This Advisory Opinion concerns the following issues as formulated from facts and/or circumstances furnished by a requestor. The Commission approved this opinion on July 11, 2003, basing its approval solely on the facts and circumstances stated herein.
 

ISSUE 1. May a community hospital employ two orthopedic surgeons when the employment agreement will encompass the community hospital continuing to provide a building to the surgeons for the operation of the medical practice and the surgeons providing all the personal property associated with the medical practice?

ISSUE 2. May a community hospital employ two orthopedic surgeons when the two surgeons are part owners of a limited liability corporation that owns half of another limited liability corporation that operates an ambulatory surgery center, the other half owned by a nonprofit corporation incorporated by the community hospital, and when the community hospital contracts to provide certain services and assistance to the limited liability corporation that operates the ambulatory surgery center?

State law restricts the Mississippi Ethics Commission to interpreting and issuing opinions on Sections 25-4-101 through 25-4-119, 1972 Mississippi Code Annotated and Article IV, Section 109, Mississippi Constitution of 1890.  Therefore, this opinion does not address the Mississippi laws outside the Commission’s jurisdiction nor the governmental entity’s internal rules and regulations.

The pertinent conflict of interest laws to be considered here are:

Code Section 25-4-101 states:

“The legislature declares that elective and public office and employment is a public trust and any effort to realize personal gain through official conduct, other than as provided by law, or as a natural consequence of the employment or position, is a violation of that trust.  Therefore, public servants shall endeavor to pursue a course of conduct which will not raise suspicion among the public that they are likely to be engaged in acts that are in violation of this trust and which will not reflect unfavorably upon the state and local governments.”

Code Section 25-4-103(c), (d), (e), (f)(i)(ii), (g)(i)(ii)(v), (h), (i), (k)(i)(ii), (l), (n), (o) and (p)(i)(ii)(iii) states:
 

“(c) ‘Business’ means any corporation, partnership, sole proprietorship, firm, enterprise, franchise, association, organization, holding company,  self-employed individual, joint stock company, receivership, trust or other legal entity or undertaking organized for economic gain, a  nonprofit corporation or other such entity, association or organization receiving public funds.

(d) ‘Business with which he is associated’ means any business of which a public servant or his relative is an officer, director, owner, partner, employee or is a holder of more than ten percent (10%) of the fair market value or from which he or his relative derives more than One Thousand Dollars ($1,000.00) in annual income or over which such public servant or his relative exercises control.

(e) ‘Compensation’ mean money or thing of value received, or to be received, from any person for services rendered.

(f) ‘Contract’ means:

(i) Any agreement to which the government is a party; or

(ii) Any agreement on behalf of the government which involves the payment of public funds.

(g) ‘Governmental’ means the state and all political entities thereof, both collectively and separately, including but not limited to:

(i) Counties;

(ii) Municipalities; and
 
 
(v) Any department, agency, board, commission, institution, instrumentality, or legislative or administrative body of the state, counties or municipalities created by statute, ordinance or executive order including all units that expend public funds.

(h) ‘Governmental entity’ means the state, a county, a municipality or any other separate political subdivision authorized by law to exercise a part of the sovereign power of the state.

(i) ‘Income’ means money or thing of value received, or to be received, from any source derived, including but not limited to, any salary, wage, advance, payment, dividend, interest, rent, forgiveness of debt, fee, royalty, commission or any combination thereof.

(k) ‘Material financial interest’ means a personal and pecuniary interest, direct or indirect, accruing to a public servant or spouse, either individually or in combination with each other.  Notwithstanding the foregoing, the following shall not be deemed to be a material financial interest with respect to a business with which a public servant may be associated:

(i)  Ownership of any interest of less than ten percent (10%) in a business where the aggregate annual net income to the public servant therefrom is less than One Thousand Dollars ($1,000.00);

(ii) Ownership of any interest of less than two percent (2%) in a business where the aggregate annual net income to the public servant therefrom is less than Five Thousand Dollars ($5,000.00).

(l) ‘Pecuniary benefit’ means benefit in the form of money, property, commercial interests or anything else the primary significance of which is economic gain.  Expenses associated with social occasions afforded public servants shall not be deemed a pecuniary benefit.

