, five members of CMC sat on the nine member Board of Fidelity Health Alliance.(54) CMC maintained control over its supporting organization through its majority representation on Fidelity's Board.
In an amendment recorded with the Secretary of State on February 22, 1994, the day before the merger, the CMC trustees voted to delete, in their entirety, the provisions establishing its Board of Trustees and Board of Incorporators, as well as the provisions giving the Board the power to control the affairs of the hospital. In place of these provisions, CMC reserved authority to revise the bylaws to its "sole member, Fidelity Health Alliance." Then, on February 23, 1994 -- one day after the documents establishing the abolition of its Board of Trustees had been filed with the Secretary of State -- CMC, purportedly by vote of its trustees, amended its Articles of Agreement by substituting "Optima Health, Inc." for "Fidelity Health Alliance," and added a new article stating that "The sole member of the corporation is Optima Health, Inc." This document was filed with the Secretary of State on March 19, 1994.
Optima's creation, then use, of corporate memberships to effectuate the 1994 merger of Fidelity Health Alliance into Optima Health, Inc. raises serious questions regarding the extent of Optima's authority to own and control CMC and Elliot. Although CMC's amended Articles purport to establish Fidelity Health Alliance and, subsequently, Optima Health, Inc. as its "sole member," the standards for "membership" or for issuance or redemption of membership certificates are not contained within CMC's Articles of Agreement, as required under RSA 292:2, II-a. Thus, the "membership" status purportedly conferred on Fidelity Health Alliance and Optima Health, Inc. by the February 1994 amendments to CMC's Articles does not appear to comply with the statute.(55)
Additionally, the purported transfer of "sole membership" status from Fidelity to Optima Health, Inc. also is problematic because the trustees voted to approve the change only after the board had abolished itself and all of its authority, and documents to that effect had already been placed on public record by filing with the Secretary of State.(56)
As a result of these apparent defects in corporate documentation, and the sequence of events which led to a vote approving transfer of sole membership status in CMC by a legally non-existent board of trustees, CMC may have been left with no legally valid member and no board of trustees. Optima Health, Inc.'s control over the assets and governance of CMC since 1994 may, therefore, lack legal foundation.
b. Elliot Hospital
Elliot Hospital's corporate existence was originally established by statute in 1881, in accordance with the will of Mary Elizabeth Elliot. The act creating Elliot Hospital appointed trustees, as specified in Mary Elliot's will. These included the Mayor of Manchester and persons chosen by each of six Protestant churches in Manchester.
The only recorded filing with the Secretary of State for Elliot Hospital (other than mandatory reports, and statements reflecting increases in the total value of property the hospital can hold) is an amended Constitution and Bylaws which dates from 1958. This filing uses the term "members" to denote trustees, and provides that there will be "not less than sixteen." The purposes section of the Constitution is expanded from the original statutory language, and includes the determination of the policies of the institution with relation to community needs, maintenance of proper professional standards, directing administrative personnel, and adequate financing and business-like control of expenditure. Other than mandatory reports, no documents have been filed with the Secretary of State with respect to Elliot Hospital since 1974.
Elliot Health Systems was established in 1983 (under the name Health Northeast, Inc.) as a 501(c)(3) supporting institution for Elliot Hospital. Conspicuously missing from the public record, however, is any document which purports to effectively cede control of the governance or assets of Elliot Hospital to Elliot Health Systems. Indeed, there is nothing in the recorded filings of either Elliot Hospital or of Elliot Health Systems which indicates that Elliot Health Systems owned or controlled Elliot Hospital or that Optima presently holds such authority.
Certain documents, not publicly filed, but provided to us for purposes of this review, do suggest that Elliot Health Systems had a substantial degree of control over Elliot at the time of the merger and that the Elliot Board may have voted to accept Optima as its "sole member." A 1993 constitution and bylaws for Elliot Hospital indicate that while prior to the merger, Elliot Health Systems was not designated as a "member," it did have authority to appoint, and to remove without cause, 3/4 of Elliot Hospital's board members.(57) Under the 1993 constitution, amendments to Elliot's constitution or bylaws required the approval of Elliot Health Systems.(58) On the day of the merger, the Elliot trustees voted to amend Elliot Hospital's constitution to make Optima Health, Inc. the sole member of Elliot Hospital, and to substitute Optima Health, Inc. for all references to Elliot Health Systems. None of these documents are on file with the Secretary of State, nor did the copies reviewed by this office include a certification of adoption. Further, as with the amendments to CMC's Articles of Agreement, the Elliot amendments shed no light on the duties or responsibilities of Optima as the "sole member" of Elliot Hospital.
c. Implications For Optima
The above defects in corporate organization and Optima's failure to place all relevant corporate documents on record with the Secretary of State(59) raise significant questions regarding the capacity of Optima Health, Inc. to control the governance, and to control or dispose of the assets of either Elliot or CMC. Accordingly, the 1994 transfer of corporate powers from the hospitals to Optima Health, Inc. and the 1995 transformation of the hospitals' respective boards of trustees into "mirror boards" of limited authority are also subject to question. Finally, Optima Health, Inc.'s participation as a member of the Optima Healthcare regional joint operating company presents similar legal issues concerning the transfer of operational control of the hospitals or their assets to that entity.
B. Optima Has Effectively Terminated The Charitable Trusts Of Elliot And CMC By Merging Their Governance Structures And Operations Into A Regional System
These corporate issues are eclipsed in importance by Optima's post-1994 actions regarding the stewardship of the assets and charitable missions of Manchester's two hospitals. These issues fall into two categories:
First, Optima failed to include the community and the Director of Charitable Trusts in crucial decisions, including substantial changes in the governance and organization of the two community hospitals and consolidation of both hospitals' acute care services at a single site. Indeed, Optima representatives have not fully informed the public or the Director of Charitable Trusts regarding its plans, nor have they provided financial or other supporting analysis for its decisions. Optima's failure to communicate with and to involve the public has resulted in an apparent repudiation of promises and commitments made at the time of the 1994 supporting organizations merger. Such promises include:
* Optima's public commitment to maintain CMC and Elliot as distinct, community-governed acute care hospitals;
* Optima's public commitment to preserve local control and governance of both Elliot and CMC;
* Optima's public commitment to preserve the distinct charitable and religious identities of both Elliot and CMC as separate elements of a unified health care system; and
* Optima's public commitment to establish a system of accountability to the community to ensure that savings achieved from the 1994 merger would be redirected back into the community.
Second, through the aggregate of its actions, including relocating services, expansion of facilities, changes in the use of facilities, changes in governance and structure, and corporate reorganization into a regional holding company, Optima has at a minimum substantially altered, if not effectively terminated, the distinct charitable identities of Elliot Hospital and CMC. It has done so without seeking the approval of the Probate Court through an action for cy pres or deviation, which are the appropriate legal processes for review of such action. Based on our review of the documents submitted to this office, Optima does not appear to have met the legal standard for cy pres, termination of, or deviation from a charitable trust with respect to either Elliot or CMC. This is so because:
* Optima has made no showing based upon financial analysis that it is illegal, impossible or impracticable to continue the distinct charitable mission of CMC as an acute care community hospital serving the Manchester community. Despite its statement that Manchester is too small a community to support two acute care hospitals, Optima's own financial analysis projects that $150 million of cost savings could be achieved by consolidating certain services while still operating two acute care hospitals. Indeed, Optima did not conduct a post-merger financial analysis of the option of continuing operation of CMC as an acute care hospital, but rather treated consolidation of acute services at a single site as the sole option available after the merger to achieve the projected savings.(60)
* Optima has not defined a clear charitable mission or other identifiable attributes for the successor integrated acute care hospital. Optima's failure at the time of the 1994 merger to forthrightly address the divergence between the hospitals in practices concerning pregnancy termination has led to profound confusion within and outside of Optima regarding the religious and ethical tenets affecting the availability of health care services for the Manchester community.
* This tension has been particularly acute with respect to abortion and reproductive services, where statements made by Optima representatives at the time of the merger that Elliot's practices were consistent with Catholic ethical doctrine have led to the promulgation -- three years later -- of a vague, ad hoc policy regarding abortion and the application of religious doctrine to health services within Optima's integrated acute care facility. The confused and often unclear policies of the consolidated acute care facility appear in many instances to be inconsistent with the established identities of both Elliot and CMC.
1. Optima Has Failed To Inform And Include The Community And The Director Of Charitable Trusts Regarding The Charitable Identities Of CMC And Elliot
It is a fundamental tenet of charitable trust law that a charitable institution may not radically alter or terminate its charitable mission without notification to the Director of Charitable Trusts, and without seeking approval of the change in mission from the Probate Court by an action for cy pres or deviation. It is equally fundamental that the social contract that binds a charitable trust to its served community includes a duty of candor and accuracy. We conclude that Optima, by integrating the hospitals into a single acute care facility and substantively changing the governance and character of the hospitals, effectively terminated the distinct charitable missions of CMC and the distinct charitable identities of CMC and Elliot as community hospitals. Optima did this without appropriate legal process and, most disturbingly, without informing its served community with candor and accuracy of its plans and actions.
a. Consolidation Of Acute Care Services At A Single Site
i. Pre-Merger Public Statements
It is clear from both the public and regulatory record that the 1994 supporting organizations merger was permitted to go forward, and received broad public support, based in large part on the common public assumption that the merger would preserve the distinct operations and identities of CMC and Elliot Hospital.(61) Widely reported pre-merger statements by Sylvio Dupuis and Scott Goodspeed, presidents of CMC and Elliot Hospital, respectively, focused on developing the distinct missions and characters of each hospital under unified holding company management, as "centers of excellence," each emphasizing particular specialties.(62) Indeed, the pre-merger Memorandum of Understanding between Fidelity Health Alliance and Elliot Health Systems identifies as one purpose of the merger "[t]o" reflect in the policies and practices of a new integrated health care system the merger of two equals who respect the standards and principles by which each is presently governed.(63)
This message was communicated in a variety of forums. At a September 1993 public hearing before the Manchester Board of Aldermen, Phillip Ryan, President and CEO of Elliot Health Systems, and Robert Cholette, President and CEO of Fidelity Health Alliance, made a joint presentation regarding the proposed merger. At one point, Mr. Cholette described the proposed merger as follows:
Here we are considering bringing the two holding companies together to form one systems corporation and this systems corporation, this holding company would be the parent company to not only the Elliot Hospital and the Catholic Medical Center, but to Hillcrest Terrace, to the One-Day Surgery Center, the Convenient Med-Care and the NH Medical Lab, all of the companies that are owned by both organizations and there are probably 17 or 18 such companies. This holding company, this new systems corporation, would be non-profit and it would be a partnership of equals. We would come together with equal representation to govern this new heath care system for greater Manchester.(64)
Later in the same presentation, Mr. Cholette responded to Alderman Buckley's question of whether there would continue to be two acute care centers after the merger by stating only that, "some of the major service areas will be unified." Mr. Ryan immediately emphasized this point, stating that "a lot of these savings [from the proposed merger] come from equipment savings as well as avoiding the need to purchase duplicate equipment, so if you have all of obstetrics in one area and all of cancer care in one area you can do some things from a cost as well as a quality point of view by unifying. Those would be tougher for two separate operations to do.(65)
In statements to the public press, the FTC, and the Board of Aldermen, Optima officials repeatedly represented that the projected merger would result in savings of $150 million over a ten year period.(66) This estimate appears to have been based on a pre-merger financial analysis conducted by Ernst & Young to analyze the potential financial benefits resulting from different levels of consolidation and integration.
Ernst & Young designed its study around three different options and compared the expected range of potential cost savings from each option:
* Option 1 - consolidation of the supporting organizations and certain overhead;
* Option 2 - service consolidation, while still operating two acute care sites; and
* Option 3 - full consolidation of acute care at one site with no new construction.
Significantly, Ernst & Young estimated that the second option, service consolidation while still operating two acute care sites, would produce approximately $150 million in savings over ten years. In fact, in a 1993 meeting with the U.S. Department of Justice Staff, Optima's attorney identified the specific acute care services which each hospital would provide.
During 1993, Fidelity Health Alliance and Elliot Health Systems management actively solicited members of the medical staffs of the two hospitals to submit letters of support for the merger to the Federal Trade Commission. To elicit physician support, management personally assured the physicians that Optima would continue to operate two acute care hospitals after the merger.(67)
It is apparent that public support for the 1994 supporting organizations merger hinged in large part on the common public understanding that the merger would result in significant savings while still preserving the distinct and independent identities of both Elliot Hospital and CMC. In his letter of support for the 1994 merger, U.S. Senator Judd Gregg wrote:
The new corporation will be governed by members of the local community, just as the separate entities are now. This will ensure continued responsiveness to community needs.
Joseph McCarron, President of Healthcare Concepts, Inc. wrote:
The merger will further enhance the two health care systems which are already largely complementary in the services they provide yet will preserve the valued identities and reputations of the two hospital institutions ... [The] continuity of the extensive community oversight and participation in the governance of the merged system will assure that savings are passed on to the community.
Numerous other letters from physicians and community members, which Optima included in submissions to the U.S. Department of Justice and the New Hampshire Attorney General's Office in connection with these agencies' antitrust reviews of the proposed merger, offer support to the concept of local governance and elimination of duplicative costs, while still preserving the essential identity and missions of the two hospitals.(68)
ii. Post-Merger Decision To Consolidate Acute Care Services At A Single Site
Notwithstanding the public's understanding of the nature and effect of the supporting organizations merger, Optima has acted with the apparent belief that the 1994 merger gave it authority not only to consolidate the supporting organizations, and to amend the corporate governance structure of the charitable hospitals, but also to change the core mission of CMC, and to relocate services and facilities at will.
Although the 1993 Memorandum of Understanding and the 1994 merger documents acknowledge the separateness of the Catholic elements of the system and speak of their preservation, Optima management took steps immediately after the merger to reduce the separate hospitals to subsidiary elements within the Optima Health system.(69) Optima internally renamed CMC and Elliot as "Optima West Side" and "Optima East Side," with the traditional names for the hospitals retained publicly for the hospitals as "dba's" for Optima. In 1996, Optima registered the trade names "CMC" and "Elliot Hospital" with the Secretary of State.(70)
On August 17, 1994, less than six months after the supporting organizations merger, Optima management outlined and presented a facilities work plan which set January 1, 1995 as the deadline for the identification of a single acute care site.(71) In post-merger submissions to governmental agencies, and in statements to the public, Optima represented that the decision to consolidate all acute care services at a single site occurred as a result of extensive financial analysis and clinical analysis by physician and other employee work groups.(72) In interviews with this office, Optima representatives said that its physicians made the decision to consolidate acute care services at a single site through their work on systems consolidation subcommittees.(73) The facts suggest otherwise.
Optima's attribution of the consolidation decision to its physicians does not accurately reflect the actual components or sequence of Optima's decision-making process as reflected in its board minutes and subcommittee minutes. Although Optima did form systems consolidation subcommittees, the decision to consolidate services at a single acute care site was made before the systems consolidation subcommittees completed their work. The record indicates that Optima's systems consolidation committees were in fact charged, not with determining whether to consolidate all acute care services at a single site, but with how to implement management's decision to do so.(74)
In light of Optima's assertion that merger savings could not be achieved without consolidation at a single acute care site, and in view of Optima's statement that its decision to consolidate was made in response to "rapid" changes in health care, Optima's election not to conduct any post-merger financial analysis of the effects of a proposed consolidation of acute care services at a single site is particularly significant. Optima relied on the same studies that before the merger showed cost savings of $150 million with two acute care sites to demonstrate, after the merger, that these cost savings could not be achieved without consolidation of acute care at a single site.(75)
In its CON application Optima states that compelling post-merger studies left it with no real choice but to consolidate acute care at a single site.(76) If Optima conducted such studies, they were not provided in connection with this review. Rather, Optima's contention that "only full integration of clinical services will result in $150 million of savings in operating expenses over a ten year period,(77) appears to be based solely upon the pre-merger financial analysis. However, this statement is not supported by the pre-merger Ernst & Young Study, which had predicted prior to the merger that $150 million could be saved from elimination of duplicative services between hospitals without consolidation at a single acute care site.
2. Optima Violated Its Commitment To Maintain Community Governance By Stripping The Hospitals' Boards Of Their Authority
In the wake of the 1994 supporting organizations merger, Optima has substantially changed the organizational structure of its hospital "subsidiaries," essentially stripping them of all independent authority, and conferring that authority on Optima Healthcare.
Optima accomplished this in several stages. After the merger, Optima made immediate efforts to exert control over its hospital "subsidiaries" through changes, some of which may have been legally ineffective, to CMC's and Elliot's governing documents. Then, in November, 1995, Optima Health, Inc. reorganized its own corporate structure and the corporate structure of the hospitals. It did so first by downsizing its own Board of Trustees -- which had previously consisted of all trustees of Fidelity Health Alliance and Elliot Health Systems -- from thirty-six to sixteen members and eliminating the prior requirement that seventy percent of its trustees come from the local community. At the same time, it restructured the hospital boards into identical "mirror boards," while retaining most authority for the conduct of hospital affairs and the control of the hospitals' assets in itself.(78)
Finally, in January 1997, Optima Health, Inc. affiliated with Covenant Health Systems to form Optima Healthcare, a regional joint operating company embracing the operations of St. Joseph's Hospital in Nashua, as well as Elliot and CMC.(79) Under the Joint Operating Agreement governing Optima Healthcare, most corporate powers of Optima Health, Inc. have been ceded to the regional institution. The two hospitals themselves retain almost no independent function beyond credentialing and a limited capacity to establish specific clinical policies and directives, which are subject to approval by the board of Optima Healthcare. Under the JOA, senior managers of the hospitals are to be employed not by the hospitals, but by Optima Healthcare.(80)
As amended, the current bylaws of Elliot and CMC are nearly identical; the two are governed by "mirror boards" of identical composition, selected and controlled by the board of Optima Health, Inc., which in turn is controlled by Optima Healthcare. The Optima Health, Inc. board members, all of whom under the bylaws are also members of the subsidiary boards, serve as the executive committee of the Elliot and CMC boards, and the Optima Health, Inc. officers serve as the officers of the subsidiary boards. The President of Optima Healthcare Corporation, ex-officio, is also the president of Elliot and CMC. The bylaws allow each of the Elliot and CMC boards to "delegate its authority with respect to the operation of the Corporation to another entity organized for the purpose of operating and managing the Corporation and other affiliated entities on an integrated basis¼." The JOA mandates that CMC and Elliot as "Network Members" implement the decisions reached by the Optima Healthcare board.
The "mirror board" governance structure deviates substantially from the pre-merger community-based corporate structure of the hospitals, and from the pre-merger guarantees of local control and governance.(81) Under the 1994 and 1995 amendments and the 1997 JOA, the hospitals are no longer controlled by boards chosen with any guarantee of meaningful local representation. Optima has ceded to Optima Healthcare control over the operating budgets of the hospitals, control over the strategic planning and location and type of services provided, and control of the disposition of profits.(82)
The changed bylaws and corporate structure of CMC appear to be inconsistent with that institution's charitable mission, as expressed in its Articles. Although the CMC bylaws state that CMC's purpose is to maintain the identity of CMC as a Catholic institution, CMC's governing board now includes equal numbers of Catholic and Protestant representatives.
Finally the "mirror bylaws" have also engendered confusion as to the applicability of Catholic Ethical doctrine to the delivery of health care services throughout the Optima network. On the one hand, the Elliot bylaws provide that the Network Ethics Committee, which serves the entire Optima and Optima Healthcare Networks, is responsible for acting "as an advisory group to the President on bioethical issues not previously covered in the Ethical and Religious Directives for Catholic Health Facilities." On the other hand, the bylaws provide that "in the case of the individual patient, the physician duly appointed to the Medical Staff shall have full authority and responsibility for the care of the patient subject only to such limitations as the Directors may formally impose and to the Bylaws, rules and regulations for the Medical Staff adopted by the Staff and Directors." Thus, neither the Elliot nor the CMC bylaws require -- as the CMC bylaws did before the merger -- that physicians practicing at CMC abide by the Ethical Directives.(83)
C. Optima Has Failed To Meet The Standard For Termination Of Or Deviation From The Charitable Missions Of Elliot And CMC
The legal processes of cy pres and deviation are public actions in which the Probate Court provides public oversight of decisions by trustees of a charity to terminate or radically change the charity's fundamental mission or identity. Despite fundamentally changing the organization and governance of Elliot and CMC, and the mission of CMC, Optima has not applied to the Probate Court for approval. As a result, Optima has not been required to demonstrate to the community it serves that these changes are necessary or appropriate under applicable legal standards.
Optima's failure to seek Court approval for its decisions regarding the charitable mission, organization and governance of the hospitals has led to a series of unexamined actions, which, on the basis of the materials submitted to and reviewed by this office, do not appear to be warranted under either the doctrines of cy pres or deviation. This is so for the following reasons:
* The only financial analysis conducted by Optima demonstrates that $150 million of cost savings could be achieved over a ten year period while still operating two acute care sites.
* No financial analysis supports the claim that cost savings can only be achieved by consolidation at a single acute care site.
* The pre-merger financial analysis does not establish that it is illegal, impracticable or impossible to preserve the distinct missions and operations of CMC and Elliot.
* Optima has yet to fully define the mission and attributes of the unified institution into which it seeks to merge Elliot and CMC, but rather appears to be defining those attributes on an ad hoc basis in response to perceived crises. It is, therefore, impossible to determine whether the unified institution has or will have a charitable mission or identity consistent with the missions and identities of either hospital. Optima has maintained that the specifics of governance of the successor organization are confidential business information.
1. Optima's Application For A Certificate Of Need For Consolidation Of Acute Care Services Of Elliot And CMC Did Not Address The Issue Of Whether Optima May Terminate Or Deviate From The Charitable Missions Of The Hospitals
In interviews with this office, Optima officials have consistently maintained that through the CON process at the Health Services Planning and Review Board, they received all necessary governmental approvals for the consolidation of acute care services of the two hospitals at a single site. This argument ignores the fundamental legal issues raised by the charitable status of the hospitals.
The CON analysis conducted by the Health Services Planning and Review Board was directed at, and limited to, the statutory criteria for approval of a certificate of need under RSA 151-C:7, and related administrative rules. In general, these criteria are applied to determine whether a proposed expenditure of health care resources meets a public need, and is consistent with quality health care for the affected community. The CON process does not distinguish between charitable and for-profit institutions and is not directed at issues relating to the charitable missions of health care institutions organized as charitable trusts. Under New Hampshire law, issues pertaining to the charitable mission of the hospitals are within the exclusive province of the Probate Court and the Director of Charitable trusts through actions for cy pres and deviation.
This office has reviewed the pre-merger Ernst & Young study, a pre-merger study conducted by the personnel of the two hospitals, and the Systems Consolidation Committee Reports generated between September 1994 and the March 1995 announcement of a decision to consolidate all acute care services of Elliot Hospital and CMC onto the Elliot campus. We have concluded that the documents provided to us -- which Optima has represented to this office and to the Health Services Planning and Review Board constituted the basis for its decision -- do not support termination or deviation from the charitable missions and identities of the community hospitals under the principles of cy pres and deviation.
2. Optima Has Not Demonstrated That It Is Impossible, Impracticable Or Illegal To Preserve The Distinct Missions And Operations Of Elliot And CMC As Charitable Trusts
Prior to the 1994 supporting organizations merger, Fidelity Health Alliance and Elliot Health Systems commissioned and relied on the Ernst & Young study of potential savings to estimate the opportunities for savings available from the proposed merger. As previously discussed, that study recognized $150 million in possible savings from an operational model which preserved the distinct operations and identities of both Elliot and CMC. This report appears to have been the basis of savings estimates which were repeatedly presented by Fidelity and Elliot Health Systems management to the Manchester Board of Aldermen and in other public forums.
Nevertheless, -- and despite public statements suggesting the contrary -- at no time after the merger did Optima conduct a financial analysis of the feasibility of preserving the distinct charitable missions and operations of the hospitals before deciding to consolidate the hospitals into a single institution.
The CON application constitutes Optima's most comprehensive public analysis of the financial basis for its decision to consolidate all acute care services of both hospitals at a single site. The Executive Summary to the CON application describes Optima's decision to consolidate services as arising from "compelling" post-merger analysis, including, in particular, the work of an internal Systems Consolidation Committee convened in September 1994 to analyze consolidation options. In the Executive Summary to its CON application, Optima asserted that "after carefully studying: (1) national and statewide trends; (2) conducting extensive financial feasibility studies; and (3) examining innovative and cutting-edge approaches to quality of care," it concluded that its plan for an integrated health care system in Manchester would achieve economies of scale, improve system efficiency, and produce optimal patient care.(84)
In fact, no post-merger financial analysis of consolidation options appears to have occurred. The Systems Consolidation Committee's work took place only after management had already arrived at the decision to consolidate all acute care services at a single hospital site, and only after management had already targeted January 1, 1995 as the deadline for identifying the acute care site.
Optima's reliance on its pre-merger financial feasibility studies and its Systems Consolidation Committee Reports to support its contentions that "consolidation of acute care services will achieve key economies of scale, resulting in tremendously increased system efficiency and optimal patient care,(85) is particularly troublesome, in that the Ernst & Young study supports the contrary conclusion -- that $150 million of cost savings could be achieved by consolidating certain services while still operating two acute care sites.
a. The Financial And Systems Analyses Relied On By Optima In Its CON Application To Justify Consolidation Of Acute Services Are Not Sufficient To Justify Termination Of Or Deviation From The Charitable Missions Of The Hospitals
The financial or systems analyses performed by Optima do not establish that it is impossible, impracticable or illegal to continue the distinct charitable missions of both Elliot Hospital and CMC through preserving their independent and distinct identities as acute care hospitals. The Ernst & Young study, for example, is nothing more than an estimate of potential savings, arrived at in 1993, several months before the merger of the supporting organizations. Because the proposed merger was under antitrust scrutiny, the parties to the transaction were not permitted to scrutinize each others' financial documentation, but rather relied on Ernst & Young to provide a general estimate of potential savings available from the transaction.(86)
Even so, the Ernst & Young study projected $150 million of cost savings over ten years by consolidating support and administrative services while still operating two acute care sites. Optima did not produce evidence of a post-merger study which contradicts this fundamental assumption on which the original merger of supporting organizations was based. Its description of the studies offered as "compelling" support for its decision to consolidate at a single site is unwarranted for the following reasons:
* Neither the Ernst & Young study nor any post merger systems analysis addresses the capital costs of implementing measures to achieve operating cost savings from consolidation at a single site. Cost savings projected to result from the consolidation of acute care at a single site do not factor in increased capital costs.
* Neither the Ernst & Young study nor any post merger systems analysis supports Optima's assertion in its CON application that over 70 percent of its projected savings are attributable to the consolidation of acute care services at one site. There is no statement or analysis in that study or any study provided by Optima that links 70 percent of the cost savings to consolidation of acute care at one site. To the contrary, the Ernst & Young study projects $150 million of savings with acute care at two sites. With consolidation of acute care at one site, and assuming no increased capital costs, the Ernst & Young study projects $250 million of savings. Thus, according to Ernst & Young, 60 percent of the maximum projected cost savings can be realized with acute care at two sites.
* The reports of the systems consolidation subcommittees do not contain any financial analysis to support possible cost savings. While information contained in the Systems Consolidation Committee materials is data that with other information and analysis could serve as a basis for a financial analysis, it is not itself a financial analysis. Neither the documents provided by Optima nor the documents submitted to the Health Services Planning and Review Board contain a focused report summarizing and analyzing the conclusions reached by the systems consolidation subcommittees.
* Neither the Ernst & Young study nor any post merger systems analysis addresses debt service for new construction and renovation as an offset against claimed savings from consolidation. The documents produced by Optima do not contain any financial analysis or data substantiating Optima's claim that the renovation of Elliot Hospital's campus will pay for itself in approximately five years with $42 million in net operating savings.
* In its CON application, Optima states that national and statewide trends support consolidation of acute care services at a single site. The documents submitted by Optima contain no evidence or analysis of "trends" which would establish the financial advantage of consolidation at a single site or the impossibility or impracticality of the continued operation of Catholic Medical Center.
Audited financial reports of Catholic Medical Center for 1992 and 1993 reveal revenues and gains in excess of expenses of approximately $5.9 million and $7.4 million, and positive cash flows of $8.7 and $10.1 million respectively. Audited financials for Elliot Hospital for 1992 show a positive cash flow of $5.5 million. This information suggests that the two hospitals were independently profitable in the years leading up to the merger. This trend appears to have continued through 1996 to the extent that Optima's financial reports continue to show each hospital generating operating surpluses. While some portion of such surplus may be attributable to post-merger savings resulting from systems consolidations, Optima has not demonstrated that the hospitals cannot maintain independent viability through operational or administrative consolidation short of its current plan to consolidate all acute care services on the Elliot campus.
b. Optima's Analysis Does Not Meet The Burden Necessary To Terminate Or Deviate From The Charitable Missions Of The Hospitals
The decision of the CON Board finds that the rationale for the consolidation of the inpatient acute care services is based on a study conducted by the two hospitals ¼ to determine the most appropriate location to consolidate all inpatient acute care services into one comprehensive hospital in the city of Manchester. The [Elliot Campus] site was chosen as the hospital of choice based on a number of inefficiencies associated with the site and spatial capabilities of the CMC facility and campus.
Finding No. 7. The criteria Optima applied in selecting the single acute care site included the size of the physical site, the availability of parking, the condition of the general facility, the ability of the site to accommodate physicians' offices, the renovation costs associated with consolidation at a single facility, and the carrying costs of the vacant site. Optima's site based criteria do not establish an appropriate rationale under the law of charitable trusts to justify the termination of Catholic Medical Center as an acute care facility. Simply put, a charitable hospital may not be terminated because another location may be more convenient or have access to better parking.
If a standard of convenience were applied to justify a substantial change in the purposes and mission of a charitable trust, no legal impediment would prevent Optima or Optima Healthcare from closing CMC at a later date and consolidating all services -- acute and non-acute -- at the Elliot campus. Indeed, this office has reviewed long-range planning documents which suggest complete consolidation of all hospital services, both acute and non-acute, at the Elliot Hospital campus as a long-term option.(87) The Joint Operating Agreement reposes full authority in Optima Healthcare to develop a strategic plan for the location of services and binds the "Network Members" to adhere to the strategic plan.(88)
Neither the Probate Court nor the Director of Charitable Trusts has ever accepted convenience as a legal standard to justify the termination of, or substantial change in the purposes of, a charitable trust. By ignoring the legal processes necessary to terminate or deviate from the distinct charitable missions and identities of the community-based hospitals, Optima has proceeded on the basis of inadequate financial analysis to transfer all acute care services from Catholic Medical Center, to reduce the licensed beds at CMC from 330 to 110, to strip the hospital boards of their authority, to sell property belonging to CMC,(89) and to exercise virtually complete legal authority over the finances and assets of CMC and Elliot Hospital.
We conclude that these actions constitute such a significant change of mission, governance and identity of both Elliot Hospital and CMC as to require the approval of the Director of Charitable Trusts and the Probate Court pursuant to RSA 547:3-d or RSA 547:3-h. Optima has not properly made the case that there is any legally cognizable justification for such changes.
3. Optima Has Not Demonstrated That The Unified Healthcare Institution It Seeks To Create Has A Charitable Identity Or Attributes Consistent With Either Elliot Or CMC
If a charity must be terminated or its mission fundamentally changed, under the doctrines of cy pres or deviation, the Probate Court is charged with determining that the charitable institution or substituted use to which the charity's assets are to be committed is as similar as possible to the purpose of the original trust. Optima has not demonstrated that the unified health care institution it seeks to substitute for the distinct community-based institutions of Elliot Hospital and CMC has a charitable mission or attributes consistent with either hospital.
In a sense, this failure is at the heart of the passionate concerns about Optima and the future of the hospitals which have been raised within the Manchester community by the Save CMC organization and others. In the years following the 1994 supporting organizations merger, this failure has manifested itself in:
* Optima's seeming disregard for the preservation of CMC's traditional commitment to religious health care; and
* Optima's vague and ad hoc application of Catholic ethical doctrines to the delivery of health care services -- including certain abortion procedures -- at Elliot Hospital.
a. Optima Has Fundamentally Altered The Nature Of CMC As A Religious Acute Care Hospital
The corporate structures adopted by Optima -- including, in particular, the establishment of mirror boards for Elliot and CMC and the ceding of virtually all independent authority from the hospital boards to Optima Health, Inc. and Optima Healthcare -- has had the effect of blurring traditional and important distinctions between the charitable missions of the two hospitals. In essence, CMC has been transformed into a non-acute care element of a larger secular hospital organization. This runs counter to the hospital's traditional mission. The 1974 CMC Articles of Agreement specifically describe CMC as an agency of the Roman Catholic Church and stress its unique spiritual mission to provide health care to those in need in a manner guided by and consistent with the tenets of the Roman Catholic Church as expressed in the Ethical Directives.
In testimony to the Attorney General's Office, Optima officials asserted, albeit with some confusion and with the notable exception of abortion policy, that the Directives themselves do not apply to the Elliot Hospital, but apply only within the CMC building. While this distinction might have merit in an organization in which CMC maintained independent viability as an acute care hospital, it has little meaning for a CMC whose health care mission has been reduced to a limited number of non-acute care functions.(90)
Optima has not provided this office with documents or evidence which indicate that the historical applicability of the Ethical Directives at CMC was ever actively considered by its constituent boards in connection with the consolidation of acute care services at a single site. Indeed, this issue appears to have gone unaddressed until the 1996 controversy regarding the availability of certain abortion procedures at Elliot Hospital led to promulgation of a controversial policy regarding religious principles and abortion procedures. This policy and statements made to this office by Optima management regarding the applicability of the Ethical Directives, appear to have been formulated as a defensive response to the recent controversy. Such a position betrays a fundamental lack of understanding and respect for the totality of the Ethical Directives as a guide to the religious underpinnings of Catholic health care.
This attitude is underscored by a conversation between Robert Cholette, CEO of Fidelity Health Alliance and later of Optima Health, Inc. and Optima Healthcare, and Dr. Maria Alicia Davila, a physician long associated with CMC. Dr. Davila testified that, prior to the 1994 merger, Mr. Cholette assured her that the proposed merger would not result in closure or termination of CMC. In the course of that conversation, Dr. Davila stated her conviction that Elliot Hospital and Catholic Medical Center could not be merged because of their different cultures. To which Mr. Cholette replied, "That's not true. These are just buildings." She in turn responded, "Excuse me? You mean an institution does not have a soul?"(91)
b. Optima Has Not Clarified Whether Health Care Services In The Merged Institutions Will Be Altered Or Curtailed To Conform With Religious Doctrine
The blurring of the distinct charitable identities of Elliot Hospital and CMC is equally troubling with respect to Elliot Hospital, a secular institution with roots in Manchester's Protestant Community. As the ongoing controversy regarding abortion procedures indicates, there is considerable concern within the medical and general communities of greater Manchester as to whether Catholic doctrine may come to control the provision of health care at Elliot Hospital. Necessarily, this issue is most acutely drawn in the area of reproductive services and abortion, though it may also have implications for other areas of health care, including care at the end of life.
