No charitable immunity for doctors' group, Virginia court rules.

A Virginia trial court judge has ruled that the charitable-immunity doctrine does not shield doctors paid by a tax-exempt foundation from malpractice suits. The state is one of nine that still support charitable immunity; the others are Alabama, Arkansas, Georgia, Maine, Maryland, New Jersey, Utah, and Wyoming.

Three cases in which doctors employed by the University of Virginia Health Services Foundation (HSF) allegedly committed malpractice were consolidated on this issue. In an October ruling, Circuit Court Judge Edward Hogshire found that HSF regularly earns a profit--paid out to its physicians as bonuses--and that its "wealth of resources and reserves is radically incongruent with the traditional conception of a struggling charity in need of public support." (Morris v. U. of Va. Health Servs. Found., No. 05-163 (Va., Charlottesville Cir. Oct. 25, 2006).)

"A big part of our argument was to distinguish between tax-exempt status and charity status, notwithstanding the IRS's labels, which are mis-leading," said Christine Thomson of Charlottesville, Virginia, who represented plaintiff Hunter Morris, injured at birth.

HSF pays doctors who work at the university and its medical center and was set up as a tax-exempt entity under Internal Revenue Code [section] 501 (c) (3). Doctors are eligible for bonuses paid out of revenue at the end of the year; in 2005, revenue was over $215 million.

"Medical groups are collection agencies. They do the doctors' billing and provide benefits for them rather than having some high charitable purpose," said Thomson. "At the end of the year, the Health Services Foundation had extensive funds left over, and doctors got 'incentives' that they assiduously avoid calling 'bonuses'--but it's profit being handed to people who've earned it."

HSF qualified as a charity for tax purposes and claimed in its articles of incorporation to have a purpose "exclusively charitable, scientific, and educational," Hogshire wrote. But applying 10 criteria that the Virginia Supreme Court set forth in Ola v. YMCA (621 S.E.2d 70 (Va. 2005)) for determining whether an entity operates as a charity, the judge said HSF did not.

"Clearly, charity was not the exclusive or even the central purpose in HSF's formation," Hogshire wrote. He noted that although HSF says its net earnings do not benefit its officers or directors, they do benefit the officers and directors in their capacity as doctors. In fact, "the bonus structure of HSF belies the presumption that HSF does not intend to earn additional, substantial revenues with which to pay handsome compensation to its physicians," he wrote.

Ola's essential question, Hogshire wrote, is whether the charity benefits those who run it or those it serves. "Those who most benefit from HSF are the physicians themselves--as employees and directors, they have a stake in the financial successes of HSE Their success effectively dismantles the plea of charitable immunity," he concluded.

"It's worth really delving into an organization's financials, its tax status, IRS letters, how it prepares tax records, and what it actually claims as its charitable worth," said Thomson.

With other similar cases pending around the state, the issue is likely to go to the Virginia Supreme Court, she said.