(n) ‘Property’ means all real or personal property.

(o) ‘Public funds’ means money belonging to the government.

(p) ‘Public servant’ means:
 
(i) Any elected or appointed official of the government;

(ii) Any officer, director, commissioner, supervisor, chief,  head, agent or employee of the government or any agency thereof, or of any public entity created by or under the laws of the State of Mississippi or created by an agency or governmental entity thereof, any of which is funded by public funds or which expends, authorizes or recommends the use of public funds; or

(iii) Any individual who receives a salary, per diem or expenses paid in whole or in part out of funds authorized to be expended by the government.”

Code Section 25-4-105(1), (3)(a) and (4)(d) states:
 

“(1) No public servant shall use his official position to obtain pecuniary benefit for himself other than that compensation provided for by law, or to obtain pecuniary benefit for any relative or any business with which he is associated.

(3) No public servant shall:

(a) Be a contractor, subcontractor or vendor with the governmental entity of which he is a member, officer, employee or agent, other than in his contract of employment, or have a material financial interest in any business which is a contractor, subcontractor or vendor with the  governmental entity of which he is a member, officer, employee or agent.

(4) Notwithstanding the provisions of subsection (3) of this section, a public servant or his relative:

 
(d) May be a contractor, subcontractor or vendor with any authority of the governmental entity of which he is a member, officer, employee or agent or have a material financial interest in a business which is a contractor, subcontractor or vendor with any  authority of the governmental entity of which he is a member, officer, employee or agent: (i) where such goods or services involved are reasonably available from two (2) or fewer commercial sources, provided such transactions comply with the public purchases laws; or (ii) where the contractual relationship involves the further research, development, testing, promotion or merchandising of an intellectual property created by the public servant.”

Pertinent facts and circumstances provided by the requestor, absent identifying data, are set forth as follows and considered a part of this opinion.
 

I am local counsel for Regional Health Center (RHC), which is a community hospital jointly owned by the City  and the County.  The Board of Trustees, consisting of five members appointed by the owners, does hereby request an advisory opinion from the Mississippi Ethics Commission regarding the hospital's proposed employment of two local physicians.

In approximately 1999, RHC incorporated a non-profit corporation,  Regional Ambulatory Surgery Center, Inc. (RASC), for the sole purpose of owning one-half of Surgery Center, a for-profit Mississippi limited liability company.  The other one-half of Surgery Center is owned by Surgeons Group, another Mississippi limited liability company.  The Surgeons Group is owned by several local physicians, all of whom are on the staff of RHC.  None of these physicians are now or ever have been a member of the Board of Trustees of the hospital and none have been or are now employed by RHC.

RHC is an acute care hospital and is the only one in a County.  The nearest hospital with its size and range of services is in another city in Mississippi, which is a few miles away.  Surgery Center is the only ambulatory surgery center within few miles of the City.

Two of the physicians who own an interest in the Surgeons Group and therefore indirectly own an interest in the Surgery Center are orthopedic surgeons.  Recently, their malpractice insurer withdrew from the State of Mississippi and therefore these physicians are faced with finding other insurance which is available but at substantially increased premiums.  Additionally, in order to purchase all important "tail" coverage from the withdrawing insurer, they are required to pay an extremely high one-time premium. As a result, RHC and these physicians are considering entering into an employment contract.

 
The physicians in question presently operate a clinic located near the hospital and they lease office space from Regional Health Center.  They do own all of their own equipment, furniture, appliances and other personal property, which is associated with the operation of their clinic.  If the hospital employs these physicians, their proposed Employment Agreement would have the following terms:

1. RHC will employ the physicians to (1) provide professional services as orthopedic surgeons to the public and (2) to provide all of the equipment, furniture, appliances and other personal property (except consumables and medications) necessary for the operation of the clinic.  RHC will provide the building for operation of the clinic, all clinic staff, medications, supplies and other consumables necessary for the operation of the clinic.  Since RHC will be providing the office space for the clinic, the existing lease between the physicians and RHC will be terminated.

