lmhs board of directors governance … shell, 275 estero blvd, ft ... ﬁ duciary duties and its six...

P.O. BOX 2218 FORT MYERS, FLORIDA

33902

239-343-2000

CAPE CORAL HOSPITAL GULF COAST MEDICAL CENTER

HEALTHPARK MEDICAL CENTER

LEE MEMORIAL HOSPITAL

THE CHILDREN’S HOSPITAL THE REHABILITATION HOSPITAL

LEE PHYSICIAN GROUP

LEE CONVENIENT CARE

BOARD OF DIRECTORS

DISTRICT ONE

Stephen R. Brown, M.D.

Marilyn Stout

DISTRICT TWO

Richard B. Akin

Nancy M. McGovern, RN, MSM

DISTRICT THREE

Lois C. Barrett, MBA

Linda L. Brown, MSN, ARNP

DISTRICT FOUR

Frank T. La Rosa

Dawson C. McDaniel

DISTRICT FIVE

James Green

Jason Moon

LMHS BOARD OF DIRECTORS GOVERNANCE RETREAT Pink Shell, 275 Estero Blvd, Ft. Myers Beach, FL 33931

Friday September 10, 2010

Please note: Conference Session will be held in the Lido Room (Main Bldg) Reception/Dinner will be held in Captiva Bldg/Jacks

Health System Governance in an Era of Healthcare Reform Participants: Board of Directors, Board Administrator, Board Counsel Board Community Representatives/PLC Consultants Physician Leadership Council Chairman System Leadership Council: Chief Executive Officer; Chief Operating Officers; Chief Medical Officers; Chief Legal Officer Chief Financial Officer; VP Planning/Strategy; System Director Public Affairs; System Director Organizational Effectiveness Investment Advisory Council 2:00pm – 5:30pm Presentation on National Challenges Facing Hospital Systems in Era of Reform and Growing Calls for Enhanced Governance Effectiveness, Accountability and Transparency Jim Rice Review Survey Results (due to survey deadline extension, results will be distributed at the meeting) Wireless confidential polling on the relative importance of the nation trends on the future governance challenges for LMHS in the coming 3-5 years.

For you and your guest:

Reception 5:30 – 6:30

Followed by Dinner at 6:30 pm

P.O. BOX 2218 FORT MYERS, FLORIDA

33902

239-343-2000

CAPE CORAL HOSPITAL GULF COAST MEDICAL CENTER

HEALTHPARK MEDICAL CENTER

LEE MEMORIAL HOSPITAL

THE CHILDREN’S HOSPITAL THE REHABILITATION HOSPITAL

LEE PHYSICIAN GROUP

LEE CONVENIENT CARE

BOARD OF DIRECTORS

DISTRICT ONE

Stephen R. Brown, M.D.

Marilyn Stout

DISTRICT TWO

Richard B. Akin

Nancy M. McGovern, RN, MSM

DISTRICT THREE

Lois C. Barrett, MBA

Linda L. Brown, MSN, ARNP

DISTRICT FOUR

Frank T. La Rosa

Dawson C. McDaniel

DISTRICT FIVE

James Green

Jason Moon

LMHS BOARD OF DIRECTORS GOVERNANCE RETREAT Pink Shell, 275 Estero Blvd, Ft. Myers Beach, FL 33931

Saturday, September 11, 2010 Please note: Conference Session will be held in the Lido Room (Main Bldg)

Participants: Board of Directors, Board Administrator, Board Counsel Physician Leadership Council Chairman System Leadership Council: Chief Executive Officer; Chief Operating Officers; Chief Medical Officers; Chief Legal Officer Chief Financial Officer; VP Planning/Strategy; System Director Public Affairs; System Director Organizational Effectiveness

7:30 – 8:15am: Breakfast will be held in Jack’s Restaurant – (use coupon)

8:30am – sharp! Review agenda for the day, results of Friday evening discussion, and brief introductions Board Chairman, CEO, and Jim Rice Presentation on Governance Best Practice Trends and Challenges Jim Rice Wireless polling to prioritize key challenges expected to face the governance model of LMHS (the polling options are to be drawn from the Board Self Assessment survey of August, interviews leading up to the retreat, the insights from Friday evening, and the presentation of Jim Rice early in morning). 9:45am – 10:00am - Break 10:00am – 12:00pm Small groups discussions about the key challenges likely to face LMHS’ governance model and systems in the coming 2-3 years based on work of Friday evening and the remarks from Jim Rice (probably three groups of 5-6 each, each group has mix of board and leaders, each group asked to explore and offer ideas about how best to address 2 key challenges from the polling) Full group receives small group reports and has full group discussion about strategies for enhance board effectiveness and efficiencies for 2011 and beyond 12:00pm - 12:30pm - Light Lunch (provided in meeting room) 12:30pm - 2:00pm Discussion of next steps for enhanced governance, opportunities for future board educational opportunities, and completion of a “999 Action Plan” for enhanced LMHS governance, i.e., actions for the next 9 days, the next 9 weeks and the next 9 months.

2:00pm - 2:30pm - Closing comments from all participants 2:30pm - Adjourn

50 PRACTICES

OF TOP-PERFORMING BOARDS

This list of 50 board practices has been drawn from The Governance Institute’s Biennial Survey of Hospitals and Health Systems. This list was used to survey leaders at hospitals and systems to determine their perspective on the importance of the governance practice as well as

their board’s adherence to it. Findings from this research are presented in The Governance Institute’s publication, Governance Forecast: Board Performance,

Challenges, & Opportunities.

This list is not intended to be exhaustive; there may be other important practices not included here. However, eff ort was made to highlight and identify key practices for boards in their

primary areas of concern. For this reason, the list is divided into six categories—a board’s three fi duciary duties and its six core responsibilities.

FIDUCIARY DUTIES

Under the laws of most states, directors of not-for-profi t corporations are responsible for the corporation; meaning directors must supervise and direct its offi cers and govern the organization’s eff orts in carrying out its mission. The duties of care, loyalty, and obedience describe the manner in which the directors are required to carry out their fundamental duty of oversight.

DUTY OF CARE Requires board members to have knowledge of all reasonably available and pertinent information before taking action. The board member must act in good faith, with the care of an ordinarily prudent businessperson in similar circumstances, and in a manner he or she reasonably believes to be in the best interest of the organization.

1. All board members receive an orientation on the duties of care, loyalty, and obedience to charitable purpose. 2. The board regularly reviews policies that specify the board’s major oversight responsibilities. 3. The board routinely seeks the advice of independent, outside experts when evaluating performance. 4. Before approving major projects and transactions, the board or a committee of the board consistently reviews sup-

porting documentation of fi nancial feasibility and considers adherence to the mission. 5. Important background materials are always or nearly always provided to the board and committees at least one week

in advance. 6. The board regularly monitors organizational performance against both board-approved goals and industry bench-

marks (where available) for fi nance, quality, customer service, and business strategy.

DUTY OF LOYALTY Requires board members to discharge their duties unselfi shly, in a manner designed to benefi t only the corporate enterprise and not the board members personally. It incorporates the duty to disclose situations that may present a potential for confl ict with the disclose situations that may present a potential for confl ict with the corporation’s mission, as well as a duty to avoid competition with the corporation.

7. All board members receive a detailed orientation and educational updates on the obligations associated with the duty of loyalty.

8. The board regularly reviews policies and procedures pertaining to confl icts of interest.

9. The board enforces a strict policy on confi dentiality that requires board members to refrain from discussing board matters with non-board members.

10. Board members who knowingly violate confl ict-of-interest and confi dentiality policies are subject to removal from the board.

