UNIVERSITY OF VA HEALTH SERVICES v. Morris

Present: All the Justices

UNIVERSITY OF VIRGINIA HEALTH
SERVICES FOUNDATION, ET AL.

v. Record No. 070214 OPINION BY JUSTICE DONALD W. LEMONS
February 29, 2008
HUNTER MORRIS, AN INFANT, BY
HIS NEXT FRIENDS, ELIZABETH
PIERCE MORRIS, HIS MOTHER,
AND DAVID R. MORRIS, HIS
FATHER, ET AL.

FROM THE CIRCUIT COURT OF THE CITY OF CHARLOTTESVILLE
Edward L. Hogshire, Judge

STUART A. HOWARDS, M.D., ET AL.

v. Record No. 070217

WILLARD A. SEARCY, AS
ADMINISTRATOR OF THE ESTATE OF
CARA LEIGH SEARCY, DECEASED,
ET AL.

FROM THE CIRCUIT COURT OF THE CITY OF CHARLOTTESVILLE
Edward L. Hogshire, Judge

CRYSTAL ANN MacARTHUR, A
MINOR, BY HER MOTHER AND NEXT
FRIEND, DEBORAH ANN YORK, ET
AL.

v. Record No. 070475

UNIVERSITY OF VIRGINIA HEALTH
SERVICES FOUNDATION

FROM THE CIRCUIT COURT OF THE CITY OF CHARLOTTESVILLE
Randy I. Bellows, Judge Designate

In these consolidated appeals, we consider whether the

University of Virginia Health Services Foundation (“HSF”) is

entitled to charitable immunity.
 I. FACTS AND PROCEEDINGS

A. Health Services Foundation

HSF is a “non-profit group practice health care provider

organization” that employs the physicians who work at the

University of Virginia School of Medicine (“Medical School”).

The physicians who are employed by HSF are also employed by

the Medical School. The physicians teach and perform research

at the Medical School and render patient care services at the

University of Virginia Medical Center (“Medical Center”) and

regional primary care offices. HSF bills patients for

professional fees when the physicians treat patients.

1. Articles of Incorporation

HSF was created in 1979, primarily to improve the patient

billing and collection process, which was previously performed

by the University of Virginia (the “University”). The

Articles of Incorporation of HSF state several purposes of the

organization:

Section 2. Purposes and Restrictions
(a) The purposes for which the Foundation
is formed are exclusively charitable,
scientific and educational, as contemplated by
Section 501(c)(3) of the Internal Revenue Code
of 1986, as amended . . . . More particularly,
the Foundation is organized and shall at all
times be operated to assist medical education
by teaching in a group practice setting within
the academic environment of the University of
Virginia (herein the “University”), and, in
particular, the University’s Medical Center; to
coordinate and deliver superior patient care

2
 therein, and in connection therewith to perform
a public trust without regard to the race,
color, creed, sex, age or ability to pay of the
patients so served; and in concert with the
University:

(i) To provide hospital and medical
care, education and research;

(ii) To assist and conduct
programs to cure, alleviate, and prevent
human illness and disease;

(iii) To provide teaching services
on the undergraduate, post graduate and
continuing education levels and to provide
service generally to the various medical
departments of the University’s Medical
Center;

(iv) To assist and conduct programs
of public charity to benefit patients who
might not otherwise receive or be able to
afford medical attention;

(v) In furtherance of the above
stated purposes, to use and apply the
whole or any part of the Foundation’s
income and principal exclusively for
charitable, scientific or educational
purposes;

(vi) To engage in any and all lawful
activities incidental to the foregoing
purposes except as limited herein.

The Articles of Incorporation also state, “No part of the

Foundation’s net earnings shall inure to the benefit of a

director or officer of the Foundation or to any private

individual.” Upon dissolution of HSF, none of the property or

proceeds of HSF may be distributed to officers or directors of

HSF, or to any individual.

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 2. Providing Medical Care to Indigents

One of the purposes stated in HSF’s Articles of

Incorporation is “[t]o assist and conduct programs of public

charity to benefit patients who might not otherwise receive or

be able to afford medical attention.” In furtherance of this

purpose, HSF provides medical care and treatment to all

persons, regardless of their ability to pay or whether they

have any outstanding debts to HSF.

