    OFFICE OF THE ATTORNEY GENERAL.      STATE OF TEXAS
   JOHN CORNYN




                                              November 2 1,200l



The Honorable David Counts                                Opinion No. JC-0434
Chair, Natural Resources Committee
Texas House of Representatives                            Re: Determination of “actual costs” a hospital
P.O. Box 2910                                             district must charge nonindigent district residents
Austin, Texas 78768-2910                                  and related questions: clarification of Attorney
                                                          General Opinion JC-0220 (2000)
                                                          (RQ-0368-JC)


Dear Representative      Counts:

         On behalf of the Garza County Hospital District (the “District”), which no longer operates
its own hospital facility, you ask about contract payments made by the District to a private hospital
system to provide medical care services to the District’s nonindigent residents.’ These questions are
a follow-up to Attorney General Opinion JC-0220 issued last year in response to a request from you
on behalf of the District. As a result of legislation passed in the last legislative session, we conclude
that the District must charge nonindigent residents the “reasonable and customary cost of [medical]
services” provided rather than their “actual cost.” Additionally, we conclude that payment for those
charges may be made directly to the District or to the contract medical provider. Finally, we
conclude that annual contract payments made by the District to the contract medical provider are not,
as a matter of law, an “illegal subsidy.” Attorney General Opinion JC-0220 is modified to the extent
it suggests that “actual cost” requires a hospital board of directors to include in the amount charged
for nonindigent medical care services all possible hospital district costs of providing the services,
including capital investments and depreciation.

         We begin by providing some background. The District is a county-wide hospital district that
was created and established pursuant to article IX, section 9 of the Texas Constitution and its special
enabling legislation (“Enabling Act”). See Act of May 17,1967,6Oth Leg., R.S., ch. 502, § 1,1967
Tex. Gen. Laws 1132. Under the constitutional provision and its Enabling Act, the District is
authorized to issue bonds or other obligations to purchase or acquire facilities for hospital purposes;
required to assume responsibility for providing medical and hospital care for its needy inhabitants;



          ‘You do not ask us any specific questions, but refer us to questions posed by W. Calloway Huffaker on
the request of the Board of Directors of the Garza County Hospital District. See Letter from Honorable David Counts,
Chair, Natural Resources Committee,         Texas House of Representatives,      to Honorable   John Cornyn, Texas
Attorney General (Mar. 27, 2001) ( on file with Opinion Committee) [hereinafter Request Letter]; Letter from
W. Calloway Huffaker, Huffaker Furlow, P.C., to Honorable David Counts (Mar. 20, 2001) (on file with Opinion
Committee) [hereinafter District Letter].
The Honorable David Counts            - Page 2            (JC-0434)




and authorized to levy a tax on all taxable property in the District to pay for bond debt service and
maintenance and operating expenses.2 Additionally, Garza County and any city in the county are
prohibited from levying a tax or issuing bonds for hospital purposes or for providing medical care
within the District’s boundaries.3    So, even though the District no longer operates a hospital, it
remains responsible for providing hospital and medical care to its needy residents, and it chooses to
do so by contracting with a private hospital organization.

         In Attorney General Opinion JC-0220, after an extensive examination of article IX, section
9, the Enabling Act, and provisions of the Health and Safety Code applicable to the District, we
concluded that: (1) the District is authorized to contract with a private hospital or health system for
the operation of a clinic to provide hospital and medical care to the District’s needy inhabitants; (2)
the District may continue to levy a tax and use the proceeds to make payments under the contract
to provide that care; and (3) it may through this contract offer medical care to nonindigent county
residents, provided the District charges those persons the actual cost of the services. See Tex. Att’y
Gen. Op. No. JC-0220 (2000).