In November 1997, in response to the disclosure that Elliot Hospital's practices with respect to abortion did not conform to Catholic doctrine or the Ethical Directives, the Trustees of the mirror boards, acting as Trustees of Elliot Hospital, adopted a policy which banned termination of pregnancy at Elliot Hospital for any reason except to save the life of the mother.(92) This policy was intended to conform Elliot's policies with the Ethical Directives regarding termination of pregnancies by banning certain procedures, rarely but consistently performed at Elliot, where pregnancies were terminated due to non-lethal fetal abnormalities.(93) The Elliot Trustees sought to address the larger issue of the impact of religious principles and directives on health care at the unified acute care hospital by including within the announced policy several statements purporting to limit the application and influence of religious doctrine to health care within the hospital.
Optima's failure to address the complex ethical issues raised by the merger of a religious and a secular hospital forthrightly, publicly and on the basis of accurate information regarding practices at both hospitals has led to the apparent compromise of the charitable identities and missions of both institutions, and has resulted in the invention of an ad hoc ethical and religious policy which does not fully address the issues raised. Indeed, the provisional nature of the policy was evident in interviews with Optima personnel in which no member of Optima's Board or present or past management appeared able to articulate the scope of the policy or the relation of the Ethical Directives to Elliot Hospital or to the unified acute care institution being formed on the Elliot campus.(94)
Similarly, members of Optima's management and boards of trustees interviewed in connection with this review demonstrated confusion concerning the effect of the recently announced policy on availability of specific procedures, such as routine administration of abortifacient drugs to rape victims.(95) At least two physicians interviewed expressed concern that the policy would affect the treatment options available for extrauterine or ectopic pregnancies in a manner they felt was inconsistent with proper medical treatment.(96) No member of Optima's boards or management interviewed by this office could define the effect of the policy on this issue.(97)
The 1994 supporting organizations merger agreement provides that "Optima will not be identified or operated under the auspices or control of any particular religious organization or group," and that Optima will "maintain the identity of Catholic Medical Center as a Catholic Institution." Optima's approach has been to treat Catholic Medical Center as a separate corporate entity for some purposes and as part of a single integrated hospital for other purposes.
By consolidating acute care at a single location, restructuring corporate governance, and transferring the authority of the local governing boards to a regional consortium, Optima has effectively terminated the separate existence of both Elliot and CMC as community-based charitable hospitals with distinct identities and missions. The mission of CMC as a Catholic hospital has not been maintained. The adoption of a termination of pregnancy policy that is consistent with Catholic doctrine for Elliot does not fulfill the obligation that Optima undertook to maintain the identity of CMC as a Catholic institution. It does, however, compromise Elliot's traditionally secular approach to medicine. The logical and legal incoherence of this approach is evident.
c. Optima Has Failed To Fulfill Its Promise That It Would Be Publicly Accountable For Its Claims That The Merger Of Elliot And CMC Would Produce Savings And That It Would Return Those Savings To The Community
Before the 1994 supporting organizations merger, Fidelity Health Alliance and Elliot Health Systems management repeatedly stated that the merger would result in savings of over $150 million in ten years. Optima said that integration would produce cost savings of over $3,600 for each household in Manchester and over $1,000 for each household in Hillsborough County,(98) and pledged to establish a program of public accountability to demonstrate that the "hospitals are vigorously pursuing cost efficiencies and are otherwise continuing their mission to be a public servant to the community."(99)
i. Optima Has Not Produced Evidence That Consolidation Of The Hospitals Has Produced Or Will Produce Cost Savings
In connection with this review, Optima provided no evidence that it has fulfilled its promise to institute a program of public accountability demonstrating cost efficiencies. When Optima was asked to produce the "public accountability" documents that would demonstrate savings from the merger, Optima provided copies of "merger report cards" prepared for and presented to its trustees on a quarterly basis. Until called for by this review, these "report cards" have been treated by Optima as confidential business information unavailable to the public.(100)
Our review of the "report cards," prepared by Optima for its Board of Trustees leads us to the conclusion that the report cards do not fulfill the pre-merger promise of a public accountability program. First, they have never been made available to the public until this review. Second, the report cards neither contain nor reflect contemporary financial analysis or data by which to evaluate the accuracy of any claimed savings.
Essentially, the report cards offer nothing other than the repeated conclusory assertion that because consolidations have taken place that were predicted by the 1993 Ernst & Young study as potential sources of savings, those savings have in fact been realized. Thus, purported cost savings are simply "reported" based on the same approach that was used to project anticipated cost savings: that is, to estimate gross savings achievable from consolidation of specified services without actual adjustments to reflect cost saved by unit of service actually delivered. While Optima's method of describing cost savings may be acceptable for estimating or projecting potential cost savings on a prospective basis, it is not a reliable or accurate method for documenting or reporting actual cost savings.(101)
Because the merger report cards are based solely on the pre-merger projections, they do not take into consideration a variety of independent factors which may relate or contribute to claimed savings. These include the reduced variable costs which may be attributable to a decline in patient census. In a hospital context, a decrease in patient census utilization may result in lower operating costs without corresponding efficiency gains. Stated simply, when a hospital has fewer patients, it may be able to recognize cost savings through consolidation or elimination of staff functions and other overhead costs. Because Optima's report cards do not account for other factors such as reductions in patient census from pre-merger levels, it cannot be determined whether Optima's claimed cost reductions result from cost efficiencies flowing from the merger and subsequent consolidations, from a lower patient census, or, alternatively, whether the claimed cost reductions are more properly attributable to managed care payor structures or other factors independent of the merger.
ii. Optima Has Not Established A Program Of Public Accountability
Before the merger, Optima represented to the Attorney General's Office and the Manchester Board of Aldermen that it would institute an accountability system so that the community could keep score of its successes. Mr. Cholette described the accountability system as a way of "report[ing] to the community number one what our plans were for the year." It would allow the community to determine "just how well we did," and provide evidence that the cost savings would be returned to the community.(102)
Instead of implementing the promised system of public accountability, Optima has refused to make its financial and corporate information available to the public. Not only has Optima not kept score for itself, it has also prevented the community from keeping an independent scorecard of its "successes."
In connection with this review, Optima has claimed that the corporate bylaws of Optima and its subsidiaries are confidential, that organizational materials reflecting its business organization and structure are confidential, that financial feasibility studies submitted to support its claims of cost savings from consolidation of acute care are confidential, that budgets are confidential, that the joint operating agreement with Optima Healthcare is confidential, and that project costs and construction related information pertaining to the ongoing construction at Elliot Hospital are confidential.
In light of this corporate culture of secrecy, it is all but impossible to determine whether Optima has either achieved cost savings or redirected those costs savings back to the community as promised.
VI. CONCLUSION
In 1993, Optima said that the merger of Fidelity and Elliot Health would benefit the Manchester community by redirecting health care dollars, wasted on competition between CMC and Elliot, back to the community. A member of the Catholic Medical Center Board described the purpose of the merger this way:
... the hospitals have worked collaboratively to sponsor the Manchester Community Health Center which provides family centered care regardless of ability to pay¼. Manchester needs more of these services. The dollars spent on competition should be redirected to accomplish benefits for the community.(103)
In letters of support for the merger, the Manchester community echoed this goal of improving health care in Manchester and surrounding communities by ending wasteful competition between its community hospitals.
It was the clear understanding of the community in 1994 that Optima would accomplish this goal by eliminating duplication in administrative and operational costs while still operating two acute care hospitals. Through its statements to the community, Optima fostered the belief that it was committed to investing in the health care of the Manchester community, improving health care services to the indigent, and maintaining a system of accountability to the citizens of Manchester.(104) To elicit broad public support for the merger, Optima acknowledged that it would be governed by its social responsibilities to the Manchester community and its indigent population. In essence, Optima promised the people of Manchester that it would honor the social contract between them and their hospitals, and the people trusted Optima to abide by that promise.
Optima is not a for-profit business accountable to its equity investors. Optima has no shareholders other than the people of the community that founded and support its constituent hospitals. In 1994, when Optima undertook the responsibility of managing two distinct charitable hospitals, each founded by and connected to different communities within the larger community of Manchester, Optima became accountable not only to the Manchester community, but also to the distinct communities which share the traditional values of CMC and Elliot.
By transferring corporate and financial control of Elliot and CMC to a regionally-based organization that is no longer governed by a Board of Trustees drawn exclusively, or even primarily, from the Manchester community, Optima failed to honor its social contract to both the Manchester community as a whole and to the distinct communities whose values are reflected and who are served by CMC and Elliot. It also severed the social contract between CMC and the community served by CMC and its predecessor hospitals by ending CMC's historical mission of ministering to the broad health care needs of its community in a traditionally Catholic setting. By failing to address forthrightly at the time of the original merger, or at any time thereafter, the complex moral and clinical issues involved in the merger of a religious with a secular health care institution, Optima violated the trust of the community that founded and is served by the Elliot Hospital.
Most troubling, Optima has taken all of these steps without engaging in the necessary legal process of cy pres or deviation to determine the legality and practical effect of its decisions on the charitable missions of Elliot and CMC. As a result, it has made a series of decisions that fundamentally alter the charitable identities, governance and missions of Elliot and CMC while effectively excluding from any meaningful dialogue the very populations those hospitals are pledged, and legally bound, to serve.
It is the conclusion of the Attorney General that Optima, as a charitable institution, must seek guidance from the community in developing its vision of quality health care. This cannot occur without dialogue and without inclusion. Unless changed as a result of that dialogue, Optima's decision to terminate or fundamentally alter the charitable missions and identities of CMC and Elliot by combining them into a single health care institution must be reviewed by the Probate Court in the context of a cy pres action.
________________________________________
Philip T. McLaughlin, Attorney General of the State of New Hampshire
Michael S. DeLucia, Director of Charitable Trusts
Leslie J. Ludtke, Associate Attorney General
Walter L. Maroney, Sr. Assistant Attorney General
Jennifer J. Patterson, Assistant Attorney General
1 Meinhard v. Salmon, 164 N.E. 545, 547 (N.Y. Ct. App. 1929) (emphasis added).
2 See RSA 547:3-d.
3 William Donovan letter to Assistant Attorney General Walter Maroney, November 29, 1993, Exhibit 19.
4 Union Leader, 3/20/93 "Cholette said it is unlikely that CMC and Elliot would ever merge."
5 See Hospital Licensing Documents and Summary, Exhibit 5.
6 A comprehensive list of documents reviewed and the witnesses from whom testimony was taken is included in Exhibit 1.
7 Optima asserts that many of the documents which it has submitted to the Attorney General's Office for review are privileged or confidential. See Confidentiality Agreement, Exhibit 26. Documents that Optima has labeled as confidential are identified in Exhibit 1 as confidential; however, other documents listed in Exhibit 1 may also be subject to a claim of privilege or confidentiality. It should be noted that some of the documents that Optima claims are privileged are required by law to be on file as public records. For example, RSA 292:7 requires that a nonprofit corporation file amendments to its articles of agreement with the Secretary of State and town or city clerk. To the extent certain corporate documents developed by Optima affect the Articles of Agreement currently on file, those documents must be filed with the Secretary of State. Optima claims that all corporate governance documents are confidential.
8 New Hampshire law defines a charitable trust as "any fiduciary relationship with respect to property arising as a result of a manifestation of an intention to create it, and subjecting the person by whom the property is held to fiduciary duties to deal with the property ¼ for any charitable, nonprofit, educational, or community purpose." RSA 7:21, II(a)(Supp. 1997). The most recent amendment to this provision became effective on January 1, 1998. The definition in effect between 1987 and 1997 was substantially identical to the quoted language.
9 See RSA 7:19, 7:20, 7:22, 7:24. See also Attorney General v. Rochester Trust Co., 115 N.H. 74 (1975); Souhegan National Bank v. Kenison, 92 N.H. 117 (1942).
10 See, e.g., Queen of Angels Hospital v. Younger, 66 Cal. App. 3d 359 (1977); Holt v. College of Osteopathic Physicians and Surgeons, 61 Cal.2d 750, 754 (1964); Attorney General v. Hahnemann Hospital, 494 N.E.2d 1018, 397 Mass. 820, 835-36 (1985) (charitable hospital could not amend its corporate charter to include additional new grant-making provisions and then devote assets given and amassed for hospital purposes to such grants); Greil Memorial Hospital v. First Alabama Bank of Montgomery, 387 So.2d 778, 781 (Ala. 1980) (gift to charitable organization which operated hospital for treatment of tuberculosis could not pass them to a successor hospital organization which had abandoned that charitable purpose); see generally Riverton Area Fire Protection District v. Riverton Volunteer Fire Dept., 566 N.E.2d 1015 (Ill. App. 1991); Bossen v. Women's Christian National Library Association, 225 S.W.2d 336 (Ark. 1949).
11 IV. A. A. Scott, The Law Of Trusts, sec 384.1 at 2778. See also Holt, 61 Cal.2d at 756-757.
12 See Henry B. Hansmann, Reforming Nonprofit Corporation Law, 129 U. Pa. L.R. 497 (1981).
13 RSA 292:2, III.
14 See Department of Revenue Administration Report on Tax Exempt Property, Exhibit 6.
15 See RSA 7:19, 7:20, 7:22, 7:24.
16 See Attorney General v. Rochester Trust Co., 113 N.H. 74, 76 (1975) ("it is well settled that the attorney general is a necessary party in any proceedings involving cy pres, or deviation or termination of charitable trusts ¼ we hold that the attorney general is not only a necessary party in such cases but may also be the initiating party").
17 See RSA 547:3-d.
18 RSA 547:3-h.
19 RSA 547:3-d.
20 Queen of Angels v. Younger, 66 Cal.3d 359 (1977).
21 The charter of Queen of Angels permitted it to "establish, ¼ own ¼ maintain ¼ and operate a hospital in the City of Los Angeles" and to educate nurses and medical students. The facts showed that from the date when the hospital was incorporated to the date of the lease, the corporation had continuously operated a hospital. In addition, the hospital had represented to the public that it was a hospital in soliciting donations and public support. In its review the court stated, "The articles of incorporation alone -- without resort to additional evidence -- compel the inference that although Queen is entitled to do many things besides operating a hospital, essential to all those other activities is the continued operation of a hospital." Id. at 368.
22 Id. at 368-69.
23 Id., citing Holt v. College of Osteopathic Physicians & Surgeons, 61 Cal.2d 750 (1964). In Holt, three trustees brought an action to enjoin a breach of charitable trust seeking injunctive relief to prevent the threatened change in corporate purpose. The college was incorporated in 1914 to establish and maintain a medical and surgical college in osteopathic medicine; in addition, by charter its members staffed the Los Angeles Osteopathic Hospital and ran clinics using that form of medical treatment. In 1961 the college trustees voted to amend the charter to run and accredit an allopathic medical school at the same facility, eliminating osteopathic medicine from its curriculum. Plaintiffs contended that the trustees' actions had the purpose and effect of abandoning the organization's main charitable purpose, which was to run an osteopathic medical school, and convert it into a school teaching non-osteopathic medicine. Id. at 761.
24 Attorney General v. Winsted Memorial Hospital, Conn. Superior Court, Judicial Dist. at Litchfield, No. CV-96-00711936-S (unreported decision).
25 Rest. 2d of Trusts, sec. 381; G.G. Bogert, The Law of Trusts and Trustees, (2d ed. rev.), sec. 561, at 225-277. IV. A. A. Scott, The Law Of Trusts, sec. 381, at 323-33.
26 In Re Certain Scholarship Funds, 133 N.H. 227, 240 (1990), Brock, C.J., dissenting, and citing Jacobs v. Bean, 99 N.H. 239, 241-42 (1954).
27 See Chwalek v. Dover School Comm., 120 N.H. 864 (1980).
28 1881 N.H. Laws ch. 178.
29 Id.
30 Id; 1909 N.H. Laws ch. 309; 1959 N.H. Laws ch. 357.
31 Articles of Agreement of Catholic Medical Center, Article II.A.
32 Id., Article II.F.
33 Id., Article II.C.
34 Id. (capitalization in original). A copy of the seventy specific "Ethical and Religious Directives of the Catholic Health Facilities," ("Ethical Directives") which integrate Catholic theology and Catholic health care, is attached as Exhibit 22.
35 See, e.g., Ethical Directive no. 3:
In accord with its mission, Catholic health care should distinguish itself by service to and advocacy for those people whose social condition puts them at the margins of our society and makes them particularly vulnerable to discrimination; the poor; the uninsured and the underinsured; children and the unborn; single parents; the elderly, those with incurable diseases and chemical dependencies; racial minorities; immigrants and refugees. In particular, the person with mental or physical disabilities, regardless of the cause or severity, must be treated as a unique person of incomparable worth, with the same right to life and to adequate health care as all other persons.
36 The pre-merger discussions were at arms-length to avoid violating the strict requirements of anti-trust law.
37 A copy of the Merger Agreement is attached as Exhibit 20.
38 Optima, CMC, Elliot Health Systems, and Fidelity Health Alliance were all incorporated as voluntary nonprofit corporations under RSA ch. 292.
39 See, e.g., Letter from Robert Cholette and Phillip Ryan to Representative Zeliff, July 27, 1993, Exhibit 18.
40 Board of Mayor and Aldermen Minutes of September 7, 1993, Exhibit 7.
41 Union Leader, 7/5/93, Scott Goodspeed "¼ we do know we will continue to operate two acute care sites." Sylvio Dupuis, "The fundamental decision has been arrived at to have two acute care sites. It's very important to patients and their families to have access to a wide array of services."
42 Letter, dated November 29, 1993 from William Donovan to Walter L. Maroney.
43 Board of Mayor and Aldermen Minutes, September 7, 1993, Exhibit 7, at 7 (statement of Mr. Cholette).
44 Merger Agreement, Exhibit 20, ¶ 11.
45 Optima Health, Inc. Amended Articles of Agreement, Art. II, at 3. Under the Merger Agreement, Optima was to be "the head of a community based health care system ¼ which has both Catholic and non-Catholic elements. OPTIMA will not be identified as operated under the auspices or control of any particular religious denomination or any other group." Merger Agreement, at ¶ 10.
46 "FHA, EHS, Catholic Medical Center, and Elliot Hospital share a long tradition of appreciating the importance of spiritual, ethical, and moral support in caring for patients. They share a commitment of a respect for life in the delivery of health care services. They are committed to affording their patients the right to address issues of life and death with dignity, with the caring support of family and hospital, and with the best interests of the patient in mind." Id., at ¶ 10.
47 See Medical Staff Resolution of December 27, 1997, Exhibit 11.
48 The "Network Members" include Optima Healthcare and Covenant Health Systems and their tax exempt affiliates. The tax exempt affiliates include CMC, Elliot Hospital, Hillcrest Terrace, Inc., Alliance Resources, Inc., Visiting Nurse Association of Manchester and Southern N.H., Inc., Women's Aid Home, CMC Regional Cardiac Foundation, CMC Physician Practice Association, VNA Home Health and Hospice, VNA Management Service, Inc., VNA Personal Services, Inc., VNA Community Services, Inc., Covenant Health Systems, St. Joseph's Hospital, and the SurgiCenter at St. Joseph's Hospital.
49 See Optima Healthcare Documents, IRS Ruling Request, Exhibit 36, at 19. ("The structure and governance of OHC were largely influenced by the fact that SJH is a Catholic-sponsored organization.").
50 See Optima Healthcare Network; Boards and Management, Exhibit 35; and Joint Operating Agreement, Exhibit 36.c.
51 Elliot Hospital, a corporation created by statute, is not governed by RSA ch. 292, but remains subject to the general principles of corporate law and to the obligations of a charitable corporation. We do not address the legal question of whether, as a legislatively created entity, the Legislature retains the sole authority to amend the charter. Even were that the case, the public would be included in the process of revisions and would receive notice of the changes through the legislative process.
52 See Chronology of Corporate and Other Records, Exhibit 3, for a schematic review of the corporate history of all entities discussed in this Report.
53 Beginning in 1976, public members were nominated by a large Board of Incorporators.
54 Fidelity Health Alliance was a 501(c)(3) voluntary corporation established on May 9, 1985 under RSA ch. 292 for the purpose of furthering the programs of CMC. Originally called Catholic Medical Center (during a time when CMC's name was Catholic Medical Center Hospital), the supporting organization's name was changed to Catholic Health Alliance in January 1989, and to Fidelity Health Alliance in August of 1990. Fidelity Health Alliance's Articles of Incorporation provided that in the event of termination or dissolution, its remaining assets would revert to the Bishop of Manchester. Fidelity Health Alliance Articles of Incorporation, Exhibit 2.f, Article 4.
55 Although at the time of the merger CMC's Articles of Agreement did not name Fidelity Alliance as a member, the Articles of Alliance Resources, Inc., previously Catholic Medical Center Networks, did name Catholic Health Alliance, the predecessor to Fidelity Health Alliance, as a member. This suggests that the Catholic Health Alliance understood the requirements of RSA 292:2, II-a. When Catholic Health Alliance became a member of Alliance Resources, CMC may have elected not to name Catholic Health Alliance as its own member because CMC controlled Catholic Health Alliance through the participation of five of its board members on the nine member Catholic Health Alliance Board.
56 CMC's last-minute change to its Articles of Agreement appears to have been done to bring CMC's Articles into conformity with earlier changes in its bylaws. During our review, Optima provided copies of CMC bylaws as amended April 13, 1989 and October 24, 1990. Under these bylaws, first Catholic Health Alliance and later its successor Fidelity Health Alliance were designated as the sole member of CMC. The bylaws gave the sole member sole authority to amend CMC's bylaws, and provided that in the event of dissolution, CMC's remaining assets would revert to the sole member, if still existing as a nonprofit organization, and if not, to the Roman Catholic Diocese. The sole member was also given responsibility for choosing trustees and appointing officers, and at one point the bylaws provided that "[a]t all times the Board of Trustees of Catholic Medical Center shall include a simple majority of the individuals then serving as the Trustees of Catholic Health Alliance." CMC bylaws as amended 4/13/89, Article II, §1(2). All of these provisions are inconsistent with CMC's Articles of Agreement on file with the Secretary of State at the time of the bylaw amendments. In particular, the dissolution provisions directing distribution of the assets to the sole member upon termination may violate the "nondistribution constraint" and the requirement of CMC's articles of organization that any assets remaining upon dissolution would go to the Catholic Church.
57 Elliot Hospital constitution and bylaws as amended 1/27/93; Constitution, Art. III and IV.
58 Id.; Bylaws, Art. I and XV.
59 In correspondence with Dr. Wayne L. Goldner, dated September 30, 1997, Patrick Duffy, Chairman of the Board of Optima Health, Inc., stated that "The corporate documents pertaining to" the consolidation of Elliot Hospital and Catholic Medical Center "are on file at the Secretary of State's Office," and that "[o]ther files and records associated with these transactions are proprietary and, as such, are not available for distribution." See Goldner/Duffy Correspondence, Exhibit 12. As noted above, our review has determined that the publicly available file at the Secretary of State's Office does not disclose the full scope and extent of Optima's consolidation of the hospitals' governance and corporate structure. See Chronology of Corporate and Other Records, Exhibit 3.
60 Minutes of the February 23, 1995 meeting of the Optima Health System Consolidation Subcommittee reflect that management presented highlights from the 1993 pre-merger studies provided by Ernst and Young and Jones, Day that illustrated the potential savings which could be achieved if acute care services were consolidated at a single site. When one of the members of the systems consolidation subcommittee observed that all data was being driven by the fact that a single acute care site would be recommended and approved, and asked whether there was data that would inform Optima as to the impact of doing nothing or leaving a major service at the site that was not selected as the acute care site, the minutes do not reflect that Optima presented analysis of that option to its trustees. See Exhibit 29.
61 Union Leader, 4/15/93 "Last month officials of both holding companies denied a report by WMUR-TV, Channel 9, that the two hospitals wanted to merge. Yesterday, Phillip B. Ryan, president and CEO of Elliot Health System, again said the two hospitals are not about to merge." Union Leader, 6/26/93 Robert Cholette, "[The merger of the two hospitals] is not on the drawing board." "I don't see the two hospital organizations merging." "In the end, the combined non-profit holding company would have an annual operating budget of $225 million, employ 2,400 people, and oversee the administration of two hospitals ¼."
62 Scott Goodspeed Testimony, Exhibit 25, at 5-8, "We had the trauma center at the Elliot. ¼ CMC had one of the preeminent cardiac surgery programs in New England. And so you can envision, you know, based on evidence in clinical areas that's how the sites would be configured."
63 1993 Memorandum of Understanding, Exhibit 30, Section I, Paragraph J.
64 Board of Mayor and Aldermen Minutes, Exhibit 7, at 2.
65 Id. at 8.
66 Id. at 3 (statement by Mr. Cholette); 1993 FTC Memorandum, 9/9/93, Exhibit 32, "The merger of these two hospital systems into a single integrated network will result in savings of over $150 million in ten years." ¼ "$150 million [dollars] in savings over ten years that the hospitals have focused on represents what they have verified through their task forces can be achieved over ten years, with acute care services divided between the two sites in a manner that minimizes costs;" Union Leader, 6/26/93, "The companies estimate that the merger will save them $150 million over the first 10 years of affiliation, all of which would be passed on to consumers in the form of lower fees for service, better equipment and expanded services."
67 Testimony of Dr. Maria Alicia Davila, Exhibit 15, at 17-19.
68 See, e.g., Letter from Phillip Ryan and Robert Cholette to Representative Zeliff, July 27, 1993, Exhibit 18.
69 Hospital Licensing Documents and Summary, Exhibit 5.
70 Chronology of Corporate and Other Records, Exhibit 3.
71 The adoption of a timeline for identifying the acute care site occurred less than two weeks after a press report by Optima that it was "feeling the pressure of a rapidly changing health-care system" and "speeding up by at least a year its plans to combine the former Elliot and Fidelity Health companies." Union Leader, 8/4/94.
72 See Executive Summary to the CON Board of Optima Health, Inc. ("CON Executive Summary"), Exhibit 21.
73 Testimony of Robert Cholette, Exhibit 38, at 103-105; Testimony of Phillip Ryan, Exhibit 39, at 115-120.
74 Minutes of Optima Health System Consolidated Subcommittees, 2/9/95. "At this time all data is being driven by the fact that a single acute care site will be recommended and approved."
75 Optima's failure to undertake additional financial analysis after the merger is of particular concern given the antitrust constraints imposed upon any pre-merger financial analysis.
76 See CON Executive Summary, at 5 "No decision on the consolidation of acute care services was initially made, however, the studies completed post-merger were compelling on this issue."
77 See CON Application, at 79.
78 See Inventory of Documents, Exhibit 1. The documents reflect that Optima's trustees voted to make these changes to the composition of the hospitals' boards. Documentation of these changes has not been filed with the Secretary of State.
79 Wentworth Douglas Hospital in Dover also has entered into a limited affiliation with Optima Healthcare.
80 See Optima Healthcare Network, Exhibit 35; Testimony of Patrick Duffy, Exhibit 41, at 76-77; Tax Exempt Organizations Ruling Request, Summary, Exhibit 36.b, at 12.
81 See Board of Mayor and Aldermen Minutes, Exhibit 7, at 4, "Both of us are locally governed health care organizations, our Boards reflect people that live here, work here, pay the health care bills and get their services at one or both of our institutions and they said find out what the community thinks about this because ultimately if we are to redesign the health care system and come up with a better way it should reflect what the community thinks is the right thing to do."
82 Optima officials themselves appear confused over the respective roles of Optima Health, Inc. and Optima Healthcare. Thus, Harold Acres, Chairman of the Board of Optima Healthcare, described an annual budgeting process in which the Optima Healthcare board essentially approved budgets for the hospitals prepared by Optima Health, Inc. and its constituent hospitals. Testimony of Harold Acres, Exhibit 43, at 46-52. Patrick Duffy, Chairman of Board of Optima Health, Inc., described a process by which Optima Healthcare establishes an operating budget subject to approval by Optima Health, Inc. Duffy Testimony, at 74-75.
83 CMC's pre-merger credentialing criteria required that physicians practicing at CMC agree to abide by the Ethical Directives. The post-merger common credentialing criteria for Elliot and CMC does not require compliance with the Ethical Directives at either institution.
84 CON Executive Summary, Exhibit 21, at 3.
85 Id., at 3.
86 Ryan Testimony, at 13-14.
87 These documents -- which Optima has designated as confidential -- are at odds with Optima's consistent public statements that the consolidation of acute care at the Elliot campus and the non-acute care at the CMC campus does not indicate an intent to close Catholic Medical Center.
88 See Joint Operating Agreement, Exhibit 36.c.
89 In or about January, 1998, Optima sold the building, improvements and leasehold on land adjacent to the CMC hospital site owned by CMC or an affiliated entity. Documents reviewed by this office do not establish whether any portion of the proceeds of that sale have been reserved for, or directed to, the benefit of CMC.
90 Optima's internal confusion is evidenced by the conflicting statements of its board members and management. Thus, in sworn testimony to the Attorney General, Mr. Ryan stated that the Bishop of the Diocese may retain authority to determine which of the seventy Ethical Directives will apply to the acute care services provided at Elliot Hospital. Ryan Testimony at 51-56. By contrast, Mr. Cholette testified that the Ethical Directives do not apply to Elliot. Cholette Testimony at 18-20. Patrick Duffy, Chairman of the Board of Optima Health, Inc., first testified that the Directives do apply to all health care procedures at Elliot, then, after consultation with counsel, suggested that they only apply to abortion procedures. See Duffy Testimony at 107-109. Monsignor John Quinn, who served as the Diocesan representative on the boards of CMC and Fidelity Health Alliance and is now a Trustee of Optima Healthcare, testified to his understanding that, under appropriate circumstances, the Ethical Directives allow for the merger of a religious hospital with a secular institution which continues to perform procedures, such as elective sterilization, that are not permitted under Catholic doctrine. He concluded that the Ethical Directives do not apply at Elliot, except to abortion procedures by virtue of the recently announced policy. Testimony of Monsignor John Quinn, Exhibit 40, at 15-18.
91 Davila Testimony, Exhibit 15, at 11-13.
92 1997 Termination of Pregnancy Policy, Exhibit 10.b.
93 Before the merger, Philip Ryan, CEO of Elliot Health, advised Robert Cholette, CEO of Fidelity Health, and others that Elliot's policy with respect to termination of pregnancy mirrored that of CMC. Ryan Testimony at 33-39; Cholette Testimony at 20-24. Mr. Ryan made the same representation to the Manchester Board of Aldermen, Board of Mayor and Aldermen Minutes, at 2, 9. Critically, Elliot Health representatives also made this representation to Monsignor Quinn and Diocesan representatives. Monsignor Quinn Testimony, at 5-8; Affidavit of Monsignor Quinn in Moreau v. Optima Health, Exhibit 16.
In fact, clinical records of pregnancy terminations at Elliot that could not have been performed at CMC under the Ethical Directives were known to the OB/GYN staff and were readily accessible to Elliot's management. In 1994, the Chairman of the Obstetrics Department at Elliot Hospital, Dr. Robert B. Cervenka, informed Philip Ryan that physicians at Elliot Hospital performed terminations for Trisomy 21, or Down Syndrome, and questioned Mr. Ryan regarding whether the merger would affect the physicians' practices. According to Dr. Cervenka, Mr. Ryan informed him that after the merger, the Ethical Directives would apply only within the four walls of CMC, and would not affect the policies or practice at Elliot Hospital. Up to and even after the merger, Mr. Ryan assured Dr. Cervenka and other physicians that the practice of medicine at Elliot would not be altered by the merger. Testimony of Dr. Robert Cervenka, Exhibit 13, at 26-37.
Optima's former managing director for marketing also testified to Optima's continuing lack of candor over this issue in deposition testimony in a pending lawsuit involving Optima, Moreau v. Optima Health, No. C-97-329, Hillsborough County Superior Court, 1997. In sworn testimony in connection with a law suit against Optima by the employee whose disclosure of the abortion practices at Elliot may have resulted in his loss of employment, Ms. Laurie Storey-Manseau stated that, as recently as 1996, Optima management was still attempting to maintain the public fiction that no elective abortions were ever performed at Elliot. Excerpts from Deposition of Laurie Storey-Manseau, Exhibit 17, at 12-16.
94 See note 90, supra.
95 Compare, Duffy Testimony, Exhibit 41, at 112-116 (administration of abortifacients permitted) with Quinn Testimony, Exhibit 40, at 48-50 (treatment may depend on confirmation of pregnancy).
96 The physicians voiced a concern that Catholic doctrine forbids any form of treatment of tubal pregnancies which involve direct termination of the pregnancy, without removal of the affected organ. Cervenka Testimony, at 74-76; Testimony of Dr. Wayne Goldner, Exhibit 14, at 85-87.
97 Quinn Testimony, at 49-50 (Directives do not permit "direct attack on fetus"); Duffy Testimony, at 109-112 (Policy intended to mirror Ethical Directives with respect to extrauterine pregnancies).
98 1993 FTC Memorandum, Exhibit 32, at 3.
99 William Donovan Letter to Walter Maroney, November 29, 1997, Exhibit 27.
100 Optima has now agreed that these "merger report cards" may be produced to the public. See Exhibit 24.
101 When examining historical performance or reporting actual cost savings, the generally accepted accounting method is to examine actual cost reductions per unit of service actually delivered. It is necessary to adjust the analysis by considering savings per unit of service, as any gross analysis will fail to account for savings attributable to decreases in units of service delivered. This criticism of Optima's cost savings methodology was voiced by John Lynch, a Trustee of Optima Healthcare. See John Lynch Testimony, Exhibit 42, at 44-55.
102 Board of Mayor and Aldermen Minutes, Exhibit 7, at 7.
103 Support Letter by Adele B. Baker, Secretary, CMC Board of Trustees, August 27, 1993, Exhibit 28.
104 1993 FTC Memorandum: "Manchester has incurred an influx of residents with poverty or near-poverty level incomes, who have health care needs that are beyond their financial means. The consolidation will enable the combined facilities to redirect resources consumed by underutilized, duplicative equipment into meeting the current needs." 1993 FTC Memorandum, Exhibit 32, at 15.

NEW HAMPSHIRE ATTORNEY GENERAL'S REPORT ON OPTIMA HEALTH
MARCH 10, 1998
EXECUTIVE SUMMARY I. INTRODUCTION II. DESCRIPTION OF THE REVIEW III. LEGAL PRINCIPLES GOVERNING CHARITABLE TRUSTS IV. HISTORY AND CHRONOLOGY V. LEGAL ANALYSIS AND FACTUAL FINDINGS VI. CONCLUSION
EXECUTIVE SUMMARY
This report is occasioned by profound concern within the Manchester community involving the conduct and ultimate fate of the City's two community hospitals -- Elliot Hospital ("Elliot") and the Catholic Medical Center ("CMC") -- under the control and stewardship of Optima Health, Inc., and Optima Healthcare ("Optima"). The report is issued pursuant to the common law and statutory authority of the New Hampshire Attorney General as the Director of Charitable Trusts to oversee New Hampshire charitable institutions and to preserve and protect New Hampshire charitable assets.
The Attorney General has intervened in this matter to review and address four central issues. First, we have examined the legality and practical effect, under New Hampshire charitable law, of Optima's decision to consolidate all acute care services previously performed at Elliot Hospital and CMC at the Elliot campus, effectively terminating the century-old charitable mission of CMC and its predecessors to serve as an acute care Catholic hospital within the City of Manchester.
Second, we have examined the legal and practical effect of the merger of a religious and a secular hospital into a single health care system. In particular, this review has focused on Optima's recent attempts to clarify the application of Catholic ethical requirements to the provision of services at facilities within the Optima system, a process which has engendered significant controversy within the medical establishment and the Manchester community.
