Honorable William J. Lawson
secretary of state
Austin, Texas

Attention:    Honorable Abner L. Lewis

Dear Sir:                                Opinion No. 0-4480
                                         Re: Corporations - Section lo4 of
                                              Article 1302, V.A.C.S. - Article
                                              4590A V.A.C.S.- Group Hospital Service

          Your request for opinion has been received and carefully con-
sidered by this department. We quote from your request as Pollows:

          "We are submitting to you herein the application for
     charter of the CAPROCK CO-OPERATIVE GENERAL HOSPITAL. We
     have on several occasions advised Hon. Edgar E. Payne, at-
     torney for said association, that in our judgment same
     should be chartered by filing through Article 459OA. He
     insists however, same should be approved and filed under
     Article 1302, Section 104, but in our judgment Section
     104 of the Revised Statutes, 1925 was made apart of Ar-
     ticle 4590A.

          "It is our judgment that this in an insurance plan
     and as such should be under the supervision of the In-
     surance Commission of Texas, and we have so advised them.

          "Will you please advise this department whether or
     not the charter as submitted to us should be approved with-
     out the intervention of the Insurance Department as outlined
     in Article 4590A or under Article 1302 of said Statute."

             Section II of the proposed charter provides:

             "The purpose for which it is formed is:

          "(a) To buy, lease, or build any hospital, and maintain
     such medical, surgical and dental staff as the members may
     deem necessary for the efficient and modern treatment of its
     said members and others;

             'l(b) For the members of said corporation to provide
     for    their hospital and medical care, if needed, and each
                                                                                 .   .


Honorable William J. Lawson, Page 2


     member of said corporation, or any member of his family, or
     any other person, if in need of medical care, shall choose
     his, her, own physician from any member of the staff, and
     the said corporation shall not attempt to control the rela-
     tion existing between any member of said corporation, or
     any other person, and his or her physician;

          "(e) To employ only physicians on the staff, who will
     not solicit, nor employ, pay or promise to pay any person,
     firm or corporation to secure, solicit or drum patients or
     patronage, and discharge any member from the staff if any
     person has accepted, or agreed to accept pay or employment
     for such securing soliciting or drumming for the patients
     for said physician."

          Section VI of the proposed charter provides:

          "The CAPROCK CO-OPERATIVE GENERAL HOSPITAL ASSOCIATION
     shall not have any capital stock and shall not be operated
     for profit, but all of its operations shall be for the mutual
     benefits of the members. . . .'

          The proposed charter does not affirmatively show that the majority
of the incorporators of the proposed corporation are superintendents of hos-
pitals or physicians or surgeons licensed by the State Board of Medical Exam-
iners.

          The 46th Legislature of Texas passed House Bill 191 in 1939. Sec-
tions 1 to 15 inclusive of the act were codified by Vernon as Article 459OA,
Vernon's Annotated Texas Civil Statutes. Section 16 of the act was codified
by Vernon as Section 104 of Article 1302, Vernon's Annotated Texas Civil Stat-
utes. The act reads as follows:

          "H. B. No. 191

          "An Act to provide for the chartering of nonprofit cor-
              porations to be organized for the purpose of furnish-
              ing group hospital service, and to provide for the
              methods of operation, regulation and supervision of
              such corporations and of their contracts; providing
              exemption from Title 78 of the Revised Civil Statutes
              of 1925; and declaring an emergency.

     "Be it enacted by the Legislature of the State of Texas:

          "Section 1.   Incorporation.

          'That from and after the passage of this Act, any seven
     (7) or more persons, a majority of whom are superintendents
     of hospitals or physicians or surgeons licensed by the State
     Board of Medical Examiners, upon application to the Secretary
     of State of the State of Texas for a corporate charter may be
     incorporated for the purpose of establishing, maintaining and
.




    Honorable William J. Lawson, Page 3


         operating a nonprofit hospital service plan, whereby hos-
         pital care may be provided by said corporation through an
         established hospital or hospitals, and sanitariums with
         which it has contracted for such care, as is hereinafter
         defined.

              "Sec. 2.   Applications

             "That such corporations when organized shall be author-
         ized to accept applicants, who may become members of said
         corporations furnishing group hospital service under a con-
         tract, which shall entitle each member to such hospital care
         for such period of time as is provided therein; and that
         such corporations shall be governed by this Act and shall
         not be construed as being engaged in the business of insur-
         ance under the laws of this State. That such corporations
         organized and operated under the provisions of this Act
         shall not be required by any department of this State to
         post bond, or place deposits with any department of this
         State to begin and/or operate under this Act and the pro-
         visions of Title 78 of the Revised Civil Statutes of Texas
         of 1925, are hereby declared inapplicable to corporations
         organized and/or operated under this Act.

              "Sec. 3. Corporations to be Nonprofit Organizations.

