NICHOLAS LAW,R’c’NC F"

Roger W. Mullins, Esq.Boyd Graves Conference Chair106 Church St.P.O. Box 647Tazewell, VA 24651-0647

August 3, 2011

Re: Report of BoydImmunity

Dear Roger:

Graves Conference Subcommittee on Charitable

Our committee consisting of John McGavin (Chair), Jim McCauley, BevedyBurton, Brad Cann, Clifford Athey, David Corrigan, The Honorable Arthur Kelsey,Matt Murray, Robert Calhoun, Robert Delano and William Hardy was formed tocontinue deliberations on the topic of Charitable Immunity. We are following up onthe work of last year’s committee chaired by Derrick Walker. That committee wasunable to reach a consensus and requested another year to continue this review.We have considered that information, reviewed additional matedal and met todeliberate.

Previously, this subcommittee met in 2010 to discuss two principal issueswhich were: 1 ) whether a recommendation should be made to abolish charitableimmunity and 2) whether there was some incremental change in the currentprocedural or legal framework which should be recommended. After discussion,review and research, the odginal subcommittee was unable to reach a consensusand requested the opportunity to reconvene.

On June 16, 2011, members of this committee met to dis(~uss the issuespresented. At our meeting, we determined there was no consensus to recommendabolishing charitable immunity.

The committee then turned i,ts attention to addressing potential procedural orlegal modifications to the current status of the charitable immunity law. Thecommittee discussed in considerable detail the Virginia Supreme Court decision ofUniversity of Virginia Health Services Foundation, et al. v. Mords et al. 275 Va. 319;

Roger W. Mullins, Esq.August 3, 2011Page 2

657 S.E 2d. 512 (2008). in that consolidated appeal from the Circuit Court of TheCity of Charlottesville, the Supreme Court considered three distinct cases. Two hadbeen decided by the Honorable Edward L. Hogshire and one by the HonorableRandy I. Bellows, Judge Designate for the Circuit Court for the City of Charlottesville.In that decision, the Virginia Supreme Court was asked to consider whether an entityformed by health professionals was entitled to the protection of charitable immunity.The court identified the ten factors that are indicative of whether a charitableorganization operates, in fact, with a charitable purpose which are:

1)purpose?

Does the entity’s charter limit the entity to a charitable or eleemosynary

2) Does the entity’s charter contain a not for profit limitation?

3)

occur?.

Is the entity’s financial purpose to break even or earn a profit?

Does the entity, in fact, earn a profit, and if so, how often does that

5) If the entity earns a profit (a surplus beyond expenses) must that beused for a charitable purpose?

6)portion of its

7)

8)ability to

9)capital?

what basis?

Does the entity depend on contributions and donations for a substantialexistence?

IS the entity exempt from federal income tax and/or local real estate tax?

Does the entity’s provision of services take into consideration a person’spay for such services?

Does the entity have stockholders or others with an equity state in its

Are the directors and officers of the entity compensated and if so, on

In the UVA Health Services case, the Virginia Supreme Court affirmeddecisions fror~ the trial court which denied the special plea of charitable immunityand reversed the decision of the tdal court which granted the special plea orcharitable immunity.

Roger W. Mullins, Esq.August 3, 2011Page 3

The committee considered whether these factors are being faidy andadequately addressed by the Circuit Courts and whether there were any specificcases of perceived inequity in the application of these factors to the law or theevidence.

There was a further discussion regarding the rebuttable presumption in favorof the charities. Currently, the chadty will be afforded a presumption that it has acharitable purpose if it has IRS qualification as a charity. The presumption isrebuttable. The committee considered whether a modification to that proceduralstatus should be a recommended.

After ~reful consideration of the existing case law, a thoughtful discussion ofthe goals and purposes of the Boyd Graves Conference ultimately the subcommitteewas unable to reach a consensus for any recommended action.

Accordingly, we are unable to reach a consensus on the issues presented.We do not recommend reconvening this committee for further study next year.

JDM/sdvEnclosure

Very truly yours,

oh~n D. McGavin

C: Jim McC~uleyBeverly BurtonBrad CannClifford AtheyDavid CordganThe Honorable Arthur KelseyMatt MurrayRobert CalhounRobert DelanoWilliam Hardy

UVA Health Services Foundation v. Morris, 275 Va. 319, 657 S.E.2d 512 (2008)

IN THE SUPREME COURT OF VIRGINIA

UNIVERSITY OF VIRGINIA HEALTHSERVICES FOUNDATION, ET AL.

V.HUNTER MORRIS, AN INFANT, BYHIS NEXT FRIENDS, ELIZABETHPIERCE MORRIS, HIS MOTHER,

AND DAVID R. MORRIS, HIS FATHER, ET AL.

Record No. 070214

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

WILLARD A. SEARCY, ASADMINISTRATOR OF THE ESTATE OF

CARA LEIGH SEARCY, DECEASED, ET AL.