11. Board members are required to complete a confl ict-of-interest/disclosure statement annually.

DUTY OF OBEDIENCE

Requires board members to ensure that the organization’s decisions and activities adhere to its fundamental cor-porate purpose and charitable mission as stated in its articles of incorporation and bylaws.

12. The board takes identifi able steps, such as a mission integration assessment, to ensure that the organization’s mis-sion and core values are followed.

13. The board reviews the mission before or during most board meetings.

14. Before making major decisions, the board considers the impact of the decisions on the mission and rejects proposals that put it at risk.

15. The board or a board committee routinely reviews compensation for executives, board members (if applicable), and physician leaders (medical directorships, etc.) to ensure appropriateness and alignment with statutory and regula-tory guidelines.

1 / Governance Best Practices 2008

16. A system is in place to measure the resources used in support of the organization’s charitable mission.

CORE RESPONSIBILITIES

A governing board, whether a hospital board or a health system board, must fulfi ll certain core or fundamental responsibili-ties in overseeing the eff orts of the organization. These responsibilities cluster around six major areas: fi nance, quality, strategy, self-evaluation, management oversight, and advocacy.

FINANCIAL OVERSIGHT

17. All board members receive ongoing education on the fi nancial management and health of the organization.

18. The board approves long-range and annual capital and fi nancial plans, and monitors results achieved against those plans.

19. The board demands corrective actions in response to under-performance on long-range and annual capital and fi nancial plans.

20. The board requires that the strategic, quality, and master facilities plans are integrated with the fi nancial plan.

21. The board and/or a board committee responsible for audit oversight meet independently with the external auditor at least annually.

22. The board and/or a board committee responsible for audit oversight have the sole authority to select the external auditor and to authorize independent reviews performed by another party if required.

23. The board understands its options with respect to acquiring debt and, if applicable, participates in the bond issu-ance process.

QUALITY OVERSIGHT

24. The board routinely reviews a performance “dashboard” or “balanced scorecard” of critical quality indicators that highlights signifi cant trends and variances requiring corrective action or follow-up reports.

25. The board annually participates in educational opportunities for board member education regarding its quality responsibilities and issues.

26. Proposed program/service additions or enhancements are required to meet specifi c quality-related performance criteria (for example, volume requirements and eff ective staffi ng levels).

27. The board includes quality-related goals in the incentive compensation plan for senior executives.

28. The board and/or board credentialing committee occasionally reject recommendations from the medical executive committee for appointment and reappointment of physicians to the medical staff .

SETTING STRATEGIC DIRECTION

29. The board is actively involved in establishing the organization’s strategic direction, including setting priorities and approving the strategic plan.

30. The board discusses the needs of all key stakeholders served by the institution when setting the long-range direction for the organization.

31. The board has adopted policies and procedures that defi ne how strategic plans are developed and updated (e.g., who is to be involved, time frames, role of the board, management, physicians, and staff ).

Governance Best Practices 2008 / 2

32. The board has adopted criteria for evaluating proposed new programs and services to assess key factors (e.g. fi nan-cial feasibility, market potential, impact on quality and patient safety, etc.).

33. Before approving a major strategic project, the board requires that plans are specifi c and measurable (where appro-priate), with implementation accountabilities clearly identifi ed.

BOARD SELF-ASSESSMENT AND DEVELOPMENT

34. An annual board self-assessment and goal-setting process are treated as top priorities.

35. The board has a committee that routinely assesses the organization’s bylaws and recommends areas for improve-ment/best practices in structure, composition, and performance.

36. The board maintains and updates policy statements regarding roles, responsibilities, duties, and job descriptions for itself, its members, offi cers, and committees.

37. The board has adopted written criteria specifying the areas of knowledge, skills, and perspectives needed on the board, and it uses these criteria as it seeks to fi ll its needs in recruiting, electing, and re-electing board members.

38. The board has established a mechanism to evaluate the performance of individual members.

39. The board has a formal program for its own orientation and ongoing education.

40. The board develops an annual board education plan, and this plan is refl ected in the organization’s budget for board activities/support.

MANAGEMENT OVERSIGHT

41. The board has adopted a written policy statement that formally establishes and/or details a process for setting the CEO’s goals and evaluating his or her performance.

42. The CEO has written performance goals that are mutually agreed upon with the board prior to the evaluation pe-riod.

43. The CEO evaluation process includes a private session between the CEO and the board chair/evaluation committee to discuss the evaluation and next year’s goals.

44. The CEO’s incentive compensation is based largely on the CEO performance evaluation.

45. The board requires the CEO to maintain a current, written succession plan.

ADVOCACY

46. The board requires a periodic community health needs assessment to understand the health issues of the communi-ties served.

47. The expectation that board members advocate on behalf of the organization is explained during board member ori-entation.

48. The ability to advocate on behalf of the organization is a board membership criterion used in the selection process of new board members.

49. The board sets goals for itself around the issue of public advocacy.

50. The board has established a policy that spells out the board’s role in fund development and philanthropy eff orts.

3 / Governance Best Practices 2008

Executive Total Compensation • MSA Executive SearchPhysician Services • MSA HR Capital

Governance & Leadership Services

© 2008 Integrated Healthcare Strategies.

INTEGRATED HEALTHCARESTRATEGIES

In cooperation with The Governance Institute

www.governanceinstitute.com

OF 12 Sample Governance Effectiveness

Appendix 1: Sample Board Roles and Responsibilities

Traits for a great health system board member The Board and Management of Sample should refine and develop this statement as a guide for our governance work, and to help encourage well-qualified community leaders to consider service as a potential future board member within one of the subsidiary organizations, committees or councils related to governing the system. We also hope that this guide will assure that we have board members that most closely meet these criteria for governance excellence during these challenging times, and in a sector of society that is complex, rapidly changing, and that requires excellent governance participants with the time and commitment to serve. The health of our citizens and the vitality of our local health system are too important not to have excellent system governance. What does an effective board do? What does an effective individual board member do? What knowledge, skills and attitudes does a board member need to excel in the discharge of their responsibilities as a great board member? This guide first outlines the major responsibilities for a superior health system board; then describes the job description of an individual board member. The document also describes a series of attributes about the ideal knowledge, skills and attitudes a great board member needs to have as they carry out their job as an effective board member. Attachment One provides the Role of The Board Attachment Two provides the Individual Board Member Job Description Attachment Three provides the idea profile oh knowledge, skills and attitudes a great board candidate needs to posses to excel in their service to our communities.



Attachment One

The Role of the Sample Board The board is responsible for the fundamental fiduciary duties listed below.

The Fundamental Duty of Oversight

The Sample board of directors is the party responsible for the overall governance of the corporation. The board must supervise and direct its own officers and govern the organization’s efforts in carrying out its mission. The duties of care, loyalty, and obedience describe the manner in which the directors are required to carry out their fundamental duty of oversight.

Duty of Care

Duty of Care requires Sample board members to have knowledge of all reasonably available and pertinent information before taking action. The board member must act in good faith, with the care of an ordinarily prudent businessperson in similar circumstances, and in a manner he or she reasonably believes to be in the best interest of the Holy Spirit Health System.

Duty of Loyalty

Duty of Loyalty requires board members to candidly discharge their duties in a manner designed to benefit only our health system, not the individual interests of the board member. It incorporates the duty to disclose situations that may present a potential for conflict with the organization’s mission, as well as a duty to avoid competition with the organization.

Duty of Obedience

Duty of Obedience requires board members to ensure that the organization’s decisions and activities adhere to its fundamental corporate purpose and charitable mission, as stated in the Sample articles of incorporation and bylaws. The Sample Board of Trustees’ primary responsibility is to develop and follow the organization’s mission statement by developing specific policies in the six key areas of: (1) quality performance, (2) financial performance, (3) planning performance (4) management performance, (5) governance effectiveness, and (6) community relations and advocacy. The board implements these policies by working with senior management to adopt specific outcome targets that measure the organization’s overall performance.