             "That said corporations shall be governed and conducted
         as nonprofit organizations for the sole purpose of offering
         and furnishing hospital service to its members in considera-
         tion of the payment by such members of a definite sum for the
         hospital care so contracted to be furnished. The necessary
         expenses of administering the affairs of said corporations
         may be paid from the dues or payments collected. Provided
         not more than fifteen per cent (15%)of all dues or payments
         received may be used for expenses of administering the af-
         fairs of said corporations, subject to the authorization or
         approval of the Board of Insurance Commissioners of Texas.

              "Sec. 4. Authority of Corporations to Contract.

              'That such corporations shall have the authority to con-
          tract with hospitals charging for services rendered, in such
          manner as to assure to each person holding a contract of said
          corporation the furnishing of such hospital care as may be
          agreed upon in the contract between said corporation and said
          member, with the right to said corporation to limit in said
          contract the types of disease for which it shall furnish hos-
          pital cars.

              "Sec. 5. Prohibition against Contracting for Medical Ser-
                       vices.
                                                                       .   .
Hon.Wm. J.Ls.wson,Page 4
          "That such corporations shall not contract to furnish
      to the member a physician or any medical services, nor shall
      said corporation contract to practice medicine in any man-
      ner, nor shall said corporation control or attempt to con-
      trol the relations existing between said member and his or
      her physician, but said corporation shall confine its activ-
      ities to rendering hospital service only through such type
      of hospitals with whom it has contracts, without restricting
      the right of the patient to obtain the services of any li-
      censed doctor of medicine.

          "Sec. 6.    Personnel   of Directors.

          "That at least a majority of the directors of such cor-
      poration must be at all times directors, superintendents or
      trustees of hospitals, which have contracted or may contract
      with such corporation to render its subscribers hospital ser-
      vice.

          "Sec. 7. Supervision.

          "That such corporation shall, before accepting applica-
      tions for membership in said nonprofit hospital service plan,
      submit to the State Insurance Commission a plan of operation,
      together with a schedule of its dues to be charged and the
      amount of hospital service contracted to be rendered; which
      plan shall first be approved by the Insurance Commission as
      fair and reasonable before said corporation shall engage in
      business.

          "Sec. 8. Approval of Rates.

          "That the Insurance Commission shall likewise approve
      the rates of payment to be made by said corporations to
      hospitals for the rendering of hospital care to the members
      of said corporation as being reasonable and just. Said hos-
      pitals shall guarantee the benefits of the certificates of
      membership issued by the corporation.

          "Sec. 9. Membership Certificates.

          "That every such corporation shall issue to its members
      certificates of membership, set forth the contract between
      the corporation and the member, and the period of such ser-
      vice, and the rate per day or week payable by said corporation
      for hospital service rendered to said member at any hospital
      other than the hospitals with which said corporation shall
      have contracted.

          "Sec. 10.    Bond of Treasurer.

          "That the treasurer of such corporation shall be required
      to give a fidelity bond with corporation surety in such sum
      as may be determined by the officers of said corporation for
      the faithful handling of the funds of said corporation and
      all funds collected from members or subscribers of said cor-
      poration shall be deposited to the account of said corporation
      in a bank, which is a State depository.
William J. Lawson, Page 5

     "Sec. 11.   Finance Procedure.

     "'Thatsaid corporations shall not pay any of the funds
 collected from members or subscribers to any hospital until
 after said hospitals shall have rendered the necessary care
 to such subscriber or member.

     "Sec. 12. Reports to Insurance Commission.

     "That every such corporation shall annually on or be-
 fore the first day of March file in the office of the In-
 surance Commission a statement verified by at least two (2)
 of the principal officers of saidcorporation, showing its
 condition on the 31st day of December then next preceding.
 The report to the Commission shall include an itemization
 of all expenses incurred for the period shown in the report,
 which expenses shall be in all things approved by said Com-
 mission. If the Commission finds any expense item unnecessary
 or unreasonable it shall make necessary rules eliminating
 same and the Commission is expressly authorized and empower-
 ed to provide for the expenses to be incurred and the amounts
 which must be within the limits provided for in this Act.

     "Sec. 13. No officer or director of the corporation
 shall receive any salary, wages or commissions but shall
 be allowed reasonable and necessary expenses for any meet-
 ings of the corporation which shall not exceed five (5)
 during any calendar year. No compensation shall be paid
 to any employee in excess of Six Thousand Dollars ($6,000)
 per year. All salaries to be approved by the Board of In-
 surance Commissioners.

     "Sec. 14. Examination of Books and Records.

     'That every such corporation shall keep complete books
 and records, showing all funds collected and disbursed, and
 all books and records shall be subject to examination by
 the Insurance Commission annually, the expense of such exam-
 ination to be borne by said corporation.

     "Sec. 15.   Dissolution.