Record No. 070217

CRYSTAL ANN MacARTHUR, AMINOR, BY HER MOTHER AND NEXT

FRIEND, DEBORAH ANN YORK, ET AL.Vo

UNIVERSITY OF VIRGINIA HEALTHSERVICES FOUNDATION

Record No. 070475Decided: February29,2008

Present: All the Justices

In collected appeals, it is concluded that a health services foundation associated with a publicuniversity’s medical center is not itself a hospital whose charitable immunity is governed by Code§§ 8.01-38 and 32.1-123, and it is likewise not entitled to common law charitable immunity fromtort liability. The foundation, which was created to increase revenue and generates funds forsalaries and incentive payments, among other things, pursues thousands of collection actions incourt and has a low ratio of charitable work to revenues. Considering four relevant factors, themanner in which the foundation actually conducts its affairs is not dominantly in accord with thecharitable purpose stated in its articles of incorporation. Instead, it operates like 4t profitablecommercial business with extensive revenue and assets. It is therefore not immune from tortliability under the doctrine of charitable immunity. Dispositions in the collected cases areaffirmed, reversed and remanded accordingly. [Page 320]

Torts -- Medical Malpractice -- Charitable Immunity -- Hospitals -- Health ServicesFoundations -- Articles of Incorporation -- Medical Care for Indigents -- Revenue Generationand Distribution -- Tax Classification -- Presumption of Charitable Purpose- Ratio of Revenuesand Cost of Charitable Work -- Profit-Based Incentive Payments to Personnel -- Absence of

Charitable Gift Funding-- Statutory Construction (Code § 8.01-38 and Code § 32~1-123)

A health services foundation associated with a large public university’s medical center is incorporatedas a non-profit group practice health care provider organization that employs the physicians who work atthe university’s medical school. The physicians it employs are also employed by the medical school; theyteach and perform research at the medical school and render patient care services at the medical centerand regional primary care offices. One of the purposes stated in the foundation’s articles of incorporationis to assist and conduct programs providing charity medical care to patients who might not otherwise beable to afford it. The foundation bills various charges, receives insurance payments, and engages inpatient billing and collections. It receives no funds as contributions or donations. Funds generated by thefoundation are used to pay part of the physicians’ guaranteed salaries and benefits, and certain incentivecompensation. The foundation was determined by the Internal Revenue Service to be exempt from federalincome tax under § 501(c)(3), and it was further determined to be a public charity rather than a privatefoundation, as § 509(a)(3) organization. In several medical malpractice cases the foundation raised thedefense of charitable immunity, and inconsistent trial court rulings resulted. This appeal collects certain ofthese cases.

1. The doctrine of charitable immunity is firmly embedded in the law of this Commonwealth and hasbecome a part of the general public policy of the State. The doctrine is grounded in part in the publicpolicy that the resources of charitable institutions are better used to further the institution’s charitablepurposes, than to pay tort claims lodged by the charity’s beneficiaries. Additionally, it preserves thespirit and intent of philanthropic gifts made by the public to charitable institutions arid so that thatmuch of the burden borne by those gifts will not be again cast upon the public.

2. The doctrine of charitable immunity in Virginia is limited. A charitable institution is immune fromliability to beneficiaries for acts of ordinary negligence by its servants or agents, but may be liable forordinary negligence in the selection and retention of its servants or agents.

3. Charitable immunity applies only to claims of negligence asserted by those who accept the charitableinstitution’s benefits. A charitable institution is not immune from liability to invitees or strangers withno beneficial relationship to the institution.

4. A charitable institution is not immune for acts of gross negligence or willful or wanton negligence, assuch conduct can never be characterized as an attempt to carry out the mission of the charity to serveits beneficiaries. [Page 321 ]

5. In addition to the judicial limitations on charitable immunity, the General Assembly has limitedcharitable immunity in certain instances. One such limitation is Code § 8.01-38, which deniescharitable immunity to most hospitals.

6. Code § 32.1-123 defines "hospital" to mean any licensed facility in which the primary function is theprovision of diagnosis, of treatment, and of medical and nursing services, surgical or nonsurgical, fortwo or more nonrelated individuals, including hospitals known by varying nomenclature ordesignation such as sanatoriums, sanitariums and general, acute, rehabilitation, chronic disease,short-term, long-term, outpatient surgical, and inpatient or outpatient maternity hospitals.

7. Whether the foundation is a hospital within the meaning of Code § § 8.01-38 and 32.1-123 is a mixedquestion of law and fact reviewed de novo on appeal.

8. 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 construction beyond its express terms.

9. The foundation does not fall under Code §§ 8.01-38 and 32.1-123. Code § 32.1-123 includes in thedefinition of "hospital" only "facilit[ies] licensed pursuant to this article." The foundation is not solicensed to operate as a hospital and has never applied for or held a license to operate as a hospital orbeen subject to any type of hospital accreditation. Because it does not come within the definition of"hospital" in Code § 32.1-123, the foundation does not fall within the scope of Code § 8.01-38’sdenial of charitable immunity to hospitals.