As a part of this process, this board must:

Establish policy guidelines and criteria for implementation of our mission and also review the mission statements of any subsidiary units to ensure that they are consistent with the overall Sample mission.

Evaluate proposals brought to the board to ensure that they are consistent with the mission statement.

Monitor programs and activities of the health system and subsidiaries to ensure mission consistency.

Periodically review, discuss, and if necessary amend the mission statement to ensure its relevance.

The fundamental duty of oversight—with specific attention to the duties of care, loyalty, and obedience—should pervade board and individual board member job descriptions. In addition, job descriptions should include specific reference to the six core board oversight responsibilities: financial oversight, quality oversight, setting strategic direction/mission oversight, board self-evaluation, management oversight, and advocacy.

1. Quality Performance Responsibilities The Sample board has the final moral, legal, and regulatory responsibility for everything that goes on within the organization, including the quality of services provided by all individuals who perform their duties in the system’s facilities or under its sponsorship. To exercise this quality oversight responsibility, the Sample board (and where appropriate via delegated activities within subsidiary committees and advisory councils) must:

Understand and accept responsibility for the actions of physicians, nurses, and other individuals who perform their clinical care and service duties in the organization’s facilities.

Review and carefully discuss quality and patient safety reports which provide comparative statistical data about the organization’s services, and set measurable policy targets to ensure continual improvement in quality performance.

Carefully review recommendations of the hospital medical staff regarding new physicians who wish to practice in the organization and are familiar with the organization’s termination and fair hearing policies.

Assure processes that re-appoint individuals to the Holy Spirit Hospital Medical Staff as recommended by the hospital board based on how they have performed since their last appointment, using comparative outcome data.

Appoint physicians to governing body committees and seek physician participation in the governance process to assist in patient quality and safety assessment responsibilities.

Fully understand the board’s responsibilities and relationships with the medical staff, and maintain effective mechanisms for effective communications with them.

Regularly receive and discuss malpractice data reflecting the hospital’s experience and the experience of individual physicians who have been appointed to the medical staff.

Regularly receive and discuss data about the medical staff to assure that future staffing will be adequate in terms of ages, numbers, specialties, and other demographic characteristics.



Ensure that management reviews and assesses the attitudes and opinions of those who work in the organization to identify strengths, weaknesses, and opportunities for improvement.

Monitor programs and services to ensure that they comply with the organization’s policies and standards relating to quality.

Take corrective action when appropriate and necessary to improve quality performance.

2. Financial Performance Responsibilities The Sample board has ultimate responsibility for the financial vitality and fiscal accountability of the organization. To accomplish this, the board must:

Review and approve overall financial plans, budgets, and policies for the implementation of those plans and budgets.

Approve financial policies, plans, programs, and performance standards to ensure the preservation and enhancement of the organization’s assets and resources.

Monitor actual performance against budget projections. Review and adopt ethical financial policies and compliance guidelines. Review major capital plans proposed for the organization and its subsidiaries.

3. Strategic Planning Performance Responsibilities The Sample board has the final responsibility for determining the future directions the health system will take to meet the community’s health and healthcare needs. To fulfill this responsibility, the board must:

Work closely with senior management to review and approve a comprehensive strategic plan and supportive policy statements.

Determine that the strategic plan is consistent with the mission statement. Assess the extent to which plans of the subsidiary units meet the strategic goals and

objectives that have been previously approved for the vitality of the system. Periodically review, discuss, and amend the strategic plan to ensure its relevance for

the market realities and needs of the communities we exist to serve. Regularly review progress toward meeting goals in the plan to assess the degree to

which the organization is meeting its mission.



4. Management Performance Responsibilities The Sample board is the final authority regarding oversight of management performance by the chief executive officer and support staff. To exercise this authority, the board must:

Recruit, employ, and regularly evaluate the performance of the chief executive officer.

Evaluate the performance of the CEO annually using goals and objectives agreed upon with the CEO at the beginning of the evaluation cycle.

Communicate regularly with the CEO regarding organizational goals, expectations, concerns and compliments.

Periodically survey CEO employment arrangements at comparable organizations to assure the reasonableness and competitiveness of the CEO’s compensation package.

Periodically review management succession plans to ensure leadership continuity. Establish specific performance policies which provide the CEO with a clear

understanding of what the board expects, and update these policies based on changing conditions.

5. Assessment of Governance Effectiveness The Sample board is also responsible for managing its own governance affairs in an efficient and successful way. To do this, the board must:

Evaluate the board’s performance as a whole, as well as the performance of each individual board member, to determine the appropriateness of continued service on the board.

Maintain written conflict of interest policies that include guidelines for the resolution of existing or apparent conflicts of interest.

Participate both as a board and as individuals in orientation programs and ongoing education programs both within the organization and externally.

Periodically review the board’s structure to assess appropriateness of size, diversity, committees, tenure and turnover of officers and chairpersons.

Assure that each board member understands and agrees to maintain confidentiality with regard to information discussed by the board and its committees.

Adopt, amend, and if necessary, repeal the articles and bylaws of the organization, Maintain an up-to-date board policy manual which includes specific policies covering

oversight responsibilities in at least the areas of quality performance, financial performance, strategic planning performance, and management performance.



6. Community Relations and Advocacy The Sample board must assure that the organization is well understood by and an active partner in the overall development of the communities it exists to serve, and that leaders from these communities are encouraged and supported to help Sample achieve it mission as a respected community focused care system and its plans for sustainable vitality via the following activities:

Help develop a community relations and public responsibility strategy that best positions the system to earn respect and support from within a diverse set of community and political groups that can shape the system’s future success in community health services and health status enhancement.

Participate in two-way communication and listening opportunities with community groups in order to better understand the needs of the communities we serve.

Be engaged in various community speaking opportunities to tell the Sample story of healthcare excellence and fiduciary prudence.

Support management as they develop communication strategies to influence public policy for health and healthcare at the local, state and federal levels.



Attachment Two

Statement of Individual Sample Board Member's Responsibilities As boards of trustees have basic collective responsibilities, board members are also entrusted with individual responsibilities as a part of board membership. The obligations of board service are considerable; they extend well beyond the basic expectations of attending meetings, sharing experience and ideas, and participating in fund-raising initiatives. Individual board members are expected to meet higher standards of personal conduct on behalf of their organization than what is usually expected of other types of volunteers. Yet, despite all these “special” responsibilities, Sample and its subsidiary organizations’ governing participants, as individuals have no special privileges, prerogatives, or authority; they must meet in formal sessions to negotiate and make corporate/system decisions. The undertaking of serving as a board member is a complex one indeed. Considering the complexities of board membership, a clear statement of individual board member responsibilities adapted to the Sample strategic performance needs and circumstances can serve at least two purposes: it can help with the process of recruiting new board members by clarifying expectations before candidates accept nomination, and it can provide criteria by which the committee responsible for identifying and recruiting prospective nominees can review the performance of incumbents who are eligible for reelection or reappointment. Prospective and incumbent Sample board members should commit themselves to: General Expectations

Knowing the Sample mission, strategic purposes for community service, goals, policies, programs, services, strengths, and needs.

Performing the duties of board membership responsibly and conforming to the

level of competence expected from board members as outlined in the duties of care, loyalty, and obedience as they apply to nonprofit board members.

Suggesting possible nominees to the board who are clearly women and men of

achievement and distinction and who can make significant contributions to the work of the board and the organization's progress.

Serving in leadership positions and undertaking special assignments willingly and

enthusiastically.