Third, we have reviewed Optima's decision-making process, particularly with respect to its decision to consolidate at a single acute care facility and its decision to reorganize governance of the organization.
Fourth, we compared Optima's recent conduct to its commitments at the time of the 1994 merger, that it would publicly account for savings resulting from the merger, that it would return those savings to the local community, and that local control of the community's hospitals would be preserved.
Both CMC and Elliot are nonprofit charitable institutions and are bound by a social contract to the local community. Through their trustees and management, Elliot and CMC have a fiduciary duty to preserve and to protect their charitable assets and to ensure that those assets are used for purposes consistent with the fundamental charitable missions of the respective institutions.
The traditional reference point for the behavior of charitable trusts was articulated by New York's Judge Cardozo in 1929:
Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden by those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of the courts of equity when petitioned to undermine the rule of undivided loyalty.(1)
Judge Cardozo was speaking of the duties of a trustee in a commercial context, but his analysis has been applied to the management of a charitable corporation. The heightened duty of loyalty to the beneficiary community requires that the managers of charitable trusts be judged by a stricter standard of duty and care than the managers of ordinary for-profit corporations, who are accountable to the company's shareholders, not to the community as a whole.
More broadly, as public charities, both hospitals -- and any organization which purports to control them -- owe their served communities important duties of candor and inclusion. Stated simply, this means that a public charity must deal with its community honestly and is required to fully and completely disclose facts relevant to its charitable mission. A charitable institution may not properly exclude the community, or the Director of Charitable Trusts, either by design or inadvertence, from having a voice in fundamental decisions affecting the continuing capacity of the institution to fulfill its historic charitable mission.
Optima has received significant benefits from the Manchester community, including exemption from property taxes. As a not-for-profit corporation, it also has access to low-interest bond financing, and the ability to accept tax deductible charitable donations for activities in furtherance of its mission. In a letter to the Attorney General's Office discussing the future of Elliot Hospital and CMC after the proposed merger of their supporting organizations into a joint institution under the name of Optima Health, Inc., Elliot's counsel described the two hospitals as a "public servant to the community." As a public servant, Optima's actions must be judged by how they benefit the community that founded and continues to support it. Optima's mission must reflect the values of the community it serves.
It is the role and duty of the Attorney General and the Probate Court to enforce the fundamental duties of charitable institutions. This role is ordinarily carried out through the actions of cy pres, deviation or quo warranto, each of which involves a petition to the Probate Court to secure that Court's approval of changes in, or the termination of, a charitable trust's fundamental mission.
As a result of this review, the Attorney General makes the following findings:
* After the 1994 merger of the supporting organizations, Optima failed to provide notice to the Director of Charitable Trusts and/or to seek the approval of the Probate Court under the doctrines of cy pres or deviation for the following fundamental changes to the charitable missions of the respective community hospitals:
* The effective termination of CMC's historical charitable mission as an acute care religious hospital by the removal of all acute care services from CMC and the conversion of CMC to a psychiatric and rehabilitation facility.
* The effective termination of CMC and Elliot as community-based hospitals by the consolidation of all acute care services at a new integrated acute care facility controlled by Optima and Optima Healthcare.
* The effective termination of CMC and Elliot as distinct community-based hospitals by the evisceration of their independent boards of trustees and the substitution in their place of mirror boards controlled by Optima and Optima Healthcare.
* The restructuring of internal governance within Optima in a manner which effectively transferred governance from a local community-based entity to a regional organization.
* The record presented to our office does not demonstrate that the actions addressed in this report would merit approval by the Probate Court under the doctrine of cy pres. Under cy pres, a party seeking to radically alter or terminate the mission of a charitable trust must show (i) that it is impossible, impracticable, illegal, obsolete or ineffective, or prejudicial to the public interest to continue the mission of the charity; and (ii) that the successor organization or alternative use toward which the assets of the charity will be directed fulfills as nearly as practicable the mission of the original charitable trust.(2) Measured by these standards:
* Optima has not established that it is impossible or impracticable to continue providing acute care services at CMC. In fact, Optima performed no post-merger financial analysis to support its decision to consolidate all acute care services at the Elliot campus. The pre-merger financial analyses relied on by Optima as justification for the proposed consolidation do not support Optima's position that consolidation at a single acute care site is necessary to achieve the $150 million in savings projected at the time of the merger.
* Optima has not demonstrated that it is necessary, or consistent with the distinct charitable missions of the hospitals, to cede all or virtually all of the hospitals' and/or Optima's corporate powers to Optima Healthcare, a regional joint operating company.
* Optima has not defined the fundamental mission and attributes of the regional health care system into which it seeks to merge both CMC and Elliot. This failure is most clearly demonstrated by Optima's unsuccessful attempt to delineate the application of Catholic moral doctrine to the provision of health care services in its integrated hospital system -- either in terms of continuing CMC's traditional commitment to the indigent or concerning any restraints dictated by Catholic moral doctrine on health care services outside CMC.
* Optima has not fulfilled its duty of candor to the community and its duty of inclusion of the Director of Charitable Trusts and the community. This failure has occurred in the following ways:
* Optima failed to include the community in its decision-making process regarding its plan to consolidate all acute care services within both hospitals at a single campus. This plan existed as an option prior to the 1994 supporting organizations merger and was proposed, without additional post-merger financial analysis, within months of the consummation of the merger.
* Optima officials have maintained in public comments that consolidation of acute care services at a single site was not actively considered prior to the merger, and was only adopted after compelling post-merger analysis. The Ernst & Young pre-merger study evaluated consolidation at a single site as an option. Optima did not conduct any additional post-merger financial analysis of this option before submitting its Certificate of Need application to the New Hampshire Health Services Planning and Review Board seeking approval to consolidate all acute care at a single site.
* Optima adopted a corporate structure which stripped both Elliot and CMC of independent corporate authority by transferring that authority to itself, and subsequently ceding it to Optima Healthcare, a regional joint operating company. This action constitutes a repudiation of prior statements and promises by Optima representatives that, after the 1994 supporting organizations merger, the hospitals would remain as vital, locally controlled institutions.
* Optima did not fully inform the community of the impact of the joint operating agreement on corporate governance and control of the hospitals. Optima currently maintains that, notwithstanding the effect of its corporate structure on the charitable missions of the respective hospitals, the specifics of this corporate structure and organization remain a confidential business matter.
* Prior to the 1994 supporting organizations merger, the management of Elliot Hospital failed to disclose to the public, to the Diocese of Manchester and to the trustees of each institution readily available facts which demonstrated that Elliot's practices with respect to termination of pregnancy were not consistent with Catholic moral doctrine. As a result, the merger went forward on the assumption that Elliot and CMC had identical practices and policies regarding abortion. This was not, and had never been, the case.
* Optima's application of Catholic moral doctrine to hospital operations through a recently announced policy is unfocused, incomplete and confusing. While the policy purports to address terminations of pregnancy, it does not specify affected procedures, and does not address sensitive issues concerning the scope of the policy with respect to victims of rape or persons suffering from extrauterine pregnancies. The policy also leaves unaddressed the fundamental issue of whether Catholic moral and ethical doctrines will be applied, directly or by implication, to other health care services traditionally available at Elliot Hospital. These include, at a minimum, family planning counseling and elective sterilization procedures.
* Optima failed to include the community in a candid discussion of the clinical and ethical implications of the merger of a traditionally religious institution with a secular institution, the practices of which are in many cases not consistent with Catholic doctrine. This has led to the formation -- without any public examination -- of a successor entity whose attributes are defined on an ad hoc basis, without consideration of the fundamental and distinct charitable missions of either hospital.
* Optima represented that it would establish a public accountability system to document the success of the merger and then failed to do so. Optima has maintained that information required to measure its success is a confidential business matter.
* Significant legal questions exist relative to the corporate documentation and procedures used to effect the 1994 merger of Elliot Health Systems and Fidelity Health Alliance, supporting organizations for the two hospitals. The questions are so fundamental as to call into issue whether the 1994 supporting organizations merger effectively vested Optima Health, Inc. (or its current "parent" Optima Healthcare, Inc.) with ownership of, or authority over, the assets and internal governance of the hospitals.
* Actions taken by Optima which have affected the fundamental charitable missions of the hospitals, including in particular the change in corporate governance and the decision to terminate acute care services at CMC, may be ultra vires and without legal effect.
Optima is and continues to be an institution which provides a broad range of quality health services to the citizens of Manchester and surrounding communities. However, this is not the sole standard by which a charitable health care institution must be measured.
Optima appears to have developed a corporate culture, led by management and acquiesced in by its trustees, which assumes that the delivery of health care is best left exclusively to the sole judgment of management. The fundamental error in this assumption is amply demonstrated by the broad loss of faith within the Manchester community in Optima and its constituent institutions.
This situation is not sustainable. Optima's decision to consolidate acute care services at Elliot Hospital and its decision to effectively terminate local community governance through regionalization must be reviewed in and by the public -- including the Probate Court -- which is by law vested with jurisdiction to review such actions.
I. INTRODUCTION
In 1994, Fidelity Health Alliance ("Fidelity") and Elliot Health Systems ("Elliot Health"), supporting organizations that provided administrative and operational assistance respectively to Catholic Medical Center and Elliot Hospital, merged into Optima Health, Inc. ("Optima"). At the time of the merger, Optima stated that the consolidation of these two supporting organizations would improve the cost effectiveness of health care in the Manchester community by eliminating duplication in services and costs.
Sylvio Dupuis, CEO and President of Catholic Medical Center, and Scott Goodspeed, CEO and President of Elliot Hospital, assured the Manchester community that the two acute care hospitals would continue to operate after the merger. So confident was Optima that the merger of the two supporting institutions, in conjunction with the operation of the two acute care hospitals, would produce cost savings for the community, that it pledged as a "public servant to the community" to institute through the two hospitals "an annual public written reporting responsibility comparing the hospitals' efforts with other comparable institutions across a wide variety of indicators, national benchmarks, and standards." Optima would measure its success by "cost efficiency, quality indicators, patient satisfaction, and outcome measures as well as broad indicators of the health status of the communities."(3)
In the four years since the merger, Optima has instituted radical changes in Manchester's health care delivery system. In so doing, it stripped CMC and Elliot of their separate corporate identities, eliminated the community-based governance structure of these charities, changed the essential core mission of CMC, and transferred control over these hospitals to a regional conglomerate, Optima Healthcare, Inc. ("Optima Healthcare").
The actions taken by Optima following the 1994 merger of the supporting organizations reflect its belief that the merger conferred unbridled authority upon it to institute whatever organizational changes it believed would produce the anticipated or projected cost savings. Notwithstanding its public statements to the contrary,(4) immediately after the 1994 merger, Optima submitted change of ownership forms to the Department of Health and Human Services in which CMC and Elliot were designated "dba's" for Optima Health. Optima referred to CMC and Elliot as "Optima East Campus" and "Optima West Campus."(5) Optima claims that its treatment of CMC and Elliot as a single combined hospital is justified because it could not achieve the cost efficiencies and quality improvements promised at the time of the merger without consolidating the two hospitals into one. Peter Davis, the interim CEO of Optima, put it this way, "We needed to squeeze the fat out of the system."
Economic efficacy is not dispositive of the question of legality. Proof of convenience, or even a good faith belief in economic "efficiencies," does not resolve the legal question of Optima's authority to merge two charities. That Optima management may have had a good faith belief in the economic wisdom of its decisions is not dispositive of the question of whether the merger of Fidelity and Elliot Health in 1994 authorized Optima to assume ownership and control of CMC and Elliot Hospital, and whether the changes in the mission and governance of CMC and Elliot were so significant as to require notice to the Director of Charitable Trusts and approval by the Probate Court.
As a matter of corporate law, we conclude that significant questions exist as to whether the merger of the supporting organizations, Fidelity and Elliot Health, transferred ownership or control of the hospitals to Optima. We find that the aggregate of actions taken by Optima so significantly changed the missions and governance of CMC and Elliot as to require notice to the Director of Charitable Trusts and the Probate Court. New Hampshire law does not allow two distinct charitable trusts to be effectively terminated by combining them into a third secular organization with mixed religious attributes without (i) proof of impossibility, illegality, or impracticability; (ii) a clear showing that the merged organization has or will have a charitable mission that fulfills as nearly as possible the charitable missions of the hospitals; and (iii) appropriate -- and public -- legal process.
Finally, we conclude that, notwithstanding its promise at the time of the 1994 supporting organizations merger, Optima has failed to establish a system of public accountability by which to measure the success of the merger in producing the projected cost savings and has failed to produce evidence that the Manchester community has benefited through Optima's return of the cost savings to the community.
II. DESCRIPTION OF THE REVIEW
In preparing this report, we have reviewed extensive documentation submitted at our request by Optima or derived from public sources and have taken statements and sworn testimony from a wide variety of individuals associated with or opposed to Optima.(6) Documents reviewed include corporate records establishing the history, corporate organization and charitable missions of Optima Healthcare, Optima Health, Inc., Elliot Hospital, CMC and its predecessor institutions. We examined records of submissions by Optima to regulatory bodies charged with oversight of various activities, including the Federal Trade Commission, the United States Department of Justice, the Health Services Planning and Review Board, the Internal Revenue Service and the Consumer Protection and Antitrust Bureau and Charitable Trusts Unit of this office.(7) We reviewed testimony and affidavits submitted in recent litigation involving Optima, and examined press reports regarding public statements made by Optima and hospital officials with respect to the matters addressed in this report.
We have also taken statements and testimony from 17 individuals. These included senior management of the hospitals at the time of the 1994 merger, present and former senior management of Optima, Inc. and Optima Healthcare, members of the Board of Trustees of Optima and its constituent institutions, Optima staff physicians, a representative of the Diocese of Manchester, a Canon Law consultant involved in the 1994 merger discussions, members of the Save CMC Coalition, and the Coalition For Live Free or Die Healthcare in Greater Manchester.
In addition, we retained financial consultants from the firm of Arthur Andersen & Company to assist us in evaluating Optima's financial structure, the savings projected to result from the 1994 merger and the community accountability system consisting of "report cards" and other records developed to demonstrate realization of such savings.
III. LEGAL PRINCIPLES GOVERNING CHARITABLE TRUSTS
A. What Is A Charitable Trust? New Hampshire's definition of the term "charitable trust" is very broad, including virtually all nonprofit and charitable organizations that operate or hold property within the state.(8) Traditionally, a trust is defined as a fiduciary relationship in which one person or entity manages property for the benefit of another person or entity, known as the beneficiary. Generally speaking, a charitable trust is a trust intended to benefit the community at large, or some specified portion of the community. A charitable trust creates a social contract between the charity and the public beneficiaries. Under New Hampshire law, a charity is not required to be organized as a trust. Many charitable trusts are organized as voluntary or nonprofit corporations.(9) Thus, the term "charitable trust" applies to any organization or entity which holds property for charitable, nonprofit, educational or community purposes. The social benefits that a charitable corporation is expected to provide to the community are defined by its articles of agreement. Although a charitable corporation may not be governed as a trust in every respect, courts have held that the assets of a charitable corporation are impressed with a charitable trust that restricts the use of the assets to the defined purposes of the corporation.(10) While there is some diversity in approach among the cases with regard to the application of trust principles to the assets of charitable corporations, ordinarily the rules that apply to charitable trusts also apply to charitable corporations.(11)
B. Who Owns The Assets Of A Charitable Trust? As with any trust, the assets of a charitable trust must be managed for the benefit of the trust's intended beneficiaries. Charitable trusts, as nonprofit corporations, are generally subject to the "nondistribution constraint." The nondistribution constraint precludes nonprofit corporations from distributing "profits" to their owners, and also precludes the distribution of the assets to the member upon dissolution. "Profits" of a charitable corporation must be applied in strict conformity with the stated charitable objects and purposes.(12) Membership in a charitable corporation does not confer on the member the right to realize economic gain from the operations of the corporation, the right to transfer the membership for value, or the right to dissolve or terminate the corporation and receive the assets upon dissolution.(13)
C. What Benefits Do Charitable Trusts Receive? Most charitable trusts are exempt from local, state and federal taxation. In New Hampshire, the principal tax benefit to a charitable trust is exemption from local property taxation. Annually, Optima and Optima Healthcare receive over $4.5 million in exemptions from local property valuation.(14) To the extent the operations of a charity would otherwise result in assessment of state business enterprise taxes, charitable trusts are exempt from state taxation. In addition, New Hampshire charities may, under certain circumstances, qualify for low-interest bond financing programs offered by the state and may receive and retain tax-deductible gifts and contributions.
D. What Legal Mechanisms Regulate Charitable Trusts And Protect The Public? The Attorney General and the Probate Court have authority to protect the public interest by insuring that charitable trusts conform their acts to their Articles of agreement. The Attorney General's Office, through its Office of Charitable Trusts, is charged with the duty, power and responsibility to supervise, administer and enforce charitable trusts.(15) By statute and under the common law, the Attorney General has standing to bring a judicial proceeding to enforce a charitable trust or to supervise the actions taken by a charitable trust.(16) In general, these proceedings take place in Probate Court, through cy pres, deviation, or quo warranto.
1. Cy Pres
Cy pres is a traditional equitable power exercised by the Probate Court. When property is given in trust for a charitable purpose, and the specified purpose of the trust has become impossible, impracticable or illegal, cy pres allows the property to be applied to another charitable purpose as similar as possible to the purpose of the trust.(17) A charitable trust may be terminated only if the continuance of the trust is impracticable or infeasible, and only with approval from the Probate Court.(18) The purpose of a cy pres proceeding is to allow the Probate Court to determine what the original purpose of the charitable trust is, whether that purpose has become impracticable or infeasible, and if so, what other purpose would be the most closely comparable. The Attorney General is authorized by statute to petition for cy pres.(19)
It is well established that the doctrine of cy pres applies to charitable hospitals, without regard to their form of organization. Cy pres has been applied to prevent an acute care hospital from changing its essential purpose or core mission. In a California case, the Queen of Angels Hospital sought court review of a proposal to lease its main hospital facility, with the exception of the outpatient clinic, and apply the proceeds to establish and operate additional medical clinics in Los Angeles for the needy.(20) After reviewing the hospital's governing documents, the court concluded that the proposal would be inconsistent with the organization's central purpose of maintaining and operating a hospital.(21) The court held that the hospital could not, "consistent with the trust imposed upon it, abandon the operation of the hospital business in favor of clinics" and was bound to its primary purpose of operating a hospital using the assets under its control.(22) As the court explained, "the issue is not whether the new and different purpose is equal to or better than the original purpose, but whether that purpose is authorized by the articles [of incorporation].(23)
In Connecticut, the Attorney General intervened in a situation involving an acute care hospital facility abandoning its historic core mission as an acute-care hospital to become an ambulatory care facility with an emergency room. There, the Hospital trustees voted to close in-patient care and lay off related medical support staff. The Connecticut Attorney General's Office contended that such a fundamental transformation required cy pres action, and the court agreed.(24)
2. Deviation
RSA 547:3-d requires that a charitable trust seek approval from the Probate Court before property is applied to a different charitable purpose. Under the doctrine of deviation, the Court may alter the administration of a trust, if it appears that strict compliance with the terms of the trust "is impossible or illegal, or that owing to circumstances not known to the settlor and not anticipated by him, compliance would defeat or substantially impair the accomplishment of the purposes of the trust.(25) Chief Justice Brock of the New Hampshire Supreme Court has described the doctrine as follows:
Where the dominant objective of a trust remains capable of fulfillment, but its method of accomplishment has been stalled due to a hitch in the administrative machinery, the doctrine of deviation permits a reworking or repair of the administrative mechanism so that the trust purposes may be accomplished effectively. The doctrine of deviation permits changes in the management of all trusts, and in the case of charitable trusts, may be employed to substitute trustees as well as to alter trust conditions.(26)
3. Quo Warranto
The common law writ of quo warranto applies generally to prevent an entity from unlawfully usurping, abusing or misusing corporate powers, and has been used successfully in other states to prevent nonprofit hospitals from merging with for profit entities. The Director of Charitable Trusts may, in addition to other statutory actions, such as declaratory judgment, cy pres and deviation, bring a writ of quo warranto to challenge the lawfulness of a business practice. The New Hampshire Supreme Court has recognized the continued existence of the writ of quo warranto to protect the interests of the public.(27) A writ of quo warranto may also be used to challenge the authority of a corporation to act without proper regulatory and legal approvals.
IV. HISTORY AND CHRONOLOGY
A. Elliot Hospital And Catholic Medical Center
For more than a century, Elliot Hospital, Catholic Medical Center, and its predecessors, Notre Dame Hospital and Sacred Heart Hospital, have ministered to the health care needs of Manchester's various and varying populations as public charitable institutions. In accordance with a grant in the will of Mary Elizabeth Elliot, Elliot Hospital was established in 1881 by a special act of the New Hampshire Legislature.(28) The legislature chartered Elliot Hospital as a "public charity" and tied that charitable status to an exemption from property taxes.(29) In subsequent amendments to the charter of the hospital, successive generations of New Hampshire legislators have reaffirmed the hospital's "public charity" status and tax exemption.(30) While Elliot Hospital has historically had close ties with a number of Protestant denominations, including mandatory representation by certain churches on its board of trustees, the hospital has always been a secular organization.
Catholic Medical Center was established in 1974 as a 501(c)(3) not-for-profit corporation, intended to continue the missions of two predecessor Catholic acute care hospitals, Sacred Heart Hospital and Notre Dame Hospital. These hospitals had served the Catholic and immigrant populations of Manchester and surrounding communities for nearly a century. In its Articles of Agreement, CMC established as its first and primary purpose the establishment and operation of "a hospital in the City of Manchester, State of New Hampshire, without pecuniary gain and without distinction as to race, color, creed, sex or ability to pay." (31) In keeping with its charitable purpose and the nondistribution constraint, CMC's Articles of Agreement provide that [n]o part or portion of the assets or earnings of this Corporation shall ever be distributed to or divided among any individuals, including any member, officer, director, trustee, or other organizer of this corporation .(32)
Under its Articles of Agreement, another aspect of CMC's essential mission is [t]o maintain its identity as a Catholic Hospital.(33) Although Catholic Medical Center has never been under the direct sponsorship of the Diocese of Manchester, its Articles of Agreement expressly identify it as an "official agency of the Roman Catholic Church." Such status, the articles continue: is indicated ... philosophically by the guiding tenets under which it operates: namely, the teachings of the Roman Catholic Church. These tenets are expressed in specific regulations of the Holy See, and the teachings of the Bishops of the United States of America, more precisely in the latter instance, in the ETHICAL AND RELIGIOUS DIRECTIVES OF THE CATHOLIC HEALTH FACILITIES as promulgated by the National Conference of Catholic Bishops.(34) Consistent with its essential Catholic mission, CMC has committed itself to a specific set of religious tenets by incorporating these theological directives into its Articles of Agreement.(35)
B. The 1994 Merger Of Elliot Health Systems And Fidelity Health Alliance
In late 1992, following a period of bitter competition between the two hospitals, management began to discuss the possibility of a merger between Elliot Health Systems and Fidelity Health Alliance, the supporting organizations for Elliot Hospital and CMC. In the spring of 1993, the supporting organizations retained the accounting firm Ernst & Young to perform a theoretical study of the savings that might be achieved through different levels of consolidation and integration. At the same time, the two companies undertook an internal "feasibility study" with respect to a possible merger.(36) On June 25, 1993, the supporting organizations signed a memorandum of understanding outlining the steps they would take to consummate the merger. On February 24, 1994, after receiving federal and state anti-trust approvals, Elliot Health Systems and Fidelity Health Alliance merged to form a new supporting organization, Optima Health, Inc.(37)
The express purpose of the merger was to continue the charitable purposes of the two hospitals and related institutions.(38) Prior to the merger, representatives of Elliot Hospital and CMC were quoted in the Manchester Union Leader and other media outlets as anticipating approximately $150 million in projected savings from an operating plan in which the two hospitals would maintain separate identities, with some unspecified level of consolidated services. Such savings, it was stated, would permit both hospitals to maintain their viability as community-based, locally-governed health care institutions committed to serving the Manchester community in an era of increasing competition and change in health care.
Optima actively sought, and widely received, the support of Manchester's and New Hampshire's business and political communities for the merger.(39) In September 1993, Philip Ryan, CEO and President of Elliot Health Systems and Robert Cholette, CEO and President of Fidelity Health Alliance, appeared before the Manchester Mayor and the Board of Aldermen to explain the rationale and possible long-term consequences of the proposed merger, explicitly citing the savings goal of $150 million in the context of a limited consolidation of services.(40) Hospital presidents Scott Goodspeed and Sylvio Dupuis were quoted in Union Leader articles as stating that Elliot Hospital and CMC would remain independently viable -- and locally managed -- centers of excellence into the foreseeable future after the proposed merger.(41)
In their communications with the public, the proponents of the merger stressed their continued commitment to remain accountable to the community. In a 1993 letter to the Attorney General's Office regarding the proposed merger, Elliot Hospital's counsel acknowledged and promised that the two hospitals were and would continue to be a "public servant to the community.(42) Before the Mayor and Aldermen, CEOs Ryan and Cholette committed to instituting an ongoing mechanism to ensure public input and accountability following the merger.(43)
C. Key Post-Merger Decision Points
Beginning immediately after the 1994 merger of Fidelity and Elliot Health, the management of Optima Health, Inc. embarked on a series of decisions which run counter to Optima's commitment to the Manchester community to continue to operate two community-based acute care hospitals, and to involve the local community in the governance and management of Elliot Hospital and CMC. Optima's decisions, and the processes by which they were made, are the primary focus of this report. The decision points are listed in chronological order.
1. Decision To Exercise Complete Control Over CMC And Elliot
Legally, the merger joined the two supporting organizations, Fidelity Health Alliance and Elliot Health Systems. The hospitals existed separately, with their own independent governance structure as specified in the Articles of Agreement on file with the Secretary of State. Nevertheless, in the merger agreement Optima expressed its intention to exert complete control over the hospitals, which it viewed as its "subsidiaries." The merger agreement provided that [t]he By-Laws of OPTIMA and all of its subsidiaries ¼ shall provide that the OPTIMA Board of Trustees shall appoint two-thirds (2/3's) of the Trustees of each subsidiary's Board of Trustees and the OPTIMA Board of Trustees shall be solely authorized to amend the By-Laws of each subsidiary of OPTIMA.(44) Immediately after the merger, Optima implemented these provisions by altering the bylaws of CMC and Elliot Hospital.
2. Decision To Move To A Single Acute Care Site
Within months of the merger and without post-merger financial analysis, Optima decided to consolidate all acute care services delivered by both hospitals at the Elliot campus, reducing CMC to a rehabilitative and psychiatric unit within a larger hospital organization. In conjunction with the acute care consolidation, Optima applied in April of 1995 to the state Health Services Planning and Review Board for a Certificate of Need ("CON") authorizing Optima to institute a construction program on the Elliot campus costing more than $35 million. On September 26, 1996, the CON application was granted. The New Hampshire Supreme Court declined to hear an appeal taken by opponents of the consolidation.
3. Decision To Restructure Optima, Elliot And CMC's Governing Boards
Following a board retreat in the summer of 1995, Optima hired Cambridge Associates, Inc., to oversee a restructuring of the governing bodies of Optima and its affiliated organizations. Pursuant to the consultant's recommendations, in November of 1995 Optima voted to reduce the membership of its board from thirty-six to sixteen trustees, and to eliminate the requirement that seventy percent of board members come from the community. At the same time, Optima instituted a structure of "mirror boards" for its subsidiaries, meaning that Elliot Hospital and CMC would now be governed by identical boards, with essentially all decision-making authority delegated to the Optima board.
4. Decision To Establish A Single Acute Care Hospital As A Successor To CMC And Elliot
Optima's decisions to reorganize the governance of the hospitals and to consolidate their acute care services at a single site are properly characterized as a decision to establish a single acute care facility as a successor to CMC and Elliot. Necessarily, the integration of secular and religious health care institutions raises difficult issues concerning the applicability of religious doctrine within the consolidated institution.
Although Optima itself is a secular entity, its Articles of Agreement include an express requirement to maintain CMC's identity as a Catholic institution, subject to the Ethical Directives.(45) The merger agreement attempts to reconcile this conflict between the secular and religious elements in its expression of "shared values" which describes certain generally stated principles which "shall continue to be principles upon which OPTIMA, Elliot Hospital and Catholic Medical Center shall conduct their affairs.(46)
In practice, however, the "shared values" which supposedly unify Optima, Elliot and CMC have not been fully defined in the years following the 1994 supporting organizations merger. This is a critical failure. Under cy pres, the Probate Court must determine that a successor organization or alternative use toward which the assets of a charity will be applied fulfills as nearly as practicable the mission of the original trust. Essentially, through cy pres, the Probate Court enforces the social contract that binds the charitable trust to the community.
Optima's post-merger conduct has been marked by confusion in governance and policies. This confusion is reflected in interviews of Optima management, and raises serious questions as to whether any judgment can be made that the mission and identity of the successor hospital fulfills as nearly as practicable those of CMC and Elliot.
This confusion over religious doctrine and over the missions and identities of the two community-based hospitals is most evident in the debate over abortion and the apparent disagreements among Optima's management about the applicability of the Ethical Directives at the single acute care facility. The merger of the supporting organizations was based in part on specific representations made by Elliot Health Systems management to the management of Fidelity Health Alliance, to physicians at both institutions, to the public, to trustees of both institutions and to representatives of the Diocese of Manchester, that termination of pregnancy policies at Elliot Hospital were consistent with practices at CMC. Disclosure in 1996 that certain abortion procedures, banned under Catholic doctrine, had historically been performed at Elliot Hospital led to the promulgation by the Elliot Hospital Board of Trustees of a policy that purports to ban all terminations of pregnancies which are not consistent with Catholic moral doctrine at any Optima Hospital. Adoption of this policy has caused widespread protest among affected physicians, and has resulted in a resolution adopted by 160 members of Optima's combined hospital staffs requesting reconsideration of the announced policy.(47) Due to Optima's original failure to articulate specifically the policies, attributes, and governance of the successor integrated hospital to CMC and Elliot, it is likely that similar issues will continue to arise.
5. Decision To Affiliate With Covenant Health Systems, Creating Optima Healthcare
In January 1997, Optima entered into a Joint Operating Agreement ("JOA") with Covenant Health Systems, a Catholic health service organization which operates Saint Joseph's Hospital in Nashua and other facilities outside New Hampshire. Under the JOA a newly created nonprofit corporation, Optima Healthcare, Inc. ("Optima Healthcare"), manages and operates all services provided by its "Network Members".(48) In contrast with Optima's Articles of Agreement, Optima Healthcare's corporate documents focus extensively on St. Joseph's Hospital as a Catholic institution.(49) Although CMC is identified as a Catholic institution, it falls under the secular "Optima" category within the Optima Healthcare organization.
The organizational structure created by the JOA gives Optima Healthcare the power to develop and implement strategic plans for the Network, develop and approve operating and capital budgets for the Network, select other Network Members, select management and personnel, develop mission statements, and negotiate payor contracts.(50) The Network Members retain authority to implement programs approved by Optima Healthcare, to conduct credentialing for their medical staff, and to approve the expenditure of their restricted funds. Optima and Covenant are empowered to elect and remove the governing boards of the Network Members, and to take any and all actions that they deem appropriate to discontinue or change the actions or operations of the Network Members, provided that the changes do not violate the religious requirements applicable to the Network Members, or the will of Mary Elliot.
Under the JOA, the boards of trustees of Optima, and indirectly Elliot and CMC, have been stripped of most independent authority. Executive management of the hospitals has been removed from the hospitals to Optima Healthcare, and hospital financial matters are now being addressed at the joint operating level rather than within the hospitals.
V. LEGAL ANALYSIS AND FACTUAL FINDINGS
The Attorney General has intervened in this matter to review and address the legality and practical effect, under New Hampshire charitable law, of Optima's decision to consolidate all acute care services previously performed at Elliot Hospital and CMC at the Elliot campus and to create a single integrated facility, effectively terminating the century-old charitable mission of CMC and its predecessors to serve as an acute care Catholic hospital within the City of Manchester. In our review, we also have examined the legal and practical effect of the merger of a secular and a non-secular institution into a single health care system.
A. The 1994 Merger Of Fidelity Health Alliance And Elliot Health Systems May Not Have Transferred To Optima Health, Inc. Ownership Of Elliot and CMC
As an initial matter, this office reviewed the structure and legality of the 1994 merger of Fidelity Health Alliance and Elliot Health Systems into Optima Health, Inc. In conducting this review, we examined all corporate and legal documents provided by Optima, all documents on file with the New Hampshire Secretary of State, and all documents filed with the Office of Charitable Trusts. Based upon our review of the corporate documents and records, a serious question exists as to whether the 1994 supporting organizations merger transferred legal ownership of Catholic Medical Center or Elliot Hospital to Optima Health, Inc. and whether Optima Health, Inc. obtained the legal right to control or restructure those entities.
1. Legal Principles
It is a fundamental principle of corporate law that a corporation has no powers beyond those set forth in its governing documents. Trustees of Dartmouth College v. Woodward, 17 U.S. 518 (1819). The powers of a voluntary corporation arise out of and must be consistent with its Articles of agreement, which must be filed with the Secretary of State in order to be valid.
CMC, Fidelity Health Alliance, Elliot Health Systems and Optima Health, Inc. are all voluntary corporations governed by New Hampshire's Voluntary Corporations and Associations Act, RSA Chapter 292.(51) A voluntary corporation may take action only in accordance with chapter 292, the corporation's articles of agreement, and the corporation's bylaws. The articles of agreement must be recorded with the Secretary of State in order for formation of the corporation to take effect. RSA 292:4. The corporation's bylaws need not be recorded, but they must be consistent with the articles of agreement. RSA 292:6.
Certain actions by voluntary corporations, including name changes, increases or decreases in capital stock or membership certificates, mergers and acquisitions, are not effective unless they are recorded with the Secretary of State. RSA 292:7. "[T]he provisions for establishing membership and participation in the corporation," and "the number of shares or membership certificates, if any, and provision for retirement, reaquisition and redemption of those shares or certificates" must be included in the articles of agreement. A non-profit corporation's articles of agreement must be filed with the Secretary of State to be legally valid. RSA 292:2, II-a and V.
2. Apparent Deficiencies In The 1994 Supporting Organizations Merger
Based on our review of the corporate histories of Elliot and CMC, as well as the documentation supplied by Optima regarding the 1994 supporting organizations merger, we conclude that the merger may not have conferred on Optima ownership or control of the two hospitals. First, both the corporate documentation and the sequence of corporate actions by which CMC sought to transfer its corporate authority and assets through Fidelity Health Alliance to Optima Health, Inc. appear to be deficient, due to CMC's failure to include membership provisions in its articles, and Fidelity Health's elimination of CMC's Board of Trustees. Second, no document recorded with the Secretary of State prior to the merger made Elliot Health Systems, Inc., or any other corporate entity, a "member" of Elliot Hospital, let alone the "sole member," with power to transfer any assets, or to otherwise control the governance, of Elliot Hospital. As a result, subsequent actions by Optima Health, Inc. to control or dispose of the assets of CMC and Elliot may be without authority, and therefore, without legal effect.(52)
a. Catholic Medical Center
CMC's corporate filings may not have properly transferred ownership of CMC to Optima. According to CMC's Articles of Agreement on file with the Secretary of State, CMC was established in 1974 as a Chapter 292 voluntary corporation and 501(c)(3) organization. Between 1974 and 1994, CMC's Board of Trustees consisted of 24 public members, a representative of the Catholic Church, 6 members of the medical staff, the CEO, and the President of the Senior Associates.(53) Under CMC's Articles of Agreement, the trustees had authority to provide hospital services, control the corporation's money, property and affairs, maintain accredited status, ensure patient safety, grant privileges to the medical staff -- in short, to control all affairs of the hospital.
