In today's environment, hospitals and health systems no longer can afford inefficient or ineffective governance processes. Boards have fiduciary responsibilities to make policy, oversee management and create and guide implementation of sound strategy. Governance structures must be designed, evaluated and redesigned to make sure that they fulfill these duties. In this context, any ambiguities about responsibility and authority constitute a profound risk to organizational integrity.
Yet successful hospitals and systems are growing and requiring changes in their governance to accommodate the addition of new facilities. These systems often find themselves wanting to create a simpler governance structure, which requires that stakeholders trade perceived local autonomy for the benefits of a more integrated system and a less cumbersome decision-making process.
Meanwhile, smaller systems are reconsidering the popular wisdom that prompted a proliferation of boards to govern what are essentially relatively simple and straightforward organizations.
This article will explain the march to complex governance structures and then, through several instructive case studies, describe a path toward rigor and clarity.
Several decades ago, the vast majority of American hospitals were independent and freestanding, and either not-for-profit corporations governed by a single community board or owned by their communities and overseen by elected officials. Only hospitals owned by proprietary companies had both local governing bodies and a parent corporate board.
Since then, governance structures have grown more complicated for two primary reasons. First, for many years, even small hospitals were advised to become systems, which called for the development of separate corporations with separate hospital and system boards. The rationale was that separate corporations could limit liability, separate boards could focus on separate issues, and system structures could facilitate acquisitions or affiliations.
Community hospitals also began to acquire such local health services organizations as visiting nurse associations, ambulance companies, home health agencies and durable medical equipment suppliers. In the process of these acquisitions, they often would leave existing governance structures intact rather than absorb and manage the organizations as departments.
The second driver of governance complexity has been the steady growth of America's more successful health care delivery enterprises. Across the country, individual hospitals are merging and affiliating at an unprecedented and ever-increasing rate to enjoy economies of scale, enhance their borrowing capacity and achieve the benefits of an integrated system.
As local hospitals are acquired by or affiliated with a system, they typically remain separate corporations, each with its own board. The system exerts indirect control as the sole corporate member of the local corporation by exercising certain reserved powers that are important legally but cumbersome in practice. This preservation of separate corporate identities and the existence of a separate board for each hospital was workable only if the system was interested in operating as a holding company with near-complete autonomy of local units. In practice, however, the structure is simply incompatible with achievement of the true value offered by clinical and operational integration.
This trend toward operating models is played out in the case studies below. They illustrate how successful enterprises of different sizes have constrained and clarified the proliferation of governing bodies.
Sutter Health: Best for Patients
Sutter Health, Sacramento, Calif., is a nonprofit system that includes approximately 25 hospitals and multiple, affiliated physician organizations. As the sole corporate member of its affiliated hospitals and medical foundations, Sutter had a board at the system level and, until recently, a separate corporate board for many affiliated hospitals and medical foundations.
The Sutter Health board continues to exist, but the system recently has completed a legal and governance reorganization affecting five geographic regions. Within these regions, the subsidiary hospital corporations and boards have been reduced to five operating corporations and governing boards, each board with defined responsibility for hospitals within the specific region. In parallel, there is a separate corporation and governing board for the affiliated medical foundations in each region. The medical foundations contract with physician groups to provide professional services for patients for whom the medical foundation has agreed to provide care. Typically, the composition of the regional medical foundation board largely overlaps the composition of the regional hospital corporation board to facilitate alignment of interests within a region.
From Sutter's perspective, the original structure was cumbersome and a barrier to timely decision-making. The purpose of the reorganization was to create a more effective and accountable governance structure to help the system respond nimbly to market pressures and support Sutter's systemwide strategic goal of delivering quality, affordable health care to its patients.
The governance restructuring process at Sutter was built on a thoughtful analysis of the status quo, its history and its functional consequences. It required deep and thoughtful conversations among all stakeholders. In the end, pre-existing hospital and foundation board members saw enough value in consolidation that they voted themselves out of director positions in favor of a new, more streamlined structure. That structure was explicitly designed, in the service of patient care, to enhance cross-fertilization regionally and throughout the system. It will also facilitate future decision-making and strategy implementation—all in the service of Sutter's mission.
Franklin Memorial Hospital: Simplicity for Success
Seventy-bed Franklin Memorial Hospital is a central fixture in Farmington, Maine, a rural town of 8,200 people. And, like many other rural hospitals, its importance cannot be measured simply by bed count. It is the primary provider of inpatient services for a 3,000-square-mile catchment area and sees patients from an area of almost 8,000 miles.
Hospital CEO Rebecca Ryder credits her predecessor with guiding the growth of the hospital and its integration with multiple local provider organizations, using clarity and simplicity as guiding principles. "The secret of our success has to do with the time and energy that went into thinking through and defining the relationships of affiliate boards with that of the parent board," Ryder says. "Accountabilities are clear, and we went to great pains to communicate extensively, so that all of our organization's leaders understand the responsibilities and limits of their respective roles."