2. Because the physicians are providing the equipment, furniture, appliances and other personal property necessary for the operation of the clinic, for accounting purposes and also to satisfy the federal regulations promulgated pursuant to the federal laws commonly known as Stark and Anti-Kickback (42 C.F.R. Sections 411.353, et seq. and 42 C.F.R. Sections 1001.952, et seq., respectively), the fair-market rental value of the personal property will be established by the parties in the employment agreement but not divisible for the purposes of the agreement. That is, termination of the physician's services, which will be for one year with extensions by agreement of the parties, will terminate RHC's use of the personalty involved.

3. RHC will be responsible for the operations and management of the medical clinic and will handle all billing and collection of revenue for professional services provided by the physicians through the clinic.

RHC has contractual arrangements with Surgery Center as follows:

1. RHC provides certified registered nurse anesthetists to the Surgery Center and is paid for the use of the hospital's employees at fair-market value.

2. RHC's maintenance department services, maintains and repairs the appropriate systems at the Surgery Center.  This includes heating, air conditioning, plumbing, electrical, etc.  The Surgery Center pays RHC the fair-market value of those services and of course pays for all parts and materials.

 3. RHC provides the Surgery Center with technical assistance related to maintenance, repair and calibration of computers and other electronic equipment.  Again, RHC is paid the fair-market value of those services and all parts and materials are paid for by the Surgery Center.

4. RHC leases space in the Surgery Center to house a satellite imaging center (radiology) and a representative of our laboratory picks up and delivers to RHC's pathology lab specimens which are to be tested for Surgery Center patients. The rent paid by RHC to the Surgery Center is fair-market value (the same as other tenants occupying space) and RHC is paid for laboratory services by the appropriate payor (Medicare, Medicaid, private insurance, etc.).

5. RHC has a standard transfer agreement with the Surgery Center.  In the event patients at the Surgery Center run into difficulties which cannot be managed in the Surgery Center and which require transfer to an acute care hospital, RHC agrees to accept those patients.  This is standard in the industry and similar agreements are in place with many other entities whereby we agree to accept transfers and also, in some instances, other entities agree to accept our transfers.

RHC also has an informal understanding with the Surgery Center as it does with other health-care providers in an area of Mississippi whereby supplies may be loaned.  For example, if RHC unexpectedly runs out of some item needed in its operating room, it might borrow that item from the Surgery Center.  RHC would then replace the Surgery Center's item when it orders and receives its replacement inventory. Of course, the "borrowing" might travel the other way but all borrowed items are returned or replaced.  This arrangement is again something fairly standard between health-care providers and is simply an accommodation within the industry.  This only rarely occurs and is strictly for the health and safety of a patient in an unusual situation.  No payment is ever made by one facility to the other but materials are simply borrowed and then replaced.

The Surgery Center does not provide any services or materials (except as explained in the paragraph above) to RHC and is not considered to be a contractor, subcontractor, or vendor for RHC.

 
The Surgery Center is governed by a Board of Directors consisting of six members.  Three of those members are appointed by RASC and the members presently appointed by that corporation are administrative employees of RHC (the Chief Executive Officer, the Chief Financial Officer and the Comptroller).  One of the physicians who RHC is considering as an employee is a member of the Board of Directors of Surgery Center and is one of three directors appointed by the Surgeons Group.  Directors of the Surgery Center serve without compensation.

RHC's questions are (1) would RHC's proposed employment of these orthopedic surgeons create a conflict of interest and (2) if so, what steps, if any, can be taken to avoid that conflict of interest?

The physicians in question will only enjoy insurance through the end of July, 2003, and therefore there is some urgency to this request.  The Board of Trustees and I thank you in advance for your consideration of the foregoing issues.

The Commission formally adopts Advisory Opinion No. 98-005-E and Advisory Opinion No. 94-079-E in response to this request and by attachment incorporates them into this opinion.

Based solely on the facts and circumstances presented by the requestor, the Commission’s opinion is as follows.

The attached Advisory Opinion No. 98-005-E was issued to this same community hospital regarding the establishing of this same Surgery Center, LLC.  Specifically, Advisory Opinion No. 98-005-E found that the community hospital’s executive and administrative officers serving as uncompensated members and officers of the nonprofit corporation incorporated by the community hospital was not as such prohibited by the state conflict of interest laws.