         Apparently, “[a] controversy has now arisen concerning the interpretation” of the opinion in
light of the District’s particular contractual arrangement for the provision of medical care services
to District residents. See District Letter, supra note 1, at 1. The District has leased its facilities to
Covenant Hospital (“the Hospital”) and contracted with the Hospital to provide medical care services
to the District residents. See id. Under the contract, the District pays the Hospital $300,000 annually
to provide the medical services. See id. The Hospital, in turn, pays the District approximately
$70,000 annually for the lease of the District facilities and equipment and for District employee
services. See id. While neither you nor the District informs us of the controversy regarding the
contract, we surmise, based on correspondence received from a District board member and a District
resident, that some District residents believe that the annual contract payments to the Hospital are
excessive or illegal. See id.4

         In view of this controversy,       the District now asks:

                    1. Definition of actual cost for payment by the non-indigent
                    resident[s] for medical services provided. Is the proportionate cost of
                    the contract with the private hospital system the actual cost, or is the



        *See TEX. CONST.art. IX, $ 9; Act of May 17, 1967,6Oth Leg., R.S., ch. 502, $0 2, 5, 6, 12, 1967 Tex. Gen.
Laws 1132, 1133, 1134-35, 1136, 1137; see generally Tex. Att’y Gen. Op. No. JC-0220 (2000) at 2-3.

         3See id.


          4See also Letter from Wesley W. Burnett, to Susan Gusky, Chair, Opinion Committee, Office of the
Attorney General (Apr. 19,200l); Letter from Carol Tobias, Garza Hospital District Board Member, to Susan Gusky
(Apr. 30,200l) [hereinafter Tobias Letter] (on file with Opinion Committee) [hereinafter jointly referred to as Resident
Letters].
The Honorable David Counts       - Page 3         (JC-0434)




                cost of the medical services      administered   to the non-indigent
                resident[s] the actual cost?

                2. Must the payments for actual cost be made directly to the District
                or may they be paid to the contract medical provider?

                3. Is the payment to the medical provider under the contract an
                “illegal subsidy” benefitting the non-indigent residents of the
                District?

District Letter, supra note 1, at 2 (emphasis in original).

        The District, in effect, asks about the application of Attorney General JC-0220’s legal
conclusions to the terms of its particular contract to resolve an apparently ongoing controversy
regarding the necessity or propriety of the District’s contractual arrangement. See Resident Letters,
supra note 4; see also Tex. Att’y Gen. Op. No. JC-0220 (2000) at 1, n.1 (setting out sources of
questions raised regarding the District’s authority), at 3 (discussing background to request). The
opinion process is ill-equipped to resolve such controversies. Nonetheless, in an effort to provide
guidance to the District and to clarify Attorney General Opinion JC-0220, we answer, to the extent
we can, the District’s questions.

         Attorney General Opinion JC-0220’s conclusion that the District must charge nonindigent
residents the “actual cost” of medical care services provided has been superseded by statute. In the
2001 legislative session, the legislature amended the District’s Enabling Act to specifically provide
as follows: “The board of directors may provide access to medical care to nonindigent residents of
Garza County if the nonindigent residents are charged the reasonable and customary cost of
services.” See Act of May 23,2001,77th          Leg., R.S., ch. 1115, 6 7,200l Tex. Gen. Laws 2330,
2334. This provision became effective September 1, 2001. Thus, the District must charge
nonindigent residents the “reasonable and customary cost of [medical care] services.” What
constitutes “reasonable and customary cost” is a determination that must be made by the District’s
board of directors in the first instance, subject to judicial review for abuse of discretion. See Act of
May 17, 1967,6Oth Leg., R.S., ch. 502, 8 4, 1967 Tex. Sess. Law Serv. 1132, 1134 (management
and control of District is vested in its board of directors). We cannot, in an attorney general opinion,
determine, as a matter of law, how the “reasonable and customary cost” of medical care services
must be calculated or what it must include.