10. Whether the foundation is eligible for common law charitable immunity from tort liability is a mixedquestion of law and fact that is reviewed de novo.

11. To establish charitable immunity as a bar to tort liability, an entity must prove at least two distinctelements. The absence of either element makes the bar of charitable immunity inapplicable. First, theentity must show it is organized with a recognized charitable purpose and that it operates in fact inaccord 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 theentity has met the foregoing test, it must then establish that the tort claimant was a beneficiary of thecharitable institution at the time of the alleged injury.

12. For the first element, if an organization’s charter sets forth a charitable or eleemosynary purpose, thereis a 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 withthe charitable purpose, then the presumption may be rebutted and the bar of charitable immunity doesnot apply.

13. Ten factors are indicative of whether a charitable organization operates in fact with a charitablepurpose: (1) Does the entity’s charter limit the entity to a charitable or eleemosynary purpose? (2)Does the entity’s charter contain a not [Page 322] for profit limitation? (3) Is the entity’s financialpurpose to break even or earn a profit? (4) Does the entity in fact earn a profit, and if so, how oftendoes that occur? (5) If the entity earns a profit (a surplus beyond expenses) must that be used for acharitable purpose? (6) Does the entity depend on contributions and donations for a substantialportion 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 suchservices? (9) Does the entity have stockholders or others with an equity stake in its capital? (10) Arethe directors and officers of the entity compensated and if so, on what basis? These factors are notexclusive, and no one factor is determinative.

14. The foundation is entitled to a presumption that it operates as a charitable institution in accordancewith the purposes set out in its Articles of Incorporation, which recite that it is formed exclusively forcharitable, scientific and educational purposes, as contemplated by Section 501(c)(3) of the InternalRevenue Code. The Articles of Incorporation established the rebuttable presumption that it is acharitable organization. The plaintiffs in the respective cases then had the burden of rebutting thepresumption.

15. Though entitled to the presumption, if the manner in which the foundation actually conducts its affairsis not in accord with the charitable purpose, then the presumption may be rebutted and the bar ofcharitable immunity does not apply. In the final analysis, whether an entity operates as a charity turnson the t;acts of each case.

16. In this case, four factors are determinative of the conclusion that the foundation does not operate infact with a charitable purpose: (a) it was created to correct billing and collection problems; (b) theratio of its revenue compared to the cost of its charitable work is substantially disproportionate; (c) itsincentive payment structure is functionally a profit-based bonus system, much like a for-profitenterprise; and (d) it does not accept charitable gifts.

17. The foundation was created to increase the amount of revenue received by the medical center, and itaggressively pursues legal collections. The magnitude of these practices suggests that the foundationoperates more like a for-profit business with a financial purpose of earning a profit than a charitableorganization.

18. The ratio of foundation’s unreimbursed shortfall in a recent year to total revenue and other incomewas only about 0.66%. The minimal cost of its charity work as compared to its income illustrates ho~vsmall a portion of its work is charitable.

19. The foundation’s incentive payment structure includes a distribution of surplus revenue in a mannermore consistent with a successful commercial business than a charitable organization. The revenue isdistributed by the foundation to the medical center departments in accordance with how muchrevenue those departments generated, rather than how much indigent care is provided, how muchresearch is performed, or how many hours their physicians spent teaching. It is functionally aprofit-based bonus system. The departments that generate [Page 323] the most revenue receive themost money from the foundation, and those physicians who are the most financially productive intheir departments generally receive the biggest incentive payments. In this respect, the foundationfollows the model of a profitable commercial business, not a charitable institution.

20. The foundation receives no charitable contributions or donations. In fact, under its affiliationagreement with the medical school, the foundation is precluded from receiving contributions ordonations. Because charitable immunity in Virginia is based on public policy, this factor is notwithout importance. If the foundation is required to pay tort awards to the various plaintiffs in thepresent cases, no philanthropic-minded intentions will be nullified, because no gifts are received.

21. Whether or not an organization accepts charitable gifts is not dispositive of whether it is entitled tocharitable immunity. There are some charitable organizations that do not receive or accept donations,particularly if they are previously endowed from a philanthropic gift. These organizations may still beentitled to charitable immunity for other reasons. The foundation, however, is clearly not dependenton philanthropic gifts, nor is it in a position of need.

22. When these factors are considered in the context of prior case law it is clear that the manner in whichthis health services foundation actually conducts its affairs is not dominantly in accord with thecharitable purpose stated in its Articles of Incorporation. It operates like a profitable commercialbusiness with extensive revenue and assets. That portion of its services providing quality medical careto medically indigent patients is commendable. However, when an organization is operated in amanner calculated to produce a profit or gain, it is not entitled to charitable immunity. The foundationis therefore not immune from tort liability under the doctrine of charitable immunity.

