UHS-Qualicare, Inc. v. Gulf Coast Community Hosp., Inc.
| Decision Date | 19 August 1987 |
| Docket Number | INC,UHS-QUALICAR,No. 56389,56389 |
| Citation | 525 So.2d 746 |
| Parties | , UHS of the Gulf Coast, Inc., and Qualicare Sub., Inc., et al. v. GULF COAST COMMUNITY HOSPITAL, INC., Safecare Company, Inc., S.C. Longview, Inc., Stephen R. Jepson, J. Stephen Wright, and Larry W. Wells. |
| Court | Mississippi Supreme Court |
George P. Hewes, III, J. Perry Sansing, Brunini, Grantham, Grower & Hewes, Jackson, Floyd J. Logan, Alben N. Hopkins, Hopkins, Vaughn & Anderson, Gulfport, James Nespole, Glen Banks, Reavis & McGarth, New York City, for appellants.
William M. Rainey, Franke, Rainey & Salloum, Gulfport, Christopher I. Brain, William H. Block, Seattle, Wash., for appellees.
Before WALKER, C.J., and ROBERTSON and ANDERSON, JJ.
I.
This declaratory judgment action arises out of a hospital management contract. The hospital drew first blood as it secured a trial court declaration that it had lawfully terminated the contract by reason of the manager's material breaches. We reverse and render, holding the breaches not sufficient to support the radical remedy of termination, for the reason that the contract vested in the hospital authority to cure immediately.
II.
Gulf Coast Community Hospital was built in 1976 in Biloxi, Mississippi. The hospital was financed and built by Safecare Company, Inc. ("Safecare") for a group of local physicians. After completion the hospital was leased to Charter Medical, a hospital management company. By 1979 Gulf Coast was in serious financial difficulty. In March of 1980 a joint venture was formed between Safecare and Qualicare of Louisiana, Inc. ("Qualicare") which promptly acquired the hospital in March of 1980. Pursuant to the joint venture agreement, Safecare and Qualicare each acquired a fifty percent stock interest in Gulf Coast Community Hospital, Inc. ("Gulf Coast") which in turn owned the hospital.
On March 1, 1980, Gulf Coast entered into a twenty year management contract with Qualicare. The contract provided that Qualicare would manage the hospital. For its services Qualicare would be paid a monthly fee based on gross revenues.
The management contract delineates the duties and prerogatives of both Qualicare, as the manager/co-owner, and Gulf Coast, referred to in the contract as the "corporation." Article III of the Management Agreement is entitled "RIGHTS AND DUTIES OF MANAGER" and provides in part:
(D) Manager shall prepare an annual budget for the Facility ... and shall cause the budget to be presented to the Corporation prior to the commencement of each fiscal year for its acceptance, rejection, or modification. Upon adoption of such budget, or any modification thereof, by the Corporation, such budgets shall serve as a guide for the operation of the facility during the ensuing year.
In Article IV, which is entitled "RIGHTS AND DUTIES OF THE CORPORATION DURING THE TERM OF THIS AGREEMENT," the contract states:
The Corporation has reserved the right to make all management and policy decisions specifically including the right to set the Corporation's admission policies and fee structures.
In Article VIII, there appears a termination clause which reads as follows (C) If Manager shall fail to keep, observe or perform any material covenant, agreement, term or provision of this Agreement to be kept, observed or performed by Manager, and such default shall continue for a period of thirty (30) days after written notice thereof by Corporation to Manager, then in case of any such event and upon the expiration of the aforesaid thirty (30) day period, this Agreement shall terminate at any time thereafter upon notice to Manager by the Corporation in writing.
The hospital operated under joint Qualicare/Safecare ownership and Qualicare management until 1983. In January of 1983, Qualicare reached an agreement with United Health Services, Inc. ("UHS") for the sale to UHS of Qualicare's interest in Gulf Coast. UHS formed a subsidiary corporation, UHS-Qualicare, Inc. ("UHS-Qualicare"), to serve as a vehicle through which acquisition could take place. Effective May 29, 1983, UHS-Qualicare succeeded to all of the rights, assets and liabilities of Qualicare and became owner of fifty percent of the stock of Gulf Coast. UHS-Qualicare also succeeded to Qualicare's position as manager of Gulf Coast Community Hospital.
