Hospitals, takings and reasonable returns


Earlier this month (August 5), the First Circuit issued a decision on one of my favorite topics, regulatory takings, in a Maine case, Franklin Memorial Hospital v. Harvey, 08-2550.

Maine's "free care" laws require hospitals to provide free care for poor Maine residents.  There is a some relief provided if the hospital can show that its "economic viability … would be jeopardized by compliance."  A hospital sued, saying this was a taking. 

The Court of Appeals went through the drill of first rejecting an argument that the law effected a physical per se taking, because no one was forcing the owner to use its property as a hospital.  This is the same reasoning applied by the Supreme Court in finding no per se takings with rent control.  There was also no Lucas per se taking because the hospital didn't allege that all economically beneficial uses of its property had been eliminated.  This leaves the ad hoc, three-factor Penn Central test (1. economic impact; 2. reasonable investment backed expectations and 3. character of the action).

Re economic impact, the court noted that while the statutory "jeopardize economic viability" off-ramp didn't preclude a taking finding, it showed that the case "was not at the end of the spectrum." 

Re investment-backed expectations, the court noted, first, that just because a property owner is not-for-profit, that doesn't mean there is a categorial exclusion from this prong, since Maine law doesn't forbid non-profits from earning a return on their investments; the law merely restricts how they may dispose of any profits they earn.  The court then acknowledged the old "heavily regulated industry" defense all defendants always raise in regulatory takings cases, but didn't say how much weight it was giving that factor.

The third prong, character of the regulation, was what the court found decisive, because, under Penn Central, a taking "may more readily be found when interference with property can be characterized as a physical invasion by the government than when interference arises from some public program adjusting the benefits and burdens of economic life to promote the common good."  438 U.S. at 124.  The Maine law left "the core rights of property ownership intact" – in other words, although the Court didn't put it this way, the free care laws look a lot more like a tax than a seizure, so it's not a taking.

A few observations.

First, the "common good" quote from Penn Central, if found to be the key in isolation is disturbingly broad.  An equally squishy counterweight is the argument that the takings clause applies when the burden being imposed – "for the common good" - is something we all should bear together, and not dump on just the property owner.  Viewed in this light, why should hospitals have to bear the cost of taking care of the indigent and not all of us collectively? 

Also, if you trace the historical origin of this prong of the test (a long time ago, I wrote a law review article that did this), this "character" element was most likely intended to examine whether the regulation is stopping a noxious use (no taking) or appropriating a benefit (taking).  Using that measure, the character of the regulation here would weigh in favor of a taking finding, not the opposite.   

Still, to the extent the court wasn't stopping at the squishy Penn Central quote but looking at the character of the regulation in terms of whether it looked like a tax or a seizure, that gives some limitation to the "common good" language.  While the tax-like character isn't necessarily non-taking for the reasons noted above (why should the owner be the only one taxed?), the lack of similarity to a seizure does seem like a relevant point.  The just compensation clause is a property-based protection, so completely aside from economic impact, the degree to which your voluntary use of property is curtailed  — the degree of interference — seems a key point, whatever the economic impact of those restrictions.  To put it in takings parlance, if you still have a lot of sticks in your bundle of property rights – you can sell the property, etc. – then it's less likely to be deemed a taking.  Whenever you talk about a monetary cost or required service, it's unlikely that there's a lot of  interference in your bundle.  

But here is my point to ponder.  When a plaintiff asserts a takings claim complaining about a regulation that undercuts its ability to make a profit, at least in the utility area, the Supreme Court applies a confiscatory rate test.  The bottom line ruling in this hopsital case is that there is no taking as a matter of law for having to serve as long as "economic viability" is not "jeopardized."  In the utility context, however, the confiscatory rate test is not so low – not "jeopardizing economic viability," but rather elimination of a "reasonable return" on your investment (or opportunity to earn a reasonable return).  It may be a nuance, and hardly expressed in practice, but at least in theory, takings law in the utility context requires an opportunity to earn a reasonable return, not just to survive.

Why should the test for hospitals be lower?  One would think the opposite, that the utility threshold would allow for a lower economic impact test, not higher, because utilities enter a regulatory bargain – in return for devoting property to public service, they get a guaranteed opportunity of a reasonable return, usually in a monopoly setting.  No one does that for hospitals – there's no counterweight guarantee of profit and monopoly – you compete in the market.  Why should the test be lower, then, for hospitals than for monopoly utilities?

You could argue, I suppose, that utility infrastructure is non-transferable – you build a nuclear plant and the only way you make a profit with that property is as a nuclear plant.  Some hospital property is  specialized, too, but if push came to shove, you can take a hospital and convert it to another commercial use. 

But that explanation wouldn't cover the rent control cases – again, there, the test is also reasonable return, and presumably that type of property is convertible.

I have no idea if the plaintiff in Franklin talked about the reasonable return cases.  The court certainly didn't discuss this line of takings law.  Reasonable return cases are case specific and so as-applied, while this looks like it was a facial case.  Still, mightn't there be a facial argument, not that this particular hospital's revenues fall below a reasonable return because of the individual application of the law on it, but that a law that doesn't respect the reasonable return level of profit is on its face unconstitutional? 

In any event, given that this does seem to be a facial case, I don't think that Franklin Hospital would be precluded from making an as-applied claim in the future – arguing that whatever the haircut it has to take in a given year due to the law drives its earnings below a reasonable return, and that, to be constitutional, the "jeopardize economic viability" test has to be measured at least using a reasonable return on investment standard.     

Oh, I could talk about takings law forever, because it has so many complicated and often counterintuitive twists.  You have to love a doctrine where, if you reduce the value of someone's property from $100 to $1 but do it through regulation, it may not be a taking, but if you are deemed to invade the property (by e.g. requiring a cable box on an appartment roof) that actually enhances the property's value, it is a taking.  In order to understand the weird and wonderful world of regulatory takings law, you need to know its historical evolution — but that doesn't make the current results any simpler or more rational.