There is no public record of any attempt to transfer control, by "membership" or any other mechanism, of CMC's assets and governance to Fidelity Health Alliance until one day before the 1994 supporting organizations merger. Prior to the 1994 merger, five members of CMC sat on the nine member Board of Fidelity Health Alliance.(54) CMC maintained control over its supporting organization through its majority representation on Fidelity's Board.
In an amendment recorded with the Secretary of State on February 22, 1994, the day before the merger, the CMC trustees voted to delete, in their entirety, the provisions establishing its Board of Trustees and Board of Incorporators, as well as the provisions giving the Board the power to control the affairs of the hospital. In place of these provisions, CMC reserved authority to revise the bylaws to its "sole member, Fidelity Health Alliance." Then, on February 23, 1994 -- one day after the documents establishing the abolition of its Board of Trustees had been filed with the Secretary of State -- CMC, purportedly by vote of its trustees, amended its Articles of Agreement by substituting "Optima Health, Inc." for "Fidelity Health Alliance," and added a new article stating that "The sole member of the corporation is Optima Health, Inc." This document was filed with the Secretary of State on March 19, 1994.
Optima's creation, then use, of corporate memberships to effectuate the 1994 merger of Fidelity Health Alliance into Optima Health, Inc. raises serious questions regarding the extent of Optima's authority to own and control CMC and Elliot. Although CMC's amended Articles purport to establish Fidelity Health Alliance and, subsequently, Optima Health, Inc. as its "sole member," the standards for "membership" or for issuance or redemption of membership certificates are not contained within CMC's Articles of Agreement, as required under RSA 292:2, II-a. Thus, the "membership" status purportedly conferred on Fidelity Health Alliance and Optima Health, Inc. by the February 1994 amendments to CMC's Articles does not appear to comply with the statute.(55)
Additionally, the purported transfer of "sole membership" status from Fidelity to Optima Health, Inc. also is problematic because the trustees voted to approve the change only after the board had abolished itself and all of its authority, and documents to that effect had already been placed on public record by filing with the Secretary of State.(56)
As a result of these apparent defects in corporate documentation, and the sequence of events which led to a vote approving transfer of sole membership status in CMC by a legally non-existent board of trustees, CMC may have been left with no legally valid member and no board of trustees. Optima Health, Inc.'s control over the assets and governance of CMC since 1994 may, therefore, lack legal foundation.
b. Elliot Hospital
Elliot Hospital's corporate existence was originally established by statute in 1881, in accordance with the will of Mary Elizabeth Elliot. The act creating Elliot Hospital appointed trustees, as specified in Mary Elliot's will. These included the Mayor of Manchester and persons chosen by each of six Protestant churches in Manchester.
The only recorded filing with the Secretary of State for Elliot Hospital (other than mandatory reports, and statements reflecting increases in the total value of property the hospital can hold) is an amended Constitution and Bylaws which dates from 1958. This filing uses the term "members" to denote trustees, and provides that there will be "not less than sixteen." The purposes section of the Constitution is expanded from the original statutory language, and includes the determination of the policies of the institution with relation to community needs, maintenance of proper professional standards, directing administrative personnel, and adequate financing and business-like control of expenditure. Other than mandatory reports, no documents have been filed with the Secretary of State with respect to Elliot Hospital since 1974.
Elliot Health Systems was established in 1983 (under the name Health Northeast, Inc.) as a 501(c)(3) supporting institution for Elliot Hospital. Conspicuously missing from the public record, however, is any document which purports to effectively cede control of the governance or assets of Elliot Hospital to Elliot Health Systems. Indeed, there is nothing in the recorded filings of either Elliot Hospital or of Elliot Health Systems which indicates that Elliot Health Systems owned or controlled Elliot Hospital or that Optima presently holds such authority.
Certain documents, not publicly filed, but provided to us for purposes of this review, do suggest that Elliot Health Systems had a substantial degree of control over Elliot at the time of the merger and that the Elliot Board may have voted to accept Optima as its "sole member." A 1993 constitution and bylaws for Elliot Hospital indicate that while prior to the merger, Elliot Health Systems was not designated as a "member," it did have authority to appoint, and to remove without cause, 3/4 of Elliot Hospital's board members.(57) Under the 1993 constitution, amendments to Elliot's constitution or bylaws required the approval of Elliot Health Systems.(58) On the day of the merger, the Elliot trustees voted to amend Elliot Hospital's constitution to make Optima Health, Inc. the sole member of Elliot Hospital, and to substitute Optima Health, Inc. for all references to Elliot Health Systems. None of these documents are on file with the Secretary of State, nor did the copies reviewed by this office include a certification of adoption. Further, as with the amendments to CMC's Articles of Agreement, the Elliot amendments shed no light on the duties or responsibilities of Optima as the "sole member" of Elliot Hospital.
c. Implications For Optima
The above defects in corporate organization and Optima's failure to place all relevant corporate documents on record with the Secretary of State(59) raise significant questions regarding the capacity of Optima Health, Inc. to control the governance, and to control or dispose of the assets of either Elliot or CMC. Accordingly, the 1994 transfer of corporate powers from the hospitals to Optima Health, Inc. and the 1995 transformation of the hospitals' respective boards of trustees into "mirror boards" of limited authority are also subject to question. Finally, Optima Health, Inc.'s participation as a member of the Optima Healthcare regional joint operating company presents similar legal issues concerning the transfer of operational control of the hospitals or their assets to that entity.
B. Optima Has Effectively Terminated The Charitable Trusts Of Elliot And CMC By Merging Their Governance Structures And Operations Into A Regional System
These corporate issues are eclipsed in importance by Optima's post-1994 actions regarding the stewardship of the assets and charitable missions of Manchester's two hospitals. These issues fall into two categories:
First, Optima failed to include the community and the Director of Charitable Trusts in crucial decisions, including substantial changes in the governance and organization of the two community hospitals and consolidation of both hospitals' acute care services at a single site. Indeed, Optima representatives have not fully informed the public or the Director of Charitable Trusts regarding its plans, nor have they provided financial or other supporting analysis for its decisions. Optima's failure to communicate with and to involve the public has resulted in an apparent repudiation of promises and commitments made at the time of the 1994 supporting organizations merger. Such promises include:
* Optima's public commitment to maintain CMC and Elliot as distinct, community-governed acute care hospitals;
* Optima's public commitment to preserve local control and governance of both Elliot and CMC;
* Optima's public commitment to preserve the distinct charitable and religious identities of both Elliot and CMC as separate elements of a unified health care system; and
* Optima's public commitment to establish a system of accountability to the community to ensure that savings achieved from the 1994 merger would be redirected back into the community.
Second, through the aggregate of its actions, including relocating services, expansion of facilities, changes in the use of facilities, changes in governance and structure, and corporate reorganization into a regional holding company, Optima has at a minimum substantially altered, if not effectively terminated, the distinct charitable identities of Elliot Hospital and CMC. It has done so without seeking the approval of the Probate Court through an action for cy pres or deviation, which are the appropriate legal processes for review of such action. Based on our review of the documents submitted to this office, Optima does not appear to have met the legal standard for cy pres, termination of, or deviation from a charitable trust with respect to either Elliot or CMC. This is so because:
* Optima has made no showing based upon financial analysis that it is illegal, impossible or impracticable to continue the distinct charitable mission of CMC as an acute care community hospital serving the Manchester community. Despite its statement that Manchester is too small a community to support two acute care hospitals, Optima's own financial analysis projects that $150 million of cost savings could be achieved by consolidating certain services while still operating two acute care hospitals. Indeed, Optima did not conduct a post-merger financial analysis of the option of continuing operation of CMC as an acute care hospital, but rather treated consolidation of acute services at a single site as the sole option available after the merger to achieve the projected savings.(60)
* Optima has not defined a clear charitable mission or other identifiable attributes for the successor integrated acute care hospital. Optima's failure at the time of the 1994 merger to forthrightly address the divergence between the hospitals in practices concerning pregnancy termination has led to profound confusion within and outside of Optima regarding the religious and ethical tenets affecting the availability of health care services for the Manchester community.
* This tension has been particularly acute with respect to abortion and reproductive services, where statements made by Optima representatives at the time of the merger that Elliot's practices were consistent with Catholic ethical doctrine have led to the promulgation -- three years later -- of a vague, ad hoc policy regarding abortion and the application of religious doctrine to health services within Optima's integrated acute care facility. The confused and often unclear policies of the consolidated acute care facility appear in many instances to be inconsistent with the established identities of both Elliot and CMC.
1. Optima Has Failed To Inform And Include The Community And The Director Of Charitable Trusts Regarding The Charitable Identities Of CMC And Elliot
It is a fundamental tenet of charitable trust law that a charitable institution may not radically alter or terminate its charitable mission without notification to the Director of Charitable Trusts, and without seeking approval of the change in mission from the Probate Court by an action for cy pres or deviation. It is equally fundamental that the social contract that binds a charitable trust to its served community includes a duty of candor and accuracy. We conclude that Optima, by integrating the hospitals into a single acute care facility and substantively changing the governance and character of the hospitals, effectively terminated the distinct charitable missions of CMC and the distinct charitable identities of CMC and Elliot as community hospitals. Optima did this without appropriate legal process and, most disturbingly, without informing its served community with candor and accuracy of its plans and actions.
a. Consolidation Of Acute Care Services At A Single Site
i. Pre-Merger Public Statements
It is clear from both the public and regulatory record that the 1994 supporting organizations merger was permitted to go forward, and received broad public support, based in large part on the common public assumption that the merger would preserve the distinct operations and identities of CMC and Elliot Hospital.(61) Widely reported pre-merger statements by Sylvio Dupuis and Scott Goodspeed, presidents of CMC and Elliot Hospital, respectively, focused on developing the distinct missions and characters of each hospital under unified holding company management, as "centers of excellence," each emphasizing particular specialties.(62) Indeed, the pre-merger Memorandum of Understanding between Fidelity Health Alliance and Elliot Health Systems identifies as one purpose of the merger "[t]o" reflect in the policies and practices of a new integrated health care system the merger of two equals who respect the standards and principles by which each is presently governed.(63)
This message was communicated in a variety of forums. At a September 1993 public hearing before the Manchester Board of Aldermen, Phillip Ryan, President and CEO of Elliot Health Systems, and Robert Cholette, President and CEO of Fidelity Health Alliance, made a joint presentation regarding the proposed merger. At one point, Mr. Cholette described the proposed merger as follows:
Here we are considering bringing the two holding companies together to form one systems corporation and this systems corporation, this holding company would be the parent company to not only the Elliot Hospital and the Catholic Medical Center, but to Hillcrest Terrace, to the One-Day Surgery Center, the Convenient Med-Care and the NH Medical Lab, all of the companies that are owned by both organizations and there are probably 17 or 18 such companies. This holding company, this new systems corporation, would be non-profit and it would be a partnership of equals. We would come together with equal representation to govern this new heath care system for greater Manchester.(64)
Later in the same presentation, Mr. Cholette responded to Alderman Buckley's question of whether there would continue to be two acute care centers after the merger by stating only that, "some of the major service areas will be unified." Mr. Ryan immediately emphasized this point, stating that "a lot of these savings [from the proposed merger] come from equipment savings as well as avoiding the need to purchase duplicate equipment, so if you have all of obstetrics in one area and all of cancer care in one area you can do some things from a cost as well as a quality point of view by unifying. Those would be tougher for two separate operations to do.(65)
In statements to the public press, the FTC, and the Board of Aldermen, Optima officials repeatedly represented that the projected merger would result in savings of $150 million over a ten year period.(66) This estimate appears to have been based on a pre-merger financial analysis conducted by Ernst & Young to analyze the potential financial benefits resulting from different levels of consolidation and integration.
Ernst & Young designed its study around three different options and compared the expected range of potential cost savings from each option:
* Option 1 - consolidation of the supporting organizations and certain overhead;
* Option 2 - service consolidation, while still operating two acute care sites; and
* Option 3 - full consolidation of acute care at one site with no new construction.
Significantly, Ernst & Young estimated that the second option, service consolidation while still operating two acute care sites, would produce approximately $150 million in savings over ten years. In fact, in a 1993 meeting with the U.S. Department of Justice Staff, Optima's attorney identified the specific acute care services which each hospital would provide.
During 1993, Fidelity Health Alliance and Elliot Health Systems management actively solicited members of the medical staffs of the two hospitals to submit letters of support for the merger to the Federal Trade Commission. To elicit physician support, management personally assured the physicians that Optima would continue to operate two acute care hospitals after the merger.(67)
It is apparent that public support for the 1994 supporting organizations merger hinged in large part on the common public understanding that the merger would result in significant savings while still preserving the distinct and independent identities of both Elliot Hospital and CMC. In his letter of support for the 1994 merger, U.S. Senator Judd Gregg wrote:
The new corporation will be governed by members of the local community, just as the separate entities are now. This will ensure continued responsiveness to community needs.
Joseph McCarron, President of Healthcare Concepts, Inc. wrote:
The merger will further enhance the two health care systems which are already largely complementary in the services they provide yet will preserve the valued identities and reputations of the two hospital institutions ... [The] continuity of the extensive community oversight and participation in the governance of the merged system will assure that savings are passed on to the community.
Numerous other letters from physicians and community members, which Optima included in submissions to the U.S. Department of Justice and the New Hampshire Attorney General's Office in connection with these agencies' antitrust reviews of the proposed merger, offer support to the concept of local governance and elimination of duplicative costs, while still preserving the essential identity and missions of the two hospitals.(68)
ii. Post-Merger Decision To Consolidate Acute Care Services At A Single Site
Notwithstanding the public's understanding of the nature and effect of the supporting organizations merger, Optima has acted with the apparent belief that the 1994 merger gave it authority not only to consolidate the supporting organizations, and to amend the corporate governance structure of the charitable hospitals, but also to change the core mission of CMC, and to relocate services and facilities at will.
Although the 1993 Memorandum of Understanding and the 1994 merger documents acknowledge the separateness of the Catholic elements of the system and speak of their preservation, Optima management took steps immediately after the merger to reduce the separate hospitals to subsidiary elements within the Optima Health system.(69) Optima internally renamed CMC and Elliot as "Optima West Side" and "Optima East Side," with the traditional names for the hospitals retained publicly for the hospitals as "dba's" for Optima. In 1996, Optima registered the trade names "CMC" and "Elliot Hospital" with the Secretary of State.(70)
On August 17, 1994, less than six months after the supporting organizations merger, Optima management outlined and presented a facilities work plan which set January 1, 1995 as the deadline for the identification of a single acute care site.(71) In post-merger submissions to governmental agencies, and in statements to the public, Optima represented that the decision to consolidate all acute care services at a single site occurred as a result of extensive financial analysis and clinical analysis by physician and other employee work groups.(72) In interviews with this office, Optima representatives said that its physicians made the decision to consolidate acute care services at a single site through their work on systems consolidation subcommittees.(73) The facts suggest otherwise.
Optima's attribution of the consolidation decision to its physicians does not accurately reflect the actual components or sequence of Optima's decision-making process as reflected in its board minutes and subcommittee minutes. Although Optima did form systems consolidation subcommittees, the decision to consolidate services at a single acute care site was made before the systems consolidation subcommittees completed their work. The record indicates that Optima's systems consolidation committees were in fact charged, not with determining whether to consolidate all acute care services at a single site, but with how to implement management's decision to do so.(74)
In light of Optima's assertion that merger savings could not be achieved without consolidation at a single acute care site, and in view of Optima's statement that its decision to consolidate was made in response to "rapid" changes in health care, Optima's election not to conduct any post-merger financial analysis of the effects of a proposed consolidation of acute care services at a single site is particularly significant. Optima relied on the same studies that before the merger showed cost savings of $150 million with two acute care sites to demonstrate, after the merger, that these cost savings could not be achieved without consolidation of acute care at a single site.(75)
In its CON application Optima states that compelling post-merger studies left it with no real choice but to consolidate acute care at a single site.(76) If Optima conducted such studies, they were not provided in connection with this review. Rather, Optima's contention that "only full integration of clinical services will result in $150 million of savings in operating expenses over a ten year period,(77) appears to be based solely upon the pre-merger financial analysis. However, this statement is not supported by the pre-merger Ernst & Young Study, which had predicted prior to the merger that $150 million could be saved from elimination of duplicative services between hospitals without consolidation at a single acute care site.
2. Optima Violated Its Commitment To Maintain Community Governance By Stripping The Hospitals' Boards Of Their Authority
In the wake of the 1994 supporting organizations merger, Optima has substantially changed the organizational structure of its hospital "subsidiaries," essentially stripping them of all independent authority, and conferring that authority on Optima Healthcare.
Optima accomplished this in several stages. After the merger, Optima made immediate efforts to exert control over its hospital "subsidiaries" through changes, some of which may have been legally ineffective, to CMC's and Elliot's governing documents. Then, in November, 1995, Optima Health, Inc. reorganized its own corporate structure and the corporate structure of the hospitals. It did so first by downsizing its own Board of Trustees -- which had previously consisted of all trustees of Fidelity Health Alliance and Elliot Health Systems -- from thirty-six to sixteen members and eliminating the prior requirement that seventy percent of its trustees come from the local community. At the same time, it restructured the hospital boards into identical "mirror boards," while retaining most authority for the conduct of hospital affairs and the control of the hospitals' assets in itself.(78)
Finally, in January 1997, Optima Health, Inc. affiliated with Covenant Health Systems to form Optima Healthcare, a regional joint operating company embracing the operations of St. Joseph's Hospital in Nashua, as well as Elliot and CMC.(79) Under the Joint Operating Agreement governing Optima Healthcare, most corporate powers of Optima Health, Inc. have been ceded to the regional institution. The two hospitals themselves retain almost no independent function beyond credentialing and a limited capacity to establish specific clinical policies and directives, which are subject to approval by the board of Optima Healthcare. Under the JOA, senior managers of the hospitals are to be employed not by the hospitals, but by Optima Healthcare.(80)
As amended, the current bylaws of Elliot and CMC are nearly identical; the two are governed by "mirror boards" of identical composition, selected and controlled by the board of Optima Health, Inc., which in turn is controlled by Optima Healthcare. The Optima Health, Inc. board members, all of whom under the bylaws are also members of the subsidiary boards, serve as the executive committee of the Elliot and CMC boards, and the Optima Health, Inc. officers serve as the officers of the subsidiary boards. The President of Optima Healthcare Corporation, ex-officio, is also the president of Elliot and CMC. The bylaws allow each of the Elliot and CMC boards to "delegate its authority with respect to the operation of the Corporation to another entity organized for the purpose of operating and managing the Corporation and other affiliated entities on an integrated basis¼." The JOA mandates that CMC and Elliot as "Network Members" implement the decisions reached by the Optima Healthcare board.
The "mirror board" governance structure deviates substantially from the pre-merger community-based corporate structure of the hospitals, and from the pre-merger guarantees of local control and governance.(81) Under the 1994 and 1995 amendments and the 1997 JOA, the hospitals are no longer controlled by boards chosen with any guarantee of meaningful local representation. Optima has ceded to Optima Healthcare control over the operating budgets of the hospitals, control over the strategic planning and location and type of services provided, and control of the disposition of profits.(82)
The changed bylaws and corporate structure of CMC appear to be inconsistent with that institution's charitable mission, as expressed in its Articles. Although the CMC bylaws state that CMC's purpose is to maintain the identity of CMC as a Catholic institution, CMC's governing board now includes equal numbers of Catholic and Protestant representatives.
Finally the "mirror bylaws" have also engendered confusion as to the applicability of Catholic Ethical doctrine to the delivery of health care services throughout the Optima network. On the one hand, the Elliot bylaws provide that the Network Ethics Committee, which serves the entire Optima and Optima Healthcare Networks, is responsible for acting "as an advisory group to the President on bioethical issues not previously covered in the Ethical and Religious Directives for Catholic Health Facilities." On the other hand, the bylaws provide that "in the case of the individual patient, the physician duly appointed to the Medical Staff shall have full authority and responsibility for the care of the patient subject only to such limitations as the Directors may formally impose and to the Bylaws, rules and regulations for the Medical Staff adopted by the Staff and Directors." Thus, neither the Elliot nor the CMC bylaws require -- as the CMC bylaws did before the merger -- that physicians practicing at CMC abide by the Ethical Directives.(83)
C. Optima Has Failed To Meet The Standard For Termination Of Or Deviation From The Charitable Missions Of Elliot And CMC
The legal processes of cy pres and deviation are public actions in which the Probate Court provides public oversight of decisions by trustees of a charity to terminate or radically change the charity's fundamental mission or identity. Despite fundamentally changing the organization and governance of Elliot and CMC, and the mission of CMC, Optima has not applied to the Probate Court for approval. As a result, Optima has not been required to demonstrate to the community it serves that these changes are necessary or appropriate under applicable legal standards.
Optima's failure to seek Court approval for its decisions regarding the charitable mission, organization and governance of the hospitals has led to a series of unexamined actions, which, on the basis of the materials submitted to and reviewed by this office, do not appear to be warranted under either the doctrines of cy pres or deviation. This is so for the following reasons:
* The only financial analysis conducted by Optima demonstrates that $150 million of cost savings could be achieved over a ten year period while still operating two acute care sites.
* No financial analysis supports the claim that cost savings can only be achieved by consolidation at a single acute care site.
* The pre-merger financial analysis does not establish that it is illegal, impracticable or impossible to preserve the distinct missions and operations of CMC and Elliot.
* Optima has yet to fully define the mission and attributes of the unified institution into which it seeks to merge Elliot and CMC, but rather appears to be defining those attributes on an ad hoc basis in response to perceived crises. It is, therefore, impossible to determine whether the unified institution has or will have a charitable mission or identity consistent with the missions and identities of either hospital. Optima has maintained that the specifics of governance of the successor organization are confidential business information.
1. Optima's Application For A Certificate Of Need For Consolidation Of Acute Care Services Of Elliot And CMC Did Not Address The Issue Of Whether Optima May Terminate Or Deviate From The Charitable Missions Of The Hospitals
In interviews with this office, Optima officials have consistently maintained that through the CON process at the Health Services Planning and Review Board, they received all necessary governmental approvals for the consolidation of acute care services of the two hospitals at a single site. This argument ignores the fundamental legal issues raised by the charitable status of the hospitals.
The CON analysis conducted by the Health Services Planning and Review Board was directed at, and limited to, the statutory criteria for approval of a certificate of need under RSA 151-C:7, and related administrative rules. In general, these criteria are applied to determine whether a proposed expenditure of health care resources meets a public need, and is consistent with quality health care for the affected community. The CON process does not distinguish between charitable and for-profit institutions and is not directed at issues relating to the charitable missions of health care institutions organized as charitable trusts. Under New Hampshire law, issues pertaining to the charitable mission of the hospitals are within the exclusive province of the Probate Court and the Director of Charitable trusts through actions for cy pres and deviation.
This office has reviewed the pre-merger Ernst & Young study, a pre-merger study conducted by the personnel of the two hospitals, and the Systems Consolidation Committee Reports generated between September 1994 and the March 1995 announcement of a decision to consolidate all acute care services of Elliot Hospital and CMC onto the Elliot campus. We have concluded that the documents provided to us -- which Optima has represented to this office and to the Health Services Planning and Review Board constituted the basis for its decision -- do not support termination or deviation from the charitable missions and identities of the community hospitals under the principles of cy pres and deviation.
2. Optima Has Not Demonstrated That It Is Impossible, Impracticable Or Illegal To Preserve The Distinct Missions And Operations Of Elliot And CMC As Charitable Trusts
Prior to the 1994 supporting organizations merger, Fidelity Health Alliance and Elliot Health Systems commissioned and relied on the Ernst & Young study of potential savings to estimate the opportunities for savings available from the proposed merger. As previously discussed, that study recognized $150 million in possible savings from an operational model which preserved the distinct operations and identities of both Elliot and CMC. This report appears to have been the basis of savings estimates which were repeatedly presented by Fidelity and Elliot Health Systems management to the Manchester Board of Aldermen and in other public forums.
Nevertheless, -- and despite public statements suggesting the contrary -- at no time after the merger did Optima conduct a financial analysis of the feasibility of preserving the distinct charitable missions and operations of the hospitals before deciding to consolidate the hospitals into a single institution.
The CON application constitutes Optima's most comprehensive public analysis of the financial basis for its decision to consolidate all acute care services of both hospitals at a single site. The Executive Summary to the CON application describes Optima's decision to consolidate services as arising from "compelling" post-merger analysis, including, in particular, the work of an internal Systems Consolidation Committee convened in September 1994 to analyze consolidation options. In the Executive Summary to its CON application, Optima asserted that "after carefully studying: (1) national and statewide trends; (2) conducting extensive financial feasibility studies; and (3) examining innovative and cutting-edge approaches to quality of care," it concluded that its plan for an integrated health care system in Manchester would achieve economies of scale, improve system efficiency, and produce optimal patient care.(84)
In fact, no post-merger financial analysis of consolidation options appears to have occurred. The Systems Consolidation Committee's work took place only after management had already arrived at the decision to consolidate all acute care services at a single hospital site, and only after management had already targeted January 1, 1995 as the deadline for identifying the acute care site.
Optima's reliance on its pre-merger financial feasibility studies and its Systems Consolidation Committee Reports to support its contentions that "consolidation of acute care services will achieve key economies of scale, resulting in tremendously increased system efficiency and optimal patient care,(85) is particularly troublesome, in that the Ernst & Young study supports the contrary conclusion -- that $150 million of cost savings could be achieved by consolidating certain services while still operating two acute care sites.
a. The Financial And Systems Analyses Relied On By Optima In Its CON Application To Justify Consolidation Of Acute Services Are Not Sufficient To Justify Termination Of Or Deviation From The Charitable Missions Of The Hospitals
The financial or systems analyses performed by Optima do not establish that it is impossible, impracticable or illegal to continue the distinct charitable missions of both Elliot Hospital and CMC through preserving their independent and distinct identities as acute care hospitals. The Ernst & Young study, for example, is nothing more than an estimate of potential savings, arrived at in 1993, several months before the merger of the supporting organizations. Because the proposed merger was under antitrust scrutiny, the parties to the transaction were not permitted to scrutinize each others' financial documentation, but rather relied on Ernst & Young to provide a general estimate of potential savings available from the transaction.(86)
Even so, the Ernst & Young study projected $150 million of cost savings over ten years by consolidating support and administrative services while still operating two acute care sites. Optima did not produce evidence of a post-merger study which contradicts this fundamental assumption on which the original merger of supporting organizations was based. Its description of the studies offered as "compelling" support for its decision to consolidate at a single site is unwarranted for the following reasons:
* Neither the Ernst & Young study nor any post merger systems analysis addresses the capital costs of implementing measures to achieve operating cost savings from consolidation at a single site. Cost savings projected to result from the consolidation of acute care at a single site do not factor in increased capital costs.
* Neither the Ernst & Young study nor any post merger systems analysis supports Optima's assertion in its CON application that over 70 percent of its projected savings are attributable to the consolidation of acute care services at one site. There is no statement or analysis in that study or any study provided by Optima that links 70 percent of the cost savings to consolidation of acute care at one site. To the contrary, the Ernst & Young study projects $150 million of savings with acute care at two sites. With consolidation of acute care at one site, and assuming no increased capital costs, the Ernst & Young study projects $250 million of savings. Thus, according to Ernst & Young, 60 percent of the maximum projected cost savings can be realized with acute care at two sites.
* The reports of the systems consolidation subcommittees do not contain any financial analysis to support possible cost savings. While information contained in the Systems Consolidation Committee materials is data that with other information and analysis could serve as a basis for a financial analysis, it is not itself a financial analysis. Neither the documents provided by Optima nor the documents submitted to the Health Services Planning and Review Board contain a focused report summarizing and analyzing the conclusions reached by the systems consolidation subcommittees.
* Neither the Ernst & Young study nor any post merger systems analysis addresses debt service for new construction and renovation as an offset against claimed savings from consolidation. The documents produced by Optima do not contain any financial analysis or data substantiating Optima's claim that the renovation of Elliot Hospital's campus will pay for itself in approximately five years with $42 million in net operating savings.
* In its CON application, Optima states that national and statewide trends support consolidation of acute care services at a single site. The documents submitted by Optima contain no evidence or analysis of "trends" which would establish the financial advantage of consolidation at a single site or the impossibility or impracticality of the continued operation of Catholic Medical Center.
Audited financial reports of Catholic Medical Center for 1992 and 1993 reveal revenues and gains in excess of expenses of approximately $5.9 million and $7.4 million, and positive cash flows of $8.7 and $10.1 million respectively. Audited financials for Elliot Hospital for 1992 show a positive cash flow of $5.5 million. This information suggests that the two hospitals were independently profitable in the years leading up to the merger. This trend appears to have continued through 1996 to the extent that Optima's financial reports continue to show each hospital generating operating surpluses. While some portion of such surplus may be attributable to post-merger savings resulting from systems consolidations, Optima has not demonstrated that the hospitals cannot maintain independent viability through operational or administrative consolidation short of its current plan to consolidate all acute care services on the Elliot campus.
b. Optima's Analysis Does Not Meet The Burden Necessary To Terminate Or Deviate From The Charitable Missions Of The Hospitals
The decision of the CON Board finds that the rationale for the consolidation of the inpatient acute care services is based on a study conducted by the two hospitals ¼ to determine the most appropriate location to consolidate all inpatient acute care services into one comprehensive hospital in the city of Manchester. The [Elliot Campus] site was chosen as the hospital of choice based on a number of inefficiencies associated with the site and spatial capabilities of the CMC facility and campus.
Finding No. 7. The criteria Optima applied in selecting the single acute care site included the size of the physical site, the availability of parking, the condition of the general facility, the ability of the site to accommodate physicians' offices, the renovation costs associated with consolidation at a single facility, and the carrying costs of the vacant site. Optima's site based criteria do not establish an appropriate rationale under the law of charitable trusts to justify the termination of Catholic Medical Center as an acute care facility. Simply put, a charitable hospital may not be terminated because another location may be more convenient or have access to better parking.
If a standard of convenience were applied to justify a substantial change in the purposes and mission of a charitable trust, no legal impediment would prevent Optima or Optima Healthcare from closing CMC at a later date and consolidating all services -- acute and non-acute -- at the Elliot campus. Indeed, this office has reviewed long-range planning documents which suggest complete consolidation of all hospital services, both acute and non-acute, at the Elliot Hospital campus as a long-term option.(87) The Joint Operating Agreement reposes full authority in Optima Healthcare to develop a strategic plan for the location of services and binds the "Network Members" to adhere to the strategic plan.(88)
Neither the Probate Court nor the Director of Charitable Trusts has ever accepted convenience as a legal standard to justify the termination of, or substantial change in the purposes of, a charitable trust. By ignoring the legal processes necessary to terminate or deviate from the distinct charitable missions and identities of the community-based hospitals, Optima has proceeded on the basis of inadequate financial analysis to transfer all acute care services from Catholic Medical Center, to reduce the licensed beds at CMC from 330 to 110, to strip the hospital boards of their authority, to sell property belonging to CMC,(89) and to exercise virtually complete legal authority over the finances and assets of CMC and Elliot Hospital.
We conclude that these actions constitute such a significant change of mission, governance and identity of both Elliot Hospital and CMC as to require the approval of the Director of Charitable Trusts and the Probate Court pursuant to RSA 547:3-d or RSA 547:3-h. Optima has not properly made the case that there is any legally cognizable justification for such changes.
3. Optima Has Not Demonstrated That The Unified Healthcare Institution It Seeks To Create Has A Charitable Identity Or Attributes Consistent With Either Elliot Or CMC
If a charity must be terminated or its mission fundamentally changed, under the doctrines of cy pres or deviation, the Probate Court is charged with determining that the charitable institution or substituted use to which the charity's assets are to be committed is as similar as possible to the purpose of the original trust. Optima has not demonstrated that the unified health care institution it seeks to substitute for the distinct community-based institutions of Elliot Hospital and CMC has a charitable mission or attributes consistent with either hospital.
In a sense, this failure is at the heart of the passionate concerns about Optima and the future of the hospitals which have been raised within the Manchester community by the Save CMC organization and others. In the years following the 1994 supporting organizations merger, this failure has manifested itself in:
* Optima's seeming disregard for the preservation of CMC's traditional commitment to religious health care; and
* Optima's vague and ad hoc application of Catholic ethical doctrines to the delivery of health care services -- including certain abortion procedures -- at Elliot Hospital.
a. Optima Has Fundamentally Altered The Nature Of CMC As A Religious Acute Care Hospital
The corporate structures adopted by Optima -- including, in particular, the establishment of mirror boards for Elliot and CMC and the ceding of virtually all independent authority from the hospital boards to Optima Health, Inc. and Optima Healthcare -- has had the effect of blurring traditional and important distinctions between the charitable missions of the two hospitals. In essence, CMC has been transformed into a non-acute care element of a larger secular hospital organization. This runs counter to the hospital's traditional mission. The 1974 CMC Articles of Agreement specifically describe CMC as an agency of the Roman Catholic Church and stress its unique spiritual mission to provide health care to those in need in a manner guided by and consistent with the tenets of the Roman Catholic Church as expressed in the Ethical Directives.
In testimony to the Attorney General's Office, Optima officials asserted, albeit with some confusion and with the notable exception of abortion policy, that the Directives themselves do not apply to the Elliot Hospital, but apply only within the CMC building. While this distinction might have merit in an organization in which CMC maintained independent viability as an acute care hospital, it has little meaning for a CMC whose health care mission has been reduced to a limited number of non-acute care functions.(90)
Optima has not provided this office with documents or evidence which indicate that the historical applicability of the Ethical Directives at CMC was ever actively considered by its constituent boards in connection with the consolidation of acute care services at a single site. Indeed, this issue appears to have gone unaddressed until the 1996 controversy regarding the availability of certain abortion procedures at Elliot Hospital led to promulgation of a controversial policy regarding religious principles and abortion procedures. This policy and statements made to this office by Optima management regarding the applicability of the Ethical Directives, appear to have been formulated as a defensive response to the recent controversy. Such a position betrays a fundamental lack of understanding and respect for the totality of the Ethical Directives as a guide to the religious underpinnings of Catholic health care.
This attitude is underscored by a conversation between Robert Cholette, CEO of Fidelity Health Alliance and later of Optima Health, Inc. and Optima Healthcare, and Dr. Maria Alicia Davila, a physician long associated with CMC. Dr. Davila testified that, prior to the 1994 merger, Mr. Cholette assured her that the proposed merger would not result in closure or termination of CMC. In the course of that conversation, Dr. Davila stated her conviction that Elliot Hospital and Catholic Medical Center could not be merged because of their different cultures. To which Mr. Cholette replied, "That's not true. These are just buildings." She in turn responded, "Excuse me? You mean an institution does not have a soul?"(91)
b. Optima Has Not Clarified Whether Health Care Services In The Merged Institutions Will Be Altered Or Curtailed To Conform With Religious Doctrine
The blurring of the distinct charitable identities of Elliot Hospital and CMC is equally troubling with respect to Elliot Hospital, a secular institution with roots in Manchester's Protestant Community. As the ongoing controversy regarding abortion procedures indicates, there is considerable concern within the medical and general communities of greater Manchester as to whether Catholic doctrine may come to control the provision of health care at Elliot Hospital. Necessarily, this issue is most acutely drawn in the area of reproductive services and abortion, though it may also have implications for other areas of health care, including care at the end of life.