When a patient presents at the Medical Center and is

unable to pay for a service, front desk staff perform a

“verbal mini-screening” to determine the patient’s income and

number of dependents. The patient is given paperwork to

complete so the Medical Center can review the patient’s

financial status. If the Medical Center determines that the

patient is unable to pay all or a portion of his bill, he is

classified at one of five levels of “medical indigency.” If a

patient is categorized as a “level one” (100% medically

indigent), he is not charged for any of the services he

receives from HSF physicians. If a patient is classified at a

lower level of medical indigency, anywhere from five to fifty-

five percent of the charge for the services is adjusted.

If a medically indigent patient does not complete the

financial paperwork, he is billed as a paying patient. The

patient may complete the paperwork during the billing and

4
collection process. If the patient is then determined by HSF

to be medically indigent, HSF makes a retroactive adjustment

for the patient’s entire account.

HSF regularly files warrants in debt in the appropriate

general district court to obtain judgments against patients

who have a balance on their account. If HSF obtains a

judgment against a medically indigent patient, the patient may

still file the financial status paperwork. If it is

determined that the patient is medically indigent, a

retroactive adjustment is made to the patient’s account.

The current Chief Operating Officer of HSF, Bradley E.

Haws (“Haws”), and the Director of Billing and Collections,

Kevin M. Higgins, testified that HSF usually collects about

35-38% of “full bill charges” from a paying patient or

insurance company because HSF has “agreements with third party

payors that provide for payments to [HSF] at amounts different

from its established rates.” HSF’s financial statements show

a loss of approximately $20-22 million a year in foregone

collections for care provided to medically indigent patients.

Because HSF would expect to actually receive only 35-38% of

that amount if “collecting a typical amount,” Haws testified

that HSF actually failed to receive roughly $7-8 million in

expected collections as a result of providing services to

medically indigent patients in 2005.

5
 The Commonwealth reimburses the Medical Center up to the

level of the costs of treating many medically indigent

patients. Haws testified that in 2005, “5 and a half million

dollars was paid to the [M]edical [C]enter and then

transferred to the faculty as compensation up to the level of

cost for seeing [medically indigent patients].” Haws

testified that HSF therefore had an actual shortfall of about

$1.5 million for treating medically indigent patients in 2005

instead of the $20 million reflected on the financial

statements.

3. Flow of Money From HSF to Physicians

HSF, having been created for the purpose of conducting

patient billing and collections, performs that function.

HSF’s revenue consists of its net patient service revenue

(“estimated net realizable amounts from patients, third-party

payors, and others for services rendered”), reimbursements

from the University for supervisory, administrative, and

clinical services provided to the Medical Center, investment

income, gain on the sale of capital assets, and “other

miscellaneous revenue.” HSF receives no funds as

contributions or donations because it is precluded from

receiving contributions or donations under its affiliation

agreement with the Medical School.

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 HSF distributes its revenue in the following manner: (1)

HSF pays its operating expenses 1 ; (2) 7% of gross revenue is

then paid to the Dean of the Medical School (the “Dean’s Tax”)

for an academic advancement fund; and (3) the balance is

transferred to the various departments of the Medical School

in accordance with how much revenue the departments generate.

The physicians are employed by both HSF and the Medical

School. A physician’s salary is set by the Dean of the

Medical School and the chair of the department for which that

physician works. The departments aggregate funds received

from HSF and the Medical School and use them to pay the

physicians’ salaries and benefits.

The physicians’ salaries consist of two components: a

guaranteed base salary, which is a fixed amount paid by the

University and, in addition, an incentive payment 2 to the

physicians from their respective departments. When the two

compensation components are combined, HSF physicians are

compensated on average at about the forty-fifth to fifty-fifth

percentile of salaries for physicians employed in academic

1
HSF’s operating expenses do not include salaries for
physician employees.
2
The plaintiffs in these cases refer to the non-fixed
compensation as “bonuses,” while HSF uses the term “incentive
payments.” Regardless of the varying terminology, it is clear
that all parties are referring to the portion of the HSF
physicians’ salaries that is not fixed, which we refer to in
this opinion as “incentive payments.”