Avoiding prejudiced judgments on the basis of information received from

individuals and urging those with grievances to follow established policies and procedures through their supervisors. (All matters of potential significance should be called to the attention of the executive and the board's leadership as appropriate.)

Helping establish and nurture exemplary relationships with various community

groups and associations so as to inform the plans of Sample, but also help assure the cost-effective implementation of those plans via influence with these other groups and organizations.

Following trends in the local and national healthcare industry, especially trends in

quality and patient safety; healthcare economics, medical technologies. physician relationships, regulatory frameworks for hospitals and community economic development

Bringing good will and a sense of humor to the board's deliberations.

Meetings

Preparing for and participating in board and committee meetings, including appropriate organizational activities. Attendance in at least 70% of all board meetings either in person or via teleconference is expected.

Asking timely and substantive questions at board and committee meetings

consistent with the board member’s conscience and convictions, while at the same time supporting the majority decision on issues decided by the board.

Maintaining confidentiality of the board's executive sessions, and speaking for

the board or organization only when authorized to do so.

Suggesting agenda items periodically for board and committee meetings to ensure that significant, policy-related matters are addressed.

Relationship with Staff

Counseling the chief executive as appropriate and supporting her or him through often difficult relationships with groups or individuals.

Avoiding asking for special favors of the staff, including special requests for

extensive information, without at least prior consultation with the chief executive, board, or appropriate committee chairperson.

Avoiding Conflicts

Serving the organization as a whole rather than any special interest group or constituency. Regardless of whether or not the board member was invited to fill a vacancy reserved for a certain constituency or organization, his/her first obligation is to avoid any preconception that he/she "represents" anything but the organization's best interests.



Avoiding even the appearance of a conflict of interest that might embarrass the board or the organization; disclosing any possible conflicts to the board in a timely fashion.

Maintaining independence and objectivity and doing what a sense of fairness,

ethics, and personal integrity dictate, even though not necessarily being obliged to do so by law, regulation, or custom.

Never accepting (or offering) favors or gifts from (or to) anyone who does

business with the organization. Fiduciary Responsibilities

Exercising prudence with the board in the control and transfer of funds. Faithfully reading and understanding the organization's financial statements and

otherwise helping the board fulfill its fiduciary responsibility as a respected, not-for-profit, tax-exempt hospital.

Fund-Raising

Assisting the Sample Philanthropic Trust Council and related development committees and staff by implementing fund-raising strategies through personal influence with others (corporations, individuals, and foundations).



Attachment Three Practical Traits Needed for Key Governance Players Board Leaders and Board Members Research by The Governance Institute and Integrated Healthcare Strategies suggests that boards and board leaders of Health Systems such as Sample need certain attributes to thrive in these confusing and turbulent times. The findings of this study are summarized here to facilitate local board and management discussion of what actions are needed for more success in Sample “Continuous Governance Improvement.” Board & Committee Chair Traits for Better Governance: Knowledge Needed: 1. How to champion needs of community and not just the organization 2. The organization’s strategic challenges and needs 3. When to take risks if they may be for the strategic good of the overall

organization 4. What external economic and regulatory trends in the industry could jump out and

bite us in the future 5. How to help all board members understand time commitments needed for

excellent governance 6. The history and heritage of the organization as a local community resource 7. The diversity of backgrounds and needs of all segments of our community 8. The importance of having everything we do be value-based and mission-driven 9. The value of board self assessments to keep us sharp 10. How to be a positive change agent with other board members Skills Needed: 1. How to perform consensus decision making among diverse board and committee

members; 2. How to practice better strategic planning and budgeting 3. How to use scenario-building exercises 4. How to run meetings and small groups 5. How, when, and where to use written and verbal communication skills, but

especially verbal skills as a spokesperson for the organization with key stakeholder groups

6. How to set and celebrate accountabilities among committees 7. Diplomacy skills for working with all types of folks 8. How to draw out ideas and buy-in from all board members 9. Some specialty skills from finance, legal, real estate development or insurance



Attitudes Needed: 1. Honesty and integrity 2. Openness for new ideas and approaches 3. Open to the role that spirituality can play to the healing process of the whole

person and to their families and the community 4. Willing to listen and to be approachable 5. A Can Do Attitude 6. Willingness to build energy and ideas from all players 7. Upbeat and enthusiastic 8. Trust carrier not stress carrier 9. CEO ally 10. Praise giver and success sharer 11. Continuous quality improvement—the key to add value to our patients Board Members Traits for Better Governance: Knowledge Needed: 1. Knowing when to speak up and when to appreciate when silence is golden 2. Service on many other boards for experience in governance 3. Understanding industry trends, issues, challenges, and opportunities facing our

local organizations 4. Our current financial position, trended for last three years, and benchmarked

against peer health systems 5. Community demographics and needs, both in aggregate and for each segment of

our market 6. How to build partnerships with other community groups to pool our resources and

expertise for the greatest good for the greatest number 7. General experiences in life and with the lives our neighbors 8. Our missions and values as a respected local resource, and the plans and

budgets needed to achieve them 9. Basic financial planning and management, and health economics 10. How employees think we could be doing things better for the community we

serve 11. An appreciation for the complexity of tasks we face 12. Medical and information technology trends and their consequences for our plans

and performance 13. Our competitive posture vis a vis technology and costs per unit of care 14. Our sources of funding 15. The difference between governance and management 16. The ins and outs of managed care and risk contracting 17. Social responsibility as the core value in a democracy 18. Real estate and land development



Skills Needed: 1. How to relate to and be supportive of people of all demographic backgrounds 2. Long-range strategic and financial planning 3. An ability to think outside the box 4. An ability to build consensus around our plans and tactics to get them

implemented 5. Leading groups of diverse people toward shared goals, missions, and values 6. Analysis of our competitive position for quality and costs 7. How to read and understand basic financial ratios that tell us about the financial

health of the organization 8. Listening abilities 9. Building and nurturing community relations in times of stress and change 10. How to separate the wheat from the chaff, the important from the trivial Attitudes Needed: 1. Change is our constant companion 2. Dare to be great and innovate 3. Entrepreneurial mindset to be decisive in all the right moments 4. Optimistic but realistic 5. Collaboration is essential for success 6. Openness and honest in all our dealings with physicians and management 7. Value continuing education to maximize our talents and contributions 8. Willing to be a positive and constructive “question raiser” 9. Servant leader for what is best for the people and communities we exist to serve 10. Focus on our targeted consumers—“The Patient Comes First”

Published by

Bader & Associates

Governance Consultants,

Potomac, MD

FALL

2007

|VOL.VII,NO.3

GREA

TBOA

RDS

DeKalb and Fulton coun-ties fund the Atlanta-basedhospital with more than$100 million per year, andthe county commissionersappoint Gradyʼs 10-memberboard. According to theAtlanta Business Chronicle,proponents argue a new,not-for-profit governancestructure would permit anexpanded board with spe-cialized expertise in financeand information technology,and open the doors to newsources of funds. In mid-August, several hundredpeople turned out for acontentious debate on howto save the hospital. StateSenator David Shaferannounced plans to intro-duce the Public HospitalAccountability Act of 2008in the General Assembly.His bill would require countyhospital authorities that runhospitals above a certainbed capacity to delegateday-to-day managementto a nonprofit corporationand adopt “standards ofgovernance.”

Gradyʼs travails illustratethe special governancechallenges facing publichospitals across thecountry. Like Grady, theirappointed boards maylack the independence orexpert backgrounds neededto oversee a complexhealthcare organization ina highly competitive envi-ronment. Public hospitalsmust open their recordsand function under openmeeting standards, whiletheir competitors meetbehind closed doors.

Public hospitals range fromurban safety-net hospitalswith sophisticated traumaunits and burn centers, tocounty-owned communityhospitals. While they oper-ate on different scalesand face a variety ofproblems, they also facecommon challenges.

