The rapid consolidation of the nonprofit health care sector will have significant governance implications, particularly in the context of board composition and qualifications. The shift from sole providers and small, community-based health systems to larger regional, multistate and national systems will in large part be complete by 2014. Given such dramatic structural change, governance models must begin to adapt now to remain relevant. A primary focus of that adaptation will be on the core competencies expected from the governing board.

The traditional nonprofit governance model has focused heavily on community and other constituent-driven representation. This often has reflected the founding heritage of the organization and the long-standing Internal Revenue Service board composition requirements for tax-exempt status (for example, the IRS requires that “independent community leaders” comprise the majority of the board). However, this model is unlikely to continue as an effective platform for health system governance given the evolution toward much larger corporate models. The dramatically increased size of such systems, in terms of both geographic scope and value of assets under control, requires a second look at the qualifications and competencies necessary for board service.

Basic Fiduciary Considerations

Duty-of-care principles mandate the selection of governing board members with qualifications that are responsive to the particular circumstances of the organization. Nonprofit status is no barrier to appointing director candidates who possess essential — and perhaps unique — fiduciary capabilities. Certainly, board member selection should be grounded in the willingness of candidates to be loyal, in all its manifestations, to the organization's charitable purposes. That notwithstanding, health system governance committees are obligated to consider the special mission and strategic, operational and financial circumstances of the system when selecting nominees. Sensitivity to competency-based board member selection must be conducted carefully, however, so as not to disrupt essential exempt-organization tax relationships.

A Competency-Based Board

The rapid movement toward regional and national health systems can be expected to create board agendas of previously unanticipated complexity and challenge at both the parent and affiliate hospital levels. These agendas may change the scope of issues being presented to the board, which, in turn, will increase the need for board members with backgrounds and competencies more attuned to these issues. The qualifications and expertise that are hallmarks of effective community hospital board service will not translate automatically to effective regional or national health system board service, no matter the good faith or good intentions of the individual trustee in question.

Boards increasingly will be called upon to monitor a diverse portfolio of businesses, complex partnerships with clinicians and other providers, new programs to create a continuum of care to ensure quality, investment in immensely expensive technology systems and possibly the assumption of risk for population health directly or with insurance carriers or capital partners.

These duties represent a fundamental change from the traditional oversight obligations of the health system parent organization. Even the work of a local hospital board will change through increased emphasis on partnerships, non-acute and episodic care, slimmer margins based on value, clinical and business risk, patient and physician engagement, and quality outcomes. Expanding the size of the board will not necessarily be the right answer to this new challenge. A more effective response may be found by focusing on the selection of new directors with more relevant competencies.

The board competencies needed to serve in new delivery systems will be more synthetic (that is, developed for the health care system’s unique challenges), arranged (meaning the individuals with these skills were deliberately sought by the governance committee) and prospective (they are needed to address the fiduciary demands of the future). Boards constantly will be adapting to new information, metrics, relationships and economics, while operating an existing business from which they may be consciously drawing to support the new initiatives. This can make board dynamics very challenging.

The board of the future should have the ability to view the entire playing field and evaluate how each investment is helping to achieve the new vision while rethinking the inpatient experience entirely. Expertise required to assess population health and wellness, extenders to the continuum, telemedicine, retail partnerships, cyber-risk and new data that map risk, and quality are just the beginning of the new types of competencies required. It also may prove beneficial to select candidates with backgrounds in information technology, commercial insurance, financial services and regulated industries in which compliance is deeply embedded within organizational culture. This does not mean that community leaders no longer have a governance role in the health system. To the contrary, many such leaders will continue to add great value to health system governance. However, the message is clear that additional skills and experience are needed.

New Needs

The success of the health systems currently in formation or expansion will depend in part upon the application of a governance model tailored to a more sophisticated agenda. The system board will be expected to oversee high-level functions, including strategy, resource allocation, and fiscal and quality oversight in alignment. It should be aligned with local provider boards, which will focus on the delivery of care for designated populations. Fundamental to both levels of governance will be boards comprising directors who possess the specific competencies required by the evolving health care environment. For this and other reasons, health system planning and formation should prominently feature competency-based board development efforts.

Michael W. Peregrine (mperegrine@ mwe.com) is a partner in the law firm of McDermott Will & Emery LLP, Chicago. David Nygren, Ph.D. (David@nygrenconsulting.com), is the founder of Nygren Consulting LLC, Santa Barbara, Calif.