        While “actual cost” no longer applies to the District’s provision of medical care services to
nonindigent residents, we take this opportunity to clarify our prior opinion. The District asks
whether “actual cost” charged a nonindigent resident must include a proportionate share of the
The Honorable David Counts             - Page 4             (JC-0434)




District’s annual contractual payments to the private hospital system.5 This question, as well as the
District’s third question regarding “illegal subsidy,” appear premised on a view that Attorney
General Opinion JC-0220 requires the District to recover from nonindigent residents as “actual cost”
the District’s full cost of providing medical care services such as the contract payments. We modify
Attorney General Opinion JC-0220 to the extent it suggests that “actual cost” requires a hospital
district board of directors to include in the amount charged for nonindigent resident medical care
services all possible hospital district costs of providing the services, including capital investments
and depreciation.

        Attorney General Opinion JC-0220 deals with the question of whether the District may
provide hospital or medical care to nonindigent residents. It concludes that the District may do so,
provided the District charges the nonindigent residents the “actual costs” of the services rendered,
relying on an earlier opinion of this office, Attorney General Opinion C-382. The latter opinion
states:

                   It must also be noted that, when a patient has been admitted who is
                   fully able to pay, the Administrator may not permit him to pay less
                   than the full and actual cost of his care and maintenance.           An
                   excellent discussion of the effect of failure to charge the full and
                   actual costs when a patient has been found able to pay may be found
                   in Goodall vs. Brite, 54 P.2d 5 10 (Calif. D.C. App. 1936). Permitting
                   such patients to pay less than the actual cost of their care would
                   constitute a donation of public funds, in contravention of Article III,
                   Section 5 1, Texas Constitution.

Tex. Att’y Gen. Op. No. C-382 (1965) at 2.

         Goodall v. Brite, cited in Texas Attorney General Opinion C-382, requires “actual cost” to
reflect a governmental entity’s “true cost” of providing medical care services, such as capital
investments and depreciation. In that case, the California District Court of Appeals held that treating
patients for free or charging them only $3.00 per day when those patients could afford available
private hospital care exceeded the county’s police powers and constituted a gift of public funds. See
Goodall, 54 P.2d 510 (Cal. Dist. Ct. App., 1936). The court noted that the $3.00 amount charged
some nonindigent patients did not take into account “capital investment of several hundred thousand
dollars, nor of depreciation.” Id. at 514. The court also stated that:

                   The method used in reaching the daily cost per patient was so
                   inaccurate and unbusinesslike that the result could not reflect the true



         ‘See District Letter sup-a, note 1, at 2 (“Is the proportionate cost of the contract with the private hospital system
the actual cost, or is the cost of the medical services administered to the non-indigent          resident the actual cost?“)
(emphasis in original).
The Honorable David Counts            - Page 5            (JC-0434)




                  daily cost to the county of any one patient. This must have resulted
                  in gifts of county money to at least those patients who paid nothing
                  and to those who paid only $3 per day and who were serious
                  operative cases.

Id. We do not believe that the Goodall court’s analysis, incorporated by reference in Attorney
General Opinion C-382, applies to hospital districts’ provision of medical care services to its
nonindigent residents under Texas law.

         First, Attorney General Opinion C-382’s requirement that the nonindigent residents be
charged not less than the “actual costs” for medical care services, including, as it suggests, capital
costs, is not derived from article IX, section 9, which does not speak to this issue! Rather, it is based
on the prohibition against gifts or grants of public funds in article III, section 51 of the Texas
Constitution. See Tex. Att’y Gen. Op. No. C-382 (1965) at 2. We believe Attorney General Opinion
C-382’s construction of article III, section 5 1 to require a hospital district to recoup essentially every
penny spent in providing the nonindigent resident medical care is incorrect, and that its reliance on
the California case, Goodall v. Brite, is misplaced.

