1. What Hospital District Commissioners Need to Know ETHICS AND CONFLICTS OF INTEREST : ETHICS AND CONFLICTS OF INTEREST : Legal Consultant Presented by: JOE LEVAN Municipal Research and Services Center of Washington November 2011 AWPHD

2. 2 (206) 281-7211 MRSC (206) 625-1300 WELCOME TO THE WEBCAST BEN LINDEKUGEL AWPHD Director of Member Services BenL@awphd.org (206) 216-2528

3. 3 AWPHD (206) 281-7211 MRSC (206) 625-1300 During the presentation, one-way phone connection (we cannot hear you) To submit a question or comment – During the presentation, click the “type here to chat” button on the right of your screen; type your message and click “send” A copy of the presentation slides will be available on the AWPHD website tomorrow: http://www.awphd.org/Publications/resources_web.aspx http://www.awphd.org/Publications/resources_web.aspx Quick Technical Notes

4. 4 AWPHD (206) 281-7211 MRSC (206) 625-1300 Legal Consultant JOE LEVAN Municipal Research & Services Center of Washington jlevan@mrsc.org (206) 625-1300 MRSC provides legal and policy assistance to local governments, including Public Hospital Districts Call on Joe and MRSC consultants with questions related to governance laws and for assistance with sample policies and other research

5. 5 AWPHD (206) 281-7211 MRSC (206) 625-1300 Introduction Gifts and Rewards Prohibited Contract Interests Special Privileges and Exemptions Disclosing Confidential Information Consider Establishing a Local Ethics Code Additional Resources Overview 1 2 3 4 5 6 7

6. 6 AWPHD (206) 281-7211 MRSC (206) 625-1300 Introduction 1

7. 7 AWPHD (206) 281-7211 MRSC (206) 625-1300 Focus Areas Today This presentation will focus on ethics and conflict of interest issues related to hospital district commissioners as elected officials of a local government Will not discuss health care law issues, such as fraud concerns under the Stark Statute Introduction

8. 8 AWPHD (206) 281-7211 MRSC (206) 625-1300 Common sense approach It you think in your gut that what you’re doing is a conflict of interest or is unethical, chances are … you’re right Court-made law and statutory provisions formalize the principles we will discuss today – and provide penalties for violations Let’s Keep it Simple Introduction

9. 9 AWPHD (206) 281-7211 MRSC (206) 625-1300 We will go through several real world scenarios to understand and apply key principles This topic boils down to: In your role as a hospital district commissioner… 1.There are some things of value you cannot receive; and 2.There are some things of value you cannot give to others. Scenarios Approach Introduction

10. 10 AWPHD (206) 281-7211 MRSC (206) 625-1300 “Municipal officer” is defined broadly to include: 1. All elected and appointed officers of a municipality (i.e., commissioners) together with: 2.All deputies and assistants of such officers, and 3.All persons exercising or undertaking to exercise any of the powers or functions of a municipal officer (including hospital district CEOs and possibly others) What’s a Municipal Officer? RCW 42.23.020(2) 42.23.020 RCW 42.23.020(2) 42.23.020 Introduction

11. 11 AWPHD (206) 281-7211 MRSC (206) 625-1300 Because there are serious penalties for violations of chapter 42.23 RCW42.23 – Good faith is not a defense – An officer violating chapter 42.23 RCW may be held liable for a $500 civil penalty42.23 “… in addition to such other civil or criminal liability or penalty as may otherwise be imposed” – Any contract made in violation of chapter 42.23 RCW is void – The officer may have to forfeit his or her office Why does this Matter? RCW 42.23.050 42.23.050 RCW 42.23.050 42.23.050 Introduction

12. 12 AWPHD (206) 281-7211 MRSC (206) 625-1300 Gifts & Rewards

13. 13 AWPHD (206) 281-7211 MRSC (206) 625-1300 Gifts and Rewards

14. 14 AWPHD (206) 281-7211 MRSC (206) 625-1300 Gifts and Rewards

15. 15 AWPHD (206) 281-7211 MRSC (206) 625-1300 A municipal officer may not, directly or indirectly, give or receive any compensation, gift, reward, or gratuity from a source except from the employing municipality for a matter connected with or related to the officer’s services Gifts and Rewards: The Basics Gifts and Rewards RCW 42.23.070(2) 42.23.070 RCW 42.23.070(2) 42.23.070 But what constitutes a gift, reward, or gratuity? – Not defined in chapter 42.23 RCW42.23 – Defined for state officials and employees under RCW 42.52.010 42.52.010 Anything of economic value for which no consideration is given – related to official duties

