Can a North Carolina municipal hospital legally join a physician-hospital organization (PHO) and put public money into it, so the hospital can compete in the managed care market?

Plain-English summary

The Attorney General answered three questions about municipal hospitals establishing physician-hospital organizations (PHOs). The opinion concludes that, under N. C. Gen. Stat. § 131E-7(b), a municipal hospital may enter a joint venture with local physicians to create a local PHO that then joins other PHOs to create a statewide PHO.

The AG also concluded that using municipal hospital revenues to establish local and statewide PHOs is an expenditure for a public purpose under Article V, Section 2(1) of the North Carolina Constitution, and that N.C. Gen. Stat. § 159-30 does not prohibit that expenditure.

Currency note

This opinion was issued in 1995. Check current law before applying its conclusions to a present-day arrangement.

Common questions

May a municipal hospital join local physicians to create a PHO?

Yes. That is the first question the AG answered. The conclusion also covers that local PHO joining other PHOs to create a statewide PHO.

May the hospital use its revenues to establish the PHOs?

The AG concluded that doing so serves a public purpose under Article V, Section 2(1) and is not prohibited by N.C. Gen. Stat. § 159-30.

Does the opinion approve any physician partnership or corporate structure?

The retained text states the AG's conclusions about local and statewide PHOs. It does not establish the details or approval of a different venture structure.

Source

• Landing page: https://ncdoj.gov/opinions/creation-of-physician-hospital-organizations-by-municipal-hospitals/

Original opinion text

The NCDOJ-published opinion begins in medias res. The questions presented and conclusions are reproduced below as published.

• (1) Does a municipal hospital have the authority, pursuant to N. C. Gen. Stat. § 131E-7(b), to enter into a joint venture with local physicians to create a local physician-hospital organization ("PHO") that will then join with other PHOs to create a Statewide PHO?
• (2) Is the expenditure of municipal hospital revenues to establish local and Statewide PHOs an expenditure for a public purpose, pursuant to Article V, Section 2(1) of the North Carolina Constitution?
• (3) Is the expenditure of municipal hospital funds to establish local and Statewide PHOs prohibited by N.C. Gen. Stat. § 159-30?

For the reasons set out below, we conclude that:

• (1) A municipal hospital does have the authority, pursuant to N. C. Gen. Stat. § 131E-7(b), to enter into a joint venture with local physicians to create a local PHO that will then join with other PHOs to create a Statewide PHO;
• (2) The expenditure of municipal hospital revenues to establish local and Statewide PHOs is an expenditure for a public purpose, pursuant to Article V, Section 2(1) of the North Carolina Constitution; and
• (3) The expenditure of municipal hospital funds to establish local and Statewide PHOs is not prohibited by N.C. Gen. Stat. § 159-30.

[STATEMENT OF THE FACTS and ANALYSIS sections follow on the NCDOJ landing page; the analysis traces the Municipal Hospital Act's express and implied authority, the Madison Cablevision two-prong test for public purpose, and the inapplicability of the idle funds statute. The opinion concludes by reaffirming each of the three answers.]

John R. McArthur
Chief Counsel

James A. Wellons
Special Deputy Attorney General