The Centers for Medicare & Medicaid Services in 2008 audited two North Carolina health systems, and both were declared to be in "immediate jeopardy" status. One system temporarily lost its Medicare certification and the ability to generate revenue for several months. The other system rebounded and continued normal operations. How the board's role differed in these organizations is key to understanding their outcomes.

Haywood Regional Medical Center: Finance Is Board Priority

Haywood Regional Medical Center, Clyde, N.C., is a 190-bed hospital authority whose board was appointed by county commissioners. Its CEO had been in place since 1993 and was chair of the North Carolina Hospital Association. HRMC had 900 employees and 137 physicians on its medical staff who performed more than 400 surgeries per month. The hospital operated profitably and had a strong balance sheet with about $20 million dollars in unrestricted reserves. It had just received a five-star rating from HealthGrades.

HRMC's board members were largely a group of respected community leaders who had down-to-earth values and track records of success in their professional fields. However, the board spent more of its time in meetings discussing financial issues than discussing patient issues. And although the board chair was one of HRMC's physicians, quality reports were ineffective and not informative, and patient safety was not a priority during meetings. In addition, there was no governance committee nor formal trustee education program. The only funds spent on board development were used to occasionally send select trustees to health care conferences.

In response to a complaint concerning medication administration from a disgruntled physician, CMS sent a five-person team to HRMC to conduct an unannounced, three-day survey of all aspects of quality and patient safety. It's important to note that the survey team can expand the scope of its examination to include all areas of operations; it is not limited to the area of the complaint. When the survey ended a week later, the surveyors placed HRMC in "immediate jeopardy" status, the most severe of four possible audit outcomes of a CMS audit. HRMC was given 23 calendar days to correct the deficiencies cited in the survey or its Medicare certification would be removed.

The responsibility of responding to the survey was delegated to the chief nursing officer, an interim employee whose work hours were limited by the fact that she was commuting from another state. The CEO was confident that the issue would be resolved successfully and decided not to inform the board. Once the CNO replied to the audit, the CMS survey team came back to see whether the issues had been resolved. The survey team was not satisfied, and HRMC was found to be out of compliance with Medicare Conditions of Participation. The medical center's contracts with Medicare, Medicaid and all other insurance companies were cancelled that day.

According to local newspapers, upon learning of CMS' decision, an emergency board meeting was called to inform trustees of what had happened. The trustees were stunned because they had no knowledge of the CMS audit nor any understanding of the potential for losing certification. During the meeting, the CEO decided to resign, and the board hired the chief operating officer to serve as interim CEO. They instructed him to use all available resources to get HRMC back in compliance with the Medicare Conditions of Participation.

CMS ran an advertisement in local newspapers announcing HRMC's loss of Medicare certification; "governing body" was first in the list of areas in which HRMC was out of compliance. For weeks following the announcement of decertification, board members were subjected to an intense, caustic and highly visible media campaign accusing them of not doing their jobs. Several members of the board, including the chair, resigned. New trustees were appointed by the county commissioners. The new chair was left in the position of recovering Medicare certification with a relatively inexperienced governing team.

Due to heroic levels of engagement and leadership by the restructured board, HRMC eventually reapplied for and received new Medicare certification. But for 155 days, it was unable to generate any revenue from filing claims with insurers. Its unrestricted reserves were depleted, and the strength of its balance sheet diminished substantially.

During the process of regaining Medicare certification, HRMC's board led the organization through a process of examining affiliation options. HRMC subsequently formed a joint operating company with another nearby rural system, WestCare, located in Sylva, N.C. The new company, MedWest, has an operating contract with Carolinas Healthcare of Charlotte, N.C. The newly formed board of MedWest is self-perpetuating and is already committed to a continuous board development process.

Blue Ridge Healthcare: Trustees Lead Quality Commitment

Blue Ridge Healthcare, located in Morganton, N.C., was formed in 1999 by the merger of two rural hospitals. One of the strategic reasons for its formation was to improve board performance. From the beginning and with the CEO's full support, the organization has regularly invested in board training and development.

In early 2008, BRHC consisted of two acute care hospitals, two nursing homes, a wellness center, a continuing care retirement community and a home health company. It had 160 active physicians, 60 of whom were employed by the system. With $225 million in net revenues, it operated profitably and had a strong balance sheet with about $90 million dollars in unrestricted reserves. It was governed by an experienced, self-perpetuating board of community leaders. A formal board development program was in place and its effectiveness was monitored by a standing governance committee.

About six weeks after HRMC announced the loss of its Medicare certification, a patient complaint triggered an unannounced CMS audit at BRHC. The entire board was notified of the audit and its potential implications by the end of the same day the CEO learned of it. In accordance with its crisis communication policy, the board received e-mail updates from the CEO at the end of each day. Additionally, the head of BRHC's media relations department notified the local media about the CMS audit as per that department's communication policy.

After the audit, CMS placed BRHC in "immediate jeopardy" status and published the advertisement charging the board with failure of governance before the 23-day response period expired.