In November 1997, in response to the disclosure that Elliot Hospital's practices with respect to abortion did not conform to Catholic doctrine or the Ethical Directives, the Trustees of the mirror boards, acting as Trustees of Elliot Hospital, adopted a policy which banned termination of pregnancy at Elliot Hospital for any reason except to save the life of the mother.(92) This policy was intended to conform Elliot's policies with the Ethical Directives regarding termination of pregnancies by banning certain procedures, rarely but consistently performed at Elliot, where pregnancies were terminated due to non-lethal fetal abnormalities.(93) The Elliot Trustees sought to address the larger issue of the impact of religious principles and directives on health care at the unified acute care hospital by including within the announced policy several statements purporting to limit the application and influence of religious doctrine to health care within the hospital.
Optima's failure to address the complex ethical issues raised by the merger of a religious and a secular hospital forthrightly, publicly and on the basis of accurate information regarding practices at both hospitals has led to the apparent compromise of the charitable identities and missions of both institutions, and has resulted in the invention of an ad hoc ethical and religious policy which does not fully address the issues raised. Indeed, the provisional nature of the policy was evident in interviews with Optima personnel in which no member of Optima's Board or present or past management appeared able to articulate the scope of the policy or the relation of the Ethical Directives to Elliot Hospital or to the unified acute care institution being formed on the Elliot campus.(94)
Similarly, members of Optima's management and boards of trustees interviewed in connection with this review demonstrated confusion concerning the effect of the recently announced policy on availability of specific procedures, such as routine administration of abortifacient drugs to rape victims.(95) At least two physicians interviewed expressed concern that the policy would affect the treatment options available for extrauterine or ectopic pregnancies in a manner they felt was inconsistent with proper medical treatment.(96) No member of Optima's boards or management interviewed by this office could define the effect of the policy on this issue.(97)
The 1994 supporting organizations merger agreement provides that "Optima will not be identified or operated under the auspices or control of any particular religious organization or group," and that Optima will "maintain the identity of Catholic Medical Center as a Catholic Institution." Optima's approach has been to treat Catholic Medical Center as a separate corporate entity for some purposes and as part of a single integrated hospital for other purposes.
By consolidating acute care at a single location, restructuring corporate governance, and transferring the authority of the local governing boards to a regional consortium, Optima has effectively terminated the separate existence of both Elliot and CMC as community-based charitable hospitals with distinct identities and missions. The mission of CMC as a Catholic hospital has not been maintained. The adoption of a termination of pregnancy policy that is consistent with Catholic doctrine for Elliot does not fulfill the obligation that Optima undertook to maintain the identity of CMC as a Catholic institution. It does, however, compromise Elliot's traditionally secular approach to medicine. The logical and legal incoherence of this approach is evident.
c. Optima Has Failed To Fulfill Its Promise That It Would Be Publicly Accountable For Its Claims That The Merger Of Elliot And CMC Would Produce Savings And That It Would Return Those Savings To The Community
Before the 1994 supporting organizations merger, Fidelity Health Alliance and Elliot Health Systems management repeatedly stated that the merger would result in savings of over $150 million in ten years. Optima said that integration would produce cost savings of over $3,600 for each household in Manchester and over $1,000 for each household in Hillsborough County,(98) and pledged to establish a program of public accountability to demonstrate that the "hospitals are vigorously pursuing cost efficiencies and are otherwise continuing their mission to be a public servant to the community."(99)
i. Optima Has Not Produced Evidence That Consolidation Of The Hospitals Has Produced Or Will Produce Cost Savings
In connection with this review, Optima provided no evidence that it has fulfilled its promise to institute a program of public accountability demonstrating cost efficiencies. When Optima was asked to produce the "public accountability" documents that would demonstrate savings from the merger, Optima provided copies of "merger report cards" prepared for and presented to its trustees on a quarterly basis. Until called for by this review, these "report cards" have been treated by Optima as confidential business information unavailable to the public.(100)
Our review of the "report cards," prepared by Optima for its Board of Trustees leads us to the conclusion that the report cards do not fulfill the pre-merger promise of a public accountability program. First, they have never been made available to the public until this review. Second, the report cards neither contain nor reflect contemporary financial analysis or data by which to evaluate the accuracy of any claimed savings.
Essentially, the report cards offer nothing other than the repeated conclusory assertion that because consolidations have taken place that were predicted by the 1993 Ernst & Young study as potential sources of savings, those savings have in fact been realized. Thus, purported cost savings are simply "reported" based on the same approach that was used to project anticipated cost savings: that is, to estimate gross savings achievable from consolidation of specified services without actual adjustments to reflect cost saved by unit of service actually delivered. While Optima's method of describing cost savings may be acceptable for estimating or projecting potential cost savings on a prospective basis, it is not a reliable or accurate method for documenting or reporting actual cost savings.(101)
Because the merger report cards are based solely on the pre-merger projections, they do not take into consideration a variety of independent factors which may relate or contribute to claimed savings. These include the reduced variable costs which may be attributable to a decline in patient census. In a hospital context, a decrease in patient census utilization may result in lower operating costs without corresponding efficiency gains. Stated simply, when a hospital has fewer patients, it may be able to recognize cost savings through consolidation or elimination of staff functions and other overhead costs. Because Optima's report cards do not account for other factors such as reductions in patient census from pre-merger levels, it cannot be determined whether Optima's claimed cost reductions result from cost efficiencies flowing from the merger and subsequent consolidations, from a lower patient census, or, alternatively, whether the claimed cost reductions are more properly attributable to managed care payor structures or other factors independent of the merger.
ii. Optima Has Not Established A Program Of Public Accountability
Before the merger, Optima represented to the Attorney General's Office and the Manchester Board of Aldermen that it would institute an accountability system so that the community could keep score of its successes. Mr. Cholette described the accountability system as a way of "report[ing] to the community number one what our plans were for the year." It would allow the community to determine "just how well we did," and provide evidence that the cost savings would be returned to the community.(102)
Instead of implementing the promised system of public accountability, Optima has refused to make its financial and corporate information available to the public. Not only has Optima not kept score for itself, it has also prevented the community from keeping an independent scorecard of its "successes."
In connection with this review, Optima has claimed that the corporate bylaws of Optima and its subsidiaries are confidential, that organizational materials reflecting its business organization and structure are confidential, that financial feasibility studies submitted to support its claims of cost savings from consolidation of acute care are confidential, that budgets are confidential, that the joint operating agreement with Optima Healthcare is confidential, and that project costs and construction related information pertaining to the ongoing construction at Elliot Hospital are confidential.
In light of this corporate culture of secrecy, it is all but impossible to determine whether Optima has either achieved cost savings or redirected those costs savings back to the community as promised.
VI. CONCLUSION
In 1993, Optima said that the merger of Fidelity and Elliot Health would benefit the Manchester community by redirecting health care dollars, wasted on competition between CMC and Elliot, back to the community. A member of the Catholic Medical Center Board described the purpose of the merger this way:
... the hospitals have worked collaboratively to sponsor the Manchester Community Health Center which provides family centered care regardless of ability to pay¼. Manchester needs more of these services. The dollars spent on competition should be redirected to accomplish benefits for the community.(103)
In letters of support for the merger, the Manchester community echoed this goal of improving health care in Manchester and surrounding communities by ending wasteful competition between its community hospitals.
It was the clear understanding of the community in 1994 that Optima would accomplish this goal by eliminating duplication in administrative and operational costs while still operating two acute care hospitals. Through its statements to the community, Optima fostered the belief that it was committed to investing in the health care of the Manchester community, improving health care services to the indigent, and maintaining a system of accountability to the citizens of Manchester.(104) To elicit broad public support for the merger, Optima acknowledged that it would be governed by its social responsibilities to the Manchester community and its indigent population. In essence, Optima promised the people of Manchester that it would honor the social contract between them and their hospitals, and the people trusted Optima to abide by that promise.
Optima is not a for-profit business accountable to its equity investors. Optima has no shareholders other than the people of the community that founded and support its constituent hospitals. In 1994, when Optima undertook the responsibility of managing two distinct charitable hospitals, each founded by and connected to different communities within the larger community of Manchester, Optima became accountable not only to the Manchester community, but also to the distinct communities which share the traditional values of CMC and Elliot.
By transferring corporate and financial control of Elliot and CMC to a regionally-based organization that is no longer governed by a Board of Trustees drawn exclusively, or even primarily, from the Manchester community, Optima failed to honor its social contract to both the Manchester community as a whole and to the distinct communities whose values are reflected and who are served by CMC and Elliot. It also severed the social contract between CMC and the community served by CMC and its predecessor hospitals by ending CMC's historical mission of ministering to the broad health care needs of its community in a traditionally Catholic setting. By failing to address forthrightly at the time of the original merger, or at any time thereafter, the complex moral and clinical issues involved in the merger of a religious with a secular health care institution, Optima violated the trust of the community that founded and is served by the Elliot Hospital.
Most troubling, Optima has taken all of these steps without engaging in the necessary legal process of cy pres or deviation to determine the legality and practical effect of its decisions on the charitable missions of Elliot and CMC. As a result, it has made a series of decisions that fundamentally alter the charitable identities, governance and missions of Elliot and CMC while effectively excluding from any meaningful dialogue the very populations those hospitals are pledged, and legally bound, to serve.
It is the conclusion of the Attorney General that Optima, as a charitable institution, must seek guidance from the community in developing its vision of quality health care. This cannot occur without dialogue and without inclusion. Unless changed as a result of that dialogue, Optima's decision to terminate or fundamentally alter the charitable missions and identities of CMC and Elliot by combining them into a single health care institution must be reviewed by the Probate Court in the context of a cy pres action.
________________________________________
Philip T. McLaughlin, Attorney General of the State of New Hampshire
Michael S. DeLucia, Director of Charitable Trusts
Leslie J. Ludtke, Associate Attorney General
Walter L. Maroney, Sr. Assistant Attorney General
Jennifer J. Patterson, Assistant Attorney General
1 Meinhard v. Salmon, 164 N.E. 545, 547 (N.Y. Ct. App. 1929) (emphasis added).
2 See RSA 547:3-d.
3 William Donovan letter to Assistant Attorney General Walter Maroney, November 29, 1993, Exhibit 19.
4 Union Leader, 3/20/93 "Cholette said it is unlikely that CMC and Elliot would ever merge."
5 See Hospital Licensing Documents and Summary, Exhibit 5.
6 A comprehensive list of documents reviewed and the witnesses from whom testimony was taken is included in Exhibit 1.
7 Optima asserts that many of the documents which it has submitted to the Attorney General's Office for review are privileged or confidential. See Confidentiality Agreement, Exhibit 26. Documents that Optima has labeled as confidential are identified in Exhibit 1 as confidential; however, other documents listed in Exhibit 1 may also be subject to a claim of privilege or confidentiality. It should be noted that some of the documents that Optima claims are privileged are required by law to be on file as public records. For example, RSA 292:7 requires that a nonprofit corporation file amendments to its articles of agreement with the Secretary of State and town or city clerk. To the extent certain corporate documents developed by Optima affect the Articles of Agreement currently on file, those documents must be filed with the Secretary of State. Optima claims that all corporate governance documents are confidential.
8 New Hampshire law defines a charitable trust as "any fiduciary relationship with respect to property arising as a result of a manifestation of an intention to create it, and subjecting the person by whom the property is held to fiduciary duties to deal with the property ¼ for any charitable, nonprofit, educational, or community purpose." RSA 7:21, II(a)(Supp. 1997). The most recent amendment to this provision became effective on January 1, 1998. The definition in effect between 1987 and 1997 was substantially identical to the quoted language.
9 See RSA 7:19, 7:20, 7:22, 7:24. See also Attorney General v. Rochester Trust Co., 115 N.H. 74 (1975); Souhegan National Bank v. Kenison, 92 N.H. 117 (1942).
10 See, e.g., Queen of Angels Hospital v. Younger, 66 Cal. App. 3d 359 (1977); Holt v. College of Osteopathic Physicians and Surgeons, 61 Cal.2d 750, 754 (1964); Attorney General v. Hahnemann Hospital, 494 N.E.2d 1018, 397 Mass. 820, 835-36 (1985) (charitable hospital could not amend its corporate charter to include additional new grant-making provisions and then devote assets given and amassed for hospital purposes to such grants); Greil Memorial Hospital v. First Alabama Bank of Montgomery, 387 So.2d 778, 781 (Ala. 1980) (gift to charitable organization which operated hospital for treatment of tuberculosis could not pass them to a successor hospital organization which had abandoned that charitable purpose); see generally Riverton Area Fire Protection District v. Riverton Volunteer Fire Dept., 566 N.E.2d 1015 (Ill. App. 1991); Bossen v. Women's Christian National Library Association, 225 S.W.2d 336 (Ark. 1949).
11 IV. A. A. Scott, The Law Of Trusts, sec 384.1 at 2778. See also Holt, 61 Cal.2d at 756-757.
12 See Henry B. Hansmann, Reforming Nonprofit Corporation Law, 129 U. Pa. L.R. 497 (1981).
13 RSA 292:2, III.
14 See Department of Revenue Administration Report on Tax Exempt Property, Exhibit 6.
15 See RSA 7:19, 7:20, 7:22, 7:24.
16 See Attorney General v. Rochester Trust Co., 113 N.H. 74, 76 (1975) ("it is well settled that the attorney general is a necessary party in any proceedings involving cy pres, or deviation or termination of charitable trusts ¼ we hold that the attorney general is not only a necessary party in such cases but may also be the initiating party").
17 See RSA 547:3-d.
18 RSA 547:3-h.
19 RSA 547:3-d.
20 Queen of Angels v. Younger, 66 Cal.3d 359 (1977).
21 The charter of Queen of Angels permitted it to "establish, ¼ own ¼ maintain ¼ and operate a hospital in the City of Los Angeles" and to educate nurses and medical students. The facts showed that from the date when the hospital was incorporated to the date of the lease, the corporation had continuously operated a hospital. In addition, the hospital had represented to the public that it was a hospital in soliciting donations and public support. In its review the court stated, "The articles of incorporation alone -- without resort to additional evidence -- compel the inference that although Queen is entitled to do many things besides operating a hospital, essential to all those other activities is the continued operation of a hospital." Id. at 368.
22 Id. at 368-69.
23 Id., citing Holt v. College of Osteopathic Physicians & Surgeons, 61 Cal.2d 750 (1964). In Holt, three trustees brought an action to enjoin a breach of charitable trust seeking injunctive relief to prevent the threatened change in corporate purpose. The college was incorporated in 1914 to establish and maintain a medical and surgical college in osteopathic medicine; in addition, by charter its members staffed the Los Angeles Osteopathic Hospital and ran clinics using that form of medical treatment. In 1961 the college trustees voted to amend the charter to run and accredit an allopathic medical school at the same facility, eliminating osteopathic medicine from its curriculum. Plaintiffs contended that the trustees' actions had the purpose and effect of abandoning the organization's main charitable purpose, which was to run an osteopathic medical school, and convert it into a school teaching non-osteopathic medicine. Id. at 761.
24 Attorney General v. Winsted Memorial Hospital, Conn. Superior Court, Judicial Dist. at Litchfield, No. CV-96-00711936-S (unreported decision).
25 Rest. 2d of Trusts, sec. 381; G.G. Bogert, The Law of Trusts and Trustees, (2d ed. rev.), sec. 561, at 225-277. IV. A. A. Scott, The Law Of Trusts, sec. 381, at 323-33.
26 In Re Certain Scholarship Funds, 133 N.H. 227, 240 (1990), Brock, C.J., dissenting, and citing Jacobs v. Bean, 99 N.H. 239, 241-42 (1954).
27 See Chwalek v. Dover School Comm., 120 N.H. 864 (1980).
28 1881 N.H. Laws ch. 178.
29 Id.
30 Id; 1909 N.H. Laws ch. 309; 1959 N.H. Laws ch. 357.
31 Articles of Agreement of Catholic Medical Center, Article II.A.
32 Id., Article II.F.
33 Id., Article II.C.
34 Id. (capitalization in original). A copy of the seventy specific "Ethical and Religious Directives of the Catholic Health Facilities," ("Ethical Directives") which integrate Catholic theology and Catholic health care, is attached as Exhibit 22.
35 See, e.g., Ethical Directive no. 3:
In accord with its mission, Catholic health care should distinguish itself by service to and advocacy for those people whose social condition puts them at the margins of our society and makes them particularly vulnerable to discrimination; the poor; the uninsured and the underinsured; children and the unborn; single parents; the elderly, those with incurable diseases and chemical dependencies; racial minorities; immigrants and refugees. In particular, the person with mental or physical disabilities, regardless of the cause or severity, must be treated as a unique person of incomparable worth, with the same right to life and to adequate health care as all other persons.
36 The pre-merger discussions were at arms-length to avoid violating the strict requirements of anti-trust law.
37 A copy of the Merger Agreement is attached as Exhibit 20.
38 Optima, CMC, Elliot Health Systems, and Fidelity Health Alliance were all incorporated as voluntary nonprofit corporations under RSA ch. 292.
39 See, e.g., Letter from Robert Cholette and Phillip Ryan to Representative Zeliff, July 27, 1993, Exhibit 18.
40 Board of Mayor and Aldermen Minutes of September 7, 1993, Exhibit 7.
41 Union Leader, 7/5/93, Scott Goodspeed "¼ we do know we will continue to operate two acute care sites." Sylvio Dupuis, "The fundamental decision has been arrived at to have two acute care sites. It's very important to patients and their families to have access to a wide array of services."
42 Letter, dated November 29, 1993 from William Donovan to Walter L. Maroney.
43 Board of Mayor and Aldermen Minutes, September 7, 1993, Exhibit 7, at 7 (statement of Mr. Cholette).
44 Merger Agreement, Exhibit 20, ¶ 11.
45 Optima Health, Inc. Amended Articles of Agreement, Art. II, at 3. Under the Merger Agreement, Optima was to be "the head of a community based health care system ¼ which has both Catholic and non-Catholic elements. OPTIMA will not be identified as operated under the auspices or control of any particular religious denomination or any other group." Merger Agreement, at ¶ 10.
46 "FHA, EHS, Catholic Medical Center, and Elliot Hospital share a long tradition of appreciating the importance of spiritual, ethical, and moral support in caring for patients. They share a commitment of a respect for life in the delivery of health care services. They are committed to affording their patients the right to address issues of life and death with dignity, with the caring support of family and hospital, and with the best interests of the patient in mind." Id., at ¶ 10.
47 See Medical Staff Resolution of December 27, 1997, Exhibit 11.
48 The "Network Members" include Optima Healthcare and Covenant Health Systems and their tax exempt affiliates. The tax exempt affiliates include CMC, Elliot Hospital, Hillcrest Terrace, Inc., Alliance Resources, Inc., Visiting Nurse Association of Manchester and Southern N.H., Inc., Women's Aid Home, CMC Regional Cardiac Foundation, CMC Physician Practice Association, VNA Home Health and Hospice, VNA Management Service, Inc., VNA Personal Services, Inc., VNA Community Services, Inc., Covenant Health Systems, St. Joseph's Hospital, and the SurgiCenter at St. Joseph's Hospital.
49 See Optima Healthcare Documents, IRS Ruling Request, Exhibit 36, at 19. ("The structure and governance of OHC were largely influenced by the fact that SJH is a Catholic-sponsored organization.").
50 See Optima Healthcare Network; Boards and Management, Exhibit 35; and Joint Operating Agreement, Exhibit 36.c.
51 Elliot Hospital, a corporation created by statute, is not governed by RSA ch. 292, but remains subject to the general principles of corporate law and to the obligations of a charitable corporation. We do not address the legal question of whether, as a legislatively created entity, the Legislature retains the sole authority to amend the charter. Even were that the case, the public would be included in the process of revisions and would receive notice of the changes through the legislative process.
52 See Chronology of Corporate and Other Records, Exhibit 3, for a schematic review of the corporate history of all entities discussed in this Report.
53 Beginning in 1976, public members were nominated by a large Board of Incorporators.
54 Fidelity Health Alliance was a 501(c)(3) voluntary corporation established on May 9, 1985 under RSA ch. 292 for the purpose of furthering the programs of CMC. Originally called Catholic Medical Center (during a time when CMC's name was Catholic Medical Center Hospital), the supporting organization's name was changed to Catholic Health Alliance in January 1989, and to Fidelity Health Alliance in August of 1990. Fidelity Health Alliance's Articles of Incorporation provided that in the event of termination or dissolution, its remaining assets would revert to the Bishop of Manchester. Fidelity Health Alliance Articles of Incorporation, Exhibit 2.f, Article 4.
55 Although at the time of the merger CMC's Articles of Agreement did not name Fidelity Alliance as a member, the Articles of Alliance Resources, Inc., previously Catholic Medical Center Networks, did name Catholic Health Alliance, the predecessor to Fidelity Health Alliance, as a member. This suggests that the Catholic Health Alliance understood the requirements of RSA 292:2, II-a. When Catholic Health Alliance became a member of Alliance Resources, CMC may have elected not to name Catholic Health Alliance as its own member because CMC controlled Catholic Health Alliance through the participation of five of its board members on the nine member Catholic Health Alliance Board.
56 CMC's last-minute change to its Articles of Agreement appears to have been done to bring CMC's Articles into conformity with earlier changes in its bylaws. During our review, Optima provided copies of CMC bylaws as amended April 13, 1989 and October 24, 1990. Under these bylaws, first Catholic Health Alliance and later its successor Fidelity Health Alliance were designated as the sole member of CMC. The bylaws gave the sole member sole authority to amend CMC's bylaws, and provided that in the event of dissolution, CMC's remaining assets would revert to the sole member, if still existing as a nonprofit organization, and if not, to the Roman Catholic Diocese. The sole member was also given responsibility for choosing trustees and appointing officers, and at one point the bylaws provided that "[a]t all times the Board of Trustees of Catholic Medical Center shall include a simple majority of the individuals then serving as the Trustees of Catholic Health Alliance." CMC bylaws as amended 4/13/89, Article II, §1(2). All of these provisions are inconsistent with CMC's Articles of Agreement on file with the Secretary of State at the time of the bylaw amendments. In particular, the dissolution provisions directing distribution of the assets to the sole member upon termination may violate the "nondistribution constraint" and the requirement of CMC's articles of organization that any assets remaining upon dissolution would go to the Catholic Church.
57 Elliot Hospital constitution and bylaws as amended 1/27/93; Constitution, Art. III and IV.
58 Id.; Bylaws, Art. I and XV.
59 In correspondence with Dr. Wayne L. Goldner, dated September 30, 1997, Patrick Duffy, Chairman of the Board of Optima Health, Inc., stated that "The corporate documents pertaining to" the consolidation of Elliot Hospital and Catholic Medical Center "are on file at the Secretary of State's Office," and that "[o]ther files and records associated with these transactions are proprietary and, as such, are not available for distribution." See Goldner/Duffy Correspondence, Exhibit 12. As noted above, our review has determined that the publicly available file at the Secretary of State's Office does not disclose the full scope and extent of Optima's consolidation of the hospitals' governance and corporate structure. See Chronology of Corporate and Other Records, Exhibit 3.
60 Minutes of the February 23, 1995 meeting of the Optima Health System Consolidation Subcommittee reflect that management presented highlights from the 1993 pre-merger studies provided by Ernst and Young and Jones, Day that illustrated the potential savings which could be achieved if acute care services were consolidated at a single site. When one of the members of the systems consolidation subcommittee observed that all data was being driven by the fact that a single acute care site would be recommended and approved, and asked whether there was data that would inform Optima as to the impact of doing nothing or leaving a major service at the site that was not selected as the acute care site, the minutes do not reflect that Optima presented analysis of that option to its trustees. See Exhibit 29.
61 Union Leader, 4/15/93 "Last month officials of both holding companies denied a report by WMUR-TV, Channel 9, that the two hospitals wanted to merge. Yesterday, Phillip B. Ryan, president and CEO of Elliot Health System, again said the two hospitals are not about to merge." Union Leader, 6/26/93 Robert Cholette, "[The merger of the two hospitals] is not on the drawing board." "I don't see the two hospital organizations merging." "In the end, the combined non-profit holding company would have an annual operating budget of $225 million, employ 2,400 people, and oversee the administration of two hospitals ¼."
62 Scott Goodspeed Testimony, Exhibit 25, at 5-8, "We had the trauma center at the Elliot. ¼ CMC had one of the preeminent cardiac surgery programs in New England. And so you can envision, you know, based on evidence in clinical areas that's how the sites would be configured."
63 1993 Memorandum of Understanding, Exhibit 30, Section I, Paragraph J.
64 Board of Mayor and Aldermen Minutes, Exhibit 7, at 2.
65 Id. at 8.
66 Id. at 3 (statement by Mr. Cholette); 1993 FTC Memorandum, 9/9/93, Exhibit 32, "The merger of these two hospital systems into a single integrated network will result in savings of over $150 million in ten years." ¼ "$150 million [dollars] in savings over ten years that the hospitals have focused on represents what they have verified through their task forces can be achieved over ten years, with acute care services divided between the two sites in a manner that minimizes costs;" Union Leader, 6/26/93, "The companies estimate that the merger will save them $150 million over the first 10 years of affiliation, all of which would be passed on to consumers in the form of lower fees for service, better equipment and expanded services."
67 Testimony of Dr. Maria Alicia Davila, Exhibit 15, at 17-19.
68 See, e.g., Letter from Phillip Ryan and Robert Cholette to Representative Zeliff, July 27, 1993, Exhibit 18.
69 Hospital Licensing Documents and Summary, Exhibit 5.
70 Chronology of Corporate and Other Records, Exhibit 3.
71 The adoption of a timeline for identifying the acute care site occurred less than two weeks after a press report by Optima that it was "feeling the pressure of a rapidly changing health-care system" and "speeding up by at least a year its plans to combine the former Elliot and Fidelity Health companies." Union Leader, 8/4/94.
72 See Executive Summary to the CON Board of Optima Health, Inc. ("CON Executive Summary"), Exhibit 21.
73 Testimony of Robert Cholette, Exhibit 38, at 103-105; Testimony of Phillip Ryan, Exhibit 39, at 115-120.
74 Minutes of Optima Health System Consolidated Subcommittees, 2/9/95. "At this time all data is being driven by the fact that a single acute care site will be recommended and approved."
75 Optima's failure to undertake additional financial analysis after the merger is of particular concern given the antitrust constraints imposed upon any pre-merger financial analysis.
76 See CON Executive Summary, at 5 "No decision on the consolidation of acute care services was initially made, however, the studies completed post-merger were compelling on this issue."
77 See CON Application, at 79.
78 See Inventory of Documents, Exhibit 1. The documents reflect that Optima's trustees voted to make these changes to the composition of the hospitals' boards. Documentation of these changes has not been filed with the Secretary of State.
79 Wentworth Douglas Hospital in Dover also has entered into a limited affiliation with Optima Healthcare.
80 See Optima Healthcare Network, Exhibit 35; Testimony of Patrick Duffy, Exhibit 41, at 76-77; Tax Exempt Organizations Ruling Request, Summary, Exhibit 36.b, at 12.
81 See Board of Mayor and Aldermen Minutes, Exhibit 7, at 4, "Both of us are locally governed health care organizations, our Boards reflect people that live here, work here, pay the health care bills and get their services at one or both of our institutions and they said find out what the community thinks about this because ultimately if we are to redesign the health care system and come up with a better way it should reflect what the community thinks is the right thing to do."
82 Optima officials themselves appear confused over the respective roles of Optima Health, Inc. and Optima Healthcare. Thus, Harold Acres, Chairman of the Board of Optima Healthcare, described an annual budgeting process in which the Optima Healthcare board essentially approved budgets for the hospitals prepared by Optima Health, Inc. and its constituent hospitals. Testimony of Harold Acres, Exhibit 43, at 46-52. Patrick Duffy, Chairman of Board of Optima Health, Inc., described a process by which Optima Healthcare establishes an operating budget subject to approval by Optima Health, Inc. Duffy Testimony, at 74-75.
83 CMC's pre-merger credentialing criteria required that physicians practicing at CMC agree to abide by the Ethical Directives. The post-merger common credentialing criteria for Elliot and CMC does not require compliance with the Ethical Directives at either institution.
84 CON Executive Summary, Exhibit 21, at 3.
85 Id., at 3.
86 Ryan Testimony, at 13-14.
87 These documents -- which Optima has designated as confidential -- are at odds with Optima's consistent public statements that the consolidation of acute care at the Elliot campus and the non-acute care at the CMC campus does not indicate an intent to close Catholic Medical Center.
88 See Joint Operating Agreement, Exhibit 36.c.
89 In or about January, 1998, Optima sold the building, improvements and leasehold on land adjacent to the CMC hospital site owned by CMC or an affiliated entity. Documents reviewed by this office do not establish whether any portion of the proceeds of that sale have been reserved for, or directed to, the benefit of CMC.
90 Optima's internal confusion is evidenced by the conflicting statements of its board members and management. Thus, in sworn testimony to the Attorney General, Mr. Ryan stated that the Bishop of the Diocese may retain authority to determine which of the seventy Ethical Directives will apply to the acute care services provided at Elliot Hospital. Ryan Testimony at 51-56. By contrast, Mr. Cholette testified that the Ethical Directives do not apply to Elliot. Cholette Testimony at 18-20. Patrick Duffy, Chairman of the Board of Optima Health, Inc., first testified that the Directives do apply to all health care procedures at Elliot, then, after consultation with counsel, suggested that they only apply to abortion procedures. See Duffy Testimony at 107-109. Monsignor John Quinn, who served as the Diocesan representative on the boards of CMC and Fidelity Health Alliance and is now a Trustee of Optima Healthcare, testified to his understanding that, under appropriate circumstances, the Ethical Directives allow for the merger of a religious hospital with a secular institution which continues to perform procedures, such as elective sterilization, that are not permitted under Catholic doctrine. He concluded that the Ethical Directives do not apply at Elliot, except to abortion procedures by virtue of the recently announced policy. Testimony of Monsignor John Quinn, Exhibit 40, at 15-18.
91 Davila Testimony, Exhibit 15, at 11-13.
92 1997 Termination of Pregnancy Policy, Exhibit 10.b.
93 Before the merger, Philip Ryan, CEO of Elliot Health, advised Robert Cholette, CEO of Fidelity Health, and others that Elliot's policy with respect to termination of pregnancy mirrored that of CMC. Ryan Testimony at 33-39; Cholette Testimony at 20-24. Mr. Ryan made the same representation to the Manchester Board of Aldermen, Board of Mayor and Aldermen Minutes, at 2, 9. Critically, Elliot Health representatives also made this representation to Monsignor Quinn and Diocesan representatives. Monsignor Quinn Testimony, at 5-8; Affidavit of Monsignor Quinn in Moreau v. Optima Health, Exhibit 16.
In fact, clinical records of pregnancy terminations at Elliot that could not have been performed at CMC under the Ethical Directives were known to the OB/GYN staff and were readily accessible to Elliot's management. In 1994, the Chairman of the Obstetrics Department at Elliot Hospital, Dr. Robert B. Cervenka, informed Philip Ryan that physicians at Elliot Hospital performed terminations for Trisomy 21, or Down Syndrome, and questioned Mr. Ryan regarding whether the merger would affect the physicians' practices. According to Dr. Cervenka, Mr. Ryan informed him that after the merger, the Ethical Directives would apply only within the four walls of CMC, and would not affect the policies or practice at Elliot Hospital. Up to and even after the merger, Mr. Ryan assured Dr. Cervenka and other physicians that the practice of medicine at Elliot would not be altered by the merger. Testimony of Dr. Robert Cervenka, Exhibit 13, at 26-37.
Optima's former managing director for marketing also testified to Optima's continuing lack of candor over this issue in deposition testimony in a pending lawsuit involving Optima, Moreau v. Optima Health, No. C-97-329, Hillsborough County Superior Court, 1997. In sworn testimony in connection with a law suit against Optima by the employee whose disclosure of the abortion practices at Elliot may have resulted in his loss of employment, Ms. Laurie Storey-Manseau stated that, as recently as 1996, Optima management was still attempting to maintain the public fiction that no elective abortions were ever performed at Elliot. Excerpts from Deposition of Laurie Storey-Manseau, Exhibit 17, at 12-16.
94 See note 90, supra.
95 Compare, Duffy Testimony, Exhibit 41, at 112-116 (administration of abortifacients permitted) with Quinn Testimony, Exhibit 40, at 48-50 (treatment may depend on confirmation of pregnancy).
96 The physicians voiced a concern that Catholic doctrine forbids any form of treatment of tubal pregnancies which involve direct termination of the pregnancy, without removal of the affected organ. Cervenka Testimony, at 74-76; Testimony of Dr. Wayne Goldner, Exhibit 14, at 85-87.
97 Quinn Testimony, at 49-50 (Directives do not permit "direct attack on fetus"); Duffy Testimony, at 109-112 (Policy intended to mirror Ethical Directives with respect to extrauterine pregnancies).
98 1993 FTC Memorandum, Exhibit 32, at 3.
99 William Donovan Letter to Walter Maroney, November 29, 1997, Exhibit 27.
100 Optima has now agreed that these "merger report cards" may be produced to the public. See Exhibit 24.
101 When examining historical performance or reporting actual cost savings, the generally accepted accounting method is to examine actual cost reductions per unit of service actually delivered. It is necessary to adjust the analysis by considering savings per unit of service, as any gross analysis will fail to account for savings attributable to decreases in units of service delivered. This criticism of Optima's cost savings methodology was voiced by John Lynch, a Trustee of Optima Healthcare. See John Lynch Testimony, Exhibit 42, at 44-55.
102 Board of Mayor and Aldermen Minutes, Exhibit 7, at 7.
103 Support Letter by Adele B. Baker, Secretary, CMC Board of Trustees, August 27, 1993, Exhibit 28.
104 1993 FTC Memorandum: "Manchester has incurred an influx of residents with poverty or near-poverty level incomes, who have health care needs that are beyond their financial means. The consolidation will enable the combined facilities to redirect resources consumed by underutilized, duplicative equipment into meeting the current needs." 1993 FTC Memorandum, Exhibit 32, at 15.

NEW HAMPSHIRE ATTORNEY GENERAL'S REPORT ON OPTIMA HEALTH
MARCH 10, 1998
EXECUTIVE SUMMARY I. INTRODUCTION II. DESCRIPTION OF THE REVIEW III. LEGAL PRINCIPLES GOVERNING CHARITABLE TRUSTS IV. HISTORY AND CHRONOLOGY V. LEGAL ANALYSIS AND FACTUAL FINDINGS VI. CONCLUSION
EXECUTIVE SUMMARY
This report is occasioned by profound concern within the Manchester community involving the conduct and ultimate fate of the City's two community hospitals -- Elliot Hospital ("Elliot") and the Catholic Medical Center ("CMC") -- under the control and stewardship of Optima Health, Inc., and Optima Healthcare ("Optima"). The report is issued pursuant to the common law and statutory authority of the New Hampshire Attorney General as the Director of Charitable Trusts to oversee New Hampshire charitable institutions and to preserve and protect New Hampshire charitable assets.
