Physicians
Physicians on the Board: Competitive Conflicts of Interest
By Linda L. LeCraw and Daniel T. Roble
When a corporation's directors have ties to competing organizations in the same industry, those directors could have divided loyalties. As courts, legislators and regulators heighten their scrutiny of corporate responsibility, boards find themselves increasingly aware of the need to ensure compliance with applicable laws and standards. One 400-bed rural hospital that grappled with this issue recently devised a procedure to address such situations that may prove useful to other institutions. The procedure has been used twice.
At "Community Hospital," a physician trustee on the hospital's medical staff had an interest in a specialty clinic that competes with the hospital, while another physician with a similar ownership interest was about to begin serving on the board as a representative of the medical staff. The board's bylaws require that it elect three members of the medical staff. But the hospital's bylaws do not explicitly preclude hospital trustees from having competitive conflicts of interest with the hospital through affiliations with hospital competitors, and the board was wrestling with how to best handle the situation.
This was the first time the board confronted this dilemma, and it had good reasons for concern. Trustees of a not-for-profit corporation have a fiduciary duty to act in the best interests of the corporation, and competitive conflicts of interest can lead to divided loyalties that may interfere with fulfillment of that duty. Trustees who violate their fiduciary duties not only place themselves at risk for personal liability but also their chair and fellow trustees if they do not provide adequate oversight of the conflicted trustees. Moreover, due to Community's status as a not-for-profit, charitable corporation, the board was likely to face intense scrutiny by the state attorney general and other federal and state agencies protecting not-for-profit corporate assets relative to those board appointments.
For these reasons, the Community board convened a special committee comprising an equal number of trustees and physicians with each group represented by their own legal counsel to explore the hospital's alternatives for addressing situations in which board members have divided loyalties. The special committee issued a report to the full board assessing competitive board conflicts and recommending a procedure for addressing them.
The report explained that each trustee has a fiduciary duty to refrain from engaging in personal activities that would injure the hospital, and that competition from a physician trustee to the detriment of the hospital contravenes this duty. It recommended that the board establish an ad hoc governance competitive conflict committee and integrate it into its conflict-of-interest assessment process.
The procedure would dovetail with the hospital's current practice of requiring each trustee to sign an annual competitive conflict-of-interest questionnaire. Both the hospital's internal legal counsel and its compliance officer review the completed questionnaires and refer any potential problems to the board's Audit and Compliance Committee.
The proposed procedure would augment these practices--i.e., if the Audit and Compliance Committee perceives a problem, the matter would then be referred to the board chair, who would decide whether to call upon the ad hoc governance competitive conflict committee (for matters involving physician trustees) or the board's governance committee (for matters involving nonphysician trustees) for an assessment.
The report recommended that the appropriate committee (ad hoc or governance) collect the facts by reviewing the relevant documents and interviewing the involved parties. Following these steps, the committee would apply the facts to a set of criteria set forth in the report in order to determine whether a situation of divided loyalty existed and whether such divided loyalty would adversely affect the trustee's ability to fulfill his or her duties to the hospital. The report identified the following 15 elements for the committee's consideration, but emphasized that the criteria were not intended to be exclusive, and that some criteria may be more important than others in a given situation:
1. Ancillary (e.g., imaging, laboratory or other diagnostic) testing--that is, a physician trustee performing tests or procedures that could have been performed by the hospital
2. Market power--i.e., the power of a trustee, or an entity of which the trustee is a member, to influence or control the relevant business in the hospital's geographic market
3. Financial magnitude--i.e., the percentage of hospital net revenue and contribution margin (the amount by which a department exceeds its own direct costs and contributes to indirect costs and activities that have a negative margin) that the competition has diverted
4. Impact on the hospital's continuity of services, including any indirect impact on services
5. Impact on the hospital's ability to develop technologies, services or procedures, or to maintain an appropriate workforce
6. Impact on access and referral of patients for hospital services
7. Impact, or the appearance of impact, on other stakeholders
8. Impact on other physicians' practices and services rendered--so that the hospital can avoid appearing to favor a physician trustee over other medical staff members
9. Shared ownership arrangement--so that the hospital can avoid the appearance of favoring a physician trustee through a joint venture that may compete with other medical staff members
10. Appearance of, or potential for, anticompetitive behavior between the hospital and a trustee
11. Aggressive marketing
12. Leadership roles at competing institutions or entities
13. Unwillingness to recuse oneself when the board is making decisions about a relationship with another institution or entity that may have an adverse impact on the hospital.
14. Board diversity--whether the physician has unique skills or other attributes to bring to the board (which might justify the risks)
15. Other factors that the board may determine to be relevant.
Based on its assessment of these 15 criteria for determining competitive conflict, the committee recommended that the full board reach one of the following conclusions:
1. The circumstances do not present a problem.
2. The board chair should recuse the conflicted trustee from the decision-making process on issues involving divided loyalty, although the board chair may ask that trustee to participate in the discussion of such issues. (The trustee would not, however, be able to vote or count toward a quorum.) If the trustee disagrees with the board chair's decision, he or she could appeal the decision to the full board.
3. The trustee should be required to sign an agreement providing that:
a.) The board chair may withhold information from the trustee relevant to the situation involving the divided loyalty, even though that information is otherwise available to the other board members.
b.) The trustee's opinion will not be requested in reaching a quorum or vote on those situations involving the divided loyalty.
c.) If matters relevant to the divided loyalty are to be discussed at board or committee meetings or retreats, the trustee will leave when requested by the board chair.
d.) The trustee will waive any rights of a trustee under state law with respect to access to books and records that are relevant to the divided loyalty.
e.) If the trustee does not agree with the contract as proposed by the board chair, the full board will consider and determine its final form.
4. The trustee should be dismissed from the hospital board.
Community Hospital adopted these recommendations. Their legal counsel believes that the report's recommendations present a creative approach to addressing competitive conflicts of interest between physician trustees and the hospital. As such situations garner increased attention in this time of heightened focus on corporate accountability, this case study serves as a useful illustration of how boards can effectively address divided loyalties among their physician trustees.
Linda L. LeCraw, J.D., is an associate of the law firm of Ropes & Gray, LLP, in Washington, D.C. She can be reached at (202) 508-4687. Daniel T. Roble, J.D., is a partner with Ropes & Gray, Boston. He can be reached at (617) 951-7476.
This article 1st appeared in the December 2099 issue of Trustee Magazine.
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