Healthcare Governance: A Guide for Effective Boards, Second Edition

HEALTHCARE

GOVERNANCE

American College of Healthcare Executives

Management Series Editorial Board

Trudy Land, FACHE, Chairman

Executive Healthcare Services

Mark C. Brown, FACHE

Lake City Medical Center-Mayo Health System

Christina R. Campos

Guadalupe County Hospital

Terence T. Cunningham III, FACHE

Shriners Hospitals for Children Los Angeles

David A. Disbrow, FACHE

University of Cincinnati

Scott A. Haraty, FACHE

North Chicago VA Medical Center

Natalie D. Lamberton

Paul A. Milton, FACHE

Ellis Hospital

Greg Napps, FACHE

Bon Secours St. Mary’s Hospital

James J. Sapienza, FACHE

MultiCare Health System

Arthur S. Shorr, FACHE

Arthur S. Shorr & Associates Inc.

Janet C. Sternberg, FACHE

Huron Medical Center

HEALTHCARE

GOVERNANCE

A Guide for Effective Boards

Errol L. Biggs

Your board, staff, or clients may also benefit from this book’s insight. For more information on quantity discounts, contact the Health Administration Press Marketing Manager at (312) 424–9470.

This publication is intended to provide accurate and authoritative information in regard to the subject matter covered. It is sold, or otherwise provided, with the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought.

The statements and opinions contained in this book are strictly those of the authors and do not represent the official positions of the American College of Healthcare Executives or the Foundation of the American College of Healthcare Executives.

Copyright © 2011 by the Foundation of the American College of Healthcare Executives. Printed in the United States of America. All rights reserved. This book or parts thereof may not be reproduced in any form without written permission of the publisher.

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Library of Congress Cataloging-in-Publication Data

Biggs, Errol L.

Healthcare governance : a guide for effective boards / Errol L. Biggs.

p. cm.

ISBN 978-1-56793-419-9 (alk. paper)

ISBN 978-1-56793-451-9 (ebook)

1. Hospitals--United States--Administration. 2. Health services administration--United States. I. Title.

RA971.B574 2011

362.11068–dc23

2011013845

Acquisitions editor: Janet Davis; Project manager: Amy Carlton; Typesetting: Network Publishing Partners, Inc.

Cover illustration by Sean Kane. Copyright 2011 Sean Kane.

Found an error or a typo? We want to know! Please e-mail it to hap1@ache.org, and put Book Error in the subject line.

For photocopying and copyright information, please contact Copyright Clearance Center at www.copyright.com or at (978) 750–8400.

Health Administration Press

A division of the Foundation of the American

College of Healthcare Executives

One North Franklin Street, Suite 1700

Chicago, IL 60606–3529

(312) 424–2800

This book is dedicated to Alison Lee Biggs, truly a lovely and very smart lady, whose husband I still have the privilege to be.

Contents

Preface

Chapter One: Basic Responsibilities of a Board and Its Members

Main Responsibilities of the Governing Board

Strategic Planning

Basic Legal Duties

Committees

Responsibilities of Individual Board Members

Responsibilities of the Board Chair

Job Descriptions

Online Resources for Board Governance Information

Chapter Two: How to Operate Your Board

Optimum Board Size

Frequency of Board Meetings

Information Needed for Board Meetings

Executive Sessions

Selecting a Board Chair

Term Limits

Age Limits

Paying Directors

Structure of the Annual Retreat

Board Self-Assessment Process and Sample Assessment Tool

Dealing with a Disruptive or Inattentive Board Member

Chapter Three: How to Build Your Board

Selecting New Members

Recruiting for Diversity

Selecting the Right Physicians for the Board

Considering Individuals from Outside the Community for the Board

Effective Orientation for New Board Members

Chapter Four: How to Work with the CEO

Relationship with the Chief Executive Officer

Governance Versus Management

Expectations When Working with a CEO

CEO Succession Planning

Chapter Five: How to Ensure Quality Care

Monitoring Quality of Healthcare

Michael Pugh, president, Verisma Systems, Inc.