Appeal from an order of the Circuit Court of the City of Charlottesville. Hon. Edward L. Hogshire,judge presiding.

Record No. 070214 -- Affirmed and remanded.

Appeal from an order of the Circuit Court of the City of Charlottesville. Hon. Edward L. Hogshire,judge presiding.

Record No. 070217 -- Affirmed and remanded.

Appeal from a judgment of the Circuit Court of the City of Charlottesville. Hon. Randy I. Bellows,judge designate presiding.

Record No. 070475 -- Reversed and remanded [Page 324]

Donald R. Morin (Michael L. Goodman; S. Vernon Priddy, lII; Bruce D. Gehle; Elizabeth G.Robertson; Morin & Barkley; Goodman, Allen & Filetti; Sands, Anderson, Marks & Miller, on briefs),for appellants University of Virginia Health Services Foundation, Dr. James Edward Ferguson, II and Dr.Barbara B. Head.

Donald R. Morin (C.J. Steuart Thomas, III; S. Vernon Priddy, III; Bruce D. Gehle; James Mayson;Morin & Barkley; Timberlake, Smith, Thomas & Moses; Sands, Anderson, Marks & Miller, on briefs),for appellants Dr. Stuart A. Howards and Dr. Carl Lynch, II.

L. Steven Emmert (Lewis T. Stoneburner; Wallace B. Wason; Sykes, Bourdon, Ahem & Levy;Cantor Arkema, on briefs), for appellants Crystal Ann MacArthur and Deborah Ann York.

Matthew B. Murray (Gerald R. Walsh; Christine Thomson; Richard Armstrong; Richmond andFishburne, on brief), for appellees Hunter Morris, Elizabeth Pierce Morris and David R. Morris.

R. Frazier Solsberry (Ralph E. Main, Jr., on brief), for appellees Willard A. Searcy and Lisa A.Searcy.

Donald R. Morin (C.J. Steuart Thomas, III; S. Vernon Priddy, III; James D. Mayson; Morin &Barkley; Timberlake, Smith, Thomas & Moses; Sands, Anderson, Marks & Miller, on brief), for appelleeUniversity of Virginia Health Services Foundation.

Amicus Curiae: The Virginia Trial Lawyers Association (Thomas E. Albro; R. Lee Livingston;Tremblay & Smith, on brief), in support of appellants Crystal Ann MacArthur and Deborah Ann York.

JUSTICE LEMONS delivered the opinion of the Court.

In these consolidated appeals, we consider whether the University of Virginia Health ServicesFoundation ("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 physicianswho work at the University of Virginia School of Medicine ("Medical School"). The physicians who areemployed by HSF are also employed by the Medical School. The physicians teach and perform researchat the Medical School and render patient care services at the University of Virginia Medical [Page 325]

Center ("Medical Center") and regional primary care offices. HSF bills patients for professional feeswhen the physicians treat patients.

1. Articles of Incorporation

HSF was created in 1979, primarily to improve the patient billing and collection process, which waspreviously performed by the University of Virginia (the "University"). The Articles of Incorporation ofHSF state several purposes of the organization:

Section 2. Purposes and Restrictions

(a) The purposes for which the Foundation is formed are exclusively charitable, scientific andeducational, as contemplated by Section 501 (c)(3) of the Internal Revenue Code of 1986, asamended .... More particularly, the Foundation is organized and shall at all times be operated toassist medical education by teaching in a group practice setting within the academic environmentof the University of Virginia (herein the "University"), and, in particular, the University’sMedical Center; to coordinate and deliver superior patient care therein, and in connectiontherewith to perform a public trust without regard to the race, color, creed, sex, age or ability topay 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 anddisease;

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

(iv) To assist and conduct programs of public charity to benefit patients who might nototherwise receive or be able to afford medical attention;

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

(vi) To engage in any and all lawful activities incidental to the foregoing purposes exceptas limited herein. [Page 326]

The Articles of Incorporation also state, "No part of the Foundation’s net earnings shall inure to thebenefit 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 anyindividual.

2. Providing Medical Care to Indigents

One of the purposes stated in HSF’s Articles of Incorporation is "[t]o assist and conduct programs ofpublic 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 theirability 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 staffperform a "verbal mini-screening" to determine the patient’s income and number of dependents. Thepatient is given paperwork to complete so the Medical Center can review the patient’s financial status. Ifthe Medical Center determines that the patient is unable to pay all or a portion of his bill, he is classifiedat one of five levels of "medical indigency." If a patient is categorized as a "level one" (100% medicallyindigent), he is not charged for any of the services he receives from HSF physicians. If a patient isclassified at a lower level of medical indigency, anywhere from five to fifty-five percent of the charge forthe services is adjusted.

