Physician alignment has emerged as one of the most transformative forces in a hospital or health system, making identifying and aligning with successful practices a priority. But before these negotiations get underway, boards should consider strengthening the process by which they review and approve physician alignment proposals. The strategic importance of these proposals, the internal momentum they may carry and the compliance challenges they may present increase pressure on the board's oversight role. The stakes for the health system are often very high. It's fair for leadership to consider whether the board is properly positioned to respond to these pressures.

This is not to suggest that health system boards have been inattentive to physician alignment matters. Indeed, most have made good faith efforts to evaluate proposals presented for their consideration. But times are changing dramatically. Physician alignment is a primary means by which a health system can respond to the Affordable Care Act's cost-containment and quality mandates, and the competition to attract physician groups known for high quality and efficiency is intense. Additionally, health systems are becoming much larger through consolidation, and the physician alignment proposals their boards are considering are often more complex and expensive. Individual negotiations can be quite protracted. Understandably, management may be highly invested in the success of particular initiatives.

Thus, the circumstances in which many alignment proposals are presented to the board are more challenging, which may affect the standard of care the law expects to be applied in the board's review of alignment proposals. More complicated circumstances require greater board scrutiny. And that's as good a reason as any to double-check current review processes to make sure they're up to the task — for both the board's and the organization's sake.

It's important to note that there is no legal mandate behind this approach, no new governance best practice that begs adoption or fiduciary duty horror story to threaten boards. But there are emerging compliance signals that trustees shouldn't ignore. Increased whistleblowing activity, government enforcement initiatives and judicial decisions such as Drakeford v. Tuomey underscore the risks associated with alignment arrangements perceived as aggressive. Indeed, filings in the Tuomey case clearly expressed the government's view that the board was partially responsible for the ultimate level of damages and penalties.

Not every health system will need to re-evaluate its practices, and no judgment should be attached to those that choose not to do so. For those systems that opt to examine their processes, there's no established path to assure a more effective alignment-oversight process. Still, there's no need to fly blindly, either. Experience suggests that the following 10 factors are likely to be central to any evaluation of existing board processes:

  • reliance factor
  • board's structural approach
  • developmental process
  • role of counsel
  • role of other advisers
  • evaluation of opinions
  • basis for the decision
  • sensitivity to internal tensions
  • addressing material changes
  • monitoring approved transactions

Reliance Factor

Trustees should be prepared for the impact a heightened level of fiduciary duty associated with their oversight may have on the traditional board-management relationship. It is a basic tenet of corporate law that the board is entitled to rely on the advice of senior management and external advisers, assuming that there is no indication that such reliance is unwarranted. Boards are appropriately accustomed to giving great deference to recommendations of management — and of management's chosen advisers — on such important topics as physician alignment, and they are understandably reluctant to push back on proposals for technical matters such as physician alignment.

Yet, the essence of a heightened duty of care requires a slight reorientation of the board's relationship with management on these proposals. Trustees still can (and should) rely on senior leaders' recommendations and strive for a supportive board-management relationship, but they need to exercise greater attentiveness and demonstrate more constructive skepticism than would ordinarily be the case. It's a slight relationship pivot that should be recognized and discussed.

Structural Approach

A key piece of the re-evaluation process is determining whether the board is structured and oriented to prudently evaluate physician alignment and similar matters. This question involves both board members' expertise and the board's forum for review and approval: How can trustees effectively and efficiently address alignment proposals presented by management for approval? Forward-thinking boards may want to tap one or more individuals with particular expertise in physician alignment and integration matters to serve on the board or on a dedicated committee. Additionally, the board should consider whether alignment questions should be brought to the entire board or to a dedicated physician alignment (and perhaps compensation) committee.

Developmental Process

As part of the evaluation, it is entirely appropriate for the board to review how management develops alignment proposals and to inquire about the consistency and suitability of the developmental process. The following questions can help boards and senior leaders in assuring that alignment proposals follow a considered developmental process:

  • Where do alignment proposals originate?
  • Do strategy officers receive compliance training?
  • Is there a standard proposal evaluation process that incorporates compliance matters?
  • At what point in the process do members of the internal financial and legal teams become involved?
  • How is due diligence conducted concerning the proposed physician partners?

Role of Counsel

While the board should not be directly involved with the performance of counsel's role in physician alignment matters except in rare situations, it still has an indirect, oversight-related function. It is the board's responsibility to ensure that the physician alignment proposals it addresses are structured in a legally appropriate matter. To this end, trustees should be comfortable inquiring about the general counsel's role and involvement in the process. They also may ask whether outside counsel is needed and, if one is selected, the credentials of that counsel. The board should have access to counsel and should inquire about the extent of coordination among legal counsel, management and other outside advisers to the health system. In other words, the board should ask, "Is everyone talking with each other?"

