Nonprofit hospital boards have changed dramatically over the last 30 years. Decades ago, serving as the trustee or director of a nonprofit hospital was not terribly demanding. Now, however, hospitals are among the most intensively regulated industries in the nation, and their operations can be imperiled by a bewildering array of potential threats. Board service requires not only a major time commitment, but also ongoing vigilance to economic, legal, public relations, human resources and community relations challenges.
Over the last decade or so, more than 1,000 hospitals in the United States have either closed or undergone a change of ownership. Others have struggled with watershed challenges. For example, a hospital system in Ohio was socked with a $108 million billing fraud settlement with the government; a New York hospital was pushed to the brink of bankruptcy by $140 million in malpractice claims; and an academic medical center was threatened with the loss of its Medicare contract over a single patient care incident. Hundreds more hospitals will not be able to survive independently for five more years. This is not all bad; some hospitals can better serve their communities as part of larger systems. But board members should be able to decide if and when to merge — rather than having the choice forced on them by incipient disaster.
Regulators, meanwhile, require nonprofit hospital trustees to meet ever-higher standards for managing their business and assets. Legislatures have passed laws, attorneys general have adopted nonprofit codes of conduct, and courts have issued admonitory rulings. When these mandates require trustees to avoid conflicts of interest, no one should be surprised. But these initiatives have gone much further — they directly challenge even the good-faith decisions of boards.
For trustees in this stressed environment, here are 10 survival strategies.
1 Get up to speed right away. When you are first invited to join a board, ask to see the bylaws, the budget, the last few years’ financials, recent management letters from the hospital’s auditors, the compliance officer’s annual report, the quality committee’s report and a summary of pending litigation. Additionally, request an explanation of the hospital’s liability coverage for directors. The Charities Bureau of the New York State Office of the Attorney General recommends that prospective trustees review even more documents, but this is a starting point (more information).
2 Don’t become complacent. No matter how long you have served on the board, keep your ear to the ground for the sound of distant thunder. A hospital can go from successful to distressed in just a year or two. One well-known academic medical center went from success to losing $240 million and sold itself to a regional system in just four years. Trustees must remain alert to emerging red flags.
3 Define an achievable mission. One paradox of nonprofit hospital management is that most of the surplus is derived from just a handful of services (cardiovascular, oncology, orthopedics), yet the community service mission of the hospital requires it to provide many services (OB/GYN, pediatrics) that lose money year after year. As a result, balance in clinical services is essential. A hospital cannot survive without having a strategic plan to grow the margin-producing lines of business. But many hospitals have failed through hubris. Not every community hospital can run a major neurosciences or open-heart program. Plan for excellence, but don’t overcommit.
4 Be collegial, but independent. Most trustees got where they are by being successful, likable people. Yet their role on the board is not to be friends but independent fiduciaries. Some trustees may bring to the board a specific issue or cause about which they feel knowledgeable and passionate. Board members should not defer to that trustee simply to be nice; they need to question his or her thinking just as they would question a consultant. That said, trustees should be reasonably collegial. To function effectively, the board must be able to reach collective decisions. The key is balance between independence and collegiality.
5 Challenge management, but don’t micromanage. The board’s job is to set priorities, review management recommendations and demand accountability for performance. Management’s job is to call the board’s attention to important issues, elicit and execute on decisions, and manage day-to-day operations. But the line between setting priorities and actively managing programs can become blurred. Some boards and board chairs micromanage. This can be dangerous because it undermines morale, trust and the CEO’s authority. Board members should demand accountability from management, but let them manage.
6 Encourage people to deliver bad news. No one wants more problems. But if trustees or senior leaders penalize a staff member who delivers bad news about hospital performance, staff members will stop telling the board and C-suite what they need to know. The best boards do the opposite by encouraging leaders and staff to raise potential problems before they become incurable.
7 Build physician relations, but don’t be captive to them. A successful community hospital needs a loyal medical staff. Management should develop a medical staff strategic enhancement plan, which includes strengthening flagship programs and filling gaps in other specialties. But developing the medical staff is different from being “owned” by it; that is, permitting a contracted medical group to decide what the hospital can do in the community. Be deliberate about financial arrangements with physicians and make sure they are vetted by competent counsel.
8 Jump on crises. A surprise visit from the Joint Commission or the Office of Inspector General, the defection of a major physician group or the threatened loss of a major payer contract are all crises that merit immediate management and board attention. Also, be alert to situations in which the board should retain special counsel. If faced with a whistleblower fraud case, a government investigation or a potential merger or other strategic transaction, obtain advice from experts who deal frequently with these issues and can provide an independent perspective.
9 Assess strategic options on an ongoing basis. In a world of ever-present threats, strategic thinking needs to be constant, not occasional. The biggest threats may be ones we discount for their rarity. If hospital volume drops 3 percent per year for three years, trustees can’t say, “Well, it’s only 3 percent ... ”
If there is a once-in-a-lifetime opportunity to merge, acquire or form a joint venture, the board had better consider it carefully. Most hospital systems that survive the current wave of consolidations will be ones that have completed a strategic transaction, critical program expansion or physician accretion strategy. Simply minding the store may not be enough.
10 Be proud. Be competitive. Health care is a surprising field in that some of the most impressive organizations have developed outside the biggest cities, such as Mayo Clinic in Rochester, Minn.; Geisinger Health System in Danville, Pa.; and Marshfield (Wis.) Clinic. So be proud and ambitious about what your community hospital can accomplish. That’s how greatness evolves.
When you have digested all this, tell yourself that in becoming a nonprofit hospital board member, a role with lots of challenges, large time commitments and no pay, you have taken on a tough job, but a genuinely noble one.
Clifford Stromberg (clifford.stromberg@hoganlovells.com) is a partner with Hogan Lovells US LLP, Washington, D.C.