“Their governance growsout of their public mission,and they rely on publicdollars,” says Larry S.Gage, president of theNational Association ofPublic Hospitals and HealthSystems in Washington,DC. “The first challengepublic hospitals face isbalancing the ability tofunction like a hospital inthe hospital industry, withthe need to be accountablefor the use of public funds.They may operate underelaborate procurementcodes and civil servicerules. Often a publichospital canʼt make deci-sions in a timely fashion,or enter into joint ventureswith physician groups.”

Barry Bader, a governanceconsultant (and publisherof Great Boards) adds,“Look at many of the bestpractices being advised forcorporate and not-for-profitboards, from competency-

continued on page 2 �

Best Practices forPublic Hospital Governance

By Elaine Zablocki

Grady Memorial Hospital, Georgiaʼs largest safety net hospital, facesa $120 million shortfall and may run out of money by year's end. InJune, a business-led task force called for a change in governance asa key element in keeping the hospitalʼs doors open.

REPRINTED FROM GREAT BOARDS, Fall 2007

� continued from page 1

based selection to creatinga culture of candor andteamwork. Every one ofthose practices is compro-mised by the constraintsplaced on public hospitals.Itʼs a credit to their ingenuityand commitment that theyaccomplish all they do.”Indeed, clever workaroundsare a tool of the trade foreffective public hospitalCEOs and their boards.In conjunction with TheGovernance Institute (TGI),

Great Boards set out todiscover how publichospitals are coping withpotential barriers to goodgovernance. A TGI surveyconducted in July drewdetailed responses from 65out of 390 public hospitals.

The top problems?Participating hospitalsreport that board meetingsopen to the public have achilling effect on candiddiscussions, that board andcommittee minutes can beaccessed by competitors,that it's difficult to hold

board members account-able for attendance andperformance when they'renamed by governmentofficials, and that publichospitals face significantrestrictions in accessingcapital or entering into jointventures.

However, more than 45%of the respondent hospitalssaid their board had insti-tuted policies and practicesthat are successfullyaddressing potential barri-ers to effective governance.

OOppeenn MMeeeettiinnggss aanndd RReeccoorrddss

Virtually all public hospitalsoperate under state or locallaws in which their meet-ings and their records are open to the public, including the press. Theprecise requirements varyconsiderably among thestates, and a meeting may be defined as any discussion among two orthree trustees. Usually


2 | GREAT BOARDS | Fall 2007


thereʼs an exception forcertain subjects, such asconfidential personnel andcredentialing matters, andfor discussions with thehospitalʼs attorney. Somestate laws authorize closedmeetings for strategic planning purposes.

In any case, open meetinglaws put public hospitals in a very different positionfrom the non-public hospi-tals who are their directcompetitors. It is difficult to have open, candid interactions among board members, and between the board and senior management, when boarddiscussions are on publicdisplay.

About 82% of TGI respon-dents say that having boardmeetings open to the public and the media has a chilling effect on candid discussion. This issuereceived the strongestresponse of any of the situations discussed in thesurvey, with about 37%calling it “a very significantproblem.” About 59%reported that any time afew trustees gather to discuss hospital business,a public meeting must beannounced in advance, andthis is a significant problemfor them, while 37% said itwas not a problem. About40% said that it is difficult

to use board committees to analyze information andprovide recommendationsto the full board, becausecommittee meetings alsoare subject to the openmeetings law.

“In Florida you canʼt gettwo board members together for dinner unlessyou notify the public; youcould go to jail for it,” saysGage. “Thatʼs an exampleof one extreme. But thereare valid reasons for openmeeting laws. Where youhave public funds beingspent, and vulnerablepatients being served, youʼvegot to have a balance.”

Some public hospitals havefound ways to keep thedoors open while creatingsuch good communicationsand trust between the hos-pital and the press, andbetween the hospital andcommunity groups, thatneither feels a need toattend meetings. Thatmeans the board or com-mittee can be more candid.

Albemarle Health, inElizabeth City, NC, a 182-bed regional medical centerserving seven counties,has worked hard to estab-lish a open relationship withthe press. “When reporterscall about a situation that

may be a bit difficult, wemake sure to give them full,accurate information,” sayspresident and CEO SharonTanner. “In 2003 we had tolay off 18 employees, andwe worked closely with thepress to communicate whatwas happening and why.We didnʼt hide anything,and the press treated usfairly.” As a result, the pressactually doesnʼt attendmany Albemarle boardmeetings, Tanner says,“because we are so open;and because most of thebusiness we do is quiteroutine.” Good reportersknow the real stories comeout of in-depth interviews,not public meetings. One ofthe hospitals responding tothe TGI survey says it limitsboard committees to threemembers, which exemptsthem from the public meet-ings law in that state. Theburden here is on thosefew directors to becomeeducated and to engage incandid dialogue with thestaff at committee meetingsso the board oversightprocess works, Bader says.“Dashboard reports are ahuge help.”

Health Central, a 180-bedhospital in Ocoee, FL, plus a 228-bed nursinghome in Winter Garden,FL, keeps its board meet-ings, which are usuallyattended by the press, crisp and



When reporters call abouta situation that may be

a bit difficult, we make sureto give them full, accurateinformation. In 2003we had to lay off 18

employees....We didn’t hideanything, and the press

treated us fairly.— Sharon Tanner, president and CEO, Albemarle Health


businesslike, primarily forapproving minutes andcommittee actions.Substantive discussionsare much more likely to occur during board committee meetings. While

Weestablisheda joint

conferencecommittee...We find thishelps createa teamworkapproach tosolving

problems,rather thana tattle-taleapproach.

— Patrick M. Hermanson, president and CEO,

Portneuf Medical Center

committee meetings alsoare open to the public,reporters seldom come.

Another challenge is thatmedical staffs may likeopen meetings becausethey provide a forum andsafety valve to air concernsabout hospital problems.However, CEOs andboards bristle at what they perceive as doctorsmaking end runs to boardmembers.

A better way is to establisha good structure wheredoctors can resolve issueswithout needing to go tothe full board. For example,Portneuf Medical Center, a 256-bed hospital inPocatello, ID, established a joint conference commit-tee about five years ago.The monthly meetingsinclude four board officers,four top administrators,medical staff leaders andby invitation the chair of the county commissioners.“Usually, a joint conferencecommittee just includesboard members and med-ical staff leaders,” saysPatrick M. Hermanson,president and CEO. “Ourmedical staff thought thesediscussions would be moreproductive if all three parties were sitting around the table. We find this helps create a teamworkapproach to solving problems, rather than a tattle-tale approach.”

Open meeting laws alsoaffect the boardʼs ability toreview information on hos-pital performance, includingquality, patient satisfactionand patient safety. About38% of respondents to theTGI survey said that sinceboard and committee meet-ings are public, it is difficultfor the board to engagesignificantly in qualityimprovement oversight.

Bader offers several suggestions heʼs seen public hospitals use. One is to use a board quality committee thatʼs closedunder the stateʼs peerreview protection law.Another is to limit the board quality committeeʼssize so its meetings may be closed under state law.“Above all, the majority ofhospital quality and safetydata are becoming transparent and publiclyavailable,” he says. “Boardshave got to get themselveseducated and comfortablediscussing the hospitalʼsefforts to improve.”

SSeelleeccttiinngg aa CCEEOO Some public hospitalsrecruiting a new CEO must make candidatesʼ orfinalistsʼ names public.About 33% of respondinghospitals said this is a significant problem forthem, while 43% said it is

not a problem, and 6% said it is an asset. WilliamMahoney, President andCEO of Labette Health inParsons, KS, says it is anasset to the hospital,because “the good olʼ boysystem canʼt kick in.Everyone can see the candidates and theirrésumés, and that is appropriate, because afterall the public owns this hospital.”