Role of Other Advisers

Similar issues apply with respect to the board's relationship to the selection, roles and responsibilities of other external advisers in the physician alignment processes, such as valuation, compensation and strategic consultants. Trustees should not be involved in the work product of these advisers to the extent of interference or disruption. Rather, the board should focus on matters of competence; the absence of conflict; coordination with other advisers; and the quality and accessibility of the work product. Trustees should not be reluctant to ask questions of such advisers simply because they may lack technical familiarity. To the contrary, it is often those questions framed from an individual board member's own perspective or experience that serve the greatest purposes.

Evaluation of Opinions

Trustees should make a special effort to understand the importance and effect of adviser opinions delivered in the context of physician alignment proposals. This can have a positive effect on the quality of the decision-making process and the extent to which relying on such opinions can be justified. It is appropriate for the board to confirm whether the opinions address the health system's identified concerns, the extent to which the advisers had access to all relevant facts, and the nature of any exceptions or disclaimers contained in the opinions. Technical discussions aside, trustees must be comfortable that they understand the basic conclusions of these opinions and the extent to which the conclusions are (by necessity or otherwise) equivocal or subject to qualification.

Basis for the Decision

The regulatory environment to which physician alignment proposals are subject places particular requirements on the board's decision-making process. Clearly, the board must consider the proposal in the context of any regulatory risks identified by counsel. The board's stewardship-based consideration of the financial feasibility of a particular proposal should be clearly separated from the determination of the amount of compensation to be paid to the participating physicians. The compensation portion of the alignment arrangement must be negotiated on an arms-length, fair-market-value basis without consideration of the potential referrals from the physicians. The board's evaluation of the overall financial implications and feasibility of the proposal to the organization should be conducted separately. Put more simply, the process by which the organization determines physician compensation should be, to the greatest extent possible, firewalled from any evaluation of the overall financial implications of the alignment proposal to the organization. This is one of the essential mandates of the health care anti-fraud laws.

Internal Tensions

A crucial check and balance provided by the board is its sensitivity to management-level tensions that inevitably arise in the context of many alignment proposals. Strategic importance, competition between health systems and the possibility of difficult negotiations all may combine to place unique pressures on individual leadership team members. Despite good-faith efforts, it is possible that this stress may distort or truncate established decision protocols. Particular pressures may be placed on the advisers to support the proposal. The board should be cognizant of these forces and make it clear that unnatural pressures will not be tolerated.

Material Changes

A board resolution of approval frequently will authorize the leadership team to move forward and take the alignment proposal to fruition without requiring a further board vote. This is done principally as a matter of efficiency; if the board has approved the parameters of a transaction, management should be trusted with implementation tasks. However, there should be a clear understanding that if any material changes arise during final negotiations, such as a material adjustment in compensation methodology or terms, they also must be approved by the board. The initial approval cannot serve as a blank check.

Monitoring Transactions

It is important that the board agenda not be cluttered with project management or review duties that are management's responsibilities. Nevertheless, an effective physician alignment process may involve some structured post-closing monitoring of the approved arrangement. This can support the board in any necessary compliance oversight, in considering the efficacy of future alignment initiatives and in preparing for the negotiation of renewal terms for the original arrangement.

Interesting Times

Three forces are calling for more substantial oversight from hospital and system governing boards: Health systems are merging and becoming larger; regulatory initiatives are more focused and intense; and the terms and conditions of strategic system initiatives are more complex and financially significant.

This is also the case with physician alignment proposals, for which there often is a particular confluence of the strategic, the regulatory and the complex. It is in this context that a review of the board's approach to evaluating such proposals becomes more important. There is no regulatory, judicial or governance mandate or even guidelines on how such a review takes place. Rather, it is a matter of common sense that suggests that, for some boards and health systems, conducting such a review is the smart thing to do under the circumstances.

Michael W. Peregrine (mperegrine@mwe.com) is a partner in the law firm of McDermott Will & Emery, Chicago. His views do not necessarily reflect the views of McDermott Will & Emery or its clients.


Drakeford v. Tuomey: Stark, False Claims Act Violations

In the Tuomey Healthcare System case, a federal jury determined that the Sumter, S.C., health system entered into physician employment agreements that violated the Stark Law, and that the health system violated the False Claims Act when it submitted reimbursement claims in connection with the prohibited agreements. The court ultimately entered a judgment against Tuomey Healthcare System in excess of $237 million. — M.P.