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This article explores the potential and the dangers of this novel form of collaboration between academic medicine and the for-profit world. The author focuses on those arrangements--purchases and leasing agreements--by which investor-owned corporations operate, for a profit, hospitals that serve as major medical teaching and research sites. He begins by reviewing how the evolving needs of academic medical centers and for-profit hospital chains have generated mutual interest in such arrangements. The author then considers some frequently expressed ethical, economic, and other public policy objections to the provision of hospital services by for-profit firms. Opponents of the acquisition and leasing of teaching hospitals by for-profit entities have built their cases upon these objections. He argues that on close inspection these objections fail and that the underlying concerns they express do not warrant opposition to the operation of teaching hospitals by investor-owned firms. Creative institutional design can enable parties to reap the benefits of such arrangements while protecting--even enhancing--academic centers' ability to perform their missions of teaching, research, and clinical service.

The author also reviews in brief some potential legal obstacles to sale and leasing agreements and to full realization of their advantages. In contemplating such arrangements, academic managers and their for-profit counterparts must pay heed to myriad federal and state restrictions. He focuses in particular on tax considerations and the dilemmas posed by limits on the use of charitable gifts. With a few possible exceptions, no legal problem poses an insurmountable barrier to the execution of a sale or lease agreement. Nevertheless, judicious institutional design, sensitive and well-planned approaches to regulatory authorities, and even litigation may be necessary in some cases to effect an arrangement and maximize its benefits.

The author concludes with some recommendations about (1) the process by which an academic medical center should decide whether to enter sale or lease negotiations with a for-profit firm, and (2) the contract terms a medical school and other involved nonprofit parties should insist upon or at least press for in negotiations. The decision process, he argues, should be public and should involve representatives of an academic medical center's diverse constituencies at an early stage. A public process, open to input from many sources, will not only enhance the quality of decisions by increasing decision makers' knowledge of their constituencies' problems and preferences; it will also build understanding and support by imbuing participants in the process with a sense of shared dilemmas and accomplishment. Contractual language, he urges, should specify the for-profit firm's financial obligations and establish systems of joint governance designed to preserve academic authority over education and research. Contract terms should also provide for academic control (or at least veto power) over new corporate ventures involving the hospital. Finally, contracts should specify procedures for settling disputes between the owner or lessor and involved nonprofit parties, and should include buy-back or lease cancellation options.

Publication Citation

65 S. Cal. L. Rev. 1035-1170 (1992)