16. 16 AWPHD (206) 281-7211 MRSC (206) 625-1300 Technically, any money or item of value received by a hospital district commissioner from a private party related to the performance of the commissioner’s official duties is an illegal gift, reward, or gratuity This could include: Additional money or compensation provided by a private party to a commissioner A free dinner provided by a private party to a commissioner A plaque given by a private party to a commissioner What is Not Allowed? (part 1) Gifts and Rewards

17. 17 AWPHD (206) 281-7211 MRSC (206) 625-1300 Technically, “no” because there is not an explicit statutory provision that applies to public hospital districts providing an exception However, the Office of the State Auditor has been known to apply a “de minimis” rule that allows public officials to accept something of limited value – which generally means a value up to $50 But isn’t there an Exception? Gifts and Rewards

18. 18 AWPHD (206) 281-7211 MRSC (206) 625-1300 State officers and employees cannot, with some exceptions, accept: – gifts with an aggregate value in excess of $50 from a single source in a calendar year, or – a single gift from multiple sources with a value in excess of $50 – Consult with your district’s legal counsel about whether the same standard applies to your district What is Not Allowed? (part 2) Gifts and Rewards RCW 42.52.150 RCW 42.52.150

19. 19 AWPHD (206) 281-7211 MRSC (206) 625-1300 Under RCW 42.52.150 related to state officials and employees, the following are not considered illegal gifts (even if the value is more than $50):42.52.150 – unsolicited flowers or plants – unsolicited advertising or promotional items of nominal value, such as pens, notepads, t-shirts, and key chains – unsolicited awards, plaques, and trophies – unsolicited informational materials, publications, or subscriptions related to the recipient’s official duties – food and beverages consumed at hosted receptions, if attendance relates to official duties What about other Exceptions for State Officials and Employees? Gifts and Rewards

20. 20 AWPHD (206) 281-7211 MRSC (206) 625-1300 Gift of Public Funds – Lending of Credit Prohibition included in our state constitution – Article VIII, Section 7 – No county, city, town or other municipal corporation shall hereafter give any money, or property, or loan its money, or credit to or in aid of any individual, association, company or corporation, except for the necessary support of the poor and infirm, or become directly or indirectly the owner of any stock in or bonds of any association, company or corporation. Gifts from the District to Others Gifts and Rewards

21. 21 AWPHD (206) 281-7211 MRSC (206) 625-1300 Some activities could constitute an illegal gift by a hospital district, such as: – Use of district facilities, equipment, or funds for private purposes that are not for the poor or infirm – Gifts to private organizations, such as the Chamber of Commerce or service clubs But Note … Illegal Gifts to Others Gifts and Rewards

22. 22 AWPHD (206) 281-7211 MRSC (206) 625-1300 Key distinction between gifts to the district and gifts to a commissioner or employee or from the district RCW 70.44.060(11) gives the district the power:70.44.060 – To solicit and accept gifts, grants, conveyances, bequests, and devises of real or personal property, or both, in trust or otherwise, and – to sell, lease, exchange, invest, or expend gifts or the proceeds, rents, profits, and income therefrom, and – to enter into contracts with for-profit or nonprofit organizations to support the purposes of this subsection, including, but not limited to, contracts providing for the use of district facilities, property, personnel, or services. Gifts and Hospital Districts Gifts and Rewards

23. 23 AWPHD (206) 281-7211 MRSC (206) 625-1300 Under RCW 70.44.315, when evaluating a potential acquisition of an interest in a district hospital by, for example, a for-profit entity, commissioners shall determine compliance with several requirements70.44.315 Including that the acquisition is allowed under: – Article VIII, Section 7 of the state constitution (prohibiting gifts of public funds or lending of credit) and – Article XI, Section 14 (prohibiting private use of public funds ) No Gifting in Relation to Acquisition of District Hospitals Gifts and Rewards

24. 24 AWPHD (206) 281-7211 MRSC (206) 625-1300 Prohibited Contract Interests

25. 25 AWPHD (206) 281-7211 MRSC (206) 625-1300 Prohibited Contract Interest

26. 26 AWPHD (206) 281-7211 MRSC (206) 625-1300  Is the contract interest one through which the municipal officer would benefit financially?  Is the contract made by, through, or under the supervision of the municipal officer?  Does an exception apply?  Does the municipal officer have what would be considered a "remote interest" in the contract under RCW 42.23.040?42.23.040 Questions under Chapter 42.23 RCW Prohibited Contract Interest