Entities that might have had quasi-independent status as subsidiaries, such as a large ambulance service and the employed physician group, have been folded into the management structure of the hospital, Ryder notes. The ambulance service is managed by the hospital's executive team, but leverages a strong advisory committee to ensure ongoing communication with the communities that it serves. "The advisory committee for our ambulance service includes community leaders and civil servants representing our entire catchment area," she says. "It serves an absolutely critical function for us, but it is not a board. It has no fiduciary duty."
Scott & White Healthcare: Careful Coordination
The Scott & White system has grown dramatically in the last 10 years. It comprises an 800-member group practice plus 300 independent providers, its flagship hospital in Temple, Texas, and eight other hospitals that are fully owned, jointly owned or managed. Not only do licensing requirements in Texas require that each hospital have its own board, the plethora of ownership and management models in the Scott & White system require that organizational partners are represented in the governance of the entities for which they have responsibility.
As the size and complexity of this enterprise increased, CEO Al Knight, M.D., and leaders of his board realized that some changes were essential. With responsibility for a growing number of subsidiaries, the system board increasingly was pulled away from the critical strategic discussions necessary to sustain growth and prepare for health reform.
Scott & White chose to migrate to a formal and tightly orchestrated system-subsidiary governance structure while creating a foundation board charged exclusively with overseeing philanthropic efforts. Formalizing and standardizing the relationship of the parent with each subsidiary board allows the system board to oversee these entities with appropriate vigilance, while devoting the majority of its efforts to big-picture strategic questions.
"We are working to be sure that all of our subsidiary boards work in tight synchrony—striving to have similar committee structures, agendas, compliance plans and approaches to self-evaluation," Knight says. "We are convinced that standardizing over time will help optimize our enterprisewide strategies and still allow us to exercise our fiduciary authority appropriately."
Scott & White thought long and hard about creating a separate foundation board. Cautionary tales from other institutions raised grave concerns about a foundation board "uncoupled" from the parent and using its philanthropic assets to confound strategies set by the parent board. Scott & White worked to obviate that risk by being quite clear about the foundation board's charter and accountability.
The Danger of Nonfiduciary Boards
As health systems grow and redesign their governance structure, so-called "nonfiduciary boards" have become more common. In each instance, its role is slightly different.
A close look at the problematic nature of this particular label will offer some lessons in how governance redesign can go awry by failing to draw clear lines of responsibility. Fiduciary duty means a duty to act with respect to any area of assigned responsibility in a way that will further the mission of the corporation, a duty to exercise due care, and a duty to be loyal to the corporation.
In all health care systems, overarching responsibility for strategy, quality and finances rests with the corporate board. But to the extent certain decisions or responsibilities are earmarked for local board control by hospital licensing bodies or by the corporate parent, the directors on such a local body have explicit fiduciary duties within their delegated sphere. Some hospital licensing laws require that at least one set of duties, that is, the credentialing of physicians, be retained by local governing bodies.
It is essential not to obscure this important reality, yet that is exactly what the term "nonfiduciary board" accomplishes. There are two causes.
First, there is confusion around the terms "financial" and "fiduciary." Even if financial responsibility is retained by a health system board or by the legal entity that owns the hospital, local hospital boards are deemed by regulators and licensing agencies to have fiduciary responsibility for credentialing and quality. The de-coupling of financial and quality responsibilities may be confusing in practice and may even compromise a hospital board's ultimate ability to fulfill its responsibilities, but it does not erase the fact that oversight of quality—with such decision-making prerogatives as those described in the area of physician credentialing—constitutes a fiduciary duty and must be exercised in a manner consistent with the duty of care referred to above.
Second, there is often a desire to subtly enhance the role of advisory bodies to assure appointees that they are in fact important members of the organization in question. Designating a purely advisory body as a "board" accomplishes that goal, but at the expense of significant confusion. Should there ever be occasion for litigation, courts might focus on the duties implied by the term "board," assuming authority that was in fact nonexistent.
This logic suggests that we should be precise and assert as a matter of definition that all true boards have formal fiduciary duties, even if they do not have the full gamut of oversight responsibilities. Similarly, the term "advisory board" or even "committee" should be used only when there is no fiduciary responsibility whatsoever—when the duty of the board is fulfilled simply by proffering advice—and when the responsibility for acting upon that advice lies elsewhere.
Across the country, the growing complexity of health care delivery—with demands for accountability as well as pressure to create economies of scale—is driving hospital reorganization and health system creation. For boards to fulfill their fiduciary duties, rigorous attention must be paid to clarity of responsibilities and coordination of duties. While there is no one right way to meet these goals, the case studies above give clear guidance in this most critical task.
Eric D. Lister, M.D. (Elister@kiassoc.com), the managing director of Ki Associates, is a physician and governance consultant. He is also a member of the Center for Healthcare Governance's Speakers Express service.
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