Gulf Coast's budget for fiscal year 1983 was already in effect at the time of this acquisition. That budget assumed an average daily census (average number of patients per day) of 103. With this census, the hospital had a projected "bottom line" profit of $2,200,000.00. The budget also contained a "variable budget," outlining the hospital's financial prospects if the census was not 103, but rather was 95. Under a 95 census, the budget projected a profit of $1,426,000.00 for the year. By the end of May, 1983, the average daily census was running around 93, and the accrued profit for the first five months was approximately $667,000.00. Under the variable budget portion of the Board-approved budget, outlining the course the hospital would take under a 95 census, the profit for five months ( 5/12 of total income) had been projected to be $600,000.00.
Here the recitation of the facts in the briefs of the parties degenerates into a series of charges and counter charges. A few basics, however, appear beyond dispute. In June of 1983, UHS-Qualicare, as manager, increased the rates charged patients from $654.00 per patient day to $738.00 per patient day. This rate increase was designed to achieve a 38 percent gross profit margin, substantially higher than the 26 percent contained in the Board-approved budget. UHS argues that this was necessary to maintain the bottom line of the $2.2 million dollar profit projected in the Board-approved budget. The scheduled June 1 increases were put off until a new budget could be developed. That was done and was completed on June 16, 1983. All increases were imposed between June 19 and June 29, 1983. The Board of Directors was not informed of the changes nor was its approval sought.
On June 16, 1983, Safecare--as distinguished from Gulf Coast--wrote to UHS insisting that it be consulted with respect to all rate changes. It is highly significant, as will appear later, that this is a letter from one 50 percent owner, Safecare Company, Inc., to the other 50 percent owner, United Health Services, Inc. 1
June 16, 1983
Mr. Alan B. Miller
President & Chairman of the Board
Universal Health Services, Inc.
367 South Gulph Road
King of Prussia, PA 19406
Dear Alan:
It has come to our attention as a result of routine conversation with the New Orleans home office staff, that on June 1 of this year certain increases in patient charges were implemented at Gulf Coast Community Hospital without the prior consent of Safecare Company. I am also aware that revised budgets have been prepared and adopted at both Gulf Coast Community Hospital and Lander Valley Regional Medical Center without our knowledge or consent.
As 50% owners of these facilities, Safecare has in the past been consulted in the rate setting process, and should in the future be consulted, and its approval sought, with respect to all rate changes. It is our firm position that unilateral increases in patient charges at any of our hospitals are unacceptable, and will not be tolerated without our prior review and consent.
In an effort to learn some specific facts regarding these changes, I made a number of inquiries to the hospital administration, and it is apparent that they are reluctant to discuss specific details and have been instructed not to communicate this kind of information to us. If this is factual, it represents a serious departure from longstanding practices as well as a violation of our right to information.
Therefore, Safecare hereby demands to be properly informed and our approval sought prior to implementation of any patient rate changes in order that we might properly evaluate the propriety and effect upon Safecare Company, Inc., and SAFECO Corporation.
Sincerely,
SAFECARE COMPANY, INC
/s/
Stephen R. Jepson
Vice President
SRJ/brl
cc: L. W. Wells
J. Stephen Wright
June and July, 1983, were months of increasing disenchantment among the new joint venturers. A series of moves and counter moves took place, each party jockeying to improve its strategic position. Quite apparently, little thought was being given to patient care at the hospital. Be that as it may, the critical event was the July 12, 1983, resignation of A. Russell Chandler from the Board of Directors. Prior to that time, the Board had consisted of six members, three "controlled" by Safecare and three "controlled" by UHS-Qualicare. Chandler had been president of the original Qualicare, the party which sold its interest to UHS. Reading between the lines, one may assume that, his company out of the picture, Chandler simply wanted no part of the imminent warfare. In any event, on July 12, 1983, Chandler resigned from Gulf Coast's Board.
In rapid fire succession, the three Safecare directors elected one of their own, Thomas L. Haywood, to succeed Chandler. Thereafter, the two remaining UHS-Qualicare directors were removed so that, following the massacre, Gulf Coast's Board of Directors consisted of four persons, all loyal to Safecare. 2 Gulf Coast, a/k/a Safecare, concedes in its brief that these changes were made to preserve its "power to make management and policy decisions reserved to it by the Management Contract," a preservation which will acquire considerable significance as we proceed.
On the same day, July 12, 1983, Gulf Coast, acting through its newly elected president, J. Stephen Wright, declared the Management Agreement terminated in a letter addressed in triplicate to Qualicare of Louisiana,...
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