     "That any dissolution or liquidation of any such corpora-
 tion subject to the provisions of this Act shall be under the
 supervision of the Insurance Commission. In case of dissolu-
 tion of any group formed under the provisions of this Act,
 certificate holders of such group shall be given priority over
 all other claims except cost of liquidation.

     "Sec. 16. Article 1302 of the Revised Civil Statutes of
 Texas of 1925 is hereby amended by adding thereto a subdivision
 to be known as No. 104, to read as follows:
Honorable William J. Lawson, Page 6

          "'Subdivision 104. Corporations may be created as chari-
      table, benevolent and nonprofit corporations to furnish hospi-
      tal services to its members.'

          "Sec. 17. Separability Clause.

          "If any article, section, subsection, sentence, clause
      of phrase of this Act is, for any reason, held to be uncon-
      stitutional or invalid, such decision shall not affect the
      validity of any remaining portions of this Act. The Legis-
      lature hereby declares that it would have passed this Act
      and each section, subsection, sentence, clause or phrase
      thereof, irrespective of the fact that any one or more of
      the sections, subsections, sentences, clauses or phrases are
      declared unconstitutional.

          "Sec. 18. Laws in Conflict with this Act Held Inapplic-
                    able.

         "That all laws or parts of laws in conflict with this
     Act are hereby declared inapplicable to any and all corpora-
     tions chartered and operated under this Act.

         "Sec. 19. The fact that there is no present law, at
     this time, which will furnish hospital services to those
     who are in dire need of same, and that this legislation
     is needed to better protect the public health creates an
     emergency and an imperative public necessity that the Con-
     stitutional Rule requiring all bills to be read on three
     separate days in each House be and the same is hereby sus-
     pended and that this Act take effect and be in force from
     and after its passage, and it is so enacted.

          "(Note.--H. B. No. 191was passed by the House, March
      16, 1939, by a vote of 120 yeas, 0 nays; by the Senate, with
      amendments, by a vote of 29 yeas, 0 nays; House concurred in
      Senate amendments, May 2, 1939, by a vote of 120 yeas, 0 nays.)

          "Approved May 10, 1939e
          "Effective May 10, 1939."

          Since Section 104 of Article 1302, V.A.C.S,, and Article 4590A,
V,A.C.S,, are parts of H.B, 191, supra, it is clear that they must be con-
strued together.

          It is our opinion that all of the provisions of H.B. 191, supra,
apply to non-profit corporations organized for the purpose of furnishing
group hospital service.

          Under said H. B. 191 a proposed corporation desiring to be ineor-
porated under Section 16 (subdivision 104 of Article 1302, R.C.S.) for the
purpose of furnishing group hospital service to its members is chartered by
the Secretary of State and not by the Board of Insurance Commissioners, How-
every after it is chartered by the Secretary of State, its activities are
supervised by the Board of Insurance Commissioners in the manner and to the
extent set out in said H.B. 191~
Hon. William J. Lawson, Page 7


          Section 6 of Article 1302, Vernon's Annotated Texas civil Statutes,
reads as follows:

           "The erection and maintenance of sanitariums, with the
       right to acquire and own lands and town lots; to improve,
       cultivate, rent and alienate same; to erect storage dams
       and otherwise develop irrigation on such lands, to erect,
       acquire and maintain hotels and bath houses on its proper-
       ty; and in conjunction therewith, to erect and maintain
       training schools and outdoor sports on its property for the
       training and pleasure of its patients and their families;
       to maintain and carry on such industrial enterprises in con-
       junction therewith as shall be necessary to furnish employ-
       ment to the patients therein and their families; provided
       such corporation shall not own or control more land than is
       necessary for the actual conduct and control of a sanitarium."

          Subdivision 104, supra, does not authorize incorporation for the
purpose of building or establishing a hospital. Subdivision 6, supra, is
the subdivision under which corporations may be formed for the purpose of
building or establishing a sanitarium.

          It is our opinion that the proposed application for charter
should be refused by you because it attempts to incorporate for a dual
purpose, to-wit, to establish a hospital and to provide group hospital
service for its members. The application would further be objectionable
if it sought to incorporate only for the purpose of providing group hospi-
tal service for its members because the application does not state that a
majority of the incorporators of the propOSed corporation are superintend-
ents of hospitals or physicians or surgeons licensed by the State Board of
Medical Examiners.

           Suffice it to say that the proposed charter should be refused by
you.

APPROVED MAY 19, 1942                  Very truly yours,
GERALD C. MANN
ATTORNEY GENERAL OF TEXAS          ATTORNEY GENERALOFTEXAS


                                   By s/ Wm. J. Fanning
                                         Wm. J Fanning
                                                Assistant
WJF:ff:hep

                                APPROVED
                                OPINION
                               COMMITTEE
                               BY BWB
                               CHAIRMAN