         Article III, sections 5 1 and 52 of the Texas Constitution limit the legislature’s authority to
appropriate public funds to private individuals and corporations, either directly or by statutes
authorizing expenditures by state or local entities. Section 5 1 provides that the “Legislature shall
have no power to make any grants or authorize the making of a grant of public moneys to any
individual, association of individuals, municipal or other corporations whatsoever.” TEX.CONST.art.
III, 8 5 1. Similarly, section 52 prohibits the legislature from authorizing any political corporation
or subdivision of the state “to lend its credit or to grant public money or thing of value in aid of, or
to any individual, association or corporation whatsoever. Id. 5 52(a). The purpose of article III,
sections 5 1 and 52 is the same: to prevent the gratuitous application of public funds or resources for
private purposes. See Byrd v. City of Dallas, 6 S.W.2d 738, 740 (Tex. 1928); Graves v. Morales,
923 S.W.2d 754, 757 (Tex. App.-Austin           1996, writ denied). But these provisions do not bar
governmental expenditures or use of governmental resources for the direct accomplishment             of a
legitimate purpose of the political subdivision. See Byrd, 6 S.W.2d at 740; Tex. Att’y Gen. Op. No.
JM- 1255 (1990) at 2 (and authorities cited therein). An expenditure “for a public purpose, with a
clear public benefit received in return, does not amount to a lending of credit or grant of public funds
in violation of article III, sections 51 and 52.” Edgewood Indep. Sch. Dist. v. Meno, 917 S.W.2d
717,740 (Tex. 1995).




          6The hospital district enabling statute at issue in Attorney General Opinion C-382 required a hospital district
to collect from those patients who are able to pay for their care “a specified sum per week, in proportion to their
financial ability, but such sum shall not exceed the actual per capita cost of maintenance.” See Tex. Att’y Gen. Op. No.
C-382 (1965) at l-2.
The Honorable David Counts        - Page 6          (JC-0434)




          Providing hospital and medical care to residents of a hospital district is a constitutionally
authorized purpose of a hospital district in this state. See TEX.CONST.        art. IX, 9 9; Tex. Att’y Gen.
Op. No. JC-0220 (2000) at 10 (article IX, 5 9 contemplates that hospital district will provide medical
care to nonindigent residents). Hospital district funds expended for these purposes are expenditures
for public purposes; there is no lending of credit or grant of public funds in violation of article III,
sections 5 1 and 52. SeeMeno, 917 S.W.2d at 740. Thus, a hospital district is not required by article
III, sections 5 1 and 52 to charge the actual cost of providing medical care to nonindigent residents.
Unless a statute-as      here-provides    otherwise, it is within the discretion of the board of directors
of a hospital district to determine, in the first instance, the method for charging nonindigent residents
and whether that method serves the hospital district’s public purpose. See, e.g., Cmty. Mem ‘IHosp.
v. County of Ventura, 56 Cal. Rptr. 2d 732, 737 (Cal. Ct. App., 1996) (determining that county in
offering discounts for medical services to nonindigent patients as revenue generating device did not
make “gift” of public funds).

         The District also asks: “Must the payments for actual cost be made directly to the District
or may they be paid to the contract medical provider?” District Letter, supra note 1, at 2. As stated
earlier, the District must charge nonindigent residents the “reasonable and customary cost of
[medical care] services,” rather than the “actual cost.” See Act of May 23,2001,77th      Leg., R.S.,
ch. 1115, 5 7,200l Tex. Sess. Law Serv. 2330’2334. Payments for these charges, in our opinion,
may reasonably be made directly to the District or to the contract medical provider. Nothing in the
District’s Enabling Act or another law that we know of requires the payments to be made directly
to the District. CJ: Tex. Att’y Gen. Op. No. DM-37 (1991) at l-2 (hospital district’s powers and
duties are determined by looking at authorizing constitutional provision, its Enabling Act, and
provisions of Health and Safety Code applicable to hospital districts generally). The law simply
requires the District to charge nonindigent residents the “reasonable and customary cost” of the
medical care services provided. Here, those services are provided by the District through its contract
with the medical provider. Which entity collects the nonindigent medical care service charges and
how they are accounted for under the contract appear to be business or financial determinations
entrusted to the District’s board of directors in the first instance. See Act of May 17, 1967, 60th
Leg., R.S., ch. 502, 5 4, 1967 Tex. Gen. Laws 1132, 1134 (management and control of District is
vested in its board of directors). As long as the nonindigent residents are charged the “reasonable
and customary cost” of the services provided, and the amounts collected inure to the benefit of the
District in some way, it appears to us legally immaterial which entity physically receives the funds.