27. 27 AWPHD (206) 281-7211 MRSC (206) 625-1300 The commissioner – who is a municipal officer – stands here to benefit financially from the professional services contract The contract is made by, through, or under the supervision of the commissioner Scenario 1 Analysis Prohibited Contract Interest

28. 28 AWPHD (206) 281-7211 MRSC (206) 625-1300 If the commissioner represents a non- rural district, the contract (or contracts) may be allowed if the total amount received under the contract or contracts by the commissioner or his/her business does not exceed $1,500 in any calendar month Scenario 1 Analysis – $ Thresholds Prohibited Contract Interest See RCW 42.23.030(6)(a) 42.23.030 See RCW 42.23.030(6)(a) 42.23.030

29. 29 AWPHD (206) 281-7211 MRSC (206) 625-1300 If the commissioner represents a rural hospital district the contract (or contracts) may be allowed even if the total amount exceeds $1,500 in any calendar month, as long as the total amount does not exceed $24,000 in any calendar year, as adjusted for inflation (beginning with the 2006 calendar year). Scenario 1 Analysis – $ Thresholds Prohibited Contract Interest See RCW 42.23.030(6)(c)RCW 42.23.030 See RCW 42.23.030(6)(c)RCW 42.23.030 DEFINITION: “Rural Hospital District” a hospital district whose geographic boundaries do not include a city with a population greater than 50,000. See RCW 70.44.460 RCW 70.44.460 DEFINITION: “Rural Hospital District” a hospital district whose geographic boundaries do not include a city with a population greater than 50,000. See RCW 70.44.460 RCW 70.44.460

30. 30 AWPHD (206) 281-7211 MRSC (206) 625-1300 Even if the total contract amount is within the allowable monthly or annual dollar thresholds, the contract is allowed only if the commissioner who has the contract interest: Does not vote on the contract; and Discloses his/her contract interest to his/her colleagues on the hospital district commission; and Has the contract interest noted in the commission minutes or similar records “before the formation of the contract” – see RCW 42.23.030 (last paragraph)42.23.030 Also … The hospital district must maintain a list of all contracts that are awarded under RCW 42.23.030(6), and the list must be made available for public inspection and copying – See RCW 42.23.030(6)(e)42.23.030 But Such Contracts are Allowed Only If … Prohibited Contract Interest

31. 31 AWPHD (206) 281-7211 MRSC (206) 625-1300 One is which a municipal officer would benefit from financially, either directly or indirectly – The contract must be one that is made by, through, or under the supervision of the municipal officer, in whole or in part – Applies to commissioners and others to whom the commission has delegated contract authority (e.g., CEOs) A municipal officer also cannot accept, directly or indirectly, any compensation, gratuity, or reward in connection with such a contract from any other person who is beneficially interested in the contract What is a Contract Interest? RCW 42.23.030 RCW 42.23.030 DEFINITION: “Contract” defined broadly and includes employment, sales, purchases, and lease agreements – see RCW 42.23.020(3) 42.23.020 DEFINITION: “Contract” defined broadly and includes employment, sales, purchases, and lease agreements – see RCW 42.23.020(3) 42.23.020 Prohibited Contract Interest

32. 32 AWPHD (206) 281-7211 MRSC (206) 625-1300 Regardless of the dollar amount, certain contract interests are not allowed – A commissioner (or other municipal officer) cannot purchase or lease property from the district – A commissioner (or other municipal officer) cannot provide legal services to the district (except for reimbursement of expenditures) Sales, Leases, and Contracts for Legal Services Prohibited Contract Interest See RCW 42.23.030(6)(d) 42.23.030 See RCW 42.23.030(6)(d) 42.23.030

33. 33 AWPHD (206) 281-7211 MRSC (206) 625-1300 Prohibited Contract Interest

34. 34 AWPHD (206) 281-7211 MRSC (206) 625-1300 The contract is prohibited because no exceptions apply Due to the monthly and total dollar amounts of the contract, the exceptions regarding the dollar thresholds for rural and non-rural districts are inapplicable Because you own 1% or more of the shares of the corporation, the interest is not considered a “remote interest” (see next slide) and you are considered to be financially interested in the contract Scenario 2 Analysis Prohibited Contract Interest

35. 35 AWPHD (206) 281-7211 MRSC (206) 625-1300 Option 1: Your company will not pursue the contract with the district or Option 2: You can resign your commissioner position so that your company can enter into the contract It would not be sufficient to recuse yourself from consideration of and voting on the contract because this contract interest is prohibited Scenario 2: You Have a Choice Prohibited Contract Interest

