New York State
Ethics Commission


Advisory Opinion No. 95-36: Application of Public Officers Law §§73 and 74 to employees who wish to serve on corporate boards and provide services pursuant to a subcontract with their agency.

INTRODUCTION

The following advisory opinion is issued in response to a request from Sanford Levine ("Levine"), University Counsel and Vice Chancellor for Legal Affairs of the State University of New York ("University"), for a formal opinion concerning the application of the Public Officers Law to: (1) University employees who may serve on the corporate board of a hospital network of which a University Hospital is a member or shareholder and with which the Hospital contracts to provide hospital services; and (2) University employees who wish to contract with the University Hospital at which they work and a network to provide medical services through the network.

Pursuant to the authority vested in the New York State Ethics Commission ("Commission") by Executive Law §94(15), the Commission hereby renders its opinion that Public Officers Law §74 prohibits University employees from serving on the corporate board of a hospital network of which a University Hospital is a member and with which the Hospital contracts for hospital services; and §73(4) prohibits University employees from contracting with the University Hospital at which they work and a managed care network to provide medical services through the network unless: (1) the Hospital exercises no discretion whatsoever in establishing the three-way arrangement, and (2) the arrangement, or an employee's refusal to enter into any such arrangement, has no bearing on the employment status of the employee.

BACKGROUND

The University's Health Science Centers at Brooklyn, Buffalo, Stony Brook and Syracuse and its College of Optometry in New York City provide for the education and training of health care professionals in New York State, offer health care to the communities in which they are located, and serve as centers for research. At Brooklyn, Stony Brook and Syracuse, the University operates teaching hospitals; the College of Optometry operates the University Optometric Center, which serves the metropolitan New York City area.

As a result of the recent growth in managed care arrangements, as well as other cooperative arrangements of health care providers, academic health science centers throughout the country are increasingly participating in networks of physicians and hospital groups that provide comprehensive health services for large populations covering communities and regions. The University Hospitals at Brooklyn, Stony Brook and Syracuse ("SUNY Hospitals") and the College of Optometry's University Optometric Center ("Center") are interested in pursuing various managed care networking options. Counsel for the State University states that they want to join, selectively, several networks to provide educational experiences for their students and continuing education for licensed professionals, and maintain the delivery of quality health care to State residents. After extensive consultation with health care consultants and among University officials, the University has determined that it is in the best interests of the University to have SUNY Hospitals and the Center participate in cooperative arrangements with other hospitals and clinics.

The University states that, from a liability standpoint, its interests may be best served under a corporate structure.(1) The assets of the SUNY Hospitals, the Center, the University and the State would be segregated from the assets of any network they joined and from the assets of other network members. A corporate structure would allow the SUNY Hospitals and the Center to participate in decisions on health care delivery in their respective regions and to exercise reasonable control over the direction of the networks, including the patient populations served in the particular region and the premium dollars received. It would also permit the SUNY Hospitals and the Center to have substantial control over the educational opportunities for their students.

The University has identified three representative health care networks that are actively seeking the University's participation. Each network provides an example of how health care networks are organized and operate. One of the networks is a not-for-profit corporation with the Center as the sole member; another is a not-for-profit corporation with hospital corporate members; and the third is a for-profit corporation with hospital shareholders.(2)

QUESTIONS PRESENTED

May a State University employee be the University's representative on the board of directors of a corporation of which the University is a member and with which the University has a contract to provide hospital or vision care services?

May the State University, as an employer, contract with its faculty health care professionals, who are State employees, for their provision of medical services under hospital service agreements or optometric service agreements?

APPLICABLE LAW

Public Officers Law §73(4) provides in part:

(a) No . . . state officer or employee. . . or firm or association of which such person is a member, or corporation, ten per centum or more of the stock of which is owned or controlled directly or indirectly by such person, shall (i) sell any goods or services having a value in excess of twenty-five dollars to any state agency, or (ii) contract for or provide such goods or services with or to any private entity where the power to contract, appoint or retain on behalf of such private entity is exercised, directly or indirectly, by a state agency or officer thereof, unless such goods or services are provided pursuant to an award or contract let after public notice and competitive bidding. . . .

Public Officers Law §74 sets forth the Code of Ethics for State officers and employees. The rule with respect to conflicts of interest, found in Public Officers Law §74(2), is as follows:

No officer or employee of a state agency. . .should have any interest, financial or otherwise, direct or indirect, or engage in any business or transaction or professional activity or incur any obligation of any nature, which is in substantial conflict with the proper discharge of his duties in the public interest.

Section 74(3) sets forth the standards that implement the rule. Those that are relevant to this opinion are:

  1. No officer or employee of a state agency. . .should disclose confidential information acquired by him in the course of his official duties nor use such information to further his personal interests.

    . . . .