         Finally, the District asks: “Is the payment to the medical provider under the contract an
‘illegal subsidy’ benefitting the nonindigent residents of the Districts?” We are somewhat perplexed
by this question. Neither the District Letter nor the Resident Letters set out a legal basis for the
perceived illegality. But we note that the District’s contract with the medical provider states that the
District will pay $25,000 “per month to subsidize losses resulting from the operation of Clinic,” or
$300,000 each year. Rural Health Clinic Operation Agreement, at 3 (Jan. 13, 1998) (attachment to
Tobias Letter supra, note 4). We are unaware of any authority that would render the annual
payments illegal as a matter of law.
The Honorable David Counts          - Page 7           (JC-0434)




         Although we are unclear as to the legal theory for the perceived illegality, it cannot be, in our
opinion, that the contract payments violate article III, sections 5 1 and 52 simply because nonindigent
residents do not pay a pro rata share of those payments. Again, providing medical care to indigents
and nonindigent residents is a public purpose of a hospital district. See supra at p. 6. An
expenditure for the direct accomplishment of a legitimate public purpose is not a lending of credit
or grant of public funds in violation of article III, sections 5 1 and 52. See supra at p. 5.

          Additionally, we do not believe the contract payments violate article IX, section 9 of the
Texas Constitution or the District’s Enabling Act. Neither article IX, section 9 nor the District’s
Enabling Act limits the amount the District may pay under a contract to provide medical care or
precludes the District from providing medical care to nonindigent residents pursuant to such a
contract.7 Furthermore, neither provision precludes the District from agreeing to “subsidize” the
medical provider’s losses in operating the clinic.8 We note that without the annual payments, it may
not be possible for the District to induce an entity to operate a clinic and provide any medical care
services.

         Whether the medical care services provided under the District’s contract with the medical
provider are necessary, the contractual payments excessive, or the District’s particular arrangement
a cost-effective method of providing medical care to indigent District residents is a determination
involving questions of fact and policy outside the scope of the opinion process.




        7See TEX. CONST.
                       art. IX, 0 9; Act ofMay 17,1967,6Oth   Leg., R.S., ch. 502, $5(a), 1967 Tex. Gen. Laws 1132,
1134 (Enabling Act); Act ofMay 23,2001,77th   Leg., R.S., ch. 1115, 2001 Tex. Sess. Law Serv. 2330,2334   (amending
Enabling Act).

        8See supra   note 7.
The Honorable David Counts           - Page 8      (JC-0434)




                                           SUMMARY

                        Garza County Hospital District must charge nonindigent
               residents the “reasonable and customary cost of [medical care]
               services.” Payment for those charges may be made directly to the
               District or to the contract medical provider.       Annual contract
               payments made by the District to a contract medical provider are not,
               as a matter of law, an “illegal subsidy.”

                          Attorney    General Opinion JC-0220 (2000) is modified   by
               statute.

                                                 Yo   sve   truly



                                                4-a-cm”b-
                                                 JOtiN    CORNYN
                                                 Attorney General of Texas



HOWARD G. BALDWIN, JR.
First Assistant Attorney General

NANCY FULLER
Deputy Attorney General - General Counsel

SUSAN D. GUSKY
Chair, Opinion Committee

Sheela Rai
Assistant Attorney General, Opinion Committee