However, executive searchconsultant Roger A. Quicksays, “the most difficultCEO searches to conductare those for public hospitals, where candidateidentification is required.Candidates who may be ʻp-pie-perfectʼ for the job,and who are sincerely interested for all the rightreasons, are often unwillingto have their names identi-fied before a search iscompleted. The executiveselection process shouldbe treated as a confidentialpersonnel matter, and thepublic interest is not well-served when candidatenames must be revealedduring the search.” Quick is the president and CEO of Quick Leonard Kieffer, in Chicago.




Martha C. Hauser, a seniorvice president at executivesearch firm Witt/Kieffer inAtlanta, estimates thatabout one-third of the candidates who might normally be prospects forany given search are willingto step forward whenthereʼs no guarantee ofconfidentiality. “We are notable to develop the bestpossible slate of candidateson behalf of the organiza-tion when candidate namesmust be released to thepublic and/or the press,”she says. “As search consultants, we feel that public disclosure require-ments prior to the selectionof ʻtheʼ final candidate aresignificant detractors to theoverall process.”

Board Appointments and Composition

Most public hospital boardsdonʼt select their own members. Instead, trusteesare appointed by public officials, or they run for theoffice in general elections.Whatʼs more, some boardsinclude elected officialssuch as county commis-sioners who rarely attendboard meetings because ofother commitments.

The TGI survey found that28% of responding hospi-tals have board membersappointed by a governmententity that accepts no inputfrom the board, and this isa significant problem forthem – because thereʼs no way to encourage appointment of trusteeswith the right mix of

expertise and backgroundsto fulfill governance responsibilities.

Some public officials wel-come input or nominationsfrom the hospital board,and this can strengthentheir relationship. Forexample, DaviessCommunity Hospital inWashington, IN, a 74-bedhospital, has an 11-memberboard that includes threecounty commissioners, fivemembers appointed by theCounty Council, and threemembers appointed by thecounty commissioners.When thereʼs a vacancy,the board presents threepossible names for eachopen slot, in order of pref-erence based on the sortsof expertise most neededon the board. “It has beena participative relationship;

we give them good candidates, and they counton us to give them good feedback on whether boardmembers are doing theirjob,” says CEO RobertHeckert.

Health Central has anunusual way of selecting itsboard. In 1949, when thestate legislature created theWest Orange HealthcareDistrict, it chose 11 differentlocal towns and organiza-tions (such as Rotary, theWest Orange JuniorLeague and the OrangeCounty HomeownersAssociation) to each makerecommendations to the governor for positions onthe 16-member board. To encourage capablenominees, “we try hard to



The most difficult CEO searches to conduct arethose for public hospitals, where candidate identificationis required. The executive selection process should betreated as a confidential personnel matter, and the

public interest is not well-served when candidate namesmust be revealed during the search.

— Roger A. Quick, president and CEO, Quick Leonard Kieffer


keep these groups in tunewith whatʼs happening atthe hospital; we go out several times a year to their meetings, and wecoach them on selectingappropriate nominees,”says Richard Irwin,President and CEO. “If you do this well, the organizations become hospital advocates.”

A related problem for publichospitals is that whenboard members areappointed by another body,it may be quite difficult toremove a trustee, even ifhe or she fails to attendmeetings. About 60% ofresponding hospitals saidthis is a significant problemfor them. Health Central copes with this problemdirectly but tactfully. Onetrustee only attended twoboard meetings in twoyears, Irwin recalls. Theboard chair discussed thesituation with the trustee,and he has now written aletter of resignation. AtAlbemarle, the board chairsent a letter and had a conversation with a member who had missedseveral meetings. “Weobtained a recommitmentto the board, and sincethen it hasnʼt been anissue,” Tanner says. Conflicts of interest canpose a special challenge if non-performing board

members may be removedonly by the public body thatnamed them. LabetteHealth, in Parsons, KS, acounty-owned 109 bedhospital, tries to addressthis by stressing trusteesʼfiduciary responsibilities.Two years ago, it passed astrict conflict of interest pol-icy. Possible conflicts ofinterest were disclosed onthe front page of the localpaper. “Anyone with a pos-sible conflict canʼt serve onrelated committees, andhas to leave the boardroomduring related votes,” saysWilliam Mahoney, presidentand CEO. “The benefit of having a policy set out inadvance is that it clarifiesthat this is not a matter ofpersonalities.”

Confusion About Public Board Members’ Role

There is considerable con-fusion about the externalrole of a public hospitalboard member. In general,not-for-profit board mem-bers are expected to leaveinternal disagreementsbehind them when they exitthe boardroom. Once theboard has made a deci-sion, board membersshould go forward with aunified public message.

But itʼs more difficult to dothis when board meetingsare public and the newsmedia report differences ofopinion and divided votes.Sometimes public boardmembers feel they repre-sent a particular constituen-cy (such as a labor union,an ethnic group, or a geographic area) and needto advocate on its behalf.

About 46% of respondinghospitals say there is confusion about whetherelected or appointed boardmembers represent thosewho chose them, orwhether they have a fiduci-ary responsibility to act inthe best interests of thehospital, and that this is asignificant problem; 51%say it is not a problem.

This was an issue atAlbemarle in the past,Tanner says, and it hasbeen a substantial focus forboard education at meet-ings and board retreats.“Today the atmosphere hasshifted. All our board mem-bers realize that as a boardmember, you represent theentire community. You maydo it through the eyes of awoman, as a physician, asan African-American, butwhen you come to the tablein the boardroom you wearyour hospital hat. Nobodycrosses that line. If some-one looks like theyʼre get-ting near that line, anotherboard member will gentlypull them back.”

Should Public Hospitals Consider Changes in Structure?

Some localities have turned their facilities over to separate not-for-profitcorporations, and othershave contracted with anon-profit to run the hospital with minimal government interference,as is being proposed forGrady Memorial. When TGI asked public hospitalswhether their board or itsparent government hadconsidered conversion toanother ownership struc-ture within the past decade,more than 40% of respon-dents answered yes. Morethan 12% are consideringconversion to anotherstructure right now.

Since 1904, the DenverHealth System had beenan agency of the city andcounty of Denver. Eventually,that became a problem.The hospital couldnʼt join a national purchasing con-sortium; all purchasing hadto go through the city.During the first Gulf War,there was a shortage ofnurse anesthetists, but bythe time the City Councilcould raise salaries, theshortage was over. It tookweeks to get a contractsigned, and six months or more to create a newhospital position.




Under a state law passedin 1994, all health systemassets were transferred tothe newly-created DenverHealth and HospitalAuthority (DHHA), a politi-cal subdivision of Colorado.The mayor appoints DHHAgoverning board members;the City Council approvesthem, and can removethem for cause. Should theAuthority cease to exist,the property would revertto the city, but the city hasno control over DHHAoperations.

What this means, saysDarlene Ebert, generalcounsel for Denver Health,is that now a contract onlyneeds one signature, theCEOʼs. In the past, thehospital could raise fundsonly as part of a generalcity request to voters; nowit can raise its own fundsin the bond market. “Over-all the new structure hasallowed DHHA and its governing board to reallyconcentrate on DenverHealth,” Ebert says. “Weʼrenot distracted by beingpart of a larger city system,and the board can focuson setting strategy for thefuture, in terms of bothfinances and quality of care.”

Short of achange incorporatestructure,anyone

seeking aneasy fixfor the

governancechallengesfacing publichospitals islikely to bedisappointed.