The Joint Commission

Cathy Barry-Ipema, chief communications officer, The Joint Commission

Driving Accountability for Improved Quality and Outcomes in Your Community: Business Coalitions on Health

Donna Marshall, executive director, Colorado Business Group on Health

Chapter Six: How to Provide Fiscal Oversight

Dennis Stillman, University of Washington, Seattle

Necessary Financial Information

Financial Oversight

Analyzing Financial Statements and Monitoring Financial Performance

Profitability Ratios

Conclusion

Chapter Seven: How to Work with the Community

Stakeholders

Kenneth Bopp, clinical professor, Health Management & Informatics Group, University of Missouri, Columbia

Health Status of the Community

Errol L. Biggs

Chapter Eight: The Board and Nonconventional Medicine

Sita Ananth, director of Knowledge Services, Samueli Institute

Complementary and Alternative Medicine

Glossary of Complementary and Alternative Medicine Terms

Epilogue

Appendix One: Sample Conflict of Interest Policy

Gregory Piche, Singularity Legal and Office of the Attorney General, State of Minnesota

Appendix Two: Sample Conflict of Interest Disclosure Statement

Gregory Piche, Singularity Legal and Office of the Attorney General, State of Minnesota

Appendix Three: Sample Board Member Performance Appraisal, Short Version

Appendix Four: Sample Board Member Performance Appraisal, Long Version

Appendix Five: Sample CEO Employment Contract

American College of Healthcare Executives

Appendix 6: CEO Separation Agreement

American College of Healthcare Executives

Appendix 7: Common Healthcare Abbreviations and Definitions

Iowa Hospital Association

About the Author

Preface

Being a hospital or health system board member has become more difficult during the last five years, and there appear to be even more challenges coming.

Some experts have suggested that many boards are little more than a collection of high-powered people engaged in low-level activities, rather than groups thinking and working strategically (Taylor, Chait, and Holland 1996). However, increasing numbers of boards are making concentrated efforts to function effectively and to adopt or adapt best practices from other, more successful boards.

In addition, changes in the law and other areas should cause many boards to examine how they are structured and how they conduct their business. Some of these changes include the following.

Healthcare Reform

On March 30, 2010, President Barack Obama signed H.R. 4872, the Health Care and Education Reconciliation Act of 2010, which modified the Patient Protection and Affordable Care Act (ACA), H.R. 3590. These laws provide the foundation for changes made by Congress to the current healthcare delivery, payment, and insurance systems. The legislation may have the most significant impact on the healthcare financing system since Medicare began in 1965. The law goes into effect in phases between 2010 and 2016 with full implementation in 2020. Hospital and health systems management and boards must fully understand the components of this new legal framework.

Some aspects of the legislation may be beneficial to hospitals and health systems, such as changes to insurance markets, malpractice reform, and funding to help with high volumes of preventable readmissions. From another angle, hospitals and health systems may well be adversely affected by scheduled payment cuts. The legislation also transforms tax-exempt status and pricing transparency. How these different aspects will balance in the long run remains to be seen.

The secretary of the U.S. Department of Health and Human Services will have the power to implement much of the legislation. For example, the secretary will develop a method for assessing hospital performance in quality improvement, relating it to reimbursement. As the phrase the secretary shall appears more than 1,000 times in the law, boards should follow the rulemaking process closely.

IRS Form 990

The Internal Revenue Service’s (IRS) redesigned Form 990 dramatically increases the number of questions dedicated to the corporate governance of tax-exempt hospitals and health systems. This increase reflects the IRS’s close scrutiny of corporate governance and the perspective that a well-governed organization is likely to be a tax-compliant organization.

The Form 990 governance emphasis contains 20 separate questions relating to the governing body and management, board policies, and disclosures.

Trustees should be aware of how many voting members on their organization’s board are considered independent. The definition of independent indicates a director or a director’s relative is not compensated by the organization or a related organization as an officer or employee; did not receive more than $10,000 a year as an independent contractor of the organization or a related organization; and did not receive a material financial benefit (more than $50,000) from the organization or a related organization. Conflicts of interest must be disclosed annually.