ISSUE 1.  This issue concerns a similar fact circumstance as that set forth in the attached Advisory Opinion No. 94-079-E.  In analyzing the fact circumstance in the current request and the fact circumstance in Advisory Opinion No. 94-079-E, this Commission finds that the circumstances are sufficiently similar to apply the finding in Advisory Opinion No. 94-079-E to this opinion.

 
Consistent with the finding regarding the employment contract in Advisory Opinion No. 94-079-E, the employment of the two orthopedic surgeons by the community hospital is interpreted by the Commission to come into being by virtue of the contracts of employment as described by the requestor. Specifically, the formulation of the employment contracts to include all the employment terms, including the contribution of the building by the community hospital and the personal property by the orthopedic surgeons, is compliant with the finding in Advisory Opinion No. 94-079-E and the state conflict of interest laws in that the orthopedic surgeons avoid prohibited contractual relationships with the community hospital.

ISSUE 2.  This issue concerns the status of certain existing contracts between the community hospital and the Surgeons Group, LLC. These contracts are: 1) the joint ownership of the Surgery Center, LLC, which operates the Regional Ambulatory Surgery Center, by the community hospital’s nonprofit corporation and the Surgeons Group, LLC and 2) the community hospital’s contracts with the Surgery Center, LLC to provide certain services and assistance for the operation of the Regional Ambulatory Surgery Center.

The contracts, as set forth in the above paragraph, are of concern due to the two orthopedic surgeons becoming public servants of the community hospital and their having ownership interests in the Surgeons Group, LLC, and thereby personal and pecuniary interests in the Surgery Center, LLC.

Specifically, these contractual relationships between the community hospital and the Surgeons Group, LLC and/or the Surgery Center, LLC raise concerns for the two orthopedic surgeons, as public servants of the community hospital, due to the prohibition set forth in the above cited Code Section 25-4-105(3)(a).

Code Section 25-4-105(3)(a) prohibits a public servant, including a community hospital employee, from being a contractor, subcontractor or vendor with the governmental entity of which they are a member, officer, employee or agent, other than in their contract of employment, or having a material financial interest in any business which is a contractor, subcontractor or vendor with the  governmental entity of which they are a member, officer, employee or agent.

Therefore, the question to be addressed is whether the two orthopedic surgeons, as community hospital public servants, by having a material financial interest in the Surgeons Group, LLC, and by way of the Surgeons Group, LLC a material financial interest in the Surgery Center, LLC, will be in violation of Code Section 25-4-105(3)(a). The violation arising due to the above described contracts between the community hospital and the Surgeons Group, LLC and/or the Surgery Center, LLC resulting in either of the LLC’s being a contractor with the community hospital.

In determining when a contract results in a contractor relationship for purposes of Code Section 25-4-105(3)(a), it is advisable to review the Mississippi Supreme Court’s discussion of the term contractor for purposes of Code Section 25-4-105(3)(a) in Moore, ex rel., et al. v. Byars, 757 So. 2d 243 (2000).

Specifically, the Court provided the following regarding the term contractor for purposes of Code Section 25-4-105(3)(a) in Byars:
 
 