The Attorney General has intervened in this matter to review and address four central issues. First, we have examined the legality and practical effect, under New Hampshire charitable law, of Optima's decision to consolidate all acute care services previously performed at Elliot Hospital and CMC at the Elliot campus, effectively terminating the century-old charitable mission of CMC and its predecessors to serve as an acute care Catholic hospital within the City of Manchester.
Second, we have examined the legal and practical effect of the merger of a religious and a secular hospital into a single health care system. In particular, this review has focused on Optima's recent attempts to clarify the application of Catholic ethical requirements to the provision of services at facilities within the Optima system, a process which has engendered significant controversy within the medical establishment and the Manchester community.
Third, we have reviewed Optima's decision-making process, particularly with respect to its decision to consolidate at a single acute care facility and its decision to reorganize governance of the organization.
Fourth, we compared Optima's recent conduct to its commitments at the time of the 1994 merger, that it would publicly account for savings resulting from the merger, that it would return those savings to the local community, and that local control of the community's hospitals would be preserved.
Both CMC and Elliot are nonprofit charitable institutions and are bound by a social contract to the local community. Through their trustees and management, Elliot and CMC have a fiduciary duty to preserve and to protect their charitable assets and to ensure that those assets are used for purposes consistent with the fundamental charitable missions of the respective institutions.
The traditional reference point for the behavior of charitable trusts was articulated by New York's Judge Cardozo in 1929:
Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden by those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of the courts of equity when petitioned to undermine the rule of undivided loyalty.(1)
Judge Cardozo was speaking of the duties of a trustee in a commercial context, but his analysis has been applied to the management of a charitable corporation. The heightened duty of loyalty to the beneficiary community requires that the managers of charitable trusts be judged by a stricter standard of duty and care than the managers of ordinary for-profit corporations, who are accountable to the company's shareholders, not to the community as a whole.
More broadly, as public charities, both hospitals -- and any organization which purports to control them -- owe their served communities important duties of candor and inclusion. Stated simply, this means that a public charity must deal with its community honestly and is required to fully and completely disclose facts relevant to its charitable mission. A charitable institution may not properly exclude the community, or the Director of Charitable Trusts, either by design or inadvertence, from having a voice in fundamental decisions affecting the continuing capacity of the institution to fulfill its historic charitable mission.
Optima has received significant benefits from the Manchester community, including exemption from property taxes. As a not-for-profit corporation, it also has access to low-interest bond financing, and the ability to accept tax deductible charitable donations for activities in furtherance of its mission. In a letter to the Attorney General's Office discussing the future of Elliot Hospital and CMC after the proposed merger of their supporting organizations into a joint institution under the name of Optima Health, Inc., Elliot's counsel described the two hospitals as a "public servant to the community." As a public servant, Optima's actions must be judged by how they benefit the community that founded and continues to support it. Optima's mission must reflect the values of the community it serves.
It is the role and duty of the Attorney General and the Probate Court to enforce the fundamental duties of charitable institutions. This role is ordinarily carried out through the actions of cy pres, deviation or quo warranto, each of which involves a petition to the Probate Court to secure that Court's approval of changes in, or the termination of, a charitable trust's fundamental mission.
As a result of this review, the Attorney General makes the following findings:
* After the 1994 merger of the supporting organizations, Optima failed to provide notice to the Director of Charitable Trusts and/or to seek the approval of the Probate Court under the doctrines of cy pres or deviation for the following fundamental changes to the charitable missions of the respective community hospitals:
* The effective termination of CMC's historical charitable mission as an acute care religious hospital by the removal of all acute care services from CMC and the conversion of CMC to a psychiatric and rehabilitation facility.
* The effective termination of CMC and Elliot as community-based hospitals by the consolidation of all acute care services at a new integrated acute care facility controlled by Optima and Optima Healthcare.
* The effective termination of CMC and Elliot as distinct community-based hospitals by the evisceration of their independent boards of trustees and the substitution in their place of mirror boards controlled by Optima and Optima Healthcare.
* The restructuring of internal governance within Optima in a manner which effectively transferred governance from a local community-based entity to a regional organization.
* The record presented to our office does not demonstrate that the actions addressed in this report would merit approval by the Probate Court under the doctrine of cy pres. Under cy pres, a party seeking to radically alter or terminate the mission of a charitable trust must show (i) that it is impossible, impracticable, illegal, obsolete or ineffective, or prejudicial to the public interest to continue the mission of the charity; and (ii) that the successor organization or alternative use toward which the assets of the charity will be directed fulfills as nearly as practicable the mission of the original charitable trust.(2) Measured by these standards:
* Optima has not established that it is impossible or impracticable to continue providing acute care services at CMC. In fact, Optima performed no post-merger financial analysis to support its decision to consolidate all acute care services at the Elliot campus. The pre-merger financial analyses relied on by Optima as justification for the proposed consolidation do not support Optima's position that consolidation at a single acute care site is necessary to achieve the $150 million in savings projected at the time of the merger.
* Optima has not demonstrated that it is necessary, or consistent with the distinct charitable missions of the hospitals, to cede all or virtually all of the hospitals' and/or Optima's corporate powers to Optima Healthcare, a regional joint operating company.
* Optima has not defined the fundamental mission and attributes of the regional health care system into which it seeks to merge both CMC and Elliot. This failure is most clearly demonstrated by Optima's unsuccessful attempt to delineate the application of Catholic moral doctrine to the provision of health care services in its integrated hospital system -- either in terms of continuing CMC's traditional commitment to the indigent or concerning any restraints dictated by Catholic moral doctrine on health care services outside CMC.
* Optima has not fulfilled its duty of candor to the community and its duty of inclusion of the Director of Charitable Trusts and the community. This failure has occurred in the following ways:
* Optima failed to include the community in its decision-making process regarding its plan to consolidate all acute care services within both hospitals at a single campus. This plan existed as an option prior to the 1994 supporting organizations merger and was proposed, without additional post-merger financial analysis, within months of the consummation of the merger.
* Optima officials have maintained in public comments that consolidation of acute care services at a single site was not actively considered prior to the merger, and was only adopted after compelling post-merger analysis. The Ernst & Young pre-merger study evaluated consolidation at a single site as an option. Optima did not conduct any additional post-merger financial analysis of this option before submitting its Certificate of Need application to the New Hampshire Health Services Planning and Review Board seeking approval to consolidate all acute care at a single site.
* Optima adopted a corporate structure which stripped both Elliot and CMC of independent corporate authority by transferring that authority to itself, and subsequently ceding it to Optima Healthcare, a regional joint operating company. This action constitutes a repudiation of prior statements and promises by Optima representatives that, after the 1994 supporting organizations merger, the hospitals would remain as vital, locally controlled institutions.
* Optima did not fully inform the community of the impact of the joint operating agreement on corporate governance and control of the hospitals. Optima currently maintains that, notwithstanding the effect of its corporate structure on the charitable missions of the respective hospitals, the specifics of this corporate structure and organization remain a confidential business matter.
* Prior to the 1994 supporting organizations merger, the management of Elliot Hospital failed to disclose to the public, to the Diocese of Manchester and to the trustees of each institution readily available facts which demonstrated that Elliot's practices with respect to termination of pregnancy were not consistent with Catholic moral doctrine. As a result, the merger went forward on the assumption that Elliot and CMC had identical practices and policies regarding abortion. This was not, and had never been, the case.
* Optima's application of Catholic moral doctrine to hospital operations through a recently announced policy is unfocused, incomplete and confusing. While the policy purports to address terminations of pregnancy, it does not specify affected procedures, and does not address sensitive issues concerning the scope of the policy with respect to victims of rape or persons suffering from extrauterine pregnancies. The policy also leaves unaddressed the fundamental issue of whether Catholic moral and ethical doctrines will be applied, directly or by implication, to other health care services traditionally available at Elliot Hospital. These include, at a minimum, family planning counseling and elective sterilization procedures.
* Optima failed to include the community in a candid discussion of the clinical and ethical implications of the merger of a traditionally religious institution with a secular institution, the practices of which are in many cases not consistent with Catholic doctrine. This has led to the formation -- without any public examination -- of a successor entity whose attributes are defined on an ad hoc basis, without consideration of the fundamental and distinct charitable missions of either hospital.
* Optima represented that it would establish a public accountability system to document the success of the merger and then failed to do so. Optima has maintained that information required to measure its success is a confidential business matter.
* Significant legal questions exist relative to the corporate documentation and procedures used to effect the 1994 merger of Elliot Health Systems and Fidelity Health Alliance, supporting organizations for the two hospitals. The questions are so fundamental as to call into issue whether the 1994 supporting organizations merger effectively vested Optima Health, Inc. (or its current "parent" Optima Healthcare, Inc.) with ownership of, or authority over, the assets and internal governance of the hospitals.
* Actions taken by Optima which have affected the fundamental charitable missions of the hospitals, including in particular the change in corporate governance and the decision to terminate acute care services at CMC, may be ultra vires and without legal effect.
Optima is and continues to be an institution which provides a broad range of quality health services to the citizens of Manchester and surrounding communities. However, this is not the sole standard by which a charitable health care institution must be measured.
Optima appears to have developed a corporate culture, led by management and acquiesced in by its trustees, which assumes that the delivery of health care is best left exclusively to the sole judgment of management. The fundamental error in this assumption is amply demonstrated by the broad loss of faith within the Manchester community in Optima and its constituent institutions.
This situation is not sustainable. Optima's decision to consolidate acute care services at Elliot Hospital and its decision to effectively terminate local community governance through regionalization must be reviewed in and by the public -- including the Probate Court -- which is by law vested with jurisdiction to review such actions.
I. INTRODUCTION
In 1994, Fidelity Health Alliance ("Fidelity") and Elliot Health Systems ("Elliot Health"), supporting organizations that provided administrative and operational assistance respectively to Catholic Medical Center and Elliot Hospital, merged into Optima Health, Inc. ("Optima"). At the time of the merger, Optima stated that the consolidation of these two supporting organizations would improve the cost effectiveness of health care in the Manchester community by eliminating duplication in services and costs.
Sylvio Dupuis, CEO and President of Catholic Medical Center, and Scott Goodspeed, CEO and President of Elliot Hospital, assured the Manchester community that the two acute care hospitals would continue to operate after the merger. So confident was Optima that the merger of the two supporting institutions, in conjunction with the operation of the two acute care hospitals, would produce cost savings for the community, that it pledged as a "public servant to the community" to institute through the two hospitals "an annual public written reporting responsibility comparing the hospitals' efforts with other comparable institutions across a wide variety of indicators, national benchmarks, and standards." Optima would measure its success by "cost efficiency, quality indicators, patient satisfaction, and outcome measures as well as broad indicators of the health status of the communities."(3)
In the four years since the merger, Optima has instituted radical changes in Manchester's health care delivery system. In so doing, it stripped CMC and Elliot of their separate corporate identities, eliminated the community-based governance structure of these charities, changed the essential core mission of CMC, and transferred control over these hospitals to a regional conglomerate, Optima Healthcare, Inc. ("Optima Healthcare").
The actions taken by Optima following the 1994 merger of the supporting organizations reflect its belief that the merger conferred unbridled authority upon it to institute whatever organizational changes it believed would produce the anticipated or projected cost savings. Notwithstanding its public statements to the contrary,(4) immediately after the 1994 merger, Optima submitted change of ownership forms to the Department of Health and Human Services in which CMC and Elliot were designated "dba's" for Optima Health. Optima referred to CMC and Elliot as "Optima East Campus" and "Optima West Campus."(5) Optima claims that its treatment of CMC and Elliot as a single combined hospital is justified because it could not achieve the cost efficiencies and quality improvements promised at the time of the merger without consolidating the two hospitals into one. Peter Davis, the interim CEO of Optima, put it this way, "We needed to squeeze the fat out of the system."
Economic efficacy is not dispositive of the question of legality. Proof of convenience, or even a good faith belief in economic "efficiencies," does not resolve the legal question of Optima's authority to merge two charities. That Optima management may have had a good faith belief in the economic wisdom of its decisions is not dispositive of the question of whether the merger of Fidelity and Elliot Health in 1994 authorized Optima to assume ownership and control of CMC and Elliot Hospital, and whether the changes in the mission and governance of CMC and Elliot were so significant as to require notice to the Director of Charitable Trusts and approval by the Probate Court.
As a matter of corporate law, we conclude that significant questions exist as to whether the merger of the supporting organizations, Fidelity and Elliot Health, transferred ownership or control of the hospitals to Optima. We find that the aggregate of actions taken by Optima so significantly changed the missions and governance of CMC and Elliot as to require notice to the Director of Charitable Trusts and the Probate Court. New Hampshire law does not allow two distinct charitable trusts to be effectively terminated by combining them into a third secular organization with mixed religious attributes without (i) proof of impossibility, illegality, or impracticability; (ii) a clear showing that the merged organization has or will have a charitable mission that fulfills as nearly as possible the charitable missions of the hospitals; and (iii) appropriate -- and public -- legal process.
Finally, we conclude that, notwithstanding its promise at the time of the 1994 supporting organizations merger, Optima has failed to establish a system of public accountability by which to measure the success of the merger in producing the projected cost savings and has failed to produce evidence that the Manchester community has benefited through Optima's return of the cost savings to the community.
II. DESCRIPTION OF THE REVIEW
In preparing this report, we have reviewed extensive documentation submitted at our request by Optima or derived from public sources and have taken statements and sworn testimony from a wide variety of individuals associated with or opposed to Optima.(6) Documents reviewed include corporate records establishing the history, corporate organization and charitable missions of Optima Healthcare, Optima Health, Inc., Elliot Hospital, CMC and its predecessor institutions. We examined records of submissions by Optima to regulatory bodies charged with oversight of various activities, including the Federal Trade Commission, the United States Department of Justice, the Health Services Planning and Review Board, the Internal Revenue Service and the Consumer Protection and Antitrust Bureau and Charitable Trusts Unit of this office.(7) We reviewed testimony and affidavits submitted in recent litigation involving Optima, and examined press reports regarding public statements made by Optima and hospital officials with respect to the matters addressed in this report.
We have also taken statements and testimony from 17 individuals. These included senior management of the hospitals at the time of the 1994 merger, present and former senior management of Optima, Inc. and Optima Healthcare, members of the Board of Trustees of Optima and its constituent institutions, Optima staff physicians, a representative of the Diocese of Manchester, a Canon Law consultant involved in the 1994 merger discussions, members of the Save CMC Coalition, and the Coalition For Live Free or Die Healthcare in Greater Manchester.
In addition, we retained financial consultants from the firm of Arthur Andersen & Company to assist us in evaluating Optima's financial structure, the savings projected to result from the 1994 merger and the community accountability system consisting of "report cards" and other records developed to demonstrate realization of such savings.
III. LEGAL PRINCIPLES GOVERNING CHARITABLE TRUSTS
A. What Is A Charitable Trust? New Hampshire's definition of the term "charitable trust" is very broad, including virtually all nonprofit and charitable organizations that operate or hold property within the state.(8) Traditionally, a trust is defined as a fiduciary relationship in which one person or entity manages property for the benefit of another person or entity, known as the beneficiary. Generally speaking, a charitable trust is a trust intended to benefit the community at large, or some specified portion of the community. A charitable trust creates a social contract between the charity and the public beneficiaries. Under New Hampshire law, a charity is not required to be organized as a trust. Many charitable trusts are organized as voluntary or nonprofit corporations.(9) Thus, the term "charitable trust" applies to any organization or entity which holds property for charitable, nonprofit, educational or community purposes. The social benefits that a charitable corporation is expected to provide to the community are defined by its articles of agreement. Although a charitable corporation may not be governed as a trust in every respect, courts have held that the assets of a charitable corporation are impressed with a charitable trust that restricts the use of the assets to the defined purposes of the corporation.(10) While there is some diversity in approach among the cases with regard to the application of trust principles to the assets of charitable corporations, ordinarily the rules that apply to charitable trusts also apply to charitable corporations.(11)
B. Who Owns The Assets Of A Charitable Trust? As with any trust, the assets of a charitable trust must be managed for the benefit of the trust's intended beneficiaries. Charitable trusts, as nonprofit corporations, are generally subject to the "nondistribution constraint." The nondistribution constraint precludes nonprofit corporations from distributing "profits" to their owners, and also precludes the distribution of the assets to the member upon dissolution. "Profits" of a charitable corporation must be applied in strict conformity with the stated charitable objects and purposes.(12) Membership in a charitable corporation does not confer on the member the right to realize economic gain from the operations of the corporation, the right to transfer the membership for value, or the right to dissolve or terminate the corporation and receive the assets upon dissolution.(13)
C. What Benefits Do Charitable Trusts Receive? Most charitable trusts are exempt from local, state and federal taxation. In New Hampshire, the principal tax benefit to a charitable trust is exemption from local property taxation. Annually, Optima and Optima Healthcare receive over $4.5 million in exemptions from local property valuation.(14) To the extent the operations of a charity would otherwise result in assessment of state business enterprise taxes, charitable trusts are exempt from state taxation. In addition, New Hampshire charities may, under certain circumstances, qualify for low-interest bond financing programs offered by the state and may receive and retain tax-deductible gifts and contributions.
D. What Legal Mechanisms Regulate Charitable Trusts And Protect The Public? The Attorney General and the Probate Court have authority to protect the public interest by insuring that charitable trusts conform their acts to their Articles of agreement. The Attorney General's Office, through its Office of Charitable Trusts, is charged with the duty, power and responsibility to supervise, administer and enforce charitable trusts.(15) By statute and under the common law, the Attorney General has standing to bring a judicial proceeding to enforce a charitable trust or to supervise the actions taken by a charitable trust.(16) In general, these proceedings take place in Probate Court, through cy pres, deviation, or quo warranto.
1. Cy Pres
Cy pres is a traditional equitable power exercised by the Probate Court. When property is given in trust for a charitable purpose, and the specified purpose of the trust has become impossible, impracticable or illegal, cy pres allows the property to be applied to another charitable purpose as similar as possible to the purpose of the trust.(17) A charitable trust may be terminated only if the continuance of the trust is impracticable or infeasible, and only with approval from the Probate Court.(18) The purpose of a cy pres proceeding is to allow the Probate Court to determine what the original purpose of the charitable trust is, whether that purpose has become impracticable or infeasible, and if so, what other purpose would be the most closely comparable. The Attorney General is authorized by statute to petition for cy pres.(19)
It is well established that the doctrine of cy pres applies to charitable hospitals, without regard to their form of organization. Cy pres has been applied to prevent an acute care hospital from changing its essential purpose or core mission. In a California case, the Queen of Angels Hospital sought court review of a proposal to lease its main hospital facility, with the exception of the outpatient clinic, and apply the proceeds to establish and operate additional medical clinics in Los Angeles for the needy.(20) After reviewing the hospital's governing documents, the court concluded that the proposal would be inconsistent with the organization's central purpose of maintaining and operating a hospital.(21) The court held that the hospital could not, "consistent with the trust imposed upon it, abandon the operation of the hospital business in favor of clinics" and was bound to its primary purpose of operating a hospital using the assets under its control.(22) As the court explained, "the issue is not whether the new and different purpose is equal to or better than the original purpose, but whether that purpose is authorized by the articles [of incorporation].(23)
In Connecticut, the Attorney General intervened in a situation involving an acute care hospital facility abandoning its historic core mission as an acute-care hospital to become an ambulatory care facility with an emergency room. There, the Hospital trustees voted to close in-patient care and lay off related medical support staff. The Connecticut Attorney General's Office contended that such a fundamental transformation required cy pres action, and the court agreed.(24)
2. Deviation
RSA 547:3-d requires that a charitable trust seek approval from the Probate Court before property is applied to a different charitable purpose. Under the doctrine of deviation, the Court may alter the administration of a trust, if it appears that strict compliance with the terms of the trust "is impossible or illegal, or that owing to circumstances not known to the settlor and not anticipated by him, compliance would defeat or substantially impair the accomplishment of the purposes of the trust.(25) Chief Justice Brock of the New Hampshire Supreme Court has described the doctrine as follows:
Where the dominant objective of a trust remains capable of fulfillment, but its method of accomplishment has been stalled due to a hitch in the administrative machinery, the doctrine of deviation permits a reworking or repair of the administrative mechanism so that the trust purposes may be accomplished effectively. The doctrine of deviation permits changes in the management of all trusts, and in the case of charitable trusts, may be employed to substitute trustees as well as to alter trust conditions.(26)
3. Quo Warranto
The common law writ of quo warranto applies generally to prevent an entity from unlawfully usurping, abusing or misusing corporate powers, and has been used successfully in other states to prevent nonprofit hospitals from merging with for profit entities. The Director of Charitable Trusts may, in addition to other statutory actions, such as declaratory judgment, cy pres and deviation, bring a writ of quo warranto to challenge the lawfulness of a business practice. The New Hampshire Supreme Court has recognized the continued existence of the writ of quo warranto to protect the interests of the public.(27) A writ of quo warranto may also be used to challenge the authority of a corporation to act without proper regulatory and legal approvals.
IV. HISTORY AND CHRONOLOGY
A. Elliot Hospital And Catholic Medical Center
For more than a century, Elliot Hospital, Catholic Medical Center, and its predecessors, Notre Dame Hospital and Sacred Heart Hospital, have ministered to the health care needs of Manchester's various and varying populations as public charitable institutions. In accordance with a grant in the will of Mary Elizabeth Elliot, Elliot Hospital was established in 1881 by a special act of the New Hampshire Legislature.(28) The legislature chartered Elliot Hospital as a "public charity" and tied that charitable status to an exemption from property taxes.(29) In subsequent amendments to the charter of the hospital, successive generations of New Hampshire legislators have reaffirmed the hospital's "public charity" status and tax exemption.(30) While Elliot Hospital has historically had close ties with a number of Protestant denominations, including mandatory representation by certain churches on its board of trustees, the hospital has always been a secular organization.
Catholic Medical Center was established in 1974 as a 501(c)(3) not-for-profit corporation, intended to continue the missions of two predecessor Catholic acute care hospitals, Sacred Heart Hospital and Notre Dame Hospital. These hospitals had served the Catholic and immigrant populations of Manchester and surrounding communities for nearly a century. In its Articles of Agreement, CMC established as its first and primary purpose the establishment and operation of "a hospital in the City of Manchester, State of New Hampshire, without pecuniary gain and without distinction as to race, color, creed, sex or ability to pay." (31) In keeping with its charitable purpose and the nondistribution constraint, CMC's Articles of Agreement provide that [n]o part or portion of the assets or earnings of this Corporation shall ever be distributed to or divided among any individuals, including any member, officer, director, trustee, or other organizer of this corporation .(32)
Under its Articles of Agreement, another aspect of CMC's essential mission is [t]o maintain its identity as a Catholic Hospital.(33) Although Catholic Medical Center has never been under the direct sponsorship of the Diocese of Manchester, its Articles of Agreement expressly identify it as an "official agency of the Roman Catholic Church." Such status, the articles continue: is indicated ... philosophically by the guiding tenets under which it operates: namely, the teachings of the Roman Catholic Church. These tenets are expressed in specific regulations of the Holy See, and the teachings of the Bishops of the United States of America, more precisely in the latter instance, in the ETHICAL AND RELIGIOUS DIRECTIVES OF THE CATHOLIC HEALTH FACILITIES as promulgated by the National Conference of Catholic Bishops.(34) Consistent with its essential Catholic mission, CMC has committed itself to a specific set of religious tenets by incorporating these theological directives into its Articles of Agreement.(35)
B. The 1994 Merger Of Elliot Health Systems And Fidelity Health Alliance
In late 1992, following a period of bitter competition between the two hospitals, management began to discuss the possibility of a merger between Elliot Health Systems and Fidelity Health Alliance, the supporting organizations for Elliot Hospital and CMC. In the spring of 1993, the supporting organizations retained the accounting firm Ernst & Young to perform a theoretical study of the savings that might be achieved through different levels of consolidation and integration. At the same time, the two companies undertook an internal "feasibility study" with respect to a possible merger.(36) On June 25, 1993, the supporting organizations signed a memorandum of understanding outlining the steps they would take to consummate the merger. On February 24, 1994, after receiving federal and state anti-trust approvals, Elliot Health Systems and Fidelity Health Alliance merged to form a new supporting organization, Optima Health, Inc.(37)
The express purpose of the merger was to continue the charitable purposes of the two hospitals and related institutions.(38) Prior to the merger, representatives of Elliot Hospital and CMC were quoted in the Manchester Union Leader and other media outlets as anticipating approximately $150 million in projected savings from an operating plan in which the two hospitals would maintain separate identities, with some unspecified level of consolidated services. Such savings, it was stated, would permit both hospitals to maintain their viability as community-based, locally-governed health care institutions committed to serving the Manchester community in an era of increasing competition and change in health care.
Optima actively sought, and widely received, the support of Manchester's and New Hampshire's business and political communities for the merger.(39) In September 1993, Philip Ryan, CEO and President of Elliot Health Systems and Robert Cholette, CEO and President of Fidelity Health Alliance, appeared before the Manchester Mayor and the Board of Aldermen to explain the rationale and possible long-term consequences of the proposed merger, explicitly citing the savings goal of $150 million in the context of a limited consolidation of services.(40) Hospital presidents Scott Goodspeed and Sylvio Dupuis were quoted in Union Leader articles as stating that Elliot Hospital and CMC would remain independently viable -- and locally managed -- centers of excellence into the foreseeable future after the proposed merger.(41)
In their communications with the public, the proponents of the merger stressed their continued commitment to remain accountable to the community. In a 1993 letter to the Attorney General's Office regarding the proposed merger, Elliot Hospital's counsel acknowledged and promised that the two hospitals were and would continue to be a "public servant to the community.(42) Before the Mayor and Aldermen, CEOs Ryan and Cholette committed to instituting an ongoing mechanism to ensure public input and accountability following the merger.(43)
C. Key Post-Merger Decision Points
Beginning immediately after the 1994 merger of Fidelity and Elliot Health, the management of Optima Health, Inc. embarked on a series of decisions which run counter to Optima's commitment to the Manchester community to continue to operate two community-based acute care hospitals, and to involve the local community in the governance and management of Elliot Hospital and CMC. Optima's decisions, and the processes by which they were made, are the primary focus of this report. The decision points are listed in chronological order.
1. Decision To Exercise Complete Control Over CMC And Elliot
Legally, the merger joined the two supporting organizations, Fidelity Health Alliance and Elliot Health Systems. The hospitals existed separately, with their own independent governance structure as specified in the Articles of Agreement on file with the Secretary of State. Nevertheless, in the merger agreement Optima expressed its intention to exert complete control over the hospitals, which it viewed as its "subsidiaries." The merger agreement provided that [t]he By-Laws of OPTIMA and all of its subsidiaries ¼ shall provide that the OPTIMA Board of Trustees shall appoint two-thirds (2/3's) of the Trustees of each subsidiary's Board of Trustees and the OPTIMA Board of Trustees shall be solely authorized to amend the By-Laws of each subsidiary of OPTIMA.(44) Immediately after the merger, Optima implemented these provisions by altering the bylaws of CMC and Elliot Hospital.
2. Decision To Move To A Single Acute Care Site
Within months of the merger and without post-merger financial analysis, Optima decided to consolidate all acute care services delivered by both hospitals at the Elliot campus, reducing CMC to a rehabilitative and psychiatric unit within a larger hospital organization. In conjunction with the acute care consolidation, Optima applied in April of 1995 to the state Health Services Planning and Review Board for a Certificate of Need ("CON") authorizing Optima to institute a construction program on the Elliot campus costing more than $35 million. On September 26, 1996, the CON application was granted. The New Hampshire Supreme Court declined to hear an appeal taken by opponents of the consolidation.
3. Decision To Restructure Optima, Elliot And CMC's Governing Boards
Following a board retreat in the summer of 1995, Optima hired Cambridge Associates, Inc., to oversee a restructuring of the governing bodies of Optima and its affiliated organizations. Pursuant to the consultant's recommendations, in November of 1995 Optima voted to reduce the membership of its board from thirty-six to sixteen trustees, and to eliminate the requirement that seventy percent of board members come from the community. At the same time, Optima instituted a structure of "mirror boards" for its subsidiaries, meaning that Elliot Hospital and CMC would now be governed by identical boards, with essentially all decision-making authority delegated to the Optima board.
4. Decision To Establish A Single Acute Care Hospital As A Successor To CMC And Elliot
Optima's decisions to reorganize the governance of the hospitals and to consolidate their acute care services at a single site are properly characterized as a decision to establish a single acute care facility as a successor to CMC and Elliot. Necessarily, the integration of secular and religious health care institutions raises difficult issues concerning the applicability of religious doctrine within the consolidated institution.
Although Optima itself is a secular entity, its Articles of Agreement include an express requirement to maintain CMC's identity as a Catholic institution, subject to the Ethical Directives.(45) The merger agreement attempts to reconcile this conflict between the secular and religious elements in its expression of "shared values" which describes certain generally stated principles which "shall continue to be principles upon which OPTIMA, Elliot Hospital and Catholic Medical Center shall conduct their affairs.(46)
In practice, however, the "shared values" which supposedly unify Optima, Elliot and CMC have not been fully defined in the years following the 1994 supporting organizations merger. This is a critical failure. Under cy pres, the Probate Court must determine that a successor organization or alternative use toward which the assets of a charity will be applied fulfills as nearly as practicable the mission of the original trust. Essentially, through cy pres, the Probate Court enforces the social contract that binds the charitable trust to the community.
Optima's post-merger conduct has been marked by confusion in governance and policies. This confusion is reflected in interviews of Optima management, and raises serious questions as to whether any judgment can be made that the mission and identity of the successor hospital fulfills as nearly as practicable those of CMC and Elliot.
This confusion over religious doctrine and over the missions and identities of the two community-based hospitals is most evident in the debate over abortion and the apparent disagreements among Optima's management about the applicability of the Ethical Directives at the single acute care facility. The merger of the supporting organizations was based in part on specific representations made by Elliot Health Systems management to the management of Fidelity Health Alliance, to physicians at both institutions, to the public, to trustees of both institutions and to representatives of the Diocese of Manchester, that termination of pregnancy policies at Elliot Hospital were consistent with practices at CMC. Disclosure in 1996 that certain abortion procedures, banned under Catholic doctrine, had historically been performed at Elliot Hospital led to the promulgation by the Elliot Hospital Board of Trustees of a policy that purports to ban all terminations of pregnancies which are not consistent with Catholic moral doctrine at any Optima Hospital. Adoption of this policy has caused widespread protest among affected physicians, and has resulted in a resolution adopted by 160 members of Optima's combined hospital staffs requesting reconsideration of the announced policy.(47) Due to Optima's original failure to articulate specifically the policies, attributes, and governance of the successor integrated hospital to CMC and Elliot, it is likely that similar issues will continue to arise.
5. Decision To Affiliate With Covenant Health Systems, Creating Optima Healthcare
In January 1997, Optima entered into a Joint Operating Agreement ("JOA") with Covenant Health Systems, a Catholic health service organization which operates Saint Joseph's Hospital in Nashua and other facilities outside New Hampshire. Under the JOA a newly created nonprofit corporation, Optima Healthcare, Inc. ("Optima Healthcare"), manages and operates all services provided by its "Network Members".(48) In contrast with Optima's Articles of Agreement, Optima Healthcare's corporate documents focus extensively on St. Joseph's Hospital as a Catholic institution.(49) Although CMC is identified as a Catholic institution, it falls under the secular "Optima" category within the Optima Healthcare organization.
The organizational structure created by the JOA gives Optima Healthcare the power to develop and implement strategic plans for the Network, develop and approve operating and capital budgets for the Network, select other Network Members, select management and personnel, develop mission statements, and negotiate payor contracts.(50) The Network Members retain authority to implement programs approved by Optima Healthcare, to conduct credentialing for their medical staff, and to approve the expenditure of their restricted funds. Optima and Covenant are empowered to elect and remove the governing boards of the Network Members, and to take any and all actions that they deem appropriate to discontinue or change the actions or operations of the Network Members, provided that the changes do not violate the religious requirements applicable to the Network Members, or the will of Mary Elliot.
Under the JOA, the boards of trustees of Optima, and indirectly Elliot and CMC, have been stripped of most independent authority. Executive management of the hospitals has been removed from the hospitals to Optima Healthcare, and hospital financial matters are now being addressed at the joint operating level rather than within the hospitals.
V. LEGAL ANALYSIS AND FACTUAL FINDINGS
The Attorney General has intervened in this matter to review and address the legality and practical effect, under New Hampshire charitable law, of Optima's decision to consolidate all acute care services previously performed at Elliot Hospital and CMC at the Elliot campus and to create a single integrated facility, effectively terminating the century-old charitable mission of CMC and its predecessors to serve as an acute care Catholic hospital within the City of Manchester. In our review, we also have examined the legal and practical effect of the merger of a secular and a non-secular institution into a single health care system.
A. The 1994 Merger Of Fidelity Health Alliance And Elliot Health Systems May Not Have Transferred To Optima Health, Inc. Ownership Of Elliot and CMC
As an initial matter, this office reviewed the structure and legality of the 1994 merger of Fidelity Health Alliance and Elliot Health Systems into Optima Health, Inc. In conducting this review, we examined all corporate and legal documents provided by Optima, all documents on file with the New Hampshire Secretary of State, and all documents filed with the Office of Charitable Trusts. Based upon our review of the corporate documents and records, a serious question exists as to whether the 1994 supporting organizations merger transferred legal ownership of Catholic Medical Center or Elliot Hospital to Optima Health, Inc. and whether Optima Health, Inc. obtained the legal right to control or restructure those entities.
1. Legal Principles
It is a fundamental principle of corporate law that a corporation has no powers beyond those set forth in its governing documents. Trustees of Dartmouth College v. Woodward, 17 U.S. 518 (1819). The powers of a voluntary corporation arise out of and must be consistent with its Articles of agreement, which must be filed with the Secretary of State in order to be valid.
CMC, Fidelity Health Alliance, Elliot Health Systems and Optima Health, Inc. are all voluntary corporations governed by New Hampshire's Voluntary Corporations and Associations Act, RSA Chapter 292.(51) A voluntary corporation may take action only in accordance with chapter 292, the corporation's articles of agreement, and the corporation's bylaws. The articles of agreement must be recorded with the Secretary of State in order for formation of the corporation to take effect. RSA 292:4. The corporation's bylaws need not be recorded, but they must be consistent with the articles of agreement. RSA 292:6.
Certain actions by voluntary corporations, including name changes, increases or decreases in capital stock or membership certificates, mergers and acquisitions, are not effective unless they are recorded with the Secretary of State. RSA 292:7. "[T]he provisions for establishing membership and participation in the corporation," and "the number of shares or membership certificates, if any, and provision for retirement, reaquisition and redemption of those shares or certificates" must be included in the articles of agreement. A non-profit corporation's articles of agreement must be filed with the Secretary of State to be legally valid. RSA 292:2, II-a and V.