7
medical centers, according to a survey conducted by the

American Association of Medical Colleges (“AAMC”). HSF

considers this level of income necessary to recruit and retain

physicians.

4. Tax Classification

In 1980, HSF applied to the United States Internal

Revenue Service (“IRS”) for recognition of federal income tax

exemption under I.R.C. § 501(c)(3). HSF requested a

definitive ruling as to the non-private foundation status of

HSF under I.R.C. § 509, applying as: (1) a hospital; (2) an

organization “normally receiving not more than one-third of

its support from gross investment income and more than one-

third of its support from contributions, membership fees, and

gross receipts from activities related to its exempt

functions” under § 509(a)(2); and (3) an organization “being

operated solely for the benefit of or in connection with one

or more of the organizations described . . . above” under

§ 509(a)(3). The IRS determined that HSF was exempt from

federal income tax under § 501(c)(3), and further determined

that HSF is a public charity (in other words, it is not a

private foundation) because it is a § 509(a)(3) organization.

HSF’s tax-exempt status is based upon its function as a

supporting organization of the University, which is a state

agency. However, HSF presented expert testimony at the

8
hearing in MacArthur that the IRS’s determination that HSF is

a § 509(a)(3) organization does not mean that it would not

have qualified as a § 509(a)(2) organization.

B. Proceedings Below

1. Howards v. Searcy and University of Virginia Health
Services Foundation v. Morris

Willard and Lisa Searcy (collectively, “Searcy”), as

Administrators of the estate of their daughter, Cara Leigh

Searcy (“Cara Leigh”), filed a motion for judgment against Dr.

Stuart Howards (“Dr. Howards”) and Dr. Carl Lynch (“Dr.

Lynch”) in the Circuit Court of the City of Charlottesville.

Searcy alleged that Dr. Howards and Dr. Lynch, who were

employees of HSF, acted negligently in commencing surgery on

Cara Leigh without reviewing a laboratory analysis of her

blood. Searcy alleged that as a direct and proximate cause of

Dr. Howards’ and Dr. Lynch’s negligence, Cara Leigh died. Dr.

Howards and Dr. Lynch jointly filed a special plea of

charitable immunity.

Hunter Morris (“Morris”), by his next friends and parents

Elizabeth and David Morris, filed a motion for judgment

against HSF, Dr. Jennifer Wenger (“Dr. Wenger”), Dr. Barbara

Head (“Dr. Head”), and Dr. James Ferguson (“Dr. Ferguson”)

jointly and severally in the Circuit Court of the City of

Charlottesville. Dr. Wenger, Dr. Head, and Dr. Ferguson were

9
physicians employed by HSF. Morris alleged that Dr. Wenger,

Dr. Head, and Dr. Ferguson negligently failed to deliver

Morris before he suffered irreversible brain damage in utero.

Morris alleged that as a direct result of their negligence, he

suffers from cerebral palsy, mixed, spastic quadriplegia with

dystonia, sensorineural hearing loss, and developmental delay.

Additionally, Morris alleged that HSF was vicariously liable

for the negligence of Dr. Wenger, Dr. Head, and Dr. Ferguson.

HSF, Dr. Wenger, Dr. Head, and Dr. Ferguson jointly filed

special pleas of charitable immunity.

Judge Edward L. Hogshire ordered that the special pleas

in Searcy’s and Morris’s cases be heard at a consolidated

hearing. 3 Judge Hogshire held that HSF does not qualify for

charitable immunity and denied the defendants’ special pleas

in both cases. HSF appeals Judge Hogshire’s interlocutory

order denying its special pleas in Morris v. HSF and Howards

v. Searcy to this Court pursuant to Code § 8.01-670.1 on five

assignments of error:

1. The trial court erred by extending the application of Va.
Code § 8.01-38 to support its decision to deny HSF
charitable immunity.

2. The trial court improperly created and applied a
beneficiary focused “balancing test” which does not apply

3
The hearing also addressed the special plea filed in
Ringheim v. University of Virginia Health Services Foundation,
et al., a case that is not before us on appeal.

10
 to whether HSF is a charitable organization under
Virginia law.

3. The trial court erred by focusing on physician
compensation, which has no place in the analysis of
whether HSF is a charitable organization or operates
consistent with its charitable purpose.

