How will you know when your hospital begins to fail? Reports from the chief executive and financial officers become increasingly pessimistic and vague. Competitors steal your best physicians and many of your commercially insured patients. A growing number of disgruntled employees file lawsuits. The physical plant needs a significant upgrade, but the organization’s recently downgraded credit rating prohibits it. The hospital is in danger of defaulting on its bonds.
One or more of these events should force trustees to take action. Yet, boards often look downward when assessing the problem and assigning blame, even though they have the ultimate authority and accountability for the hospital’s affairs. Before embarking on a turnaround to save the organization, the board should engage in a thorough self-assessment. If the governing body is dysfunctional, the turnaround will fail no matter what resources are poured into the hospital.
A small inner city hospital with a patient population comprising predominately Medicare, Medicaid and charity care patients recently faced some of these challenges. The CEO and CFO had been let go and the board was running the hospital. The event that triggered the turnaround effort was a technical default under the hospital’s bond covenants. As required, a consulting firm assessed the hospital and, at the outset, identified the board as the most significant problem. The board had lost sight of its proper role, it was filled with unaddressed conflicts of interest and it had no idea how to fix the problem.
With pressure from the department of health, the financing authority, and state and local political leaders, the board was forced to make changes. More than two-thirds of the trustees eventually resigned and were replaced with new members, including me. The new board was faced with managing a turnaround that, if unsuccessful, would bring about the demise of a hospital that had been providing essential health care services to the community for more than 100 years.
Where to begin? The turnaround process addressed five core board elements in this order: diversity, conflicts of interest, education, CEO selection and strategic planning.
Infuse the Board with Diversity
At the beginning of the turnaround process, the board was made up of individuals who looked, talked, thought and acted alike. Without diversity, boards can become social clubs that stagnate and are incapable of moving forward. Because the hospital was in a racially diverse community, ethnicity played an important role in recruiting new board members. The board also looked at other facets of diversity and performed a self-assessment that considered age, professional background, neighborhood and commitment to the community served.
An understanding of the modern health care system was equally important. While hospitals often aim to recruit individuals with diverse backgrounds in business, the learning curve in health care is significant. Even successful business people struggle to understand health care’s legal and regulatory complexities. As James Sheehan, former United States attorney, often said, “From the government’s perspective, when it comes to health care, if it makes good business sense — it’s probably illegal.”
Diversity extends to recruiting board members who understand the services the hospital provides. For example, the hospital was heavily involved in behavioral health services, so we recruited the director of a supportive housing project for mental health patients outside our service area. We also realized that while we had addressed physician representation on the board, we didn’t have the perspective of any other type of provider. We then recruited a professor of nursing studies at a local university.
At the end of the day, we had added local business owners, accountants, health care professionals, religious leaders and lawyers who represented a wide mix of ethnicity and professional backgrounds. Finally, we had a board that truly reflected the community we served and understood our business.
Tackle Conflicts of Interest Up Front
Conflicts of interest will hinder any attempt at a turnaround. When looking at the composition of the former board, nearly all members had some form of conflict. Some were direct, such as compensation arrangements with the hospital. In other situations, members owned or worked at companies that were vendors to the hospital, yet there was no documentation to demonstrate that the board had followed a process to clear such conflicts before engaging the companies. Some conflicts were unusual; for example, multiple board members had business relationships with each other. We quickly realized we needed to address potential conflicts in selecting new board members.
Although it is now axiomatic that a board needs — and in the case of a nonprofit, IRS Form 990 requires — a robust conflict of interest policy, many hospitals never implement it. No one is deemed responsible for collecting, evaluating, acting on and documenting the process on an ongoing basis and no one knows where such documentation is retained.
Many conflict of interest issues arise after the fact; that is, the conflicts were never disclosed and now the trustees with conflicts act in their own self-interest. Had the conflicts been properly addressed up front, they could have been resolved and the member either educated about the responsibility to act independently in the best interest of the hospital or replaced.
Don’t Skimp on Education
Even when the hospital recruits individuals with an understanding of health care, governance education is essential. It also can reveal members’ level of commitment to the organization: Those who are unable or unwilling to spend time in board development belong elsewhere.
Trustees also need instruction about their role in the organization. Boards often go to extremes: either overinvolved or completely hands-off. The latter is problematic because the board is failing to fulfill its fiduciary responsibilities; however, the former sometimes can be worse.
When I became chair of the board at our hospital, I inherited a culture that tolerated individual board members being intimately involved in hospital operations. In fact, the former chair had several employees (ranked below the CEO) who reported directly to him. Other board members also were overinvolved, suffering from “walking the halls” syndrome. After each meeting, they would round the hospital, talking to employees who soon realized that they had direct access to the board. Staff members no longer had to go through their supervisor or the CEO. It became unclear who was in charge and who had authority to give direction to employees. Employee discipline became difficult to manage.
Basic board education should cover the trustee’s fiduciary duties, the delivery system and health care reimbursement in general, financial statements, the services being provided and the community served.
Prepare for CEO Selection
In our situation, the turnaround company initially ran the hospital and we had only an acting CEO. It made no sense, however, to replace the turnaround consultants with a new CEO until we had completed the first three steps. Then we approached the CEO search process in a manner similar to how we selected a new board.
The search committee comprised members who were diverse in ethnicity, profession, age and leadership skills. It included the board chair and vice chair, the finance committee chair, the president of the medical staff, another physician trustee and our community’s mayor. We all agreed up front that, notwithstanding the ethnic diversity of the community served, we were committed to selecting the right individual, regardless of ethnicity.
Look to Long Term for Strategic Planning
After creating an appropriately diverse board, dealing with conflicts of interest, educating the board and hiring the new CEO, we were ready to engage in strategic planning. As is the case in many hospital turnarounds, we initially had turned to outside help by engaging a turnaround firm. While turnaround companies can be helpful and even essential, boards should not wait long before regaining control of the hospital.
In a financially distressed hospital, a turnaround company has a specific purpose; that is, to restore the financial viability of the hospital. In the for-profit setting, that need is obvious. But even in the nonprofit setting, it’s important to remember the axiom “no margin, no mission.”
The downside to a turnaround firm is its short-term focus. It makes quick decisions to save money and restore financial viability, usually by cutting services, staff and other areas of hospital operations. While effective, those decisions have long-term consequences. So, while the firm may keep the organization afloat, the longer it retains control, the more likely its decisions will have an adverse impact on the long-term viability of the hospital.
As important as strategic planning is, it can’t begin until the board is in place. Moreover, engaging the new CEO (if possible) before the process begins is critical. The board will need the chief executive’s input and assistance in implementing the programs, services and directives from the strategic planning process.
While there are many other aspects to a turnaround that go beyond the scope of this article, addressing these five core elements can provide the basis for a successful hospital renewal. It worked for our hospital. The organization not only underwent a successful turnaround, but within a few years, it was the only surviving hospital of its size, services and patient mix in the surrounding area. We were able to continue to serve the needs of our community.
Todd C. Brower (tbrower@mccarter.com) is a partner in the health care practice of McCarter & English LLP, Newark, N.J. He is a former chairman of the board of East Orange (N.J.) General Hospital.