2. Apparent Deficiencies In The 1994 Supporting Organizations Merger
Based on our review of the corporate histories of Elliot and CMC, as well as the documentation supplied by Optima regarding the 1994 supporting organizations merger, we conclude that the merger may not have conferred on Optima ownership or control of the two hospitals. First, both the corporate documentation and the sequence of corporate actions by which CMC sought to transfer its corporate authority and assets through Fidelity Health Alliance to Optima Health, Inc. appear to be deficient, due to CMC's failure to include membership provisions in its articles, and Fidelity Health's elimination of CMC's Board of Trustees. Second, no document recorded with the Secretary of State prior to the merger made Elliot Health Systems, Inc., or any other corporate entity, a "member" of Elliot Hospital, let alone the "sole member," with power to transfer any assets, or to otherwise control the governance, of Elliot Hospital. As a result, subsequent actions by Optima Health, Inc. to control or dispose of the assets of CMC and Elliot may be without authority, and therefore, without legal effect.(52)
a. Catholic Medical Center
CMC's corporate filings may not have properly transferred ownership of CMC to Optima. According to CMC's Articles of Agreement on file with the Secretary of State, CMC was established in 1974 as a Chapter 292 voluntary corporation and 501(c)(3) organization. Between 1974 and 1994, CMC's Board of Trustees consisted of 24 public members, a representative of the Catholic Church, 6 members of the medical staff, the CEO, and the President of the Senior Associates.(53) Under CMC's Articles of Agreement, the trustees had authority to provide hospital services, control the corporation's money, property and affairs, maintain accredited status, ensure patient safety, grant privileges to the medical staff -- in short, to control all affairs of the hospital.
There is no public record of any attempt to transfer control, by "membership" or any other mechanism, of CMC's assets and governance to Fidelity Health Alliance until one day before the 1994 supporting organizations merger. Prior to the 1994 merger, five members of CMC sat on the nine member Board of Fidelity Health Alliance.(54) CMC maintained control over its supporting organization through its majority representation on Fidelity's Board.
In an amendment recorded with the Secretary of State on February 22, 1994, the day before the merger, the CMC trustees voted to delete, in their entirety, the provisions establishing its Board of Trustees and Board of Incorporators, as well as the provisions giving the Board the power to control the affairs of the hospital. In place of these provisions, CMC reserved authority to revise the bylaws to its "sole member, Fidelity Health Alliance." Then, on February 23, 1994 -- one day after the documents establishing the abolition of its Board of Trustees had been filed with the Secretary of State -- CMC, purportedly by vote of its trustees, amended its Articles of Agreement by substituting "Optima Health, Inc." for "Fidelity Health Alliance," and added a new article stating that "The sole member of the corporation is Optima Health, Inc." This document was filed with the Secretary of State on March 19, 1994.
Optima's creation, then use, of corporate memberships to effectuate the 1994 merger of Fidelity Health Alliance into Optima Health, Inc. raises serious questions regarding the extent of Optima's authority to own and control CMC and Elliot. Although CMC's amended Articles purport to establish Fidelity Health Alliance and, subsequently, Optima Health, Inc. as its "sole member," the standards for "membership" or for issuance or redemption of membership certificates are not contained within CMC's Articles of Agreement, as required under RSA 292:2, II-a. Thus, the "membership" status purportedly conferred on Fidelity Health Alliance and Optima Health, Inc. by the February 1994 amendments to CMC's Articles does not appear to comply with the statute.(55)
Additionally, the purported transfer of "sole membership" status from Fidelity to Optima Health, Inc. also is problematic because the trustees voted to approve the change only after the board had abolished itself and all of its authority, and documents to that effect had already been placed on public record by filing with the Secretary of State.(56)
As a result of these apparent defects in corporate documentation, and the sequence of events which led to a vote approving transfer of sole membership status in CMC by a legally non-existent board of trustees, CMC may have been left with no legally valid member and no board of trustees. Optima Health, Inc.'s control over the assets and governance of CMC since 1994 may, therefore, lack legal foundation.
b. Elliot Hospital
Elliot Hospital's corporate existence was originally established by statute in 1881, in accordance with the will of Mary Elizabeth Elliot. The act creating Elliot Hospital appointed trustees, as specified in Mary Elliot's will. These included the Mayor of Manchester and persons chosen by each of six Protestant churches in Manchester.
The only recorded filing with the Secretary of State for Elliot Hospital (other than mandatory reports, and statements reflecting increases in the total value of property the hospital can hold) is an amended Constitution and Bylaws which dates from 1958. This filing uses the term "members" to denote trustees, and provides that there will be "not less than sixteen." The purposes section of the Constitution is expanded from the original statutory language, and includes the determination of the policies of the institution with relation to community needs, maintenance of proper professional standards, directing administrative personnel, and adequate financing and business-like control of expenditure. Other than mandatory reports, no documents have been filed with the Secretary of State with respect to Elliot Hospital since 1974.
Elliot Health Systems was established in 1983 (under the name Health Northeast, Inc.) as a 501(c)(3) supporting institution for Elliot Hospital. Conspicuously missing from the public record, however, is any document which purports to effectively cede control of the governance or assets of Elliot Hospital to Elliot Health Systems. Indeed, there is nothing in the recorded filings of either Elliot Hospital or of Elliot Health Systems which indicates that Elliot Health Systems owned or controlled Elliot Hospital or that Optima presently holds such authority.
Certain documents, not publicly filed, but provided to us for purposes of this review, do suggest that Elliot Health Systems had a substantial degree of control over Elliot at the time of the merger and that the Elliot Board may have voted to accept Optima as its "sole member." A 1993 constitution and bylaws for Elliot Hospital indicate that while prior to the merger, Elliot Health Systems was not designated as a "member," it did have authority to appoint, and to remove without cause, 3/4 of Elliot Hospital's board members.(57) Under the 1993 constitution, amendments to Elliot's constitution or bylaws required the approval of Elliot Health Systems.(58) On the day of the merger, the Elliot trustees voted to amend Elliot Hospital's constitution to make Optima Health, Inc. the sole member of Elliot Hospital, and to substitute Optima Health, Inc. for all references to Elliot Health Systems. None of these documents are on file with the Secretary of State, nor did the copies reviewed by this office include a certification of adoption. Further, as with the amendments to CMC's Articles of Agreement, the Elliot amendments shed no light on the duties or responsibilities of Optima as the "sole member" of Elliot Hospital.
c. Implications For Optima
The above defects in corporate organization and Optima's failure to place all relevant corporate documents on record with the Secretary of State(59) raise significant questions regarding the capacity of Optima Health, Inc. to control the governance, and to control or dispose of the assets of either Elliot or CMC. Accordingly, the 1994 transfer of corporate powers from the hospitals to Optima Health, Inc. and the 1995 transformation of the hospitals' respective boards of trustees into "mirror boards" of limited authority are also subject to question. Finally, Optima Health, Inc.'s participation as a member of the Optima Healthcare regional joint operating company presents similar legal issues concerning the transfer of operational control of the hospitals or their assets to that entity.
B. Optima Has Effectively Terminated The Charitable Trusts Of Elliot And CMC By Merging Their Governance Structures And Operations Into A Regional System
These corporate issues are eclipsed in importance by Optima's post-1994 actions regarding the stewardship of the assets and charitable missions of Manchester's two hospitals. These issues fall into two categories:
First, Optima failed to include the community and the Director of Charitable Trusts in crucial decisions, including substantial changes in the governance and organization of the two community hospitals and consolidation of both hospitals' acute care services at a single site. Indeed, Optima representatives have not fully informed the public or the Director of Charitable Trusts regarding its plans, nor have they provided financial or other supporting analysis for its decisions. Optima's failure to communicate with and to involve the public has resulted in an apparent repudiation of promises and commitments made at the time of the 1994 supporting organizations merger. Such promises include:
* Optima's public commitment to maintain CMC and Elliot as distinct, community-governed acute care hospitals;
* Optima's public commitment to preserve local control and governance of both Elliot and CMC;
* Optima's public commitment to preserve the distinct charitable and religious identities of both Elliot and CMC as separate elements of a unified health care system; and
* Optima's public commitment to establish a system of accountability to the community to ensure that savings achieved from the 1994 merger would be redirected back into the community.
Second, through the aggregate of its actions, including relocating services, expansion of facilities, changes in the use of facilities, changes in governance and structure, and corporate reorganization into a regional holding company, Optima has at a minimum substantially altered, if not effectively terminated, the distinct charitable identities of Elliot Hospital and CMC. It has done so without seeking the approval of the Probate Court through an action for cy pres or deviation, which are the appropriate legal processes for review of such action. Based on our review of the documents submitted to this office, Optima does not appear to have met the legal standard for cy pres, termination of, or deviation from a charitable trust with respect to either Elliot or CMC. This is so because:
* Optima has made no showing based upon financial analysis that it is illegal, impossible or impracticable to continue the distinct charitable mission of CMC as an acute care community hospital serving the Manchester community. Despite its statement that Manchester is too small a community to support two acute care hospitals, Optima's own financial analysis projects that $150 million of cost savings could be achieved by consolidating certain services while still operating two acute care hospitals. Indeed, Optima did not conduct a post-merger financial analysis of the option of continuing operation of CMC as an acute care hospital, but rather treated consolidation of acute services at a single site as the sole option available after the merger to achieve the projected savings.(60)
* Optima has not defined a clear charitable mission or other identifiable attributes for the successor integrated acute care hospital. Optima's failure at the time of the 1994 merger to forthrightly address the divergence between the hospitals in practices concerning pregnancy termination has led to profound confusion within and outside of Optima regarding the religious and ethical tenets affecting the availability of health care services for the Manchester community.
* This tension has been particularly acute with respect to abortion and reproductive services, where statements made by Optima representatives at the time of the merger that Elliot's practices were consistent with Catholic ethical doctrine have led to the promulgation -- three years later -- of a vague, ad hoc policy regarding abortion and the application of religious doctrine to health services within Optima's integrated acute care facility. The confused and often unclear policies of the consolidated acute care facility appear in many instances to be inconsistent with the established identities of both Elliot and CMC.
1. Optima Has Failed To Inform And Include The Community And The Director Of Charitable Trusts Regarding The Charitable Identities Of CMC And Elliot
It is a fundamental tenet of charitable trust law that a charitable institution may not radically alter or terminate its charitable mission without notification to the Director of Charitable Trusts, and without seeking approval of the change in mission from the Probate Court by an action for cy pres or deviation. It is equally fundamental that the social contract that binds a charitable trust to its served community includes a duty of candor and accuracy. We conclude that Optima, by integrating the hospitals into a single acute care facility and substantively changing the governance and character of the hospitals, effectively terminated the distinct charitable missions of CMC and the distinct charitable identities of CMC and Elliot as community hospitals. Optima did this without appropriate legal process and, most disturbingly, without informing its served community with candor and accuracy of its plans and actions.
a. Consolidation Of Acute Care Services At A Single Site
i. Pre-Merger Public Statements
It is clear from both the public and regulatory record that the 1994 supporting organizations merger was permitted to go forward, and received broad public support, based in large part on the common public assumption that the merger would preserve the distinct operations and identities of CMC and Elliot Hospital.(61) Widely reported pre-merger statements by Sylvio Dupuis and Scott Goodspeed, presidents of CMC and Elliot Hospital, respectively, focused on developing the distinct missions and characters of each hospital under unified holding company management, as "centers of excellence," each emphasizing particular specialties.(62) Indeed, the pre-merger Memorandum of Understanding between Fidelity Health Alliance and Elliot Health Systems identifies as one purpose of the merger "[t]o" reflect in the policies and practices of a new integrated health care system the merger of two equals who respect the standards and principles by which each is presently governed.(63)
This message was communicated in a variety of forums. At a September 1993 public hearing before the Manchester Board of Aldermen, Phillip Ryan, President and CEO of Elliot Health Systems, and Robert Cholette, President and CEO of Fidelity Health Alliance, made a joint presentation regarding the proposed merger. At one point, Mr. Cholette described the proposed merger as follows:
Here we are considering bringing the two holding companies together to form one systems corporation and this systems corporation, this holding company would be the parent company to not only the Elliot Hospital and the Catholic Medical Center, but to Hillcrest Terrace, to the One-Day Surgery Center, the Convenient Med-Care and the NH Medical Lab, all of the companies that are owned by both organizations and there are probably 17 or 18 such companies. This holding company, this new systems corporation, would be non-profit and it would be a partnership of equals. We would come together with equal representation to govern this new heath care system for greater Manchester.(64)
Later in the same presentation, Mr. Cholette responded to Alderman Buckley's question of whether there would continue to be two acute care centers after the merger by stating only that, "some of the major service areas will be unified." Mr. Ryan immediately emphasized this point, stating that "a lot of these savings [from the proposed merger] come from equipment savings as well as avoiding the need to purchase duplicate equipment, so if you have all of obstetrics in one area and all of cancer care in one area you can do some things from a cost as well as a quality point of view by unifying. Those would be tougher for two separate operations to do.(65)
In statements to the public press, the FTC, and the Board of Aldermen, Optima officials repeatedly represented that the projected merger would result in savings of $150 million over a ten year period.(66) This estimate appears to have been based on a pre-merger financial analysis conducted by Ernst & Young to analyze the potential financial benefits resulting from different levels of consolidation and integration.
Ernst & Young designed its study around three different options and compared the expected range of potential cost savings from each option:
* Option 1 - consolidation of the supporting organizations and certain overhead;
* Option 2 - service consolidation, while still operating two acute care sites; and
* Option 3 - full consolidation of acute care at one site with no new construction.
Significantly, Ernst & Young estimated that the second option, service consolidation while still operating two acute care sites, would produce approximately $150 million in savings over ten years. In fact, in a 1993 meeting with the U.S. Department of Justice Staff, Optima's attorney identified the specific acute care services which each hospital would provide.
During 1993, Fidelity Health Alliance and Elliot Health Systems management actively solicited members of the medical staffs of the two hospitals to submit letters of support for the merger to the Federal Trade Commission. To elicit physician support, management personally assured the physicians that Optima would continue to operate two acute care hospitals after the merger.(67)
It is apparent that public support for the 1994 supporting organizations merger hinged in large part on the common public understanding that the merger would result in significant savings while still preserving the distinct and independent identities of both Elliot Hospital and CMC. In his letter of support for the 1994 merger, U.S. Senator Judd Gregg wrote:
The new corporation will be governed by members of the local community, just as the separate entities are now. This will ensure continued responsiveness to community needs.
Joseph McCarron, President of Healthcare Concepts, Inc. wrote:
The merger will further enhance the two health care systems which are already largely complementary in the services they provide yet will preserve the valued identities and reputations of the two hospital institutions ... [The] continuity of the extensive community oversight and participation in the governance of the merged system will assure that savings are passed on to the community.
Numerous other letters from physicians and community members, which Optima included in submissions to the U.S. Department of Justice and the New Hampshire Attorney General's Office in connection with these agencies' antitrust reviews of the proposed merger, offer support to the concept of local governance and elimination of duplicative costs, while still preserving the essential identity and missions of the two hospitals.(68)
ii. Post-Merger Decision To Consolidate Acute Care Services At A Single Site
Notwithstanding the public's understanding of the nature and effect of the supporting organizations merger, Optima has acted with the apparent belief that the 1994 merger gave it authority not only to consolidate the supporting organizations, and to amend the corporate governance structure of the charitable hospitals, but also to change the core mission of CMC, and to relocate services and facilities at will.
Although the 1993 Memorandum of Understanding and the 1994 merger documents acknowledge the separateness of the Catholic elements of the system and speak of their preservation, Optima management took steps immediately after the merger to reduce the separate hospitals to subsidiary elements within the Optima Health system.(69) Optima internally renamed CMC and Elliot as "Optima West Side" and "Optima East Side," with the traditional names for the hospitals retained publicly for the hospitals as "dba's" for Optima. In 1996, Optima registered the trade names "CMC" and "Elliot Hospital" with the Secretary of State.(70)
On August 17, 1994, less than six months after the supporting organizations merger, Optima management outlined and presented a facilities work plan which set January 1, 1995 as the deadline for the identification of a single acute care site.(71) In post-merger submissions to governmental agencies, and in statements to the public, Optima represented that the decision to consolidate all acute care services at a single site occurred as a result of extensive financial analysis and clinical analysis by physician and other employee work groups.(72) In interviews with this office, Optima representatives said that its physicians made the decision to consolidate acute care services at a single site through their work on systems consolidation subcommittees.(73) The facts suggest otherwise.
Optima's attribution of the consolidation decision to its physicians does not accurately reflect the actual components or sequence of Optima's decision-making process as reflected in its board minutes and subcommittee minutes. Although Optima did form systems consolidation subcommittees, the decision to consolidate services at a single acute care site was made before the systems consolidation subcommittees completed their work. The record indicates that Optima's systems consolidation committees were in fact charged, not with determining whether to consolidate all acute care services at a single site, but with how to implement management's decision to do so.(74)
In light of Optima's assertion that merger savings could not be achieved without consolidation at a single acute care site, and in view of Optima's statement that its decision to consolidate was made in response to "rapid" changes in health care, Optima's election not to conduct any post-merger financial analysis of the effects of a proposed consolidation of acute care services at a single site is particularly significant. Optima relied on the same studies that before the merger showed cost savings of $150 million with two acute care sites to demonstrate, after the merger, that these cost savings could not be achieved without consolidation of acute care at a single site.(75)
In its CON application Optima states that compelling post-merger studies left it with no real choice but to consolidate acute care at a single site.(76) If Optima conducted such studies, they were not provided in connection with this review. Rather, Optima's contention that "only full integration of clinical services will result in $150 million of savings in operating expenses over a ten year period,(77) appears to be based solely upon the pre-merger financial analysis. However, this statement is not supported by the pre-merger Ernst & Young Study, which had predicted prior to the merger that $150 million could be saved from elimination of duplicative services between hospitals without consolidation at a single acute care site.
2. Optima Violated Its Commitment To Maintain Community Governance By Stripping The Hospitals' Boards Of Their Authority
In the wake of the 1994 supporting organizations merger, Optima has substantially changed the organizational structure of its hospital "subsidiaries," essentially stripping them of all independent authority, and conferring that authority on Optima Healthcare.
Optima accomplished this in several stages. After the merger, Optima made immediate efforts to exert control over its hospital "subsidiaries" through changes, some of which may have been legally ineffective, to CMC's and Elliot's governing documents. Then, in November, 1995, Optima Health, Inc. reorganized its own corporate structure and the corporate structure of the hospitals. It did so first by downsizing its own Board of Trustees -- which had previously consisted of all trustees of Fidelity Health Alliance and Elliot Health Systems -- from thirty-six to sixteen members and eliminating the prior requirement that seventy percent of its trustees come from the local community. At the same time, it restructured the hospital boards into identical "mirror boards," while retaining most authority for the conduct of hospital affairs and the control of the hospitals' assets in itself.(78)
Finally, in January 1997, Optima Health, Inc. affiliated with Covenant Health Systems to form Optima Healthcare, a regional joint operating company embracing the operations of St. Joseph's Hospital in Nashua, as well as Elliot and CMC.(79) Under the Joint Operating Agreement governing Optima Healthcare, most corporate powers of Optima Health, Inc. have been ceded to the regional institution. The two hospitals themselves retain almost no independent function beyond credentialing and a limited capacity to establish specific clinical policies and directives, which are subject to approval by the board of Optima Healthcare. Under the JOA, senior managers of the hospitals are to be employed not by the hospitals, but by Optima Healthcare.(80)
As amended, the current bylaws of Elliot and CMC are nearly identical; the two are governed by "mirror boards" of identical composition, selected and controlled by the board of Optima Health, Inc., which in turn is controlled by Optima Healthcare. The Optima Health, Inc. board members, all of whom under the bylaws are also members of the subsidiary boards, serve as the executive committee of the Elliot and CMC boards, and the Optima Health, Inc. officers serve as the officers of the subsidiary boards. The President of Optima Healthcare Corporation, ex-officio, is also the president of Elliot and CMC. The bylaws allow each of the Elliot and CMC boards to "delegate its authority with respect to the operation of the Corporation to another entity organized for the purpose of operating and managing the Corporation and other affiliated entities on an integrated basis¼." The JOA mandates that CMC and Elliot as "Network Members" implement the decisions reached by the Optima Healthcare board.
The "mirror board" governance structure deviates substantially from the pre-merger community-based corporate structure of the hospitals, and from the pre-merger guarantees of local control and governance.(81) Under the 1994 and 1995 amendments and the 1997 JOA, the hospitals are no longer controlled by boards chosen with any guarantee of meaningful local representation. Optima has ceded to Optima Healthcare control over the operating budgets of the hospitals, control over the strategic planning and location and type of services provided, and control of the disposition of profits.(82)
The changed bylaws and corporate structure of CMC appear to be inconsistent with that institution's charitable mission, as expressed in its Articles. Although the CMC bylaws state that CMC's purpose is to maintain the identity of CMC as a Catholic institution, CMC's governing board now includes equal numbers of Catholic and Protestant representatives.
Finally the "mirror bylaws" have also engendered confusion as to the applicability of Catholic Ethical doctrine to the delivery of health care services throughout the Optima network. On the one hand, the Elliot bylaws provide that the Network Ethics Committee, which serves the entire Optima and Optima Healthcare Networks, is responsible for acting "as an advisory group to the President on bioethical issues not previously covered in the Ethical and Religious Directives for Catholic Health Facilities." On the other hand, the bylaws provide that "in the case of the individual patient, the physician duly appointed to the Medical Staff shall have full authority and responsibility for the care of the patient subject only to such limitations as the Directors may formally impose and to the Bylaws, rules and regulations for the Medical Staff adopted by the Staff and Directors." Thus, neither the Elliot nor the CMC bylaws require -- as the CMC bylaws did before the merger -- that physicians practicing at CMC abide by the Ethical Directives.(83)
C. Optima Has Failed To Meet The Standard For Termination Of Or Deviation From The Charitable Missions Of Elliot And CMC
The legal processes of cy pres and deviation are public actions in which the Probate Court provides public oversight of decisions by trustees of a charity to terminate or radically change the charity's fundamental mission or identity. Despite fundamentally changing the organization and governance of Elliot and CMC, and the mission of CMC, Optima has not applied to the Probate Court for approval. As a result, Optima has not been required to demonstrate to the community it serves that these changes are necessary or appropriate under applicable legal standards.
Optima's failure to seek Court approval for its decisions regarding the charitable mission, organization and governance of the hospitals has led to a series of unexamined actions, which, on the basis of the materials submitted to and reviewed by this office, do not appear to be warranted under either the doctrines of cy pres or deviation. This is so for the following reasons:
* The only financial analysis conducted by Optima demonstrates that $150 million of cost savings could be achieved over a ten year period while still operating two acute care sites.
* No financial analysis supports the claim that cost savings can only be achieved by consolidation at a single acute care site.
* The pre-merger financial analysis does not establish that it is illegal, impracticable or impossible to preserve the distinct missions and operations of CMC and Elliot.
* Optima has yet to fully define the mission and attributes of the unified institution into which it seeks to merge Elliot and CMC, but rather appears to be defining those attributes on an ad hoc basis in response to perceived crises. It is, therefore, impossible to determine whether the unified institution has or will have a charitable mission or identity consistent with the missions and identities of either hospital. Optima has maintained that the specifics of governance of the successor organization are confidential business information.
1. Optima's Application For A Certificate Of Need For Consolidation Of Acute Care Services Of Elliot And CMC Did Not Address The Issue Of Whether Optima May Terminate Or Deviate From The Charitable Missions Of The Hospitals
In interviews with this office, Optima officials have consistently maintained that through the CON process at the Health Services Planning and Review Board, they received all necessary governmental approvals for the consolidation of acute care services of the two hospitals at a single site. This argument ignores the fundamental legal issues raised by the charitable status of the hospitals.
The CON analysis conducted by the Health Services Planning and Review Board was directed at, and limited to, the statutory criteria for approval of a certificate of need under RSA 151-C:7, and related administrative rules. In general, these criteria are applied to determine whether a proposed expenditure of health care resources meets a public need, and is consistent with quality health care for the affected community. The CON process does not distinguish between charitable and for-profit institutions and is not directed at issues relating to the charitable missions of health care institutions organized as charitable trusts. Under New Hampshire law, issues pertaining to the charitable mission of the hospitals are within the exclusive province of the Probate Court and the Director of Charitable trusts through actions for cy pres and deviation.
This office has reviewed the pre-merger Ernst & Young study, a pre-merger study conducted by the personnel of the two hospitals, and the Systems Consolidation Committee Reports generated between September 1994 and the March 1995 announcement of a decision to consolidate all acute care services of Elliot Hospital and CMC onto the Elliot campus. We have concluded that the documents provided to us -- which Optima has represented to this office and to the Health Services Planning and Review Board constituted the basis for its decision -- do not support termination or deviation from the charitable missions and identities of the community hospitals under the principles of cy pres and deviation.
2. Optima Has Not Demonstrated That It Is Impossible, Impracticable Or Illegal To Preserve The Distinct Missions And Operations Of Elliot And CMC As Charitable Trusts
Prior to the 1994 supporting organizations merger, Fidelity Health Alliance and Elliot Health Systems commissioned and relied on the Ernst & Young study of potential savings to estimate the opportunities for savings available from the proposed merger. As previously discussed, that study recognized $150 million in possible savings from an operational model which preserved the distinct operations and identities of both Elliot and CMC. This report appears to have been the basis of savings estimates which were repeatedly presented by Fidelity and Elliot Health Systems management to the Manchester Board of Aldermen and in other public forums.
Nevertheless, -- and despite public statements suggesting the contrary -- at no time after the merger did Optima conduct a financial analysis of the feasibility of preserving the distinct charitable missions and operations of the hospitals before deciding to consolidate the hospitals into a single institution.
The CON application constitutes Optima's most comprehensive public analysis of the financial basis for its decision to consolidate all acute care services of both hospitals at a single site. The Executive Summary to the CON application describes Optima's decision to consolidate services as arising from "compelling" post-merger analysis, including, in particular, the work of an internal Systems Consolidation Committee convened in September 1994 to analyze consolidation options. In the Executive Summary to its CON application, Optima asserted that "after carefully studying: (1) national and statewide trends; (2) conducting extensive financial feasibility studies; and (3) examining innovative and cutting-edge approaches to quality of care," it concluded that its plan for an integrated health care system in Manchester would achieve economies of scale, improve system efficiency, and produce optimal patient care.(84)
In fact, no post-merger financial analysis of consolidation options appears to have occurred. The Systems Consolidation Committee's work took place only after management had already arrived at the decision to consolidate all acute care services at a single hospital site, and only after management had already targeted January 1, 1995 as the deadline for identifying the acute care site.
Optima's reliance on its pre-merger financial feasibility studies and its Systems Consolidation Committee Reports to support its contentions that "consolidation of acute care services will achieve key economies of scale, resulting in tremendously increased system efficiency and optimal patient care,(85) is particularly troublesome, in that the Ernst & Young study supports the contrary conclusion -- that $150 million of cost savings could be achieved by consolidating certain services while still operating two acute care sites.
a. The Financial And Systems Analyses Relied On By Optima In Its CON Application To Justify Consolidation Of Acute Services Are Not Sufficient To Justify Termination Of Or Deviation From The Charitable Missions Of The Hospitals
The financial or systems analyses performed by Optima do not establish that it is impossible, impracticable or illegal to continue the distinct charitable missions of both Elliot Hospital and CMC through preserving their independent and distinct identities as acute care hospitals. The Ernst & Young study, for example, is nothing more than an estimate of potential savings, arrived at in 1993, several months before the merger of the supporting organizations. Because the proposed merger was under antitrust scrutiny, the parties to the transaction were not permitted to scrutinize each others' financial documentation, but rather relied on Ernst & Young to provide a general estimate of potential savings available from the transaction.(86)
Even so, the Ernst & Young study projected $150 million of cost savings over ten years by consolidating support and administrative services while still operating two acute care sites. Optima did not produce evidence of a post-merger study which contradicts this fundamental assumption on which the original merger of supporting organizations was based. Its description of the studies offered as "compelling" support for its decision to consolidate at a single site is unwarranted for the following reasons:
* Neither the Ernst & Young study nor any post merger systems analysis addresses the capital costs of implementing measures to achieve operating cost savings from consolidation at a single site. Cost savings projected to result from the consolidation of acute care at a single site do not factor in increased capital costs.
* Neither the Ernst & Young study nor any post merger systems analysis supports Optima's assertion in its CON application that over 70 percent of its projected savings are attributable to the consolidation of acute care services at one site. There is no statement or analysis in that study or any study provided by Optima that links 70 percent of the cost savings to consolidation of acute care at one site. To the contrary, the Ernst & Young study projects $150 million of savings with acute care at two sites. With consolidation of acute care at one site, and assuming no increased capital costs, the Ernst & Young study projects $250 million of savings. Thus, according to Ernst & Young, 60 percent of the maximum projected cost savings can be realized with acute care at two sites.
* The reports of the systems consolidation subcommittees do not contain any financial analysis to support possible cost savings. While information contained in the Systems Consolidation Committee materials is data that with other information and analysis could serve as a basis for a financial analysis, it is not itself a financial analysis. Neither the documents provided by Optima nor the documents submitted to the Health Services Planning and Review Board contain a focused report summarizing and analyzing the conclusions reached by the systems consolidation subcommittees.
* Neither the Ernst & Young study nor any post merger systems analysis addresses debt service for new construction and renovation as an offset against claimed savings from consolidation. The documents produced by Optima do not contain any financial analysis or data substantiating Optima's claim that the renovation of Elliot Hospital's campus will pay for itself in approximately five years with $42 million in net operating savings.
* In its CON application, Optima states that national and statewide trends support consolidation of acute care services at a single site. The documents submitted by Optima contain no evidence or analysis of "trends" which would establish the financial advantage of consolidation at a single site or the impossibility or impracticality of the continued operation of Catholic Medical Center.
Audited financial reports of Catholic Medical Center for 1992 and 1993 reveal revenues and gains in excess of expenses of approximately $5.9 million and $7.4 million, and positive cash flows of $8.7 and $10.1 million respectively. Audited financials for Elliot Hospital for 1992 show a positive cash flow of $5.5 million. This information suggests that the two hospitals were independently profitable in the years leading up to the merger. This trend appears to have continued through 1996 to the extent that Optima's financial reports continue to show each hospital generating operating surpluses. While some portion of such surplus may be attributable to post-merger savings resulting from systems consolidations, Optima has not demonstrated that the hospitals cannot maintain independent viability through operational or administrative consolidation short of its current plan to consolidate all acute care services on the Elliot campus.
b. Optima's Analysis Does Not Meet The Burden Necessary To Terminate Or Deviate From The Charitable Missions Of The Hospitals
The decision of the CON Board finds that the rationale for the consolidation of the inpatient acute care services is based on a study conducted by the two hospitals ¼ to determine the most appropriate location to consolidate all inpatient acute care services into one comprehensive hospital in the city of Manchester. The [Elliot Campus] site was chosen as the hospital of choice based on a number of inefficiencies associated with the site and spatial capabilities of the CMC facility and campus.
Finding No. 7. The criteria Optima applied in selecting the single acute care site included the size of the physical site, the availability of parking, the condition of the general facility, the ability of the site to accommodate physicians' offices, the renovation costs associated with consolidation at a single facility, and the carrying costs of the vacant site. Optima's site based criteria do not establish an appropriate rationale under the law of charitable trusts to justify the termination of Catholic Medical Center as an acute care facility. Simply put, a charitable hospital may not be terminated because another location may be more convenient or have access to better parking.
If a standard of convenience were applied to justify a substantial change in the purposes and mission of a charitable trust, no legal impediment would prevent Optima or Optima Healthcare from closing CMC at a later date and consolidating all services -- acute and non-acute -- at the Elliot campus. Indeed, this office has reviewed long-range planning documents which suggest complete consolidation of all hospital services, both acute and non-acute, at the Elliot Hospital campus as a long-term option.(87) The Joint Operating Agreement reposes full authority in Optima Healthcare to develop a strategic plan for the location of services and binds the "Network Members" to adhere to the strategic plan.(88)
Neither the Probate Court nor the Director of Charitable Trusts has ever accepted convenience as a legal standard to justify the termination of, or substantial change in the purposes of, a charitable trust. By ignoring the legal processes necessary to terminate or deviate from the distinct charitable missions and identities of the community-based hospitals, Optima has proceeded on the basis of inadequate financial analysis to transfer all acute care services from Catholic Medical Center, to reduce the licensed beds at CMC from 330 to 110, to strip the hospital boards of their authority, to sell property belonging to CMC,(89) and to exercise virtually complete legal authority over the finances and assets of CMC and Elliot Hospital.
We conclude that these actions constitute such a significant change of mission, governance and identity of both Elliot Hospital and CMC as to require the approval of the Director of Charitable Trusts and the Probate Court pursuant to RSA 547:3-d or RSA 547:3-h. Optima has not properly made the case that there is any legally cognizable justification for such changes.
3. Optima Has Not Demonstrated That The Unified Healthcare Institution It Seeks To Create Has A Charitable Identity Or Attributes Consistent With Either Elliot Or CMC
If a charity must be terminated or its mission fundamentally changed, under the doctrines of cy pres or deviation, the Probate Court is charged with determining that the charitable institution or substituted use to which the charity's assets are to be committed is as similar as possible to the purpose of the original trust. Optima has not demonstrated that the unified health care institution it seeks to substitute for the distinct community-based institutions of Elliot Hospital and CMC has a charitable mission or attributes consistent with either hospital.
In a sense, this failure is at the heart of the passionate concerns about Optima and the future of the hospitals which have been raised within the Manchester community by the Save CMC organization and others. In the years following the 1994 supporting organizations merger, this failure has manifested itself in:
* Optima's seeming disregard for the preservation of CMC's traditional commitment to religious health care; and
* Optima's vague and ad hoc application of Catholic ethical doctrines to the delivery of health care services -- including certain abortion procedures -- at Elliot Hospital.
a. Optima Has Fundamentally Altered The Nature Of CMC As A Religious Acute Care Hospital
The corporate structures adopted by Optima -- including, in particular, the establishment of mirror boards for Elliot and CMC and the ceding of virtually all independent authority from the hospital boards to Optima Health, Inc. and Optima Healthcare -- has had the effect of blurring traditional and important distinctions between the charitable missions of the two hospitals. In essence, CMC has been transformed into a non-acute care element of a larger secular hospital organization. This runs counter to the hospital's traditional mission. The 1974 CMC Articles of Agreement specifically describe CMC as an agency of the Roman Catholic Church and stress its unique spiritual mission to provide health care to those in need in a manner guided by and consistent with the tenets of the Roman Catholic Church as expressed in the Ethical Directives.
In testimony to the Attorney General's Office, Optima officials asserted, albeit with some confusion and with the notable exception of abortion policy, that the Directives themselves do not apply to the Elliot Hospital, but apply only within the CMC building. While this distinction might have merit in an organization in which CMC maintained independent viability as an acute care hospital, it has little meaning for a CMC whose health care mission has been reduced to a limited number of non-acute care functions.(90)
Optima has not provided this office with documents or evidence which indicate that the historical applicability of the Ethical Directives at CMC was ever actively considered by its constituent boards in connection with the consolidation of acute care services at a single site. Indeed, this issue appears to have gone unaddressed until the 1996 controversy regarding the availability of certain abortion procedures at Elliot Hospital led to promulgation of a controversial policy regarding religious principles and abortion procedures. This policy and statements made to this office by Optima management regarding the applicability of the Ethical Directives, appear to have been formulated as a defensive response to the recent controversy. Such a position betrays a fundamental lack of understanding and respect for the totality of the Ethical Directives as a guide to the religious underpinnings of Catholic health care.