4. The trial court erred by misapplying the ten factors
listed in Ola [v. YMCA of South Hampton Roads, Inc., 270
Va. 550, 621 S.E.2d 70 (2005)] and, as a result, finding
that HSF did not operate consistent with its acknowledged
charitable purposes.

5. The trial court erred by denying the appellants’ Plea of
Charitable Immunity.

2. MacArthur v. University of Virginia
Health Services Foundation

Crystal Ann MacArthur (“MacArthur”), by her next friend

Deborah Ann York, filed a motion for judgment against HSF in

the Circuit Court of the City of Charlottesville. MacArthur

alleged that physicians employed by HSF negligently delayed

emergency surgery to treat her shunt malfunction. MacArthur

alleged that as a direct and proximate result of the

physicians’ negligence, she suffered permanent vision loss.

Additionally, MacArthur alleged that HSF was vicariously

liable for the individual physicians’ negligence. HSF filed a

special plea of charitable immunity. Judge Randy I. Bellows

held that HSF enjoys charitable immunity and sustained HSF’s

special plea.

MacArthur appeals Judge Bellow’s grant of HSF’s special

plea and dismissal of the case to this Court pursuant to Code

11
§ 8.01-670 on one assignment of error: “The trial court

erroneously sustained the foundation’s plea of charitable

immunity and dismissed this action.”

II. Analysis

A. Code § 8.01-38

“The doctrine of charitable immunity ‘is firmly embedded

in the law of this Commonwealth and has become a part of the

general public policy of the State.’ " Ola, 270 Va. at 555,

621 S.E.2d at 72 (quoting Memorial Hosp. v. Oakes, 200 Va.

878, 889, 108 S.E.2d 388, 396 (1959)). Our previous

discussions of charitable immunity have grounded the doctrine

in part in the “public policy that the resources of charitable

institutions are better used to further the institution’s

charitable purposes, than to pay tort claims lodged by the

charity’s beneficiaries.” Id. Additionally, we have upheld

the doctrine of charitable immunity so as to preserve the

spirit and intent of philanthropic gifts made by the public to

charitable institutions and so that “that much of the burden

[borne by those gifts will not be] again cast upon the

public.” Hill v. Leigh Mem’l Hosp., Inc., 204 Va. 501, 507,

132 S.E.2d 411, 415 (1963).

The doctrine of charitable immunity in Virginia is

limited. A charitable institution is immune from liability to

beneficiaries for acts of ordinary negligence by its servants

12
or agents, but may be liable for ordinary negligence in the

selection and retention of its servants or agents. Bailey v.

Lancaster Ruritan Rec. Ctr., Inc., 256 Va. 221, 224, 504

S.E.2d 621, 622 (1998). Charitable immunity applies only to

claims of negligence asserted by those who accept the

charitable institution’s benefits. A charitable institution

is not immune from liability to invitees or strangers with no

beneficial relationship to the institution. Thrasher v.

Winand, 239 Va. 338, 340-41, 389 S.E.2d 699, 701 (1990). A

charitable institution is not immune for acts of gross

negligence or willful or wanton negligence, as “such conduct

can never be characterized as an attempt . . . to carry out

the mission of the charity to serve its beneficiaries.” Cowan

v. Hospice Support Care, Inc., 268 Va. 482, 488, 603 S.E.2d

916, 919 (2004).

In addition to the judicial limitations on charitable

immunity, the General Assembly has limited charitable immunity

in certain instances. One such limitation is Code § 8.01-38,

which denies charitable immunity to most hospitals:

Hospital as referred to in this section
shall include any institution within the
definition of hospital in § 32.1-123.

No hospital, as defined in this section,
shall be immune from liability for negligence
or any other tort on the ground that it is a
charitable institution unless (i) such hospital
renders exclusively charitable medical services

13
 for which service no bill for service is
rendered to, nor any charge is ever made to the
patient or (ii) the party alleging such
negligence or other tort was accepted as a
patient by such institution under an express
written agreement executed by the hospital and
delivered at the time of admission to the
patient or the person admitting such patient
providing that all medical services furnished
such patient are to be supplied on a charitable
basis without financial liability to the
patient. . . .

