The Law of Healthcare Administration 144 Chapter 3: The O (continued from previous page) leave the board because of age , illness , or certain board members, the cessation of the completion of a normal term; and (5) the case is essentially the nice ; first in the District of's find on appea all business transactions with their related Columbia to discuss these issues compre- wrong and [w firms, an accounting of all hospital funds, affirm the cor and awards of money damages against the individual defendants. However, the hensively, and thus no clear legal standards The only previously existed. sioner was p court declined to adopt these rather severe For these reasons, the court declines to candidly adr measures. The court points out the factors that it remove the defendant ndants from the board, to subsidiary o considered significant: (1) the defendant assess money damages, or to take other Diversified trustees are a small minority of the board, more severe actions. Instead, it requires new wholly own whereas all board members were in some policies and procedures to make certain that Blue Shield way guilty of nonmanagement; (2) the defec- all present and future trustees are aware of . . . ADIC tive practices have been corrected, and the requirements of the law and that the ated solely those who were most responsible for them fully disclose all hospital transactions with would pro have either died or been dismissed; (3) the any financial institutions in which they have wise be p defendants did not profit personally from the an interest or position.] own life [i transactions; (4) the defendants will soon pete in th Blue Discussion Questions which in presiden 1. If this case were decided today, would the outcome be different? If so, how? both AD 2. As the CEO or board member of a not-for-profit hospital corporation, what measures hold pos would you put in place to prevent a repeat of the activities that led to the lawsuit involved nies use here ? nery. A case? 3. How would you summarize the duties of board members based on the holding in this sell ins done b The comm clude (2 auth IIII porat in a The Court Decides pora tran Woodyard, Insurance Commissioner v. Arkansas Diversified Insurance Co. and 268 Ark. 94, 594 S.W.2d 13 (1980) rat Hickman, J. th The appellant is Arkansas Insurance Commis- AD sioner W. H. L. Woodyard, Ill. The appellee is Cross and Blue Shield . . . subscriber groups. to Sa Woodyard denied the application. On appeal, Arkansas Diversified Insurance Company (ADIC). his decision was reversed by the Pulaski ADIC sought a certificate of authority from County Circuit Court as being arbitrary and Woodyard to sell group life insurance to Blue not supported by substantial evidence. WeMapter 3: The Organization and Management of a Corporate Healthcare Institution 145 find on appeal [that] the circuit court was wrong and [we] reverse the judgment. We affirm the commissioner. of Blue Cross. The evidence indicates that The only evidence before the commis- ADIC's management will not act indepen- sioner was presented by ADIC. The app dently but will conduct the affairs of ADIC in candidly admitted it was a wholly owned a manner calculated primarily to further the interest of Blue Cross. subsidiary of a corporation named Arkansas Diversified Services, Inc. (ADS) which is a . . . The commissioner found that since wholly owned subsidiary of Blue Blue Cross could not sell life insurance itself, f Blue Cross and it should not be able to do so through corpo- Blue Shield, Inc. rate subsidiaries. We find that decision nei- . . . ADIC candidly admitted it was cre- ther arbitrary nor unsupported by substantial ated solely to serve Blue Cross customers. It evidence. would provide services that could not other- We agree with the commissioner's find- wise be provided by law. . . . ADS wanted its ing that [ Arkansas law] limits the power of own life [insurance] company to better com- medical corporations to providing medical pete in the market place. service. If it did not, they could not only sell Blue Cross owns all the stock of ADS, life insurance, but automobiles or anything which in turn owns all the stock of ADIC. The else. Clearly, an insurance company orga- president of Blue Cross is the president of nized under a charter or statute empowering both ADS and ADIC. Other Blue Cross officials to sell another. it to sell one kind of insurance lacks authority hold positions in ADS and ADIC. The compa- nies use the same location and similar station The appellees argue that even if the com- nery. ADIC will use Blue Cross employees to missioner was right in ruling Blue Cross could not market its own life insurance poli- sell insurance. Underwriting for ADIC will be cies, Blue Cross could . . . invest in a wholly done by a division of ADS. owned subsidiary which would [have that There was no real controversy over the power]. The statutes, however, provide that commissioner's findings of fact. He con- such an investment can be made only with cluded that: the commissioner's consent. ... (2) That [Arkansas law] would apparently Blue Cross is a tax exempt, non-profit authorize a hospital and medical service cor- corporation enjoying a financial advantage poration [of which Blue Cross is one] to invest over conventional insurers. Allowing it to in a wholly owned subsidiary insurance cor- sell, through subsidiaries, its own life insur- poration with the Commissioner's consent. ance policies, could be unfair to competitors. (3) That Blue Cross is limited by [law] to While the commissioner did allow Blue Cross transact business as a non-profit hospital to invest in ADS, we can see why he disap and medical service corporation. proved of ADIC. ADS, unlike ADIC, could sell (4) That ADIC is not a separate corpo- only policies written by insurance companies rate entity from Blue Cross since Blue Cross which lacked the competitive advantages of through ADS owns all the capital stock of Blue Cross. ADIC. ADIC has common Officers and Direc- The appellee argues the commissioner tors with Blue Cross, Blue Cross pays the arbitrarily pierced the corporate veil of these subsidiaries... . [Courts will ignore the cor- salary for the Officers and employees of ADIC, ADIC will sell its products only to Blue porate form of a subsidiary where fairness demands it. Usually, this will be where it is Cross subscriber groups and the record indi- necessary to prevent wrongdoing and where cates that ADIC is to be treated as a division (continued)The Law of Healthcare Administration 146 Chal (continued from previous page) the subsidiary is a mere tool of the parent. all efforts and endeavors of ADIC, and collect all profits. We believe both criteria were met here. . .. We cannot say the commissioner was Blue Cross, through its president and other officials, candidly admitted why they wrong in piercing the corporate veil or in wanted ADIC to sell insurance. Blue Cross denying the application. The facts are clearly can, through its total control of both subsid- there to support his findings. This order is iaries by stock, officers and directors, direct not contrary to law. Reversed. Discussion Questions 1. How does a Blue Cross health plan fall under the definition of a "hospital and medical service corporation"? 2. What is the function of that type of corporation in the healthcare system? (Other states assign different names to those corporations.) 3. What factual differences in this general situation might have led to a different outcome in the case, applying the same legal standard? Notes 1. Since 1914, the National Conference of Commissioners on Uniform State Laws has promoted a Uniform Partnership Act ( UPA) for adoption by the states and territories. Louisiana is the only state that has not adopted some version of the UPA. See 6 U.L.A. 1 (Supp. 1986) (table of jurisdictions) 636 (1819). 2. Trustees of Dartmouth College v. Woodward, 17 US. (4 Wheat) 510