Nonprofit health care entities are operating today in an environment of uncertainty and unpredictable change. Significant disruption is occurring on many fronts, including the uncertainty surrounding federal legislation, regulatory changes in federal health coverage and payment rules, requirements for adjusting to innovative payment models, technological change and cybersecurity risks, and a variety of new compliance obligations.
Any of these issues can substantially alter an entity’s overall strategy and operational needs and, in turn, create challenges and ambiguity for the nonprofit’s board.
As the body charged with overseeing the entity, the board’s responsibilities may be unclear as these market shifts generate novel legal and strategic considerations, new opportunities and unparalleled challenges. Moreover, since nonprofit boards are often run by part-time volunteers, the boards may be faced with multiple potential conflicts of interest.
Although these issues are difficult to manage even during times of stability, they may seem almost impossible for a board to navigate during times of significant change and uncertainty. In such times, a nonprofit board may be successful only if it remains focused on the proper exercise of its fiduciary duties to guide its decision-making.
Duty of care
Trustees are responsible for managing the operations of the entity using reasonable diligence and due care. This does not mean that trustees must be familiar with every aspect of the entity’s operations. Instead, trustees must act as an “ordinarily prudent person” as they oversee the organization.
In practice, this means trustees should discharge their oversight responsibilities by regularly attending meetings, carefully reviewing provided materials and asking questions when necessary. In a period of uncertainty and change, it is even more important for trustees to make sure that they understand the legal and business issues that may affect the entity’s operations and to proactively ask questions when they do not.
During times of uncertainty and change, the issues become murky, which could cause some trustees to pull back. But this is the time for trustees to lean in and focus more on understanding the myriad and often conflicting issues that are affecting the decisions they make. In this regard, trustees may rely upon employees and outside advisers to assist them. Engaging experts is clearly permitted; it allows the board to rely on expertise that its trustees may not have and is an appropriate way for the board to exercise its duty of care. The board, however, is responsible for exercising prudence in choosing advisers, who should be well-suited to understanding the implications of changes and uncertainty in the market as they relate to the entity.
For example, a provider that participates in an Accountable Care Organization or other value-based payment model should obtain guidance from lawyers, consultants or others who may advise on implications of annual changes to programmatic rules or modifications to applicable agreements with private payers. Similarly, the board of a hospital with significant Medicare and Medicaid exposure would be well-served to rely upon staff or outside counsel with appropriate experience regarding compliance with governmental-payer rules.
The board also must exercise prudence in acting on this advice. For example, if an adviser determines that a federal health care overpayment may exist (and the board is responsible for authorizing repayments), the board may be required to consider making such a refund.
Understanding the often-conflicting legal and business implications for the organization related to making such a refund is crucial to making the right decision. Without appropriate advice, the board may focus on one set of issues without knowing or understanding competing issues that may enter into the picture. For example, the board of a hospital that is struggling financially may find it difficult to authorize a repayment to the government when one is legally required. Well-chosen advisers can help the board focus on the issues that matter to support the board’s decision-making process.
Finally, documentation is key to demonstrating the board’s compliance with the duty of care. Complete records of meeting minutes, resolutions, and other official records of the board’s deliberations (and the documents and advice that the board considered when deliberating) will help to demonstrate that trustees took their duties seriously and exercised prudence in guiding their decisions.
Duty of loyalty
Trustees also have a duty of loyalty to the entity, which means they must place the good of the entity over other considerations. This duty involves the board’s resolution of any actual or potential conflicts of interest and can become complex if changes in the health care market create competing interests for trustees.
Note that such competing interests are not inherently problematic or suspect. In many cases, a nonprofit entity will seek out trustees precisely because of their other expertise in the health care market. It is therefore predictable that some trustees may have personal or financial interests that may cross over with the mission of the nonprofit entity. Further, as organizations grapple with the changes in the health care marketplace, alignment of interests may develop among entities that once were competitors, and new competitive relationships may emerge.