Other key issues include

Reviewing the organization’s Form 990 by the board or a specifically designated board committee

Explaining best practices policies, including a written whistleblower policy with protections against retaliation and a document retention and destruction policy

Justifying and structuring of salaries and perks for key employees

Sufficiency of current policy on conflict of interest

Examining the organization’s assessment and response to community needs

Boards could use the IRS Form 990 to their advantage as a management tool, conducting a yearly audit using the form as a guide.

American Competitiveness and Corporate Accountability Act of 2002

Commonly known as the Sarbanes-Oxley Act, this legislation mainly relates to publicly traded companies, but it also has some provisions with which several states are now asking nonprofit organizations to comply. The five main areas nonprofits should address include sections relating to

Audit committees being made up of independent members, including a financial expert

The audit committee’s relationship to external auditors

Establishment of an audit committee charter and code of ethics

A requirement for executive certification of financial statements

Establishment of certain internal controls

Rating Agencies

Rating agencies now ask questions of the governing board before rating a hospital’s bonds. Some areas of exploration have included

Whether the board has adopted certain sections of Sarbanes-Oxley

Whether the audit shows any material weaknesses

Whether audit adjustments go to the board for its review

How the management letter from the external auditors is used

Quality of Care

Quality, the most fundamental objective of all healthcare services, is now a public issue, no longer closely held solely by the professions. Its link to the cost of care has also moved to the forefront of the public’s attention. Managing to achieve optimal, cost-effective quality and safety will continue to be a dominant governance issue for many years.

Hospitalists

The rapid emergence of hospitalists is one example of a significant change in the organization of hospital practice, and it has implications for the financial and quality relationships between the hospital and individual physicians. This change will undoubtedly alter the role of the traditional medical staff, which is already declining and becoming more disorganized as physicians increasingly identify with medical groups and specialty associations. How the board relates to these developments while maintaining responsibility for quality and safety will be the issue.

Other Challenges for Boards

Development of accountable care organizations resulting from the ACA

Growing consumer demand, fueled by the Internet, for information and accountability

The effect of the baby boomer age wave on healthcare financing and delivery

The continued nursing shortage and a predicted physician shortage

The growth of complementary and alternative medicine

In these turbulent times, hospitals and health systems are fortunate to still have sincere, well-meaning individuals willing to take on the formidable task of being board members. It is important to provide support for the work of both new and seasoned members as they deal with new ideas or challenges to old ones.

Although I have worked with many boards of directors throughout my career in the healthcare industry, I am continually intrigued by boards of similar health organizations from similar communities, which vary so much in their efficiency and efficacy. Certainly, no individual agrees to serve on a board to be ineffective. However, many otherwise competent individuals have never received job descriptions or an effective orientation session, and they simply don’t know their roles and responsibilities as productive healthcare board members.

This book is designed to be used by both new and experienced board members. It focuses on the best practices of board structure and function and board members’ responsibilities. I developed this book during the several years I spent running hospitals and later attending eight to ten management-contract hospital board meetings a month. The work has been further advanced during my subsequent years serving on boards, working and interacting with boards, teaching graduate students about governance, consulting, and doing research about boards.

The book is structured to be perused in sections—allowing the reader to go to specific areas of interest or need—or it can be considered as a whole. My goal is to present information in a format that will be helpful regardless of the expertise of anyone using it.

Acknowledgments

I would like to thank some individuals who were very helpful in developing several areas of the book: Sita Ananth (director of Knowledge Services, Samueli Institute, Alexandria, Virginia); Alison K. Biggs, MSHA, RN; Kenneth Bopp (clinical professor and director, Health Management & Informatics Group, University of Missouri, Columbia); Donna Marshall (executive director, Colorado Business Group on Health, Denver); Gregory Piche (Singularity Legal and Office of the Attorney General, State of Minnesota); Michael Pugh (president, Verisma Systems, Inc., Pueblo, Colorado); Larry Tyler (president, Tyler & Company, Atlanta); Cathy Barry-Ipema (chief communications officer, The Joint Commission, Oakbrook Terrace, Illinois); Lee Seidel (professor of Health Administration, University of New Hampshire, Durham); Dennis Stillman (senior lecturer, University of Washington, Seattle); and Bruce Sullivan (retired partner, Ernst & Young, Nashville).