36. 36 AWPHD (206) 281-7211 MRSC (206) 625-1300 Certain contract interests are considered acceptable “remote interests” – regardless of the dollar amount What is a Remote Interest? See RCW 42.23.040 42.23.040 See RCW 42.23.040 42.23.040 Prohibited Contract Interest DEFINITION: “Remote Interest” That of a non salaried officer of a nonprofit corporation; That of an employee or agent of a contracting party where the compensation of such employee or agent consists entirely of fixed wages or salary; That of a landlord or tenant of a contracting party; [or] That of a holder of less than one percent of the shares of a corporation or cooperative which is a contracting party. DEFINITION: “Remote Interest” That of a non salaried officer of a nonprofit corporation; That of an employee or agent of a contracting party where the compensation of such employee or agent consists entirely of fixed wages or salary; That of a landlord or tenant of a contracting party; [or] That of a holder of less than one percent of the shares of a corporation or cooperative which is a contracting party.

37. 37 AWPHD (206) 281-7211 MRSC (206) 625-1300 If a hospital district commissioner with authority over the making of a contract has a remote interest: Conditions for a Remote Interest to Apply See RCW 42.23.040 42.23.040 See RCW 42.23.040 42.23.040 – The commissioner must fully disclose the contract interest to the board of commissioners; – The commissioner is not to vote on the contract, or, as the statute puts it, the commissioner’s vote cannot be counted (the former approach is advisable) – If the commissioner influences or attempts to influence any other commissioner of the board of commissioners on the matter, the remote interest exception does not apply – The remote interest must be noted in the commission’s minutes before entering into the contract, and – The commission must approve the contract “in good faith” Prohibited Contract Interest

38. 38 AWPHD (206) 281-7211 MRSC (206) 625-1300 Prohibited Contract Interest

39. 39 AWPHD (206) 281-7211 MRSC (206) 625-1300 The contract is allowed What is statutorily prohibited are contract interests in which a municipal officer is financially interested, directly or indirectly Here, as a mere member of the nonprofit organization, you would have no legally recognized financial interest in the contract – not even a remote interest You may advocate regarding entering into the contract and you may vote on it But Note: If this situation involved a commissioner who was a nonsalaried officer of the nonprofit corporation at issue, the contract interest would be considered a remote interest and the remote interest conditions would apply Scenario 3 Analysis Prohibited Contract Interest

40. 40 AWPHD (206) 281-7211 MRSC (206) 625-1300 Prohibited Contract Interest

41. 41 AWPHD (206) 281-7211 MRSC (206) 625-1300 Your contract interest would be considered a remote interest based on two of the remote interest conditions because: – You are an employee on fixed salary or wages; and – You are the holder of less than one percent of shares in the corporation You would not be regarded as an officer “interested” in the contract and the contract would be allowed But you cannot vote on the contract and cannot influence or attempt to influence the other commissioners regarding the matter (see the previous slide regarding the other remote interest conditions) Scenario 4 Analysis Prohibited Contract Interest

42. 42 AWPHD (206) 281-7211 MRSC (206) 625-1300 Prohibited Contract Interest

43. 43 AWPHD (206) 281-7211 MRSC (206) 625-1300 Specific exception for hospital district spouses: A hospital district commission can authorize, approve, or ratify any employment contract with the spouse of a district commissioner if: Scenario 5 – Spousal Employment RCW 42.23.030(12) 42.23.030 RCW 42.23.030(12) 42.23.030 The spouse was employed by the district before the date the commissioner was initially elected; The terms of the contract are commensurate with the pay plan or collective bargaining agreement operating in the district for similar employees; The interest of the commissioner is disclosed to the board of commissioners and noted in the official minutes or similar records of the hospital district prior to the letting or continuation of the contract; and The commissioner does not vote on the authorization, approval, or ratification of the contract or any conditions in the contract. Prohibited Contract Interest

44. 44 AWPHD (206) 281-7211 MRSC (206) 625-1300 The are a few other less common types of contract interests that are allowed A commissioner (or other district municipal officer) is allowed to have a financial interest in a contract related to: Additional Exceptions See RCW 42.23.030(1)-(3), (5) 42.23.030 See RCW 42.23.030(1)-(3), (5) 42.23.030 The furnishing of utility services by a municipality engaged in the business of furnishing such services The designation of public depositaries for municipal funds The publication of legal notices required by law to be published by a public hospital district, upon competitive bidding or at rates not higher than prescribed by law for members of the general public The employment of any person by a hospital district for unskilled day labor at wages not exceeding $200 in any calendar month Prohibited Contract Interest