  2. No officer or employee of a state agency. . .should engage in any transaction as a representative or agent of the state with any business entity in which he has a direct or indirect financial interest that might reasonably tend to conflict with the proper discharge of his official duties.

    . . . .

  3. An officer or employee of a state agency. . .should endeavor to pursue a course of conduct which will not raise suspicion among the public that he is likely to be engaged in acts that are in violation of his trust.

DISCUSSION

1. May a State University employee be the University's representative on the board of directors of a corporation of which the University is a member and with which the University has a contract to provide hospital or vision care services?

To join a network, a SUNY Hospital or the Center must invest in and become a member of the not-for-profit corporation or a shareholder in the for-profit corporation that administers the network. By virtue of the corporations' rules, each member or shareholder is to have a representative on the board of directors. For a SUNY Hospital or the Center, a University employee, most likely an administrator of the institution, would serve on the corporate board.

The University indicates that: (1) the employees designated to serve would not receive compensation or any other financial benefit from their service on such boards; (2) the employees would serve on the boards as representatives of their Hospital or the Center in an ex officio capacity; (3) the employees would vote the interests of their Hospital or the Center in matters coming before the corporate boards; and, (4) the contracts between the corporations and a SUNY Hospital or the Center would be negotiated prior to its becoming a corporate member.

The University argues that, since a designated employee would be serving on the board pursuant to the directive of his or her employer -- a Hospital or the Center -- and would vote the position of the institution in any matter before the board, the employee's devotion of time and attention to the corporation's activities would be within the official discharge of his or her duties as a State employee.

The University indicates that the majority of the terms of agreements between networks and hospitals for the provision of hospital services are standard, and any contracts that include a negotiated rate of hospital reimbursement must be approved by the Department of Health. Amendments thereafter would be negotiated at a staff level and would not involve negotiations by the corporate and Hospital boards. Certain amendments would also have to be approved by the Department of Health. For vision care services, the majority of the terms are boilerplate as well, and amendments would be negotiated in the same manner.

The University argues that, under these circumstances, it would be acceptable for its employees to serve on the corporate boards of the proposed networks. For example, it notes that the delivery of health care is a highly regulated industry, and most of the pricing of health care services, including compensation for services rendered, is imposed by the Department of Health. Thus, the corporate boards of hospitals and networks are not placed in the position of setting prices.(3)

The University further suggests that the activities of the not-for-profit or for-profit corporation would be limited to the business of administering the network. The sole issues for the board, it states, would be expanding or limiting the network's membership; developing or changing the service packages and products that it markets to health plans;(4) contracting with established physician networks and ancillary health care provider networks, such as nursing homes and home care providers; and managing the general fiscal matters of the corporation, such as hiring and setting the compensation for key administrative positions. Due to the nature of these activities, the University argues that an employee sitting on a corporate board would have little potential for a conflict of interest between his or her representing the Hospital or the Center on the board and upholding the fiduciary duty a board member owes to the corporation.

The University also notes that the activities of the Hospitals are similarly limited, as they may provide only the services for which they are licensed by the Department of Health. While the list of those services may be long, it is not infinite. And whether a hospital may expand its services is in large measure a decision that rests with the Department of Health. The clinical activities of the Center are also limited under its license from the Department.

The University further argues that in the contracts with the networks, the terms of buy-out are set in advance in the subvention or shareholder agreements. The terms are quite specific, including the actual dollar amount that a corporation will pay to any member or shareholder at the time of termination.

Finally, the University reports that the nature of hospital and vision care networks is such that all members' board representatives will be voting the interests of the hospital or entity that appointed them to the board. The network is really a cooperative of community and tertiary care hospitals or vision care specialists. As a cooperative, the board representatives from each of the members will vote the interests of the institution that they serve.

While the University's arguments are well presented, they do not reflect the Commission's prior opinions. In Advisory Opinion No. 95-4, the Commission permitted MTA employees to serve on the governing board of a public-private joint venture. Critical to the holding there was the Commission's finding that the State representatives would always act in the interests of the MTA and not those of the venture. It specifically noted the difference between the structure of the venture and a corporate structure. The Commission, aware that it had previously prohibited State officers from serving on a corporate board in light of the conflicting fiduciary duty owed by board members to the corporation, stated:

The Commission agrees that under this proposed arrangement, Public Officers Law §74 would be satisfied as long as the MTA Group's representatives on the governing board of the Venture act at all times in the MTA Group's best interests and not necessarily those of the Venture. The concerns that were present in Advisory Opinion No. 91-3 are not present here because the members of the Venture's governing board would not have a fiduciary obligation to the Venture; rather, their first loyalty would be to the co-venturer they represent. Presumably, the Venture would be dissolved if, at sometime in the future, it no longer served the purposes of the MTA Group. Thus, the MTA board members and the MTA Group employees would not have an obligation to serve the interests of the Venture should they conflict with the interests of the entity they represent.

