Health-care providers generally encourage their patients to have regular checkups to spot potential problems before they develop into irreversible, or untreatable conditions. Periodic "legal checkups," or audits, which draw on preventive law techniques, can help corporations (such as hospitals, nursing homes, clinics, laboratories, physician groups, and therapists) anticipate, and guard against, potential legal problems, liabilities, and excessive costs.
Typically, an executive with responsibility for the management of his or her corporation's legal affairs will determine, hopefully, when the company has a legal problem, retain legal counsel, and turn the matter over to the professional. Executives, however, do not automatically recognize incipient legal problems.
A legal audit is a systematic procedure for determining potential legal problems before they arise, together with a standardized method of providing legal advice and assistance. In the first part of the process, an attorney will review basic corporate documents, practices, and procedures to discover potential problems. In the second part of the audit, the attorney provides effective legal advice to the corporation in an effort to correct any problems before they cause serious consequences.
The best time to schedule a legal checkup is during the period after the corporation's fiscal year end and the preparation of its annual financial statements. Management can then consider both legal and accounting issues in tandem with their professional advisors. In particular, if a corporation has recently expanded or changed its focus - for example, the establishment of a physician-hospital organization, or the addition of a new health care product for subscribers - an annual review session or legal consultation can identify areas of potential future litigation.
Preventive Medicine
Curative law represents the traditional method of legal practice. In this approach, a corporation must recognize a legal problem and retain an attorney to pursue a legal right or defend it against the exercise of a right claimed by someone else. An applicant for a nursing position may claim he or she was discriminated against in a hiring decision because of age. Preventive law, on the contrary, seeks to forecast future legal trouble, so that incipient problems do not develop into actual ones. For example, a review of the personnel records of a hospital might reveal that no nurse over the age of fifty had been hired in the last eight years. The purpose of the legal audit, therefore, is to determine the legal health of the company, and to present recommendations to avoid legal problems for the future.
Some attorneys will construct a matrix or graph for a corporation, in which they plot the client's particular concerns against types of legal risk. This approach can produce a chart that highlights the areas posing the greatest threat and deserving the most immediate attention. Other evaluation tools include audit questionnaires and computer programs.
An alternative approach concentrates on the sources of risk. such as the industry in which the corporation operates, the way in which a company fits into a loose association of affiliates or an integrated system, the size and frequency of transactions, and the type of assets owned by the company. The frequency of transactions conducted by a provider is often a better indicator of potential risk than its relative size. Providers with frequent transactions, such as health care institutions which focus on patient care, involve more people and present more occasions for legal complications.
To help keep companies healthy, a legal audit would begin with the basic, standard considerations regarding the appropriateness of the form used to conduct business, with both tax and nontax analysis, and its size, number of employees, and the nature of its business. The attorney would review basic corporate documents, such as the corporate charter, bylaws, minutes of meetings of the shareholders and the Board of Directors or Trustees, and the stock record book and ledger of all past transactions.
Next, the audit would focus on the operating documents which customarily concern third parties. Examples of operating agreements include loan documents, leases (do they violate any fraud and abuse safe harbors?), buy/sell agreements, and other agreements which address employment, trade (does the company properly protect its trade secrets and inventions?), secrecy and stock transfer rights.
Finally, the checkup would include a review of ongoing practices and procedures to ensure the corporation's compliance with all applicable laws, for example, hiring and firing practices (does the employment application ask illegal questions?); insurance coverage; OSHA standards; third-party reimbursement (are the utilization review plans and quality assurance programs properly and timely reviewed?); environmental (does the client comply with all of the constantly changing federal, state, and local laws?) and zoning issues; business license, franchise, and consumer protection laws (is a plan's subscriber provided with sufficient information to make an informed selection?); and pension, employment, and workers' compensation concerns.
Frequently, employment discrimination audits or employment practices audits reveal examples of personnel applications, handbooks and policies which put a company at risk of significant liability. Once disclosed, these potential problems can be corrected and the liability averted before they ever develop into serious grievances or complaints.
Client-Specific Audits
Depending upon the nature of a corporation's business, a lawyer may suggest client-specific audits. Hospitals and other health-care providers constantly address issues regarding the proper disposal of medical waste, management of infectious materials, and sterile condition of equipment and instrumentation. Safety and health audits, which ensure compliance with OSHA standards and company policies and identify problem areas, determine how individual work areas, operating rooms, laboratories, plant facilities, or departments manage safety. Providers should always include an experienced attorney in all their audit plans, however, to prevent the results of such a voluntary review from later becoming evidence against them. Counsel can help ensure the audit is subject to the attorney-client or work-product privilege. In fact, managers may even be subject to criminal charges such as aggravated battery and reckless conduct over their workers' safety.
Litigation audits can provide insights into an institution's record-keeping process and assist in the adoption of practices which, to the extent possible, maximize its ability to pursue, defend, and avoid lawsuits. Health-care providers may confront the full range of possible litigation, from medical malpractice, to breach of contract, wrongful employee termination, and antitrust. In an audit of the provider's litigation, the attorney will identify the sources of legal strengths as well as legal risks, and help institute a system that discourages improper conduct and the documentation that exacerbates the legal risks, and encourages the conduct and documentation that preserves the client's legal strengths.
An audit will help the attorney understand the nature of the client's business and the scope of its legal knowledge. In turn, the professional advisor will be in a better position to identify, and suggest ways to eliminate or moderate, potential sources of risk and liability. The attorney can focus on areas which might catch management off-guard, such as the antitrust laws. For example, has one provider tacitly agreed with a competitor on the fees they will charge? This type of action raises price-fixing concerns. Is an institution entering into a supply contract that allows the purchase of certain products only if it agrees to purchase other goods or services of questionable quality or value? Agreements of this type frequently involve illegal tying arrangements.
Although few institutions or other health care providers specifically seek closer or more frequent contact with their attorneys, periodic reviews in which lawyers practice preventive law, rather than primarily curative law after trouble has arisen, will produce real savings for the clients at the end of the year. Working with their attorneys, clients can target areas for legal risk and policy evaluation, while they maintain control over the scope, and cost, of the project. The more their attorneys understand the nature of their business and management's legal concerns, the better advice their counsel will be in a position to give them.