If a medically indigent patient does not complete the financial paperwork, he is billed as a payingpatient. The patient may complete the paperwork during the billing and collection process. If the patient isthen determined by HSF to be medically indigent, HSF makes a retroactive adjustment for the patient’sentire account.

HSF regularly files warrants in debt in the appropriate general district court to obtain judgmentsagainst patients who have a balance on their account. If HSF obtains a judgment against a medicallyindigent patient, the patient may still file the financial status paperwork. If it is determined that the patientis 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 Billingand Collections, Kevin M. Higgins, testified that HSF usually collects about 35-38% of"full bill charges"from a paying patient or insurance company because [Page 3271 HSF has "agreements with third partypayers that provide for payments to [HSF] at amounts different from its established rates." HSF’sfinancial statements show a loss of approximately $20-22 million a year in foregone collections for careprovided to medically indigent patients. Because HSF would expect to actually receive only 35-38% ofthat 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 in2005.

The Commonwealth reimburses the Medical Center up to the level of the costs of treating manymedically 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 $1.5million for treating medically indigent patients in 2005 instead of the $20 million reflected on thefinancial statements.

3. Flow of Money From HSF to Physicians

HSF, having been created for the purpose of conducting patient billing and collections, performs thatfunction. HSF’s revenue consists of its net patient service revenue ("estimated net realizable amountsfrom patients, third-party payers, and others for services rendered"), reimbursements from the Universityfor 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 ascontributions or donations because it is precluded from receiving contributions or donations under itsaffiliation agreement with the Medical School.

HSF distributes its revenue in the following manner: (1) HSF pays its operating expenses~; (2) 7% ofgross revenue is then paid to the Dean of the Medical School (the "Dean’s Tax") for an academicadvancement 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 theDean of the Medical School and the chair of the department for which that physician [Page 328] works.The departments aggregate funds received from HSF and the Medical School and use them to pay thephysicians’ salaries and benefits.

The physicians’ salaries consist of two components: a guaranteed base salary, which is a fixed amountpaid by the University and, in addition, an incentive payment2 to the physicians from their respectivedepartments. When the two compensation components are combined, HSF physicians are compensated onaverage at about the forty-fifth to fifty-fifth percentile of salaries for physicians employed in academicmedical 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 federalincome tax exemption under I.R.C. § 501 (c)(3). HSF requested a definitive ruling as to the non-privatefoundation status of HSF under I.R.C. § 509, applying as: (1) a hospital; (2) an organization "normallyreceiving not more than one-third of its support from gross investment income and more than one-third ofits support from contributions, membership fees, and gross receipts from activities related to its exemptfunctions" under § 509(a)(2); and (3) an organization "being operated solely for the benefit of or inconnection with one or more of the organizations described.., above" under § 509(a)(3). The IRSdetermined that HSF was exempt from federal income tax under § 501(c)(3), and further determined thatHSF 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 theUniversity, which is a state agency. However, HSF presented expert testimony at the hearing inMacArthur that the IRS’s determination that HSF is a § 509(a)(3) organization does not mean that itwould not have qualified as a § 509(a)(2) organization. [Page 329]

B. Proceedings Below

1. Howards v. Searcy and University of Virginia Health ServicesFoundation 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. Searcyalleged that Dr. Howards and Dr. Lynch, who were employees of HSF, acted negligently in commencingsurgery on Cara Leigh without reviewing a laboratory analysis of her blood. Searcy alleged that as adirect and proximate cause of Dr. Howards’ and Dr. Lynch’s negligence, Cara Leigh died. Dr. Howardsand 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 motionfor 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 physicians employed by HSF. Morris alleged that Dr.Wenger, Dr. Head, and Dr. Ferguson negligently failed to deliver Morris before he suffered irreversiblebrain damage in utero. Morris alleged that as a direct result of their negligence, he suffers from cerebralpalsy, 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 charitableimmunity.

Judge Edward L. Hogshire ordered that the special pleas in Searcy’s and Morris’s cases be heard at aconsolidated hearing.3 Judge Hogshire held that HSF does not qualify for charitable immunity and deniedthe defendants’ special pleas in both cases. HSF appeals Judge Hogshire’s interlocutory order denying itsspecial pleas in Morris v. HSF and Howards v. Searcy to this Court pursuant to Code § 8.01-670.1 on fiveassignments of error: [Page 330]

1 .The trial court erred by extending the application of Va. Code § 8.0 l-38 to support its decisionto deny HSF charitable immunity.

2. The trial court improperly created and applied a beneficiary focused "balancing test" whichdoes not apply 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 analysisof 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 HamptonRoads, Inc., 270 Va. 550, 621 S.E.2d 70 (2005)] and, as a result, finding that HSF did notoperate consistent with its acknowledged charitable purposes.