Code § 8.01-38. Code § 32.1-123 defines “hospital” as

follows:

“Hospital” means any facility licensed pursuant
to this article in which the primary function
is the provision of diagnosis, of treatment,
and of medical and nursing services, surgical
or nonsurgical, for two or more nonrelated
individuals, including hospitals known by
varying nomenclature or designation such as
sanatoriums, sanitariums and general, acute,
rehabilitation, chronic disease, short-term,
long-term, outpatient surgical, and inpatient
or outpatient maternity hospitals.

Code § 32.1-123.

Whether HSF is a hospital within the meaning of Code

§§ 8.01-38 and 32.1-123 is a mixed question of law and fact.

The Court reviews this issue de novo. See Uninsured

Employer’s Fund v. Gabriel, 272 Va. 659, 662-63, 636 S.E.2d

408, 411 (2006). Code § 8.01-38 is in derogation of the

common law of charitable immunity and must be “strictly

construed and not . . . enlarged in [its] operation by

14
construction beyond [its] express terms." Schwartz v.

Brownlee, 253 Va. 159, 166, 482 S.E.2d 827, 831 (1997).

HSF does not fall under Code §§ 8.01-38 and 32.1-123.

Code § 32.1-123 includes in the definition of “hospital” only

“facilit[ies] licensed pursuant to this article . . . .” HSF

is not licensed pursuant to Code § 32.1-123 et seq. (“Hospital

and Nursing Home Licensure and Inspection”). HSF is not

currently licensed to operate as a hospital. From its

inception, HSF has never applied for or held a license to

operate as a hospital or been subject to any type of hospital

accreditation.

Because HSF does not come within the definition of

“hospital” in Code § 32.1-123, it does not fall within the

scope of Code § 8.01-38’s denial of charitable immunity to

hospitals. The Morris and Howards appellants argue that the

trial court erroneously extended the application of Code

§ 8.01-38 to deny charitable immunity to HSF. The trial court

noted that

[a]lthough the statute does not include medical
foundations when defining hospitals, it clearly
expresses the legislative policy to limit
charitable immunity in the traditional halls of
medicine, and no distinguishing factor suggests
a more generous approach to medical foundations
that engage in the same activities and hire the
same physicians as hospitals.

15
This comment by the trial court does not extend the

application of Code § 8.01-38 to medical foundations, but only

noted the legislative intent behind the statute as further

support for his application of the Ola factors to HSF.

B. The Ola Test

Whether HSF is eligible for common law charitable

immunity from tort liability is a mixed question of law and

fact that is reviewed de novo. This Court recently

articulated the test for charitable immunity in Ola v. YMCA of

South Hampton Roads, Inc.:

To establish charitable immunity as a bar
to tort liability, an entity must prove at
least two distinct elements. The absence of
either element makes the bar of charitable
immunity inapplicable. First, the entity must
show it is organized with a recognized
charitable purpose and that it operates in fact
in accord with that purpose. In conducting
this inquiry, Virginia courts apply a two-part
test, examining (1) whether the organization’s
articles of incorporation have a charitable or
eleemosynary purpose and (2) whether the
organization is in fact operated consistent
with that purpose.

Second, assuming the entity has met the
foregoing test, it must then establish that the
tort claimant was a beneficiary of the
charitable institution at the time of the
alleged injury.

Ola, 270 Va. at 556, 621 S.E.2d at 72-73 (internal citations

and quotations omitted). For the first element,

[i]f an organization’s charter sets forth a
charitable or eleemosynary purpose, there is a

16
 rebuttable presumption it operates as a
charitable institution in accordance with that
purpose. However, if the manner in which the
organization actually conducts its affairs is
not in accord with the charitable purpose, then
the presumption may be rebutted and the bar of
charitable immunity does not apply.

