This Advisory Opinion concerns the following issue as formulated from facts and/or circumstances furnished by a requestor. The Commission approved this opinion on October 1, 2004, basing its approval solely on the facts and circumstances stated herein.
 

May a public hospital provide management services under contract to a business in which a hospital employee holds a material financial interest?

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 25-4-103(c), (d), (h), (k)(i)(ii)(iii)(iv), (l) and (p)(i)(ii)(iii) states, in pertinent part:
 

“(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.

(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.

(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);

(iii) The income as an employee of a relative if neither the public servant or relative is an officer, director or partner in the business and any ownership interest would not be deemed material pursuant to subparagraph (i) or (ii) herein; or

(iv) The income of the spouse of a public servant when such spouse is a contractor, subcontractor or vendor with the governmental entity that employs the public servant and the public servant exercises no control, direct or indirect, over the contract between the spouse and such governmental entity.

(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.

(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) and (3)(a) states, in pertinent part:
 

“(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.”

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

Our firm is legal counsel to a Doctor.  The Doctor is the owner of  a Physicians Professional Association (PA) which has entered into a Services Agreement with the Board of Trustees of a Public Hospital under which the PA provides certain physician staffing and administrative services to the Hospital.  Under the Services Agreement, the PA provides administrative services required for the management of the day-to-day operations of the Hospital, which include the provision of an individual to serve as administrator for the Hospital.

The Hospital is a public community hospital managed and operated by a Board of Trustees and owned by a City and a County.  The Doctor is not an employee of the Hospital, but serves in the position of its Administrator pursuant to the terms of the Services Agreement.  Another person is an employee of the Hospital and serves as its Chief Operating Officer.  A third person is an independent contractor with the PA who sometimes provides services to the Hospital, on behalf of the PA and in satisfaction of its obligations under the Services Agreement.

The Doctor, the Chief Operating Officer and the Independent Contractor have formed and are owners of a limited liability company (LLC).  The LLC was formed to own and operate physician clinics and has recently acquired a physician’s clinic in another city.

We hereby request on behalf of the Doctor an advisory opinion from the Mississippi Ethics Commission addressing a proposal that the LLC enter into a Management Agreement with the Hospital whereby the Hospital would provide management services required for the operation of the physician’s clinic recently purchased by the LLC.  The Chief Operating Officer, the Independent Contractor and the members of the Board of Trustees of the Hospital join in this request.

The management services which are contemplated to be provided by the Hospital to the LLC include billing, collection, clinic staffing and accounting services.  The LLC would compensate the Hospital for these management services. This proposed management arrangement is similar to the contracts between a community hospital and a surgery center which were reviewed in Advisory Opinion No. 03-073-E.  In Advisory Opinion No. 03-073-E, the Ethics Commission held that the community hospital’s contractual relationships with a surgery center did 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).

The compensation to be paid to the Hospital for services rendered under the Management Agreement may either be a fixed fee or a percentage fee arrangement based on a percentage of collections or net revenue of the Physician’s Clinic.  The Board of Trustees will obtain an independent valuation verifying the appropriate methodology for determining the compensation and the fair market value of the compensation under the Management Agreement before entertaining execution of the Management Agreement.

The Doctor, the Chief Operating Officer and the Independent Contractor will totally recuse themselves from any discussion with the Board of Trustees concerning the Management Agreement.  A representative of the LLC will handle the presentation and negotiation of the terms of the Management Agreement with the Board of Trustees of the Hospital.  Full disclosure will be made to the Board of Trustees as to the ownership held by the Doctor, Chief Operating Officer and the Independent Contractor in the LLC.

It is contemplated that if the Board of Trustees determines to proceed with the Management Agreement that the Board of Trustees would appoint a Hospital employee to serve as “clinic administrator” of the Physician’s Clinic and that such employee will be responsible for the management services provided by the Hospital to the LLC under the Agreement.  Such employee would report directly to the Board of Trustees concerning the fulfillment of the Hospital’s contractual obligations.

Opinion Request:  Based on the above described structure and proposed activities, please provide us with an advisory opinion on the following questions:

1. Do the Mississippi Ethics in Government laws permit the Board of Trustees of the Hospital to enter into an agreement for the Hospital to provide management services to the LLC needed for the management of the Physician’s Clinic, when the LLC is owned by the Doctor, Chief Operating Officer and the Independent Contractor?

2. Do the Mississippi Ethics in Government laws permit the Doctor, Chief Operating Officer and the Independent Contractor to have an ownership interest in the LLC which would contract with the Board of Trustees of the Hospital for services to be provided by the Hospital as needed for the management of the Physician’s Clinic?

3. Is the method proposed in this opinion request for the review, negotiation, approval and monitoring of the proposed Management Agreement between the Board of Trustees of the Hospital and the LLC in compliance with the Mississippi Ethics in Government laws?

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

Many of these facts are indeed similar to those in Advisory Opinion No. 03-073-E, as the requestor notes. In fact, that opinion is dispositive of the first and second questions presented by the requestor. Here the Chief Operating Officer (COO), and perhaps the other shareholders of the Limited Liability Company (LLC), is definitely a public servant employed by the public hospital. Furthermore, the COO presumably holds a material financial interest in the LLC. See Section 25-4-103(k), Miss. Code of 1972, quoted above. Thus, Section 25-4-105(3)(a), Miss. Code of 1972, quoted above, prohibits the LLC from being a contractor to the hospital.

However, as outlined in Advisory Opinion No. 03-073-E, when the contractual services are being provided by the public hospital to the LLC, the LLC is not a “contractor” to the hospital, as defined by the Mississippi Supreme Court in Moore, ex rel. City of Aberdeen v. Byars, 757 So.2d 243, 248 ( 15) (Miss. 2000). Here the LLC will compensate the public hospital for management services provided to the LLC by the hospital. Under this arrangement, the LLC is not a contractor to the public hospital, and no violation of Section 25-4-105(3)(a) will result if the Board of Trustees enters into the proposed management agreement with the LLC.

The remaining issue implicates Section 25-4-105(1), Miss. Code of 1972, quoted above. That provision will prohibit the shareholders of the LLC from using any official position they may hold with the hospital now or in the future to obtain pecuniary benefit for the LLC. This prohibition is of particular concern considering two of the shareholders in the LLC are the Administrator and Chief Operating Officer of the hospital. Moreover, the individual charged with overseeing the performance of the management agreement will be a hospital employee.

Yet the proposed measures to “automate” the compensation and oversight mechanisms of the management agreement serve to mitigate these concerns. The intention of the LLC members to “totally recuse themselves from any discussion with the Board of Trustees concerning the Management Agreement” and fully disclose their respective interests is laudable and perhaps necessary to avoid a violation of Section 25-4-105(1). The Commission also notes with approval that the hospital employee who will serve as administrator of the physicians clinic is to “report directly to the Board of Trustees concerning the fulfillment of the Hospital’s contractual obligations.”

Nevertheless, the shareholders of the LLC will be under a continuing duty to vigilantly ensure that none of the actions they take in their respective capacities with the hospital will result in a pecuniary benefit to the LLC. It appears the measures proposed to remove the LLC members from the review, negotiation, approval and monitoring of the proposed management agreement will be sufficient to prevent any foreseeable violation of Section 25-4-105(1).
 
 

Scott Rankin
Executive Director