“The second issue is whether the State's failure to allege that Byars was a contractor, subcontractor, or vendor with the City of Aberdeen was fatal to its complaint. Miss. Code Ann. § 25 4 105(3)(a) provides as follows: (3) No public servant shall: (a) Be a contractor, subcontractor or vendor with the governmental entity of which he is a member, officer, employee or agent, other than in his contract of employment, or have a material financial interest in any business which is a contractor, subcontractor or vendor with the governmental entity of which he is a member, officer, employee or agent. . . . The State argues that § 25 4 105(3)(a) contains two proscriptions: the first forbids public servants from acting as contractors, etc. with the governmental entity. The second forbids the public servant from having a ‘material interest in any business which is a contractor, subcontractor, or vendor with the governmental entity of which he is a member, employee or agent.’ The State is correct in that the statute contains two separate restrictions. Since Byars is obviously not a ‘a contractor, subcontractor or vendor with the entity’, the question remains as to whether Byars has a material financial interest in any business which is a contractor, subcontractor or vendor with the governmental entity of which he is a member, officer, employee or agent. To answer this question, we must first examine whether Dr. Layne's business is a ‘contractor, subcontractor or vendor’ with the City of Aberdeen. The ethics in government statute defines contract but fails to supply a definition of contractor. See Miss. Code Ann. § 25 4 103(f) (1999). The American Heritage Dictionary, 3rd Ed., defines contractor as ‘one who agrees to perform services at a specified price, esp. for construction work.’ According to Webster's Third International New Dictionary 495 (1961), a contractor is ‘one that contracts, a party to a bargain, one that formally undertakes to do so something for another,’ or as ‘one who contracts on predetermined terms to provide labor and materials and to be responsible for the performance of a construction job in accordance with established specifications or plans.’ Similarly, Black's Law Dictionary describes the term ‘contractor’ as ‘strictly applicable to any person who enters into a contract, but ... commonly reserved to designate one who, for a fixed price, undertakes to procure the performance of works or services on a large scale ... generally classified as general contractors (responsible for entire job) and subcontractors (responsible for only a portion of job; e.g., plumber, carpenter).’ Black's Law Dictionary 295 (5th ed. 1979).Where the legislature has not defined a term within the statutory scheme, we look to the term's common and generally accepted meaning. . . . The term contractor is generally used in the strict sense of one who contracts to perform a service for another and not in the broad sense of one who is a party to a contract. Thus, while Dr. Layne has a contract in the form of a loan with the City of Aberdeen, Dr. Layne is a not a contractor as that term is meant in Miss. Code Ann. § 25 4 105(3)(a). That count against Byars should have been dismissed.” [Emphasis added to bold text]  Byars, 757 So. 2d 247, 248.

The first contractual relationship to review under the finding in Byars is the joint ownership of the Surgery Center, LLC, which operates the Regional Ambulatory Surgery Center, by the community hospital’s nonprofit corporation and the Surgeons Group, LLC.

It is this Commission’s finding that the joint ownership of the Surgery Center, LLC does not  result in the Surgeons Group, LLC or the Surgery Center, LLC being a contractor with the community hospital and thereby the two orthopedic surgeons having material financial interests in a business that is a contractor with the community hospital.  In short, the joint ownership relationship does not meet the Court’s finding that “the term contractor is generally used in the strict sense of one who contracts to perform a service for another and not in the broad sense of one who is a party to a contract.” Byars, 757 So.2d 248.

Notwithstanding the above finding, even if the joint ownership relationship resulted in either the Surgery Center, LLC or the Surgeons Group, LLC being a contractor with the community hospital, the exception to a violation of Code Section 25-4-105(3)(a), set forth in Code Section 25-4-105(4)(d), cited above, would be applicable in this instance.

Specifically, Code Section 25-4-105(4)(d) provides that a violation of Code Section 25-4-105(3)(a) can be avoided “where such goods or services involved are reasonably available from two (2) or fewer commercial sources, provided such transactions comply with the public purchases laws.”

The facts submitted by the requestor show that the services provided by the Surgery Center, LLC, through the operation of the Regional Ambulatory Surgery Center, are within the exception language of  “services involved are reasonably available from two (2) fewer commercial sources” set forth in Code Section 25-4-105(4)(d). Also, there are no facts or other reasons provided to cause this Commission to conclude that the joint ownership agreement did not comply with the public purchases laws.