—Errol L. Biggs

Denver, Colorado

Reference

Taylor, B. E., R. P. Chait, and T. P. Holland. 1996. The New Work of the Nonprofit Board. Harvard Business Review 74 (5): 36–46.

C H A P T E R    O N E

Basic Responsibilities of a Board and Its Members

MAIN RESPONSIBILITIES OF THE GOVERNING BOARD

All boards, regardless of their organization’s focus, share the same traits:

Board membership is as high as one can get and still be in the organization. It is the ultimate authority.

Boards only have authority when they meet. Unless boards are in session in person, or have arranged to meet in a conference call, they don’t have authority to act. If the board’s bylaws allow, an executive committee may meet and act for the board, or the board can vote on issues by mail or email. It is important for the bylaws to detail what is considered a regular board meeting, what kind of special meetings may be called, how much advance notice is required, and any other parameters that must be met for a regular or special meeting to occur.

No one individual has authority to act for the board. A board member may be given authority by the board to complete a purchase or carry out a specific task, but only the board as a whole has the authority to take any action.

Boards are not like Congress or the courts. They need to speak with one voice. There should be much discussion, there may be disagreements, and opinions should be expressed. But, in the end, board members need to unite behind a majority decision.

Time is a precious commodity. Boards need to use their time efficiently because they don’t have much of it.

Although an ideal board functions as a team for the good of the organization, the very nature of a board may preclude the development of teamwork:

Directors are not full time. Most independent directors have full-time jobs elsewhere, and their primary focus rests with that job, not the board.

There is only periodic interaction. Board members meet together for relatively short periods of time, separated by weeks or months. This makes it difficult to build continuity or develop as a team.

Meeting time is limited. Boards have a limited amount of time to spend on board activities or on any one issue. Because they are not in the organization’s day-to-day information loop, board members may approach their work with limited knowledge or understanding of the nuances of particular issues.

Unclear authority relationships may exist. Unlike a hierarchical management structure, board members all have equal authority, adding to the ambiguity under which a board functions.

Lack of clarity may exist about management versus governance. Sometimes the distinctions between management’s role and the governing board’s role are not exactly clear, particularly to new board members. When the board gets involved in operations, it loses its governing effectiveness.

The board’s work is done in board and committee meetings, making it absolutely essential for those meetings to be effective and productive—teamwork at its best, regardless of the factors that seem designed to prevent it.

The Board and the Organization’s Mission, Vision, and Goals

While some may feel it is obvious the board runs the show, that kind of simplistic approach ignores reality. Without a knowledge of and attention to the basic components of a board’s reason for being, a board may inadvertently abdicate its responsibilities.

It is the board’s responsibility to map the hospital’s course through the establishment and periodic review of its mission, vision, and goals. As Lewis Carroll said, If you don’t know where you are going, any road will get you there. Without a clear understanding and agreement of what the organization wants to accomplish (its mission), how it wants to accomplish the mission (its goals), and where it wants to be in the future (its vision), a board can wander countless roads, never knowing when it has accomplished something of value or even what is valued. Strategic planning (discussed later in this chapter) is a function of the board that ties these three components together.

Once the mission, vision, and goals are established and a strategic plan is developed, the board will be able to reach its decisions. However, experience has shown that board members may not always be truly aware of the hospital’s mission.

The simple act of putting the mission statement at the top of the agenda for every board and committee meeting can save time and unnecessary discussion. If board members can readily see the mission statement, their course of action will be more obvious. Some agenda items may even be dispensed with quickly if it is obvious they are not part of the mission.

To focus the entire organization on the mission statement, it should also be printed clearly on the back of all business cards and at the top of agendas for any hospital-related meetings of the board, employees, medical staff, or volunteers.

The Board and Executive Management Performance

When dealing with the hospital’s staff, the board should concentrate on the only employee who reports directly to them—the chief executive officer (CEO). Although the chief operating officer, chief financial officer, chief nursing officer, medical director, and any vice presidents are important in making the organization a success, the board does not supervise or evaluate these individuals. Many boards have difficulty staying focused on the CEO, particularly in smaller communities where everyone tends to know each other. However, it is important for that focus to remain clear.

The board does not evaluate anyone but the CEO, does not hire anyone but the CEO,