Id. at 557, 621 S.E.2d at 73 (internal citations omitted). We

articulated ten factors that are indicative of whether a

charitable organization operates in fact with a charitable

purpose:

(1) Does the entity’s charter limit the entity
to a charitable or eleemosynary purpose?
(2) Does the entity’s charter contain a not-
for-profit limitation?
(3) Is the entity’s financial purpose to break
even or earn a profit?
(4) Does the entity in fact earn a profit, and
if so, how often does that occur?
(5) If the entity earns a profit (a surplus
beyond expenses) must that be used for a
charitable purpose?
(6) Does the entity depend on contributions and
donations for a substantial portion of its
existence?
(7) Is the entity exempt from federal income
tax and/or local real estate tax?
(8) Does the entity’s provision of services
take into consideration a person’s ability to
pay for such services?
(9) Does the entity have stockholders or others
with an equity stake in its capital?
(10) Are the directors and officers of the
entity compensated and if so, on what basis?

17
Id. at 557 n.1, 621 S.E.2d at 73 n.1 (internal citations

omitted). The factors are not exclusive, and no one factor is

determinative. Id. at 557, 621 S.E.2d at 73. 4

1. Presumption that HSF Operates With a Charitable Purpose

HSF is entitled to a presumption that it operates as a

charitable institution in accordance with the purposes set out

in its Articles of Incorporation. The HSF Articles of

Incorporation state: “The purposes for which the Foundation is

formed are exclusively charitable, scientific and educational,

as contemplated by Section 501(c)(3) of the Internal Revenue

Code of 1986, as amended.” This is similar to the language in

the YMCA’s articles of incorporation that we found in Ola to

create a rebuttable presumption that the YMCA was a charitable

organization: “Article II(A) mandates that the YMCA ‘shall be

operated exclusively for one or more charitable, religious,

educational and scientific purposes.’ ” Id. at 559, 621

S.E.2d at 74. The HSF Articles of Incorporation established

the rebuttable presumption that it is a charitable

4
The Morris and Howards Appellants argue in assignment of
error 2 that the trial court improperly created and applied a
“beneficiary focused balancing test” to HSF. The trial court
noted that “[t]he closing inquiries of Ola probe the
charitableness of an organization by asking whether it
primarily benefits those who run it or those it serves.” In
doing so, the trial court did not create or apply a
beneficiary-focused balancing test, but summarized the Ola
factors it had previously discussed, finding that the
structure of HSF most benefits those with a financial stake in
HSF: the physicians employed by HSF.

18
organization. The plaintiffs in the respective cases then had

the burden of rebutting the presumption. Id. at 561, 621

S.E.2d at 75.

2. Rebuttal of Presumption

Though entitled to the presumption, “[i]f the manner in

which [HSF] actually conducts its affairs is not in accord

with the charitable purpose, then the presumption may be

rebutted and the bar of charitable immunity does not apply.”

Id. at 557, 621 S.E.2d at 73. In Ola, we articulated ten

factors that are indicative of whether an organization

operates in fact with a charitable purpose. The factors “are

not exclusive and the presence or absence of any particular

factor is not determinative.” Id. The Morris and Howards

appellants argue in assignment of error 4 that the trial court

misapplied the Ola factors to find that HSF does not operate

as a charitable institution.

“In the final analysis, whether an entity operates as a

charity turns on the facts of each case . . . .” Id. In this

case, we find the following four factors determinative of the

conclusion that HSF does not operate in fact with a charitable

purpose: (a) HSF was created to correct billing and collection

problems; (b) the ratio of HSF’s revenue compared to the cost

of its charitable work is substantially disproportionate; (c)

HSF’s incentive payment structure is functionally a profit-

19
based bonus system, much like a for-profit enterprise; and (d)

HSF does not accept charitable gifts.

(a) Creation of HSF

The founding Chief Executive Officer of HSF, William

Edgar Carter, Jr., testified that a primary reason for the

creation of HSF was to improve the billing system that was

used to collect fees for the clinical services of the

physicians employed by the Medical School. The billing system

used at the time was inadequate, such that not enough money

was being collected and not enough revenue was returned to the

Medical School. HSF’s primary goal at inception was to find,

set up, and operate a new billing system to collect more of

the receivables generated by providing patient care.

The record reflects that the HSF Billings and Collections

Department employs 115 people. Of those people, five full-

time employees (four collectors and one clerical employee) are

involved in the legal collection unit. In addition, HSF

contracts with an attorney that represents HSF if it goes to

trial for collections purposes.