 
The final contractual relationships to review, under the finding in Byars, is the community hospital’s contracts with the Surgery Center, LLC to provide certain services and assistance for the operation of the Regional Ambulatory Surgery Center. Specifically, the requestor describes these contractual arrangements as follows: 1) the community hospital provides certified registered nurse anesthetists to the Surgery Center and is paid for the use of the hospital’s employees at fair-market value; 2) the community hospital’s maintenance department services, maintains and repairs the appropriate systems at the Surgery Center.  This includes heating, air conditioning, plumbing, electrical, etc. The Surgery Center pays the community hospital the fair-market value of those services and, of course, pays for all parts and materials; 3) the community hospital provides the Surgery Center with technical assistance related to maintenance, repair and calibration of computers and other electronic equipment.  Again, the community hospital is paid the fair-market value of those services and all parts and materials are paid for by the Surgery Center; 4) the community hospital leases space in the Surgery Center to house a satellite imaging center (radiology) and a representative of our laboratory picks up and delivers to the community hospital’s lab specimens which are to be tested for Surgery Center patients.  The rent paid by the community hospital to the Surgery Center is fair-market value (the same as other tenants occupying the space) and the community hospital is paid for laboratory services by the appropriate payor (Medicare, Medicaid, private insurance, etc.); and 5) the community hospital has a standard transfer agreement with the Surgery Center. In the event patients at the Surgery Center run into difficulties which cannot be managed in the Surgery Center and which require transfer to an acute care hospital, the community hospital agrees to accept the patients.  This is standard in the industry and similar agreements are in place with many other entities whereby we agree to accept transfers and also, in some instances, other entities agree to accept our transfers.

Regarding the community hospital’s contractual relationships with the Surgery Center, LLC as described and set forth in the above paragraph as items 1) through 5), the goods or services are being provided by the community hospital to the Surgery Center, LLC.  The prohibition in Code Section 25-4-105(3)(a) prohibits a business, in this instance, the Surgery Center, LLC, from being a contractor with a governmental entity/authority, in this instance, the community hospital, not the reversed relationship.

Therefore, based on the above facts, the community hospital’s contractual relationships with the Surgery Center, LLC, as described and set forth in the above paragraph as items 1) through 5), do not result in the two orthopedic surgeons, as public servants of the community hospital, having a material financial interest in a business that is a contractor with the community hospital in violation of Code Section 25-4-105(3)(a).

Regarding the “informal understanding” whereby supplies maybe loaned from time to time on rare occasions, the community hospital and the Surgery Center, LLC having such an “informal understanding”does not appear to result in a legally enforceable contract, and thereby a contractor relationship, based on the requestor’s facts. Thereby, such an “informal understanding”would not be covered by the prohibition imposed by Code Section 25-4-105(3)(a).

 
Notwithstanding the above findings pertaining to Code Section 25-4-105(3)(a), the requestor is cautioned to advise the community hospital and the two orthopedic surgeons to remain keenly aware of the prohibition imposed by the above cited Code Section 25-4-105(1) and the public policy mandates set forth in the above cited Code Section 25-4-101.  These two code sections are of particular concern regarding the orthopedic surgeon serving as a member of the board of the directors of the Surgery Center, LLC and as a director of the Surgeons Group, LLC. [Emphasis added to bold text]

Code Section 25-5-105(1), prohibits a public servant, including a community hospital employee, from using his or her official position to obtain a pecuniary benefit for himself or herself or a business with which he or she is associated.  For purposes of this opinion, the Surgery Center, LLC and the Surgeons Group, LLC, are businesses with which the two orthopedic surgeons are associated. This is especially of concern regarding the orthopedic surgeon serving as a director of the two LLC’s. [Emphasis added to bold text]

As previously stated, the issues presented by the requestor also must be viewed as they relate to Code Section 25-4-101. This code section sets the tone for the conflict of interest laws as the Legislature’s “Declaration of Public Policy.” This public policy can be summarized as any circumstance having the potential of creating suspicion among the public and reflecting unfavorably upon the state or local government should be closely reviewed by public servants with the intent to reduce or eliminate any suspicion on the part of the public which detracts from the public’s trust in state or local government.

Clearly, an employee of a community hospital serving as a director of two LLC’s which have the above described relationships with the community hospital has the potential to create suspicion among the public and reflect unfavorably upon the community hospital.

Based on the above, the Commission recommends that the orthopedic surgeon should not remain a director of the two LLC’s if he is employed by the community hospital so as to be certain that he does not violate Code Section 25-4-105(1) and to comply with the public policy mandate set forth in Code Section 25-4-101.
 
 

Scott Rankin
Executive Director
 

¹ Advisory Opinion No. 94-079-E differs from the current situation to the extent that the physician in Advisory Opinion No. 94-079-E owned both the personal property and the building used in the medical practice.