Canada: Hospital Service Accountability Agreements: Recommendations For The Negotiating Process

Hospital CEOs and Boards need to know what due diligence they must exercise prior to signing a Hospital Service Accountability Agreement (HSAA) with their Local Health Integration Network (LHIN). This Osler Update answers some key questions on the subject.

Binding Agreement - Significant Decision

Signing the HSAA is a very significant decision for a hospital Board. The HSAA creates binding legal obligations for the hospital and should not be entered into without sufficient due diligence and negotiation to ensure that the hospital has the necessary funding to provide the agreed upon hospital services and maintain a balanced budget. LHINs expect hospitals to comply with the terms and conditions of the HSAA and will not grant exemptions in respect of the balanced budget obligation unless a waiver or factor beyond the hospital's reasonable control is formally identified in the HSAA. In our view, identifying a "deficit" as a factor beyond the hospital's reasonable control is more advantageous to a hospital than trying to obtain a waiver, as the former may result in additional funding, whereas the latter must be funded by the hospital's working capital. Past practices of trying to obtain an exemption by, for example, attaching covering letters setting out funding assumptions have proven to be ineffective and of no value.

It is important to keep in mind that the LHIN cannot borrow and must itself balance its budget under its accountability agreement with the Ministry of Health and Long-Term Care. As such, it is relying on hospitals to provide the services within their agreed upon funding envelope. Accordingly, it is in both parties' interests not to sign the HSAA if the hospital will not be able to meet its obligations.

Legislated Process and Timelines for Negotiation

We have seen recent correspondence from LHINs to hospitals which provide the hospitals with their HSAA and a suggested "deadline" of ten (10) days to sign the HSAA. In our view, this does not comply with the Commitment to the Future of Medicare Act, 2004 (CFMA), which contemplates that the hospitals have up to ninety (90) days to "negotiate" the agreements.

Any hospital that does not believe that it will be able to meet the contractual terms and conditions of its HSAA should avail itself of the process for negotiating a HSAA that is set out in the CFMA and the Local Health System Integration Act, 2006 (LHSIA). Under the CFMA, a LHIN is required to give a hospital notice that it proposes to enter into a HSAA. Following the LHIN notice, the statutory 90-day negotiation period commences.

Q.1: When does the notice period begin? The CFMA does not define what constitutes "notice". However, because the CFMA obligates the parties to (i) negotiate the HSAA within an applicable time period and (ii) share information necessary to negotiating a HSAA, our interpretation is that the negotiation process can only be meaningful if the notice period begins when the LHIN has provided a hospital with a complete HSAA for review, including all completed schedules. Only with this complete set of information can a hospital be expected to (i) evaluate whether it can provide the required services within the allocated funding envelope and (ii) consult as necessary with its stakeholders to make a reasonably informed and considered decision.

Q.2: How long is the notice period? The CFMA allows for a 90-day negotiation period for the second HSAA if the first HSAA was for a year or less. It is our view that a hospital has a full 90-day period to negotiate the HSAA with its LHIN.

Of course, at the end of the 90-day negotiation period, the LHIN can direct a hospital to enter into the HSAA. Any direction, compliance directive or compliance order under the CFMA comes with an additional 30-day discussion period. However, in "exceptional circumstances" an order may be issued immediately with no discussion period.

Despite the LHIN's ultimate power to require the hospital to enter into the HSAA, this does not relieve the hospital board of its duty to use the 90-day period to the best of its ability.

Considerations During the 90-Day Negotiation Period

Hospital boards are aware of the considerable powers the Minister of Health and Long-Term Care and the LHIN have over public hospitals. In addition to being the hospital funder, the LHIN has the power to issue integration orders regarding the types and volumes of services provided. The Minister may appoint an investigator or recommend the appointment of a supervisor, powers that the Minister has shown a willingness to use. Under LHSIA, the Minister can also order a hospital to cease operations, amalgamate, or transfer operations to another health services provider.

Despite these considerable powers, the Minister and the LHIN are only two of the stakeholders to be considered as the board wrestles with the decision to sign the HSAA. We believe that it is extremely important that the hospital board consider and consult with its other important stakeholders before signing a HSAA if signing the agreement will negatively impact one of its important stakeholders (i.e., patients, physicians, employees, the community).

Q.3: Should the Board be consulting with the community? Yes. There is a specific duty under LHSIA for a hospital to engage the community when developing plans and setting priorities for the delivery of health services. This is exactly what the Board will attempt to do during the 90-day negotiation period. Furthermore, when decisions by hospital boards go against the wishes of communities and physicians, there can be serious consequences to the hospital. The board should ensure that the interests of all stakeholders are solicited and taken into account during the negotiation period, particularly where the stakeholders have competing interests.

Q.4: What steps can we take to ensure we have done our due diligence? We encourage hospitals to look to their decision-making touchstones - their mission, vision, values, and overall strategic plan - in evaluating the HSAA. The hospital board should ensure that these touchstones are reviewed and updated in light of the enactment of the CFMA and LHSIA, to ensure that accountability is part of the organization's values and that the hospital recognizes that it must set its priorities with a system-wide perspective, in keeping with the LHIN's own stated priorities in its Integrated Health Service Plan. It is also prudent to externally validate your management's assumptions or conclusions about whether the hospital is adequately funded through an independent third party before entering into negotiations with the LHIN for more funding than has been identified in the HSAA.

Consequences of Breach of the HSAA

When trying to decide whether to sign the HSAA (or instead require the LHIN to order the hospital to sign the HSAA), the board will need to understand the consequences of any breach of the HSAA.

Q.5: What are the "legal" consequences of breaching the HSAA? In reality, breaching the HSAA as a contract does not create new consequences for the hospital. The Minister and the LHIN have the same powerful tools (e.g., investigators, supervisors, orders and directives) they had when there was no HSAA.

Q.6: Are there other consequences we should be concerned about? There are two real, practical risks in breaching the HSAA:

There is a significant reputational risk. Signing the HSAA with a promise to balance the hospital's budget, and then failing to do so, impugns the credibility and capabilities of the hospital, the board, and the CEO.

There is also the possibility that a hospital unable to balance its budget may be "insolvent" at law. In that event, the directors may become personally liable for various statutory obligations, such as unpaid wages and vacation pay. These personal liabilities may be covered by insurance, if available. The directors have a personal interest in ensuring that the hospital is able to pay its debts. Hospital boards with concerns in this area should seek advice.

For more information on HSAAs, contact the authors.

Michael Watts is a partner in the firm's Toronto office and Co-Chair of the firm's National Health Care Group. Kathy O'Brien is a partner in the firm's Toronto office and Co-Chair of the firm's National Health Care Group.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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