Once a week, a representative from the legal collection

unit goes to the Charlottesville General District Court to

file warrants in debt. From 2001 to 2005, HSF filed 16,158

warrants in debt and obtained 5,885 judgments. In those

years, HSF sought $124,108,445 and collected $7,009,718

20
through these efforts. HSF expended an estimated 45,760

employment hours in “efforts to obtain legal collection of

payment[s] on behalf of HSF” between 2001 and 2005.

HSF was created to increase the amount of revenue

received by the Medical Center and aggressively pursues legal

collections. The magnitude of these practices suggests that

HSF operates more like a for-profit business with a financial

purpose of earning a profit than a charitable organization.

(b) Ratio of Revenue to Cost of Charitable Work

In 2005, HSF’s total revenue from billing for patient

services, reimbursements from the University for services

provided to the Medical Center, and “other miscellaneous

revenue” was $216,780,000, with additional income from

investments and gains from sales of capital assets of

$9,118,000. HSF’s financial statements show foregone

collections of approximately $22.5 million in 2005 as a result

of providing medical care to indigent patients. Haws

testified that this figure reflects the amount that would have

been billed if collection efforts had not been waived for

indigency. However, Haws testified that HSF usually collects

only about thirty-five to thirty-eight percent of the amount

billed from insurance companies and paying patients.

Therefore, by treating medically indigent patients in 2005,

21
HSF actually failed to receive approximately $7-8 million in

collections.

Moreover, the Commonwealth reimburses the University up

to the level of the costs of treating indigent patients. In

2005, the Commonwealth reimbursed the University $5.5 million,

which was transferred to the faculty (the physicians employed

by HSF) as compensation. Taking into account the

Commonwealth’s reimbursement, Haws testified that HSF’s actual

shortfall in 2005 was only about $1.5 million as a result of

providing medical care to indigent patients. The ratio of

this shortfall to HSF’s total revenue and other income of

$225,898,000 in 2005 is only about 0.66%. The minimal cost of

HSF’s charity work as compared to its income illustrates how

small a portion of HSF’s work is charitable.

(c) Physician Incentive Payments

The Morris and Howards appellants argue in assignment of

error 3 that the trial court erred by focusing on physician

compensation, which is not a factor under Ola. The trial

court in these cases was concerned with the manner in which

HSF’s surplus is distributed. The trial court found that the

incentive payment system, by which a large part of HSF’s

revenue is distributed to its physician employees, was

“diametrically opposed” to the model of how a charitable

institution uses its profit or surplus. HSF’s method of

22
revenue distribution, not the amount, was the subject of the

trial court’s analysis. This analysis is clearly relevant to

whether an institution operates in accordance with its stated

charitable purpose. Ola, 270 Va. at 562, 621 S.E.2d at 76.

After HSF pays its operating expenses and the Dean’s Tax,

the balance of HSF’s revenue is transferred to the various

departments of the Medical School, depending on which

departments generate the revenue. The departments group this

revenue with money from the Medical School and use it to pay

physician salaries and benefits. A department may then pay

out incentive payments to the physicians who work for the

department.

HSF spends an average of $12 to 17 million a year in

incentive payments. When the incentive payments are added to

the fixed compensation paid to the physicians, the physicians

are compensated on average at about the forty-fifth to fifty-

fifth percentile of the AAMC survey of salaries for physicians

employed in academic medical centers. We recognize that this

level of payment is necessary to recruit and retain talented

physicians. The Medical Center is a world-class medical

facility, in large part because of the high quality of the

physicians employed by HSF. However, what is important to

this analysis is not the reason the physicians are paid at a

certain level or whether it is necessary to recruit and retain

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physicians, but how HSF uses its substantial revenue,

including its surplus. See Ola, 270 Va. at 562, 621 S.E.2d at

76.

HSF’s incentive payment structure includes a distribution

of surplus revenue in a manner more consistent with a

successful commercial business than a charitable organization.

The revenue is distributed by HSF to the Medical Center

departments in accordance with how much revenue those

departments generated, rather than how much indigent care is

provided, how much research is performed, or how many hours

their physicians spent teaching. The departments then

distribute the incentive payments as determined by the chair

of the department and the Dean of the Medical School.