This attitude is underscored by a conversation between Robert Cholette, CEO of Fidelity Health Alliance and later of Optima Health, Inc. and Optima Healthcare, and Dr. Maria Alicia Davila, a physician long associated with CMC. Dr. Davila testified that, prior to the 1994 merger, Mr. Cholette assured her that the proposed merger would not result in closure or termination of CMC. In the course of that conversation, Dr. Davila stated her conviction that Elliot Hospital and Catholic Medical Center could not be merged because of their different cultures. To which Mr. Cholette replied, "That's not true. These are just buildings." She in turn responded, "Excuse me? You mean an institution does not have a soul?"(91)
b. Optima Has Not Clarified Whether Health Care Services In The Merged Institutions Will Be Altered Or Curtailed To Conform With Religious Doctrine
The blurring of the distinct charitable identities of Elliot Hospital and CMC is equally troubling with respect to Elliot Hospital, a secular institution with roots in Manchester's Protestant Community. As the ongoing controversy regarding abortion procedures indicates, there is considerable concern within the medical and general communities of greater Manchester as to whether Catholic doctrine may come to control the provision of health care at Elliot Hospital. Necessarily, this issue is most acutely drawn in the area of reproductive services and abortion, though it may also have implications for other areas of health care, including care at the end of life.
In November 1997, in response to the disclosure that Elliot Hospital's practices with respect to abortion did not conform to Catholic doctrine or the Ethical Directives, the Trustees of the mirror boards, acting as Trustees of Elliot Hospital, adopted a policy which banned termination of pregnancy at Elliot Hospital for any reason except to save the life of the mother.(92) This policy was intended to conform Elliot's policies with the Ethical Directives regarding termination of pregnancies by banning certain procedures, rarely but consistently performed at Elliot, where pregnancies were terminated due to non-lethal fetal abnormalities.(93) The Elliot Trustees sought to address the larger issue of the impact of religious principles and directives on health care at the unified acute care hospital by including within the announced policy several statements purporting to limit the application and influence of religious doctrine to health care within the hospital.
Optima's failure to address the complex ethical issues raised by the merger of a religious and a secular hospital forthrightly, publicly and on the basis of accurate information regarding practices at both hospitals has led to the apparent compromise of the charitable identities and missions of both institutions, and has resulted in the invention of an ad hoc ethical and religious policy which does not fully address the issues raised. Indeed, the provisional nature of the policy was evident in interviews with Optima personnel in which no member of Optima's Board or present or past management appeared able to articulate the scope of the policy or the relation of the Ethical Directives to Elliot Hospital or to the unified acute care institution being formed on the Elliot campus.(94)
Similarly, members of Optima's management and boards of trustees interviewed in connection with this review demonstrated confusion concerning the effect of the recently announced policy on availability of specific procedures, such as routine administration of abortifacient drugs to rape victims.(95) At least two physicians interviewed expressed concern that the policy would affect the treatment options available for extrauterine or ectopic pregnancies in a manner they felt was inconsistent with proper medical treatment.(96) No member of Optima's boards or management interviewed by this office could define the effect of the policy on this issue.(97)
The 1994 supporting organizations merger agreement provides that "Optima will not be identified or operated under the auspices or control of any particular religious organization or group," and that Optima will "maintain the identity of Catholic Medical Center as a Catholic Institution." Optima's approach has been to treat Catholic Medical Center as a separate corporate entity for some purposes and as part of a single integrated hospital for other purposes.
By consolidating acute care at a single location, restructuring corporate governance, and transferring the authority of the local governing boards to a regional consortium, Optima has effectively terminated the separate existence of both Elliot and CMC as community-based charitable hospitals with distinct identities and missions. The mission of CMC as a Catholic hospital has not been maintained. The adoption of a termination of pregnancy policy that is consistent with Catholic doctrine for Elliot does not fulfill the obligation that Optima undertook to maintain the identity of CMC as a Catholic institution. It does, however, compromise Elliot's traditionally secular approach to medicine. The logical and legal incoherence of this approach is evident.
c. Optima Has Failed To Fulfill Its Promise That It Would Be Publicly Accountable For Its Claims That The Merger Of Elliot And CMC Would Produce Savings And That It Would Return Those Savings To The Community
Before the 1994 supporting organizations merger, Fidelity Health Alliance and Elliot Health Systems management repeatedly stated that the merger would result in savings of over $150 million in ten years. Optima said that integration would produce cost savings of over $3,600 for each household in Manchester and over $1,000 for each household in Hillsborough County,(98) and pledged to establish a program of public accountability to demonstrate that the "hospitals are vigorously pursuing cost efficiencies and are otherwise continuing their mission to be a public servant to the community."(99)
i. Optima Has Not Produced Evidence That Consolidation Of The Hospitals Has Produced Or Will Produce Cost Savings
In connection with this review, Optima provided no evidence that it has fulfilled its promise to institute a program of public accountability demonstrating cost efficiencies. When Optima was asked to produce the "public accountability" documents that would demonstrate savings from the merger, Optima provided copies of "merger report cards" prepared for and presented to its trustees on a quarterly basis. Until called for by this review, these "report cards" have been treated by Optima as confidential business information unavailable to the public.(100)
Our review of the "report cards," prepared by Optima for its Board of Trustees leads us to the conclusion that the report cards do not fulfill the pre-merger promise of a public accountability program. First, they have never been made available to the public until this review. Second, the report cards neither contain nor reflect contemporary financial analysis or data by which to evaluate the accuracy of any claimed savings.
Essentially, the report cards offer nothing other than the repeated conclusory assertion that because consolidations have taken place that were predicted by the 1993 Ernst & Young study as potential sources of savings, those savings have in fact been realized. Thus, purported cost savings are simply "reported" based on the same approach that was used to project anticipated cost savings: that is, to estimate gross savings achievable from consolidation of specified services without actual adjustments to reflect cost saved by unit of service actually delivered. While Optima's method of describing cost savings may be acceptable for estimating or projecting potential cost savings on a prospective basis, it is not a reliable or accurate method for documenting or reporting actual cost savings.(101)
Because the merger report cards are based solely on the pre-merger projections, they do not take into consideration a variety of independent factors which may relate or contribute to claimed savings. These include the reduced variable costs which may be attributable to a decline in patient census. In a hospital context, a decrease in patient census utilization may result in lower operating costs without corresponding efficiency gains. Stated simply, when a hospital has fewer patients, it may be able to recognize cost savings through consolidation or elimination of staff functions and other overhead costs. Because Optima's report cards do not account for other factors such as reductions in patient census from pre-merger levels, it cannot be determined whether Optima's claimed cost reductions result from cost efficiencies flowing from the merger and subsequent consolidations, from a lower patient census, or, alternatively, whether the claimed cost reductions are more properly attributable to managed care payor structures or other factors independent of the merger.
ii. Optima Has Not Established A Program Of Public Accountability
Before the merger, Optima represented to the Attorney General's Office and the Manchester Board of Aldermen that it would institute an accountability system so that the community could keep score of its successes. Mr. Cholette described the accountability system as a way of "report[ing] to the community number one what our plans were for the year." It would allow the community to determine "just how well we did," and provide evidence that the cost savings would be returned to the community.(102)
Instead of implementing the promised system of public accountability, Optima has refused to make its financial and corporate information available to the public. Not only has Optima not kept score for itself, it has also prevented the community from keeping an independent scorecard of its "successes."
In connection with this review, Optima has claimed that the corporate bylaws of Optima and its subsidiaries are confidential, that organizational materials reflecting its business organization and structure are confidential, that financial feasibility studies submitted to support its claims of cost savings from consolidation of acute care are confidential, that budgets are confidential, that the joint operating agreement with Optima Healthcare is confidential, and that project costs and construction related information pertaining to the ongoing construction at Elliot Hospital are confidential.
In light of this corporate culture of secrecy, it is all but impossible to determine whether Optima has either achieved cost savings or redirected those costs savings back to the community as promised.
VI. CONCLUSION
In 1993, Optima said that the merger of Fidelity and Elliot Health would benefit the Manchester community by redirecting health care dollars, wasted on competition between CMC and Elliot, back to the community. A member of the Catholic Medical Center Board described the purpose of the merger this way:
... the hospitals have worked collaboratively to sponsor the Manchester Community Health Center which provides family centered care regardless of ability to pay¼. Manchester needs more of these services. The dollars spent on competition should be redirected to accomplish benefits for the community.(103)
In letters of support for the merger, the Manchester community echoed this goal of improving health care in Manchester and surrounding communities by ending wasteful competition between its community hospitals.
It was the clear understanding of the community in 1994 that Optima would accomplish this goal by eliminating duplication in administrative and operational costs while still operating two acute care hospitals. Through its statements to the community, Optima fostered the belief that it was committed to investing in the health care of the Manchester community, improving health care services to the indigent, and maintaining a system of accountability to the citizens of Manchester.(104) To elicit broad public support for the merger, Optima acknowledged that it would be governed by its social responsibilities to the Manchester community and its indigent population. In essence, Optima promised the people of Manchester that it would honor the social contract between them and their hospitals, and the people trusted Optima to abide by that promise.
Optima is not a for-profit business accountable to its equity investors. Optima has no shareholders other than the people of the community that founded and support its constituent hospitals. In 1994, when Optima undertook the responsibility of managing two distinct charitable hospitals, each founded by and connected to different communities within the larger community of Manchester, Optima became accountable not only to the Manchester community, but also to the distinct communities which share the traditional values of CMC and Elliot.
By transferring corporate and financial control of Elliot and CMC to a regionally-based organization that is no longer governed by a Board of Trustees drawn exclusively, or even primarily, from the Manchester community, Optima failed to honor its social contract to both the Manchester community as a whole and to the distinct communities whose values are reflected and who are served by CMC and Elliot. It also severed the social contract between CMC and the community served by CMC and its predecessor hospitals by ending CMC's historical mission of ministering to the broad health care needs of its community in a traditionally Catholic setting. By failing to address forthrightly at the time of the original merger, or at any time thereafter, the complex moral and clinical issues involved in the merger of a religious with a secular health care institution, Optima violated the trust of the community that founded and is served by the Elliot Hospital.
Most troubling, Optima has taken all of these steps without engaging in the necessary legal process of cy pres or deviation to determine the legality and practical effect of its decisions on the charitable missions of Elliot and CMC. As a result, it has made a series of decisions that fundamentally alter the charitable identities, governance and missions of Elliot and CMC while effectively excluding from any meaningful dialogue the very populations those hospitals are pledged, and legally bound, to serve.
It is the conclusion of the Attorney General that Optima, as a charitable institution, must seek guidance from the community in developing its vision of quality health care. This cannot occur without dialogue and without inclusion. Unless changed as a result of that dialogue, Optima's decision to terminate or fundamentally alter the charitable missions and identities of CMC and Elliot by combining them into a single health care institution must be reviewed by the Probate Court in the context of a cy pres action.
________________________________________
Philip T. McLaughlin, Attorney General of the State of New Hampshire
Michael S. DeLucia, Director of Charitable Trusts
Leslie J. Ludtke, Associate Attorney General
Walter L. Maroney, Sr. Assistant Attorney General
Jennifer J. Patterson, Assistant Attorney General
1 Meinhard v. Salmon, 164 N.E. 545, 547 (N.Y. Ct. App. 1929) (emphasis added).
2 See RSA 547:3-d.
3 William Donovan letter to Assistant Attorney General Walter Maroney, November 29, 1993, Exhibit 19.
4 Union Leader, 3/20/93 "Cholette said it is unlikely that CMC and Elliot would ever merge."
5 See Hospital Licensing Documents and Summary, Exhibit 5.
6 A comprehensive list of documents reviewed and the witnesses from whom testimony was taken is included in Exhibit 1.
7 Optima asserts that many of the documents which it has submitted to the Attorney General's Office for review are privileged or confidential. See Confidentiality Agreement, Exhibit 26. Documents that Optima has labeled as confidential are identified in Exhibit 1 as confidential; however, other documents listed in Exhibit 1 may also be subject to a claim of privilege or confidentiality. It should be noted that some of the documents that Optima claims are privileged are required by law to be on file as public records. For example, RSA 292:7 requires that a nonprofit corporation file amendments to its articles of agreement with the Secretary of State and town or city clerk. To the extent certain corporate documents developed by Optima affect the Articles of Agreement currently on file, those documents must be filed with the Secretary of State. Optima claims that all corporate governance documents are confidential.
8 New Hampshire law defines a charitable trust as "any fiduciary relationship with respect to property arising as a result of a manifestation of an intention to create it, and subjecting the person by whom the property is held to fiduciary duties to deal with the property ¼ for any charitable, nonprofit, educational, or community purpose." RSA 7:21, II(a)(Supp. 1997). The most recent amendment to this provision became effective on January 1, 1998. The definition in effect between 1987 and 1997 was substantially identical to the quoted language.
9 See RSA 7:19, 7:20, 7:22, 7:24. See also Attorney General v. Rochester Trust Co., 115 N.H. 74 (1975); Souhegan National Bank v. Kenison, 92 N.H. 117 (1942).
10 See, e.g., Queen of Angels Hospital v. Younger, 66 Cal. App. 3d 359 (1977); Holt v. College of Osteopathic Physicians and Surgeons, 61 Cal.2d 750, 754 (1964); Attorney General v. Hahnemann Hospital, 494 N.E.2d 1018, 397 Mass. 820, 835-36 (1985) (charitable hospital could not amend its corporate charter to include additional new grant-making provisions and then devote assets given and amassed for hospital purposes to such grants); Greil Memorial Hospital v. First Alabama Bank of Montgomery, 387 So.2d 778, 781 (Ala. 1980) (gift to charitable organization which operated hospital for treatment of tuberculosis could not pass them to a successor hospital organization which had abandoned that charitable purpose); see generally Riverton Area Fire Protection District v. Riverton Volunteer Fire Dept., 566 N.E.2d 1015 (Ill. App. 1991); Bossen v. Women's Christian National Library Association, 225 S.W.2d 336 (Ark. 1949).
11 IV. A. A. Scott, The Law Of Trusts, sec 384.1 at 2778. See also Holt, 61 Cal.2d at 756-757.
12 See Henry B. Hansmann, Reforming Nonprofit Corporation Law, 129 U. Pa. L.R. 497 (1981).
13 RSA 292:2, III.
14 See Department of Revenue Administration Report on Tax Exempt Property, Exhibit 6.
15 See RSA 7:19, 7:20, 7:22, 7:24.
16 See Attorney General v. Rochester Trust Co., 113 N.H. 74, 76 (1975) ("it is well settled that the attorney general is a necessary party in any proceedings involving cy pres, or deviation or termination of charitable trusts ¼ we hold that the attorney general is not only a necessary party in such cases but may also be the initiating party").
17 See RSA 547:3-d.
18 RSA 547:3-h.
19 RSA 547:3-d.
20 Queen of Angels v. Younger, 66 Cal.3d 359 (1977).
21 The charter of Queen of Angels permitted it to "establish, ¼ own ¼ maintain ¼ and operate a hospital in the City of Los Angeles" and to educate nurses and medical students. The facts showed that from the date when the hospital was incorporated to the date of the lease, the corporation had continuously operated a hospital. In addition, the hospital had represented to the public that it was a hospital in soliciting donations and public support. In its review the court stated, "The articles of incorporation alone -- without resort to additional evidence -- compel the inference that although Queen is entitled to do many things besides operating a hospital, essential to all those other activities is the continued operation of a hospital." Id. at 368.
22 Id. at 368-69.
23 Id., citing Holt v. College of Osteopathic Physicians & Surgeons, 61 Cal.2d 750 (1964). In Holt, three trustees brought an action to enjoin a breach of charitable trust seeking injunctive relief to prevent the threatened change in corporate purpose. The college was incorporated in 1914 to establish and maintain a medical and surgical college in osteopathic medicine; in addition, by charter its members staffed the Los Angeles Osteopathic Hospital and ran clinics using that form of medical treatment. In 1961 the college trustees voted to amend the charter to run and accredit an allopathic medical school at the same facility, eliminating osteopathic medicine from its curriculum. Plaintiffs contended that the trustees' actions had the purpose and effect of abandoning the organization's main charitable purpose, which was to run an osteopathic medical school, and convert it into a school teaching non-osteopathic medicine. Id. at 761.
24 Attorney General v. Winsted Memorial Hospital, Conn. Superior Court, Judicial Dist. at Litchfield, No. CV-96-00711936-S (unreported decision).
25 Rest. 2d of Trusts, sec. 381; G.G. Bogert, The Law of Trusts and Trustees, (2d ed. rev.), sec. 561, at 225-277. IV. A. A. Scott, The Law Of Trusts, sec. 381, at 323-33.
26 In Re Certain Scholarship Funds, 133 N.H. 227, 240 (1990), Brock, C.J., dissenting, and citing Jacobs v. Bean, 99 N.H. 239, 241-42 (1954).
27 See Chwalek v. Dover School Comm., 120 N.H. 864 (1980).
28 1881 N.H. Laws ch. 178.
29 Id.
30 Id; 1909 N.H. Laws ch. 309; 1959 N.H. Laws ch. 357.
31 Articles of Agreement of Catholic Medical Center, Article II.A.
32 Id., Article II.F.
33 Id., Article II.C.
34 Id. (capitalization in original). A copy of the seventy specific "Ethical and Religious Directives of the Catholic Health Facilities," ("Ethical Directives") which integrate Catholic theology and Catholic health care, is attached as Exhibit 22.
35 See, e.g., Ethical Directive no. 3:
In accord with its mission, Catholic health care should distinguish itself by service to and advocacy for those people whose social condition puts them at the margins of our society and makes them particularly vulnerable to discrimination; the poor; the uninsured and the underinsured; children and the unborn; single parents; the elderly, those with incurable diseases and chemical dependencies; racial minorities; immigrants and refugees. In particular, the person with mental or physical disabilities, regardless of the cause or severity, must be treated as a unique person of incomparable worth, with the same right to life and to adequate health care as all other persons.
36 The pre-merger discussions were at arms-length to avoid violating the strict requirements of anti-trust law.
37 A copy of the Merger Agreement is attached as Exhibit 20.
38 Optima, CMC, Elliot Health Systems, and Fidelity Health Alliance were all incorporated as voluntary nonprofit corporations under RSA ch. 292.
39 See, e.g., Letter from Robert Cholette and Phillip Ryan to Representative Zeliff, July 27, 1993, Exhibit 18.
40 Board of Mayor and Aldermen Minutes of September 7, 1993, Exhibit 7.
41 Union Leader, 7/5/93, Scott Goodspeed "¼ we do know we will continue to operate two acute care sites." Sylvio Dupuis, "The fundamental decision has been arrived at to have two acute care sites. It's very important to patients and their families to have access to a wide array of services."
42 Letter, dated November 29, 1993 from William Donovan to Walter L. Maroney.
43 Board of Mayor and Aldermen Minutes, September 7, 1993, Exhibit 7, at 7 (statement of Mr. Cholette).
44 Merger Agreement, Exhibit 20, ¶ 11.
45 Optima Health, Inc. Amended Articles of Agreement, Art. II, at 3. Under the Merger Agreement, Optima was to be "the head of a community based health care system ¼ which has both Catholic and non-Catholic elements. OPTIMA will not be identified as operated under the auspices or control of any particular religious denomination or any other group." Merger Agreement, at ¶ 10.
46 "FHA, EHS, Catholic Medical Center, and Elliot Hospital share a long tradition of appreciating the importance of spiritual, ethical, and moral support in caring for patients. They share a commitment of a respect for life in the delivery of health care services. They are committed to affording their patients the right to address issues of life and death with dignity, with the caring support of family and hospital, and with the best interests of the patient in mind." Id., at ¶ 10.
47 See Medical Staff Resolution of December 27, 1997, Exhibit 11.
48 The "Network Members" include Optima Healthcare and Covenant Health Systems and their tax exempt affiliates. The tax exempt affiliates include CMC, Elliot Hospital, Hillcrest Terrace, Inc., Alliance Resources, Inc., Visiting Nurse Association of Manchester and Southern N.H., Inc., Women's Aid Home, CMC Regional Cardiac Foundation, CMC Physician Practice Association, VNA Home Health and Hospice, VNA Management Service, Inc., VNA Personal Services, Inc., VNA Community Services, Inc., Covenant Health Systems, St. Joseph's Hospital, and the SurgiCenter at St. Joseph's Hospital.
49 See Optima Healthcare Documents, IRS Ruling Request, Exhibit 36, at 19. ("The structure and governance of OHC were largely influenced by the fact that SJH is a Catholic-sponsored organization.").
50 See Optima Healthcare Network; Boards and Management, Exhibit 35; and Joint Operating Agreement, Exhibit 36.c.
51 Elliot Hospital, a corporation created by statute, is not governed by RSA ch. 292, but remains subject to the general principles of corporate law and to the obligations of a charitable corporation. We do not address the legal question of whether, as a legislatively created entity, the Legislature retains the sole authority to amend the charter. Even were that the case, the public would be included in the process of revisions and would receive notice of the changes through the legislative process.
52 See Chronology of Corporate and Other Records, Exhibit 3, for a schematic review of the corporate history of all entities discussed in this Report.
53 Beginning in 1976, public members were nominated by a large Board of Incorporators.
54 Fidelity Health Alliance was a 501(c)(3) voluntary corporation established on May 9, 1985 under RSA ch. 292 for the purpose of furthering the programs of CMC. Originally called Catholic Medical Center (during a time when CMC's name was Catholic Medical Center Hospital), the supporting organization's name was changed to Catholic Health Alliance in January 1989, and to Fidelity Health Alliance in August of 1990. Fidelity Health Alliance's Articles of Incorporation provided that in the event of termination or dissolution, its remaining assets would revert to the Bishop of Manchester. Fidelity Health Alliance Articles of Incorporation, Exhibit 2.f, Article 4.
55 Although at the time of the merger CMC's Articles of Agreement did not name Fidelity Alliance as a member, the Articles of Alliance Resources, Inc., previously Catholic Medical Center Networks, did name Catholic Health Alliance, the predecessor to Fidelity Health Alliance, as a member. This suggests that the Catholic Health Alliance understood the requirements of RSA 292:2, II-a. When Catholic Health Alliance became a member of Alliance Resources, CMC may have elected not to name Catholic Health Alliance as its own member because CMC controlled Catholic Health Alliance through the participation of five of its board members on the nine member Catholic Health Alliance Board.
56 CMC's last-minute change to its Articles of Agreement appears to have been done to bring CMC's Articles into conformity with earlier changes in its bylaws. During our review, Optima provided copies of CMC bylaws as amended April 13, 1989 and October 24, 1990. Under these bylaws, first Catholic Health Alliance and later its successor Fidelity Health Alliance were designated as the sole member of CMC. The bylaws gave the sole member sole authority to amend CMC's bylaws, and provided that in the event of dissolution, CMC's remaining assets would revert to the sole member, if still existing as a nonprofit organization, and if not, to the Roman Catholic Diocese. The sole member was also given responsibility for choosing trustees and appointing officers, and at one point the bylaws provided that "[a]t all times the Board of Trustees of Catholic Medical Center shall include a simple majority of the individuals then serving as the Trustees of Catholic Health Alliance." CMC bylaws as amended 4/13/89, Article II, §1(2). All of these provisions are inconsistent with CMC's Articles of Agreement on file with the Secretary of State at the time of the bylaw amendments. In particular, the dissolution provisions directing distribution of the assets to the sole member upon termination may violate the "nondistribution constraint" and the requirement of CMC's articles of organization that any assets remaining upon dissolution would go to the Catholic Church.
57 Elliot Hospital constitution and bylaws as amended 1/27/93; Constitution, Art. III and IV.
58 Id.; Bylaws, Art. I and XV.
59 In correspondence with Dr. Wayne L. Goldner, dated September 30, 1997, Patrick Duffy, Chairman of the Board of Optima Health, Inc., stated that "The corporate documents pertaining to" the consolidation of Elliot Hospital and Catholic Medical Center "are on file at the Secretary of State's Office," and that "[o]ther files and records associated with these transactions are proprietary and, as such, are not available for distribution." See Goldner/Duffy Correspondence, Exhibit 12. As noted above, our review has determined that the publicly available file at the Secretary of State's Office does not disclose the full scope and extent of Optima's consolidation of the hospitals' governance and corporate structure. See Chronology of Corporate and Other Records, Exhibit 3.
60 Minutes of the February 23, 1995 meeting of the Optima Health System Consolidation Subcommittee reflect that management presented highlights from the 1993 pre-merger studies provided by Ernst and Young and Jones, Day that illustrated the potential savings which could be achieved if acute care services were consolidated at a single site. When one of the members of the systems consolidation subcommittee observed that all data was being driven by the fact that a single acute care site would be recommended and approved, and asked whether there was data that would inform Optima as to the impact of doing nothing or leaving a major service at the site that was not selected as the acute care site, the minutes do not reflect that Optima presented analysis of that option to its trustees. See Exhibit 29.
61 Union Leader, 4/15/93 "Last month officials of both holding companies denied a report by WMUR-TV, Channel 9, that the two hospitals wanted to merge. Yesterday, Phillip B. Ryan, president and CEO of Elliot Health System, again said the two hospitals are not about to merge." Union Leader, 6/26/93 Robert Cholette, "[The merger of the two hospitals] is not on the drawing board." "I don't see the two hospital organizations merging." "In the end, the combined non-profit holding company would have an annual operating budget of $225 million, employ 2,400 people, and oversee the administration of two hospitals ¼."
62 Scott Goodspeed Testimony, Exhibit 25, at 5-8, "We had the trauma center at the Elliot. ¼ CMC had one of the preeminent cardiac surgery programs in New England. And so you can envision, you know, based on evidence in clinical areas that's how the sites would be configured."
63 1993 Memorandum of Understanding, Exhibit 30, Section I, Paragraph J.
64 Board of Mayor and Aldermen Minutes, Exhibit 7, at 2.
65 Id. at 8.
66 Id. at 3 (statement by Mr. Cholette); 1993 FTC Memorandum, 9/9/93, Exhibit 32, "The merger of these two hospital systems into a single integrated network will result in savings of over $150 million in ten years." ¼ "$150 million [dollars] in savings over ten years that the hospitals have focused on represents what they have verified through their task forces can be achieved over ten years, with acute care services divided between the two sites in a manner that minimizes costs;" Union Leader, 6/26/93, "The companies estimate that the merger will save them $150 million over the first 10 years of affiliation, all of which would be passed on to consumers in the form of lower fees for service, better equipment and expanded services."
67 Testimony of Dr. Maria Alicia Davila, Exhibit 15, at 17-19.
68 See, e.g., Letter from Phillip Ryan and Robert Cholette to Representative Zeliff, July 27, 1993, Exhibit 18.
69 Hospital Licensing Documents and Summary, Exhibit 5.
70 Chronology of Corporate and Other Records, Exhibit 3.
71 The adoption of a timeline for identifying the acute care site occurred less than two weeks after a press report by Optima that it was "feeling the pressure of a rapidly changing health-care system" and "speeding up by at least a year its plans to combine the former Elliot and Fidelity Health companies." Union Leader, 8/4/94.
72 See Executive Summary to the CON Board of Optima Health, Inc. ("CON Executive Summary"), Exhibit 21.
73 Testimony of Robert Cholette, Exhibit 38, at 103-105; Testimony of Phillip Ryan, Exhibit 39, at 115-120.
74 Minutes of Optima Health System Consolidated Subcommittees, 2/9/95. "At this time all data is being driven by the fact that a single acute care site will be recommended and approved."
75 Optima's failure to undertake additional financial analysis after the merger is of particular concern given the antitrust constraints imposed upon any pre-merger financial analysis.
76 See CON Executive Summary, at 5 "No decision on the consolidation of acute care services was initially made, however, the studies completed post-merger were compelling on this issue."
77 See CON Application, at 79.
78 See Inventory of Documents, Exhibit 1. The documents reflect that Optima's trustees voted to make these changes to the composition of the hospitals' boards. Documentation of these changes has not been filed with the Secretary of State.
79 Wentworth Douglas Hospital in Dover also has entered into a limited affiliation with Optima Healthcare.
80 See Optima Healthcare Network, Exhibit 35; Testimony of Patrick Duffy, Exhibit 41, at 76-77; Tax Exempt Organizations Ruling Request, Summary, Exhibit 36.b, at 12.
81 See Board of Mayor and Aldermen Minutes, Exhibit 7, at 4, "Both of us are locally governed health care organizations, our Boards reflect people that live here, work here, pay the health care bills and get their services at one or both of our institutions and they said find out what the community thinks about this because ultimately if we are to redesign the health care system and come up with a better way it should reflect what the community thinks is the right thing to do."
82 Optima officials themselves appear confused over the respective roles of Optima Health, Inc. and Optima Healthcare. Thus, Harold Acres, Chairman of the Board of Optima Healthcare, described an annual budgeting process in which the Optima Healthcare board essentially approved budgets for the hospitals prepared by Optima Health, Inc. and its constituent hospitals. Testimony of Harold Acres, Exhibit 43, at 46-52. Patrick Duffy, Chairman of Board of Optima Health, Inc., described a process by which Optima Healthcare establishes an operating budget subject to approval by Optima Health, Inc. Duffy Testimony, at 74-75.
83 CMC's pre-merger credentialing criteria required that physicians practicing at CMC agree to abide by the Ethical Directives. The post-merger common credentialing criteria for Elliot and CMC does not require compliance with the Ethical Directives at either institution.
84 CON Executive Summary, Exhibit 21, at 3.
85 Id., at 3.
86 Ryan Testimony, at 13-14.
87 These documents -- which Optima has designated as confidential -- are at odds with Optima's consistent public statements that the consolidation of acute care at the Elliot campus and the non-acute care at the CMC campus does not indicate an intent to close Catholic Medical Center.
88 See Joint Operating Agreement, Exhibit 36.c.
89 In or about January, 1998, Optima sold the building, improvements and leasehold on land adjacent to the CMC hospital site owned by CMC or an affiliated entity. Documents reviewed by this office do not establish whether any portion of the proceeds of that sale have been reserved for, or directed to, the benefit of CMC.
90 Optima's internal confusion is evidenced by the conflicting statements of its board members and management. Thus, in sworn testimony to the Attorney General, Mr. Ryan stated that the Bishop of the Diocese may retain authority to determine which of the seventy Ethical Directives will apply to the acute care services provided at Elliot Hospital. Ryan Testimony at 51-56. By contrast, Mr. Cholette testified that the Ethical Directives do not apply to Elliot. Cholette Testimony at 18-20. Patrick Duffy, Chairman of the Board of Optima Health, Inc., first testified that the Directives do apply to all health care procedures at Elliot, then, after consultation with counsel, suggested that they only apply to abortion procedures. See Duffy Testimony at 107-109. Monsignor John Quinn, who served as the Diocesan representative on the boards of CMC and Fidelity Health Alliance and is now a Trustee of Optima Healthcare, testified to his understanding that, under appropriate circumstances, the Ethical Directives allow for the merger of a religious hospital with a secular institution which continues to perform procedures, such as elective sterilization, that are not permitted under Catholic doctrine. He concluded that the Ethical Directives do not apply at Elliot, except to abortion procedures by virtue of the recently announced policy. Testimony of Monsignor John Quinn, Exhibit 40, at 15-18.
91 Davila Testimony, Exhibit 15, at 11-13.
92 1997 Termination of Pregnancy Policy, Exhibit 10.b.
93 Before the merger, Philip Ryan, CEO of Elliot Health, advised Robert Cholette, CEO of Fidelity Health, and others that Elliot's policy with respect to termination of pregnancy mirrored that of CMC. Ryan Testimony at 33-39; Cholette Testimony at 20-24. Mr. Ryan made the same representation to the Manchester Board of Aldermen, Board of Mayor and Aldermen Minutes, at 2, 9. Critically, Elliot Health representatives also made this representation to Monsignor Quinn and Diocesan representatives. Monsignor Quinn Testimony, at 5-8; Affidavit of Monsignor Quinn in Moreau v. Optima Health, Exhibit 16.
In fact, clinical records of pregnancy terminations at Elliot that could not have been performed at CMC under the Ethical Directives were known to the OB/GYN staff and were readily accessible to Elliot's management. In 1994, the Chairman of the Obstetrics Department at Elliot Hospital, Dr. Robert B. Cervenka, informed Philip Ryan that physicians at Elliot Hospital performed terminations for Trisomy 21, or Down Syndrome, and questioned Mr. Ryan regarding whether the merger would affect the physicians' practices. According to Dr. Cervenka, Mr. Ryan informed him that after the merger, the Ethical Directives would apply only within the four walls of CMC, and would not affect the policies or practice at Elliot Hospital. Up to and even after the merger, Mr. Ryan assured Dr. Cervenka and other physicians that the practice of medicine at Elliot would not be altered by the merger. Testimony of Dr. Robert Cervenka, Exhibit 13, at 26-37.
Optima's former managing director for marketing also testified to Optima's continuing lack of candor over this issue in deposition testimony in a pending lawsuit involving Optima, Moreau v. Optima Health, No. C-97-329, Hillsborough County Superior Court, 1997. In sworn testimony in connection with a law suit against Optima by the employee whose disclosure of the abortion practices at Elliot may have resulted in his loss of employment, Ms. Laurie Storey-Manseau stated that, as recently as 1996, Optima management was still attempting to maintain the public fiction that no elective abortions were ever performed at Elliot. Excerpts from Deposition of Laurie Storey-Manseau, Exhibit 17, at 12-16.
94 See note 90, supra.
95 Compare, Duffy Testimony, Exhibit 41, at 112-116 (administration of abortifacients permitted) with Quinn Testimony, Exhibit 40, at 48-50 (treatment may depend on confirmation of pregnancy).
96 The physicians voiced a concern that Catholic doctrine forbids any form of treatment of tubal pregnancies which involve direct termination of the pregnancy, without removal of the affected organ. Cervenka Testimony, at 74-76; Testimony of Dr. Wayne Goldner, Exhibit 14, at 85-87.
97 Quinn Testimony, at 49-50 (Directives do not permit "direct attack on fetus"); Duffy Testimony, at 109-112 (Policy intended to mirror Ethical Directives with respect to extrauterine pregnancies).
98 1993 FTC Memorandum, Exhibit 32, at 3.
99 William Donovan Letter to Walter Maroney, November 29, 1997, Exhibit 27.
100 Optima has now agreed that these "merger report cards" may be produced to the public. See Exhibit 24.
101 When examining historical performance or reporting actual cost savings, the generally accepted accounting method is to examine actual cost reductions per unit of service actually delivered. It is necessary to adjust the analysis by considering savings per unit of service, as any gross analysis will fail to account for savings attributable to decreases in units of service delivered. This criticism of Optima's cost savings methodology was voiced by John Lynch, a Trustee of Optima Healthcare. See John Lynch Testimony, Exhibit 42, at 44-55.
102 Board of Mayor and Aldermen Minutes, Exhibit 7, at 7.
103 Support Letter by Adele B. Baker, Secretary, CMC Board of Trustees, August 27, 1993, Exhibit 28.
104 1993 FTC Memorandum: "Manchester has incurred an influx of residents with poverty or near-poverty level incomes, who have health care needs that are beyond their financial means. The consolidation will enable the combined facilities to redirect resources consumed by underutilized, duplicative equipment into meeting the current needs." 1993 FTC Memorandum, Exhibit 32, at 15.

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