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

2. MacArthur v. University of VirginiaHealth Services Foundation

Crystal Ann MacArthur ("MacArthur"), by her next friend Deborah Ann York, filed a motion forjudgment against HSF in the Circuit Court of the City of Charlottesville. MacArthur alleged thatphysicians 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 sufferedpermanent vision loss. Additionally, MacArthur alleged that HSF was vicariously liable for the individualphysicians’ negligence. HSF filed a special plea of charitable immunity. Judge Randy I. Bellows held thatHSF 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 Courtpursuant to Code § 8.01-670 on one assignment of error: "The trial court erroneously sustained thefoundation’s plea of charitable immunity and dismissed this action." [Page 331]

lI. Analysis

A. Code § 8.01-38

[1 ] "The doctrine of charitable immunity ’is firmly embedded in the law of this Commonwealth andhas 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 previousdiscussions of charitable immunity have grounded the doctrine in part in the "public policy that theresources of charitable institutions are better used to further the institution’s charitable purposes, than topay 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 tocharitable institutions and so that "that much of the burden [borne by those gifts will not be] again castupon the public." Hill v. Leigh Mem’l Hosp., Inc., 204 Va. 501,507, 132 S.E.2d 411,415 (1963).

[2-4] The doctrine of charitable immunity in Virginia is limited. A charitable institution is immunefrom liability to beneficiaries for acts of ordinary negligence by its servants or agents, but may be liablefor ordinary negligence in the selection and retention of its servants or agents. Bailey v. Lancaster RuritanRec. Ctr., Inc., 256 Va. 221,224, 504 S.E.2d 621,622 (1998). Charitable immunity applies only to claimsof negligence asserted by those who accept the charitable institution’s benefits. A charitable institution isnot 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 notimmune for acts of gross negligence or willful or wanton negligence, as "such conduct can never becharacterized 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).

[5-6] In addition to the judicial limitations on charitable immunity, the General Assembly has limitedcharitable immunity in certain instances. One such limitation is Code § 8.01-38, which denies charitableimmunity to most hospitals:

Hospital as referred to in this section shall include any institution within the definition ofhospital in § 32.1-123. [Page 332]

No hospital, as defined in this section, shall be immune from liability for negligence or anyother tort on the ground that it is a charitable institution unless (i) such hospital rendersexclusively charitable medical services for which service no bill for service is rdndered to, norany charge is ever made to the patient or (ii) the party alleging such negligence or other tort wasaccepted as a patient by such institution under an express written agreement executed by thehospital and delivered at the time of admission to the patient or the person admitting such patientproviding that all medical services furnished such patient are to be supplied on a charitable basiswithout 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 theprovision 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 ordesignation 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.

[7-8] Whether HSF is a hospital within the meaning of Code §§ 8.01-38 and 32.1-123 is a mixedquestion 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, 41 t (2006). Code § 8.01-38 is in derogation of thecommon law of charitable immunity and must be "strictly construed and not.., enlarged in [its]operation by construction beyond [its] express terms." Schwartz v. Brownlee, 253 Va. 159, 166, 482S.E.2d 827, 831 (1997).

[9] HSF does not fall under Code §§ 8.01-38 and 32.1-123. Code § 32.1-123 includes in the definitionof "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 currentlylicensed to operate as a hospital. From its inception, HSF has never applied for or held a license to operateas a hospital or been subject to any type of hospital accreditation. [Page 333]

Because HSF does not come within the definition of"hospital" in Code § 32.1-123, it does not fallwithin the scope of Code § 8.01-38’s denial of charitable immunity to hospitals. The Morris and Howardsappellants argue that the trial court erroneously extended the application of Code § 8.01"38 to denycharitable immunity to HSF. The trial court noted that

[a] lthough the statute does not include medical foundations when defining hospitals, it clearlyexpresses 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 thatengage in the same activities and hire the same physicians as hospitals.

This comment by the trial court does not extend the application of Code § 8.01-3 8 to medical foundations,but only noted the legislative intent behind the statute as further support for his application of the Olafactors to HSF.

B. The Ola Test

I10-13] Whether HSF is eligible for common law charitable immunity from tort liability is a mixedquestion of law and fact that is reviewed de novo. This Court recently articulated the test for charitableimmunity 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 twodistinct elements. The absence of either element makes the bar of charitable immunityinapplicable. First, the entity must show it is organized with a recognized charit.able purpose andthat it operates in fact in accord with that purpose. In conducting this inquiry, Virginia courtsapply a two-part test, examining (1) whether the organization’s articles of incorporation have acharitable or eleemosynary purpose and (2) whether the organization is in fact operated consistentwith that purpose.

Second, assuming the entity has met the foregoing test, it must then establish that the tortclaimant was a beneficiary of the charitable institution at the time of the alleged injury. [Page334]

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

Id. at 557, 621 S.E.2d at 73 (internal citations omitted). We articulated ten factors that are indicative ofwhether a charitable organization operates in fact with a charitable purpose:

( I ) 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 charitablepurpose?