The board and CEO appointed a team of senior staff members to respond to the audit and cleared their calendars of all other responsibilities. Due to cooperative leadership provided by the board, management and medical staff, BRHC's response to the audit was found to be satisfactory, and the immediate jeopardy status was removed. Additionally, the auditors said that while examining BRHC's response, they found numerous best practices and announced their intention to share them with other North Carolina hospitals. Following this episode, BRHC continued normal operations.

What We Learned

These two stories offer boards numerous lessons. Here are a few of the most important.

In dealing with a crisis, a prepared board can be the differentiating factor. These organizations were similar in many ways. However, they did not share a consistent commitment to a robust board development program. In designing your organization's development program, the following items are essential:

  • A codified process to ensure board composition is based on the future needs of the organization
  • A thorough orientation process for new members
  • Codified board policies, including code of conduct, conflict of interest, executive compensation and evaluation
  • A continuing education program for experienced trustees
  • An effective board self-assessment process
  • A performance-based reappointment process for trustees whose terms are expiring
  • A formal succession planning process for future board leaders

Board development is not easy and does not happen accidentally; it requires an intentional decision by the board. It takes time, money and effort. But it is the basis of turning a group of well-intentioned individuals into an effective governing team that is continuously ready and able to provide flexible, effective leadership in the face of ever-changing circumstances in the boardroom, including dealing with a crisis.

The board is responsible for all aspects of the organization's relationship with the CEO. According to Mark B. Clasby, an HRMC board member who served through the crisis and subsequently became chair of the MedWest board, "One of the most important things other boards can learn from the HRMC story is the importance of good board-CEO relations."

Indeed, one of the central issues in the HRMC story is the apparent breakdown in communication between the board and the CEO. Strong board-CEO relationships are based on mutual trust and respect. We hope this article will encourage trustees to consider creating a board policy that does two things. First, it should require that the CEO share bad news with the board as quickly as he or she shares good news. Second, it should recognize that a "just organizational culture" begins in the board room. In other words, if the board always reacts to bad news delivered by the CEO with a "kill the messenger" attitude, its chances of receiving such news on a timely basis will be minimized.

Ensure your board has a crisis policy in place. While such policies are organization-specific, they usually contain some common elements. The crisis policy used by BRHC contains such elements as recognition that the board's role may change during a crisis and a requirement that the CEO immediately deliver bad news to the board. It also describes how the board expects the CEO to communicate with trustees during a crisis and how and when the organization will communicate with key stakeholders. A crisis policy should identify the organization's spokesperson; typical candidates are the CEO or board chair. Generally speaking, it is not helpful for individual trustees to speak to the press during a crisis. Boards should also consider assigning a senior staff member to build ongoing relations with senior personnel in local media outlets in advance of the next controversial issue that might be covered by the media.

Create processes that enable your board to be informed about your organization's culture. In retrospect, the HRMC board found that a culture of fear and intimidation had taken root in its hospital over the years. Trustees received information only from the CEO; there were no channels through which unfiltered information could flow from the organization to the board. Other boards have worked in partnership with their CEOs to successfully overcome this problem; solutions include conducting periodic assessments of the organization's culture, creating confidential hot lines monitored by independent parties, and placing a notice on the hospital's website that tells stakeholders how to get a message directly to the board. Another option is giving board members a chance to speak directly with employees through a rounding process that lets trustees walk the floors accompanied by a member of the senior staff. One of the consultants that helped HRMC recover its Medicare certification expressed the opinion that the board was out of touch with what was really going on in the organization. It is vital for your board to work in partnership with your CEO to ensure this is not the case in your hospital.

Create and maintain quality literacy among your trustees. Effective board leadership of continuous quality improvement is one of the things that will differentiate winning organizations from losing ones in the era of reform. Boards should invest in having all trustees participate in periodic training sessions on the board's role in driving continuous quality improvement. Trustees have specific responsibilities to perform and should have the appropriate tools to fulfill those duties. Boards should also ensure new trustees are knowledgeable about the board's role in quality improvement by building quality literacy into the topics in their orientation process.

Assign strategically important issues to a team of leaders. One reason HRMC's survey response suffered was because it was entrusted to a single employee with a limited tenure. Hospital boards and management are obligated to ensure mission-critical issues get the attention of a team of exceptional employees. Problems of this magnitude deserve decision-making processes designed to ensure the development of alternative solutions and thorough debate of each alternative.

Sound Investment

The core responsibility of the board of a nonprofit health care organization is to create and maintain the public's trust in its organization. HRMC's experience demonstrates how quickly the public's trust can be lost and how painful it is for trustees who are caught up in a crisis that causes that loss to happen.

There are numerous learning points for administrators and medical staff leaders. From the board's perspective, the most important point is the value of helping the governing team to develop the skills needed to perform effectively under the most difficult circumstances. While board development programs are resource-intensive, great boards consider them an essential investment that pays handsome dividends. Board training and development is the process that changes a group of accomplished, individual community leaders who can only "do what comes naturally" into an effective governing team—a team that is always prepared to deal with crisis.

Mac McCrary ( is a governance consultant and vice-chair of the Blue Ridge Healthcare board. Al Byers, FACHE (, recently retired as interim CEO of Haywood Regional Medical Center and is now a health care consultant.

Sidebar - CMS Audits: A Reality Check