Portneuf Medical Centerfaces an unusual chal-lenge that could lead to achange in structure. Thehospital is part waythrough a $200 millionbuilding project using rev-enue bonds issued in2005, and it expected touse additional bond pro-ceeds to finance the rest ofthe project. However, in

April 2006 the IdahoSupreme Court ruled thatwith very limited excep-tions, public entities cannotissue revenue bonds;instead they must issuegeneral obligation bonds,requiring a public vote.The hospital governingboard recommends con-version to a 501(c)(3), butthis plan is controversial.CEO Hermanson predictsthe hospitalʼs structure willchange dramatically (eitherto a free-standing not-for-profit, or to become part ofa chain) within the next sixto nine months.

* * *

Short of a change in cor-porate structure, anyoneseeking an easy fix for thegovernance challengesfacing public hospitals islikely to be disappointed.Although public hospitalboards are finding ways topopulate themselves withwell-qualified membersand to have candid discus-sions based on good infor-mation, thereʼs no guaran-tee that the same practicestransplanted elsewhere willhave the same result.

“Board members have tounderstand they share afiduciary responsibility forthe success of the organi-zation and its mission, andthey have to put that inter-est ahead of any politicalor personal agendas,” says

Bader. “They have to buildtrust in each other and inmanagement. When theydo, the best practices have a good chance tosucceed.”

— Elaine Zablocki, editorof Great Boards, is a freelance healthcarejournalist whose work hasappeared in PhysiciansPractice, Internal MedicineNews, Medicine on theNet, and numerous otherpublications.

FFoorr MMoorree IInnffoo rrmmaatt iioonn:: Darlene M. [email protected]

Larry S. Gage [email protected]

Martha C. Hauser [email protected]

Robert [email protected]

Patrick M. [email protected]

Richard [email protected]

William Mahoney [email protected]

Roger A. Quick [email protected]

Sharon [email protected]


mailto:[email protected]











Fresh Thinking for Improved Eff ectiveness & Effi ciency in our Board Work

Governance Enhancement Plan

An Integrated Healthcare Strategies Practice

GOVERNANCE & LEADERSHIP SERVICES

Actions Developed During Several Board Orientation and Planning Retreats

Enhancing the Governance of Our Health System 2

Our Focus During Governance Enhancement Planning (GEP)

Collaboration between leaders of Integrated Healthcare Strategies and The Governance Institute (www.governanceinstitute.com) has lead to the development of this sample guide to illustrate the

results of “Governance Enhancement Planning.” Workplans and budgets will vary for each unique governance enhancement process.

▪ What is great governance?

▪ Why do we need to intentionally develop and nurture it, rather than hope it happens by magic?

▪ What are the building blocks for great governance?

▪ What actions should we take for enhanced board performance?

▪ What actions should we each try to take to enhance our own personal growth and effectiveness as a board member?

▪ What actions should management take to help support our efforts at collective and personal performance improvement?

▪ What are the longer-term strategies we should consider to advance the overall effectiveness of our governance?

Measurable ResultsIf hospital governance leaders do the actions in this sample “Governance Enhancement Plan” (GEP) well, they should expect to see the following important results by the end of your next fiscal year:

▪ We will all have a greater sense of comfort and satisfaction as board members that our decision-making processes have these key attributes:

− Focused more on the strategic than the tactical or operations.

− More efficient use of our time and talents.

− More civil discussions about what to do and how.

− More mutual respect and trust for each other, and for our management and physician colleagues.

▪ Our stakeholders (patients, citizens, physicians, and employees) will have greater confidence and satisfaction with where OUR HEALTH SYSTEM is headed; and

▪ OUR HEALTH SYSTEM will be achieving a higher level of financial

performance and vitality.

We agree to measure the degree to which these goals of great governance are actually achieved during an upcoming HEALTH SYSTEM Board Retreat.


“I appreciated this chance early in my term as a new board member to

see where we are, and to talk openly, away from the limelight, about

how we can all improve the way we work together and how we work

with management.”

“I have been on the board for some time, and this is the type of idea

exchange we need to keep us moving in the right direction for governance

effectiveness.”

When you successfully develop your Governance Enhancement Plan (GEP), you are more likely to generate these observations from board members:


Section 1: Background for Governance Enhancement Planning

Purpose of Governance Enhancement Plan (GEP)To identify practical strategies and short-term actions that will enhance our effectiveness in the governance of our health system.

Process for GEP Discussions:Board leaders and CEO work with advisors to review the following against governance best practices:▪ Strategic and financial plan▪ Time audit of board member and executive time devoted to governance▪ Board self-assessment survey▪ Past committee minutes and work plans▪ Board agenda and meeting materials▪ Bylaws and reports to the community on community benefits

Operations Review Insights:▪ We face several financial challenges, but management has a number of solid

initiatives and systems underway to guide us through a financial-turnaround. We will want to track management’s progress in achieving stretch performance targets.

▪ Benchmarking our performance against other hospitals and health systems will help us all focus on what is most important for the economic vitality, which we need to assure we can meet our obligations of patient and community health service.

Strategic Planning Review Insights:▪ We have a hierarchy of results we hope to achieve as we work together to

accomplish our healthcare mission for the region.▪ Management has a system to measure and track accountabilities for over 90 tasks

that are clustered and tie back to our strategic plan’s major performance goals and initiatives.

Board Orientation and Development Insights:▪ Our strategic plan calls for us to enhance our effectiveness as board members.▪ Our planning committee asked that we focus an important block of time in our

GEP to explore ways to build on the good parts of our governance system, and find sensible ways to improve our board work in the future.

Opportunities for enhanced governance team work exist for us to better serve our communities’ healthcare and health.


Section 2: What is Great Governance?

Building Blocks for Great Governance

To accomplish this lofty purpose, the board understands that a number of building blocks for success must be available.

A system of policy decision making by community, physician, and management leaders designed to: (a) define the strategic and financial plan for the health system; (b) hire and support a CEO to implement actions and investments needed to achieve this strategic and financial plan; and (c) to actively monitor, on behalf of the public and our many other stakeholders, our progress to achieve these plans and budgets in the most cost-effective, ethical, and highest-quality manner possible.


Building Blocks for Great Governance?

Enhanced Board

Information System

Fewer but Better

Committees

Leaner Size & Structure

of Board

Board Compensation KSA Matrix

Clear Market Needs & Strategic

Plans

Fewer/Better MeetingsCalendarsAgendas

Clear Board Job

Descriptions

Terrifi c Orientation

Process

Excellent Ongoing

Education Programs

Rigorous Ongoing

Assessment and

Refi nement

Section 3: Why Do We Need to Intentionally Develop and Nurture Great Governance?

Why Faster and Smarter Decision Making?

Our assessment of our market needs, our competitive position, our fiscal position, and the likely regulatory challenges of the next few years are unforgiving pressures that demand our governance model yield faster and smarter decision making.

An Environment of Change and Challenge Demands Great Governance

▪ New medical technologies

▪ New information technologies

▪ More assertive consumers and patients

▪ Shortage of nurses and technicians

▪ Calls for better quality and patient safety

▪ Lack of revenue from low pay insurance entities and uninsured self pay

▪ Erosion of employee morale and loyalty

▪ Competition for patient care revenue, physician loyalty and enthusiasm, employee excitement and creativity for enhanced care/service, and scarce capital needed to keep pace with ever-increasing demands for innovative technologies, compensation of skilled workers, and new program developments for better care and health.

The challenges facing OUR HEALTH SYSTEM, and the complicated needs of our communities and patients, physicians, and employees require us to make faster and smarter decisions about who we are; where we need to go as a high performance health system; how we need to work together to get there; and how we will measure and monitor the degree to which we are getting there, and then to make the needed improvements if we stray off course.