(6) Does the entity depend on contributions and donations for a substantial portion of itsexistence?

(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 suchservices?

(9) Does the entity have stockholders or others with an equity stake in its capital?

(l 0) Are the directors and officers of the entity compensated and if so, on what basis?

Id. at 557 n.1,621 S.E.2d at 73 n.1 (internal citations omitted). The factors are not exclusive, and no onefactor is determinative. Id. at 557, 621 S.E.2d at 73.4 [Page 335]

1. Presumption that HSF Operates With a Charitable Purpose

[14] HSF is entitled to a presumption that it operates as a charitable institution in accordance with thepurposes set out in its Articles of Incorporation. The HSF Articles of Incorporation state: "The purposesfor which the Foundation is formed are exclusively charitable, scientific and educational, as contemplatedby Section 501(c)(3) of the Internal Revenue Code of 1986, as amended." This is similar to the languagein the YMCA’s articles of incorporation that we found in Ola to create a rebuttable presumption that theYMCA was a charitable organization: "Article II(A) mandates that the YMCA ’shall be’operatedexclusively for one or more charitable, religious, educational and scientific purposes.’" Id. at 559, 621S.E.2d at 74. The HSF Articles of Incorporation established the rebuttable presumption that it is acharitable organization. The plaintiffs in the respective cases then had the burden of rebutting thepresumption, ld. at 561, 621 S.E.2d at 75.

2. Rebuttal of Presumption

[ 15-16] Though entitled to the presumption, "[i]f the manner in which [HSF] actually conducts itsaffairs is not in accord with the charitable purpose, then the presumption may be rebutted and the bar ofcharitable immunity does not apply." Id at 557, 621 S.E.2d at 73. In Ola, we articulated ten factors thatare indicative of whether an organization operates in fact with a charitable purpose. The factors "are notexclusive and the presence or absence of any particular factor is not determinative." Id. The Morris andtIowards appellants argue in assignment of error 4 that the trial court misapplied the Ola factors to findthat 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 operatein 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; [Page336] (c) HSF’s incentive payment structure is functionally a profit-based bonus system, much like afor-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 primaryreason for the creation of HSF was to improve the billing system that was used to collect fees for theclinical services of the physicians employed by the Medical School. The billing system used at the timewas inadequate, such that not enough money was being collected and not enough revenue was returned tothe Medical School. HSF’s primary goal at inception was to find, set up, and operate a new billing systemto collect more of the receivables generated by providing patient care.

The record reflects that the HSF Billings and Collections Department employs 115 l~eople. Of thosepeople, five full-time employees (four collectors and one clerical employee) are involved in the legalcollection unit. In addition, HSF contracts with an attorney that represents HSF if it goes to trial forcollections purposes.

Once a week, a representative from the legal collection unit goes to the Charlottesville GeneralDistrict Court to file warrants in debt. From 2001 to 2005, HSF filed 16,158 warrants in debt and obtained5,885 judgments. In those years, HSF sought $124,108,445 and collected $7,009,718 through theseefforts. HSF expended an estimated 45,760 employment hours in "efforts to obtain legal collection ofpayment[s] on behalf of HSF" between 2001 and 2005.

[17] HSF was created to increase the amount of revenue received by the Medical Center andaggressively pursues legal collections. The magnitude of these practices suggests that HSF operates morelike 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 forservices provided to the Medical Center, and "other miscellaneous revenue" was $216,780,000, withadditional income from investments and gains from sales of capital assets of $9,118,000. HSF’s financialstatements show foregone collections of approximately $22.5 million in 2005 as a result, of providingmedical care to indigent patients. Haws testified [Page 337] that this figure reflects the amount that wouldhave been billed if collection efforts had not been waived for indigency. However, Haws testified thatHSF usually collects only about thirty-five to thirty-eight percent of the amount billed from insurancecompanies and paying patients. Therefore, by treating medically indigent patients in 2005, HSF actuallyfailed to receive approximately $7-8 million in collections.

[ 18] Moreover, the Commonwealth reimburses the University up to the level of the costs of treatingindigent patients. In 2005, the Commonwealth reimbursed the University $5.5 million, which wastransferred to the faculty (the physicians employed by HSF) as compensation. Taking into account theCommonwealth’s reimbursement, Haws testified that HSF’s actual shortfall in 2005 was only about $1.5million as a result of providing medical care to indigent patients. The ratio of this shortfall to HSF’s totalrevenue and other income of $225,898,000 in 2005 is only about 0.66%. The minimal cost of HSF’scharity work as compared to its income illustrates how small a portion of HSF’s ~vork is charitable.