In Advisory Opinion No. 91-3, the Commission held that Department of Health officials could not serve on the board of a for-profit corporation because of the appearance of a conflict of interest under Public Officers Law §74. Its holding was premised upon the legal duties of corporate directors. Both the Business Corporation Law [§717] and the Not-For-Profit Corporation Law [§717] impose a fiduciary duty upon directors to act in good faith and with the degree of care that an ordinary prudent person in a like position would use under similar circumstances. Those provisions require a corporate director's loyalties be to the corporation.

In the case of a senior University employee appointed to serve on the board of a corporate network, he or she would be required to exercise significant responsibility in both capacities. The loyalty of the University-employed board member would come into question if there were ever a dispute between the University and the network concerning its agreements. It is unlikely that the University's interests will always be compatible with network's interests, and it is not clear how the University official could serve the best interests of both in such a situation, even if recusal under such circumstances were permitted.

While the University claims that its designated employees would vote only the interests of the University, their legal obligation, as a board member, would not guarantee this approach and might even compel a contrary result. Once a member of a corporate board of a network, employees would be faced with the cited provisions of the Business Corporation Law or the Not-for-Profit Corporation Law. It is not clear how they could overcome their conflicting responsibilities under these provisions.

The Commission, therefore, concludes that for a University employee to serve on the corporate board of a managed care network, as proposed, would substantially conflict with the proper discharge of his or her duties in the public interest in violation of Public Officers Law §74.

2. May the State University, as an employer, contract with its faculty health care professionals, who are State employees, for their provision of medical services under hospital service agreements or optometric service agreements?

The University asks the Commission to consider whether a University faculty member who is a health care professional(5) may contract with the SUNY Hospital at which he or she is employed or the Center to provide medical services or optometric services under the aegis of a network without violating Public Officers Law §73(4) or the conflict of interest standards of Public Officers Law §74.

The SUNY Hospitals and the Center appoint health care professionals as faculty members to teach residents, medical students, dental students and optometry students. These health care professionals are employees of the State for academic assignment purposes, which may include classroom instruction, clinical training and supervision of students and residents, and research. They may also render services to private patients for a fee, but, when doing so, they are not acting as State employees. The University states that it cannot legally bind these professionals when they are acting in their non-State, or private, capacities, to accept fee schedules or require them to participate in managed care networks, HMOs or as participating providers in indemnity plans.

The University's position is based, in large part, on Public Officers Law §17, the defense and indemnification provision for state employees working within the scope of their employment. Subdivision (11) of §17 specifically exempts from State defense and indemnification those malpractice actions arising out of circumstances where physicians are acting pursuant to the provisions of a plan for the management of clinical practice income. Such plans govern the private patient practices of physicians employed by the University.(6)

As noted above, several health maintenance organizations and hospital networks have approached the SUNY Hospitals about negotiating hospital services agreements for the benefit of their subscribers. The Center has similarly been approached with respect to optometric services. However, the HMOs and networks would require that the Hospitals and the Center subcontract with their health care professionals to provide the medical services component of inpatient and outpatient services. It is anticipated that a unified bill for medical and hospital services would be submitted to the HMO or network for payment. For the Center, the situation would be analogous.

To meet this business demand of bundling services, the SUNY Hospitals and the Center would be required to subcontract with faculty professionals, who are University employees, in relation to their private, or non-State, practices. The University indicates, however, that negotiation of the terms of the subcontracts would not be conducted between the institutions and the individual professionals. Rather, the individuals would negotiate all terms, including professional compensation, directly with the HMO or the network. These terms would require them to adhere to the HMO or network's (1) pre-admission authorization procedures; (2) utilization review procedures; (3) quality assurance programs; (4) patient grievance procedures and (5) professional liability insurance requirements. The only exception would be credentialing. By law, the Hospitals and the Center would have to credential the physicians, i.e., grant them admitting privileges or clinic practicing privileges.

The subcontracts may vary as to how payment for services will be accomplished. In one proposal, payment for services would flow directly from the network to the individual health care professionals. In another, the Hospitals or the Center would be the payment conduit to them under a unified bill.(7)

Examining the applicable statutes and the Commission's opinions, Advisory Opinion No. 91-5 would clearly permit a State employee to subcontract with the agency in which he or she is employed within the context of the competitive bid process. However, the University says that, due to the nature of the services, the competitive bidding process is not appropriate in the context presented here. These are personal services that require a professional to hold an academic faculty title from the University and to have admitting privileges to the Hospital, pursuant to the Hospital Bylaws, or credentialing at the Center.

Since competitive bidding, which would except the employees involved from the restrictions of Public Officers Law §73(4), is not appropriate, the Commission must look to the provisions of that section. Paragraph (a) clearly bars any State employee from selling services to any State agency or contracting where the power to contract can be exercised by a State agency. The questions, then, are whether the health care professionals would be selling their services to a SUNY Hospital or to a network, and whether a SUNY Hospital can exercise any power over their contracts.