45. 45 AWPHD (206) 281-7211 MRSC (206) 625-1300 Special Privileges & Exemptions

46. 46 AWPHD (206) 281-7211 MRSC (206) 625-1300 Common Law Conflict of Interest General prohibition against specially benefitting financially from a matter you vote upon 1909 court decision invalidating a street vacation ordinance because a councilmember who stood to benefit financially from its enactment cast the deciding vote Common Law Origins Smith v. CentraliaSmith v. Centralia, 55 Wash. 573 (1909) Smith v. CentraliaSmith v. Centralia, 55 Wash. 573 (1909) Special Privileges and Exceptions

47. 47 AWPHD (206) 281-7211 MRSC (206) 625-1300 No municipal officer may use his or her position to obtain special privileges for himself, herself, or others DEFINITION: Special Privilege - being allowed to do something that would otherwise be prohibited DEFINITION: Special Exemption - being relieved from doing something that would be otherwise mandated Statutory Basics 47 For a good description of the difference between a special benefit and a special exemption see point 3 in: 2010 AGO No. 3 2010 AGO No. 3 For a good description of the difference between a special benefit and a special exemption see point 3 in: 2010 AGO No. 3 2010 AGO No. 3 RCW 42.23.07042.23.070 RCW 42.23.07042.23.070 Special Privileges and Exceptions

48. 48 AWPHD (206) 281-7211 MRSC (206) 625-1300 Confidential Information

49. 49 AWPHD (206) 281-7211 MRSC (206) 625-1300 Only reference to confidentiality specifically in the hospital district statute, chapter 70.44 RCW, is in RCW 70.44.062chapter 70.44 RCW 70.44.062 But that provision is limited in scope – pertains to holding executive sessions regarding the status of clinical or staff privileges of a physician or health care provider in some circumstances and regarding deliberations of a quality improvement committee Confidential Information

50. 50 AWPHD (206) 281-7211 MRSC (206) 625-1300 A municipal officer may not disclose confidential information gained by reason of the officer’s position, or otherwise use such information for his/her personal gain or benefit Confidential Information See RCW 42.23.070(3)-(4) 42.23.070 See RCW 42.23.070(3)-(4) 42.23.070 A municipal officer may not accept employment or engage in business or professional activity that the officer might reasonably expect would require or induce him/her by reason of his/her official position to disclose confidential information – This could mean, for example, that a commissioner may not disclose confidential information that was discussed in executive session

51. 51 AWPHD (206) 281-7211 MRSC (206) 625-1300 Consider a Local Ethics Code

52. 52 AWPHD (206) 281-7211 MRSC (206) 625-1300 A public hospital district may adopt an ethics policy that includes additional local requirements Cannot conflict with state law but can supplement it Can cover employees as well as officers Many hospital districts do not have formal ethics codes but some do (e.g., Valley Medical – King County PHD No. 1) and MRSC has samples Consider Establishing a Local Ethics Code Local Ethics Codes

53. 53 AWPHD (206) 281-7211 MRSC (206) 625-1300 Additional Resources 7

54. 54 AWPHD (206) 281-7211 MRSC (206) 625-1300 MRSC Website – Conflicts of Interest Conflicts of Interest – Sample Codes of Ethics Sample Codes of Ethics – MRSC Index – General Government: G 5.3100 - Conflicts of interest, code of ethics for municipal officers, contract interests, Ch. 42.23 RCW MRSC Index – General Government: G 5.3100 - Conflicts of interest, code of ethics for municipal officers, contract interests, Ch. 42.23 RCW MRSC Publications: – Knowing the Territory - Basic Legal Guidelines for Washington City, County, and Special Purpose District Officials – discusses conflict of interest and ethics issues under chapter 42.23 RCW and otherwise Knowing the Territory - Basic Legal Guidelines for Washington City, County, and Special Purpose District Officials Additional Resources 7

55. 55 AWPHD (206) 281-7211 MRSC (206) 625-1300 Contact Info JOE LEVAN MRSC Legal Consultant jlevan@mrsc.org (206) 625-1300 BEN LINDEKUGEL AWPHD Director of Member Services BenL@awphd.org (206) 216-2528 Additional Resources 7

56. 56 AWPHD (206) 281-7211 MRSC (206) 625-1300 Ethics and Conflicts of Interest: What Hospital District Commissioners Need to Know www.awphd.org www.mrsc.org