Therefore, appropriately managing potential conflicts of interest may require more scrutiny in times of change and uncertainty than in times of stability. Trustees should be keenly aware of their obligation to disclose any potential conflicts of interest as they arise, and not just in connection with completing an annual disclosure.
For example, a hospital may expand services into new service lines via a joint venture with a physician practice. The trustees of the joint venture are appointed by the owner of the joint venture, such that each trustee may have dual loyalties to the joint venture and to the hospital-owner. Further, the interests of the joint venture entity and the hospital-owner may diverge over time, for example, as new, innovative payment models emerge or reimbursement changes. The duty of loyalty generally would require the hospital representatives on the joint venture entity’s board to act as fiduciary to the joint venture’s interests, and this can create conflict at times with the interests of the hospital-owner.
Navigating these conflicts of interest requires foresight. Often the issues can be addressed in the joint venture’s governing documents or conflict of interest policy based on the requirements of state law.
Proper discharge of the duty of loyalty may become particularly complex in the wake of new payment reform models designed to improve coordination of care in different settings. For example, the Medicare Shared Savings Program requires that an ACO’s governing body allow the entities and individuals participating in the ACO to “meaningfully participate” in its governance. This may mean the ACO’s board is composed of representatives of providers that have incentives very different from those of the ACO (i.e., ensuring adequate reimbursement for providers versus achieving savings for the ACO as a whole).
The duty of loyalty also is implicated when the organization seeks to conduct business through arrangements with its trustees or the organizations they own. In most states, a board may approve or ratify a transaction with an interested trustee through a vote of the nonconflicted trustees. At the same time, when a trustee is a physician or other provider, interested trustee transactions may raise concerns under Stark Law, the Anti-Kickback Statute, or other fraud and abuse laws. The board should be sure it is aware of all the implications of approving any such interested transaction to properly discharge both the duty of loyalty and the duty of care.
Clearly, in times of uncertainty and change, it is often confusing for trustees to separate different, potentially conflicting duties. As a result, it is important for the entity itself to develop a clear process for resolving conflicts. In general, the operating agreement or bylaws (as applicable) or conflict of interest policy of the nonprofit entity should identify a process for identifying, disclosing and resolving conflicts of interest, and each trustee should be required to follow the process.
Duty of obedience
Nonprofit trustees also have a special responsibility to act in furtherance of the mission of the entity they serve. Nonprofit charters and documents such as grants or pledges often state specific nonprofit purposes that the entity is charged to fulfill.
Obedience to a nonprofit mission is particularly important for tax-exempt nonprofits. Because preservation of the entity’s exemption is a key business consideration, trustees have additional responsibilities to ensure that they are not jeopardizing the entity’s tax-exempt status under Internal Revenue Service rules. This is a particularly significant issue in times of change and uncertainty. Trustees are often called on to approve innovative arrangements that may be new to the board. Protecting the mission of the organization and its tax-exempt status becomes even murkier as the board ponders arrangements or transactions involving for-profit entities.
Trustees must always step back and consider whether the activities of the nonprofit entity will remain consistent with the stated mission of the organization and whether tax-exempt status is protected. This can involve evaluating a number of factors, including the function of any new business, the size and structure of any distributions, and whether any compensation to be paid by the entity is reasonable and of fair-market value. The IRS has developed general guidance to assist tax-exempt entities in navigating this process.
Trustees can improve their chances of successfully navigating these unsettled times for the health care field by going back to basics and maintaining focus on their core fiduciary responsibilities. In particular, they should understand and seek to preserve the organization’s mission described in its charter or other governing documents, and take particular care to focus on the duties of care, loyalty and obedience.
By systematically taking the steps that each of these duties requires, the board can be confident that its decision-making will be protected and will help the organization navigate through the times of uncertainty and change to a place that preserves the organization’s mission.
Janice A. Anderson (JAnderson@Polsinelli.com) is a partner with Polsinelli in Chicago. Neal D. Shah (NShah@Polsinelli.com) is an associate at Polsinelli in Chicago.