Surgical departments (plastic surgery, cardiovascular surgery,

general surgery, and neurological surgery) tend to generate

more revenue than other departments, such as pediatrics or

psychiatry, because they perform procedures that are highly

compensated. The surgical departments receive more revenue

from HSF, and the physicians who work for those departments

tend to receive the biggest incentive payments. For example,

the Chair of the Department of Surgery, who also served on the

HSF Board of Directors, received incentive payments, in

addition to a base salary provided by the Medical School,

between $430,000 and $600,000 a year from 2002 to 2005. In

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comparison, the Chair of the Department of Internal Medicine,

who also served on the HSF Board of Directors, received

incentive payments between $10,000 and $15,000 a year from

2003 to 2005.

The HSF incentive payment structure is functionally a

profit-based bonus system. The departments that generate the

most revenue receive the most money from HSF, and those

physicians who are the most financially productive in their

departments generally receive the biggest incentive payments.

In this respect, HSF follows the model of a profitable

commercial business, not a charitable institution.

(d) No Charitable Gifts

HSF receives no charitable contributions or donations.

In fact, under its affiliation agreement with the Medical

School, HSF is precluded from receiving contributions or

donations.

Because charitable immunity in Virginia is based on

public policy, this factor is not without importance. We have

justified granting charitable immunity to a charitable

hospital in the past, saying:

It cannot be debated that the care of the sick
and injured is a public purpose, a matter of
public concern. When a portion of the
responsibility therefor is borne by the gifts
of the philanthropic-minded, so much of the
burden is removed from the public. If a
portion of those gifts is diverted to the

25
 payment of tort claims, without restriction,
the spirit and intent of the gifts are, at
once, nullified and that much of the burden is
again cast upon the public.

Hill, 204 Va. at 507, 132 S.E.2d at 415. If HSF is required

to pay tort awards to the various plaintiffs in the present

cases, no philanthropic-minded intentions will be nullified,

because no gifts are received.

Whether or not an organization accepts charitable gifts

is not dispositive of whether that organization is entitled to

charitable immunity. We recognize that there are some

charitable organizations that do not receive or accept

donations, particularly if they are previously endowed from a

philanthropic gift. Cf. George v. Jefferson Hosp. Ass’n,

Inc., 987 S.W.2d 710, 714 (Ark. 1999) (“[A] modern hospital,

with rare exception, would find it extremely difficult to

operate wholly or predominately on charitable donations. . . .

[The hospital’s] financial and organizational structure

[meeting only six percent of its financial obligations by

donations] do not negate its overriding charitable purpose.”).

These organizations may still be entitled to charitable

immunity for other reasons. See, e.g., Auerbach v. Jersey

Wahoos Swim Club, 846 A.2d 646, 650 (N.J. Super. Ct. App. Div.

2004) (finding that swim club’s lack of funding from

contributions, gifts, grants, and donations was irrelevant

26
under N.J. Charitable Immunity Act because club was organized

for exclusively educational purposes). HSF, however, is

clearly not dependent on philanthropic gifts, nor is it in a

position of need.

III. Conclusion

When the previously discussed four factors are considered

in the context of the Ola factors, it is clear that the manner

in which HSF actually conducts its affairs is not in accord

with the charitable purpose stated in its Articles of

Incorporation. HSF operates like a profitable commercial

business with extensive revenue and assets. That portion of

HSF’s services providing quality medical care to medically

indigent patients is commendable. However, when an

organization is operated “in a manner calculated to produce a

profit or gain,” it is not entitled to charitable immunity.

Purcell v. Mary Washington Hosp. Ass’n, Inc., 217 Va. 776,

781, 232 S.E.2d 902, 905 (1977). HSF is therefore not immune

from tort liability under the doctrine of charitable immunity.

Accordingly, the orders of the trial court denying the

special plea of charitable immunity in University of Virginia

Health Services Foundation v. Morris and Howards v. Searcy are

affirmed, and those cases are remanded for further proceedings

consistent with this opinion. For the same reasons, the

judgment of the trial court in MacArthur v. University of

27
Virginia Health Services Foundation is reversed, and the case

is remanded for further proceedings consistent with this

opinion.

Record No. 070214 – Affirmed and remanded.
Record No. 070217 – Affirmed and remanded.
Record No. 070475 – Reversed and remanded.

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