(c) Physician Incentive Payments

The Morris and Howards appellants argue in assignment of error 3 that the trial court erred byfocusing on physician compensation, which is not a factor under Ola. The trial court in these cases wasconcerned with the manner in which HSF’s surplus is distributed. The trial court found that the incentivepayment 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’smethod of revenue distribution, not the amount, was the subject of the trial court’s analysis. This analysisis 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 transferredto 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 physiciansalaries and benefits. A department may then pay out incentive payments to the physicians who work forthe department. [Page 338]

HSF spends an average of $12 to 17 million a year in incentive payments. When the’ incentivepayments are added to the fixed compensation paid to the physicians, the physicians are compensated onaverage at about the forty-fifth to fifty-fifth percentile of the AAMC survey of salaries for physiciansemployed in academic medical centers. We recognize that this level of payment is necessary to recruitand retain talented physicians. The Medical Center is a world-class medical facility, in large part becauseof the high quality of the physicians employed by HSF. However, what is important to this analysis is notthe reason the physicians are paid at a certain level or whether it is necessary to recruit and retainphysicians, but how HSF uses its substantial revenue, including its surplus. See Ola, 270 Va. at 562, 621S.E.2d at 76.

[19] HSF’s incentive payment structure includes a distribution of surplus revenue in a manner moreconsistent with a successful commercial business than a charitable organization. The revenue isdistributed by HSF to the Medical Center departments in accordance with how much revenue thosedepartments 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 incentivepayments as determined by the chair of the department and the Dean of the Medical School. Surgicaldepartments (plastic surgery, cardiovascular surgery, general surgery, and neurological surgery) tend togenerate more revenue than other departments, such as pediatrics or psychiatry, because they performprocedures that are highly compensated. The surgical departments receive more revenue from HSF, andthe physicians who work for those departments tend to receive the biggest incentive payments. Forexample, 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 Schodl, between$430,000 and $600,000 a year from 2002 to 2005. In comparison, the Chair of the Department of InternalMedicine, who also served on the HSF Board of Directors, received incentive payments between $10,000and $15,000 a year from 2003 to 2005.

The HSF incentive payment structure is functionally a profit-based bonus system. The departmentsthat generate the most revenue receive the most money from HSF, and those physicians who are the mostfinancially productive in their departments generally receive the [Page 339] biggest incentive payments.In this respect, HSF follows the model of a profitable commercial business, not a charitable institution.

(d) No Charitable Gifts

[20] HSF receives no charitable contributions or donatiot~s. In fact, under its affiliation agreementwith 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 withoutimportance. 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 publicconcern. When a portion of the responsibility therefor is borne by the gifts of thephilanthropic-minded, so much of the burden is removed from the public. If a portion of thosegifts is diverted to the payment of tort claims, without restriction, the spirit and intent of the giftsare, 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 inthe present cases, no philanthropic-minded intentions will be nullified, because no gifts are received.

[21] Whether or not an organization accepts charitable gifts is not dispositive of whether thatorganization is entitled to charitable immunity. We recognize that there are some charitable organizationsthat do not receive or accept donations, particularly if they are previously endowed from a philanthropicgift. 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 charitabledonations .... [The hospital’s] financial and organizational structure [meeting only six percent of itsfinancial obligations by donations] do not negate its overriding charitable purpose."). These organizationsmay still be entitled to charitable immunity for other reasons. See, e.g., Auerbach v. Jersey Wahoos SwimClub, 846 A.2d 646, 650 (N.J. Super. Ct. App. Div. 2004) (finding that swim club’s lack of funding fromcontributions, gifts, grants, and donations was irrelevant under N.J. Charitable Immunity Act because clubwas organized for exclusively [Page 340] educational purposes). HSF, however, is clearly not dependenton philanthropic gifts, nor is it in a position of need.

III. Conclusion

[22] When the previously discussed four factors are considered in the context of the Ola factors, it isclear that the manner in which HSF actually conducts its affairs is not in accord with the charitablepurpose stated in its Articles of Incorporation. HSF operates like a profitable commercial business withextensive revenue and assets. That portion of HSF’s services providing quality medical care to medicallyindigent patients is commendable. However, when an organization is operated "in a manner calculated toproduce 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 liabilityunder the doctrine of charitable immunity.

Accordingly, the orders of the trial court denying the special plea of charitable immunity in Universityof Virginia HeaRh Services Foundation v. Morris and Howards v. Searcy are affirmed, and those casesare remanded for further proceedings consistent with this opinion. For the same reasons,’ the judgment ofthe trial court in MacArthur v. University of Virginia Health Services Foundation is reversed, and the caseis 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.

FOOTNOTES

~ 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 isnot fixed, which we refer to in this opinion as "incentive payments."

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.

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 "It]he closing inquiries of Ola probe the charitableness ofan organization by asking whether it primarily benefits those who run it or those it serves." In doing so, the trial court did notcreate or apply a beneficiary-focused balancing test, but summarized the Ola factors it had previously discussed, finding that thestructure of HSF most benefits those with a financial stake in HSF: the physicians employed by HSF.