While there will technically be a subcontract between the Hospital and the individual professional, the real arrangement appears to be between the individual and the network. If, in fact, a Hospital or the Center does nothing more than recruit professionals who meet the qualifications -- and it exercises no judgment whatsoever with regard to whether or not an individual is accepted or considered for participation into a network, or as to the terms of the arrangement or compensation, except insofar as limited by University rules for engaging in any private practice -- it cannot be said that a professional is selling his or her services to the Hospital or Center, nor would the institution be exercising any power over the contract. To bar a health care professional from negotiating with or joining a network because one of the papers in the three-way arrangement would be a purely boilerplate subcontract between the professional and the Hospital would be placing form over substance. In such circumstances, the individual professional could not use his or her State position to gain advantage, nor could he or she be perceived as being engaged in a conflict of interest or engaging in a course of conduct that would raise suspicion that he or she is engaging in acts in violation of the public trust. Thus, such an arrangement would not be barred.

This would not be the case, however, if the SUNY Hospital or the Center exercised any discretion in dealing with the professional, or in his or her arrangement with the network or as to his or her compensation or work; or if the professional's employment status were affected by the results of negotiations. Once such discretion can be exercised, or if employment status can be altered, the arrangement falls squarely within the prohibitions of Public Officers Law §73(4)(a). The University's policy arguments as to why such arrangements in such circumstances should not be a violation are properly addressed to the Legislature.

CONCLUSION

The Commission concludes that Public Officers Law §74 prohibits University employees from serving on the corporate board of a hospital network of which a SUNY Hospital is a member and with which it contracts for hospital services; and §73(4) prohibits University employees from contracting with the SUNY Hospital at which they work or the Center and a managed care network to provide medical services through the network or the Center unless: (1) the Hospital or the Center exercises no discretion whatsoever in establishing the three-way arrangement, and (2) the arrangement, or an employee's refusal to enter into any such arrangement, has no bearing on the employment status of the employee.

This opinion, until and unless amended or revoked, is binding on the Commission in any subsequent proceeding concerning the person who requested it and who acted in good faith, unless material facts were omitted or misstated by the person in the request for opinion or related supporting documentation.

All concur:

Joseph M. Bress, Chair

Angelo A. Costanza
Robert E. Eggenschiller
Donald A. Odell, Members

Dated: November 20, 1995


Endnotes

1. Whether SUNY Hospitals may join or form corporate entities without further statutory authorization is not a question for this Commission, and this opinion should not be read as an indication of any view with respect to that question.

2. These proposals have not necessarily received final approval from the University or the State approvals required by the State Finance Law. The University describes three proposed networks: HealthFirst PHSP, Inc.; Eye Trust America, Inc.; and FirstChoice Network, Inc.

Eye Trust America is proposed as a not-for-profit corporation with the Center as its sole member, with the corporate purpose of establishing a vision care network in the New York City area metropolitan market.

HealthFirst PHSP is a "prepaid health service plan" with the corporate purpose of enrolling Medicaid recipients into its plan and arranging with health care providers for the provision of health care services to them. The University Hospitals want to be hospital providers to the Medicaid recipients. To do so, they must be corporate members. HealthFirst PHSP has been incorporated under New York State's Not-For-Profit Corporation Law.

First Choice Network, Inc. is a preferred provider organization that is to establish a health care network on Long Island. The University Hospital Medical Center at Stony Brook wants to be a hospital provider to the beneficiaries of the plans that contract with First Choice. This network has been incorporated as a for profit corporation under New York State's Business Corporation Law, as §501(c)(3) qualifications could not be met under the Internal Revenue Code. It is anticipated that the corporation will be operated like a not-for-profit corporation so that the State would not be receiving profits.

3. The only entities that are able to negotiate reimbursement rates in New York State are health maintenance organizations and certain pre-1985 self-retained employee benefit plans. And even then, thw Department of Health must approve the rates under statutory guidelines. See Public Health Law §2807-c(2).

4. In this context, service packages or products mean the various array of hospital services that are offered to the health plans as "covered services," as well as offers of ancillary services such as laboratory, home care and long term residential care.

5. Typically, a health care professional would be a licensed physician at the medical schools and Hospitals and a licensed optometrist or ophthalmologist at the Center.

6. The plan for the management of clinical practice income is found in Article XVI of the Policies of the Board of Trustees of the State University of New York, 8 NYCRR Article 8.

7. It is assumed that the individual professionals will be able to either choose the method of payment or be able to decline the method offered without employment repercussions of any kind, including their ability to earn outside income as permitted.



URL: http://www.nysl.nysed.gov/edocs/ethics/95-36.htm