Many general hospitals in New York participate in multi-provider health care delivery systems.  These networks are usually coordinated by parent entities (often another not-for-profit corporation) or natural persons (often a representative or representatives of a religious group or a similar organization) who are designated as the “member” or “members” of the network providers.  The role of a “member” is similar to shareholders in business corporations.  Thus, the “sole member” of a not-for-profit corporation is in the position of someone who owns all the stock in a business corporation.  Members, like shareholders, may be divided into classes, each with specific rights and obligations. 

The concept of one not-for-profit corporation being designated as a “member” of another not-for-profit corporation, and exercising the governance authority given to members under the NPCL, has provided the foundational legal basis and the structural building blocks for virtually all health care systems in the state of New York for at least the last 30 years.  The exercise of such membership-derived governance authority has never required the licensure of a hospital member as an “established” operator under the laws of New York or any other state.  This is because the governance rights of members involve areas of sponsor-level decision-making, not operational detail.  Thus, unlicensed members have no authority over such key operational areas as formation of corporate policies, regulatory compliance, standards of care, or medical staff credentialing. 

The exercise of membership rights is often referred to as “passive” control exercised by a “passive parent” entity, as compared to the exercise of authority over a hospital that requires licensure, often referred to as “active” control exercised by an “active parent” entity.

From time to time, the New York State Department of Health (DOH) and various special-interest advocacy groups have raised the question of whether the sponsoring members of hospitals hold and exercise operational control, thus requiring their establishment and licensure.  Raised for the first time in 1986, the question of membership rights over hospitals is again on the mind of DOH as a result of certain perceived governance and quality-of-care problems that DOH links to the passive-parent model.

This article provides a historical account of the active/passive parent rules, examines the current issues raised by DOH, and offers for consideration and debate certain remedial recommendations.

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Reprinted with permission from: Health Law Journal, Winter 2012, Vol. 17, No. 1, published by the New York State Bar Association, One Elk Street, Albany, NY 12207