Section 4: What Actions Should We take now to Enhance Our Performance as the Board of OUR HEALTH SYSTEM?

We Should Be Prepared to Do More of This▪ Open and civil discourse about our plans, progress, options and issues.▪ Calls not just for more and better data, but data that have been transformed

into information, and then transformed from information into intelligence that contributes to strategic thinking and decision making needed for bold initiatives.

▪ Come well prepared to board and committee meetings.▪ Promote what is best for the overall integrity and vitality of OUR HEALTH

SYSTEM and its stakeholders.▪ Focus on strategic “dashboard” measures of performance in areas of service

quality and finance.▪ Calls for one-page summaries of proposed strategic actions, with a clear and

easy-to-understand rationale and the analysis process followed to meet the proposal.

▪ Trust more of the work of our committees.▪ Provide at least 2–3 times a year for higher quality of brainstorming and relaxed

discussion about our challenges, plans, and progress.▪ Calls for one-page summaries of proposed strategic actions, with a clear and

easy-to-understand rationale and the analysis process followed to meet the proposal.

We should also consider the ideas for better meetings, better information, and better committee work shown on the last pages of this summary GEP report.

We Should Be Prepared to Do Less of This▪ Not becoming more educated about the issues and options facing OUR

HEALTH SYSTEM.▪ “Scapegoating” and reliving difficulties of the past; i.e., more learning, less

hand-wringing.▪ Individual politicking, posturing, or grandstanding.▪ Improperly interrupting each other during meetings.▪ Straying from strategic opportunities and challenges into engaging in micro-

management of operations.

We defined a critical few actions we should more often take, and a smaller number that we should do less often.


Section 5: What Can I Do as an Individual to Enhance My Personal Performance and Contributions to Great Governance of OUR HEALTH SYSTEM?

I Am Prepared to Personally Strive to (personal card for each board member and manager available for review):

▪ Improve the quality and style of my communication with my colleagues on the board and with management.

▪ Work to build consensus among my fellow board members.

▪ Work to support, thank, encourage, and motivate our employees.

▪ Be more knowledgeable about health industry directions and developments.

▪ Be more trusting and supportive of the hard work of our committees.

▪ Frame disagreements in a constructive manner.

▪ Look for partnerships and networking opportunities to enhance our ideas and effectiveness.

▪ Remember that we are serving the community’s health and healthcare.

▪ Improve my listening skills to hear what people are really saying.

▪ Promote our positive accomplishments to nurture good image and morale in and outside our health facilities.

▪ To behave as our stakeholders would want me to behave in their best interest.

▪ To enhance the quality of our committees’ work.

▪ Bring forward great information that supports the board’s decision-making activities.

Personal board member commitments to continuously improve governance effectiveness


Section 6: What Actions Should Management Taketo Help Support Great Governance of OUR HEALTH SYSTEM?

Management Needs to Do More of This

▪ Provide information that has following key attributes:

1. Timely and well enough in advance to come prepared to use it.

2. Offers comparative insights into how we and others are doing against accepted industry performance targets and criteria.

3. Comprehensive but summarized graphically (via paper and web-based dashboards) wherever possible.

4. Accurate, honest and reliable.

▪ Frame requests for action with clear definition of what is needed, the rationale and risks associated with the request, and a summary of what other options or analyses were used to arrive at the requested proposal.

▪ Share your expertise and experiences to help improve our decision-making effectiveness and efficiency.

Management Needs to Do Less of This

▪ Overreacting to individual board member requests that inappropriately distract your time and energies from what the board has defined as strategically important.

▪ Not following-up in a timely and complete manner on important progress reporting about our plans and budgets.

▪ How would you edit and enhance similar initiatives for your organization?

Respect and support the board members as they strive to serve the public’s interest and the long-term vitality of OUR HEALTH SYSTEM


Section 7: What Are the Longer-Term Strategies We Should Consider to Advance the Overall Effectiveness of the Governance of OUR HEALTH SYSTEM?

Enhanced Annual Strategic Planning Linked to Budgeting

Strengthen our use of a carefully managed annual calendar and process for strategic studies and thinking about how best to defi ne plans that successfully drive our capital and operating budgets.

Coordinate More Carefully with New Community Advisory Councils

Develop more frequent and coordinated joint education and planning with community advisory councils that help us assess and shape our plans and board work.

Define the Attributes of an Ideal Board and Ideal Board Members

A new profile on competencies and attributes our board members require would help us better accomplish:

▪ Attracting other excellent community leaders to stand for future board service.▪ Guiding how we educate candidates for board service.▪ Guide the appointment of persons who may fill an unscheduled board vacancy.▪ Educating and developing the knowledge, skills, and attitudes of existing board

members needed for world class governance.▪ Guiding our annual self-assessments of the board, our committees and

individual board member performance.

Enhancing our governance systems and partnerships for strategic planning and development


Our research into high performance hospital boards suggest a number of practical ideas for enhanced governance in areas of better meetings, committees, and information, as follows:

Better Meetings▪ Board members must come prepared, after management has provided information

with adequate time for study and raising questions with the chair before the meeting to avoid surprises for all of us.

▪ Start and end on time (hopefully no more than 3 hours), with minimal distraction from agenda to unrelated items or issues, and with reasonable time lines/discipline so no one dominates and we can move through the agenda.

▪ Allow for consent agenda items and for questions/comments on new topics that can be brought back for future meetings or work by committees.

▪ Publish an 18 month calendar with periodic agendas focused on strategic reviews and education.

Better Committee Work▪ Develop annual road map/action plan for each committee.▪ Establish web-based schedule for all meetings that does not change dramatically from

year to year.▪ Keep members on committee for more than one year to gain continuity and quality.▪ Develop a more uniform and useful process for reporting on committee plans and

progress.▪ Provide better information and lead time for committee work and deliberations.▪ Committee chairs need guidance on efficient and effective conduct of meeting agendas

and discussion to stay on track.▪ Committee chairs need to actively invite and encourage ideas from all members.

▪ Everyone needs to listen and interact courteously.

Better Information▪ Develop more consistent and clear reporting formats.▪ Avoid jargon and abbreviations.▪ Use standard English in reports.▪ Increase management by exception reporting.▪ Rely on more executive summaries.▪ Share insights more intentionally—gather from other meetings and healthcare articles.▪ Always strive for accurate data.


ACTIONS FOR GOVERNANCE VITALITY

Insights from National Board Leaders

The Manager’s Perspective1. Design and invest in a clear game plan to earn and rekindle trust, win–win, and

true/realistic partnerships with our physician colleagues and clinical staff.2. Establish an action plan and budget to compete on quality dimensions and

excellent customer service.3. Continue aggressive cost controls and drive toward the most efficient provider

system in our local market.4. Just say no to bad managed care contracts.5. Develop explicit plan to lower our operating costs through use of new

technologies.6. Get smart fast on how to provide “knock-your-socks-off service” to well-

informed and assertive consumers (especially the “Boomers”).7. Define our core competencies (who we really are) and drive our behavior and

investment to maximize them.8. Develop an aggressive plan to access capital needed to excel and keep pace.9. Invest economically and psychologically in care management that really makes a

difference for quality and to payers.10. Immediately convene a session on what it will take for us to innovate and

streamline to build dominant market position in an unforgiving and rapidly changing market.

11. Design a strategy and budget to serve the elderly segment with chronic care needs.

12. Invest in information technology game plan to bond with patients, physicians, and payers.

13. Support board to lobby for more favorable payment arrangements from big government payers.

14. Others …?

Approximately 300 leaders from over 74 organizations in 36 states were asked to react to the many key challenges likely to face hospitals and health systems in the US during the next five years. Participants in the conferences were then asked to define the single most important action that their organization should consider taking within the next 24 months. Their insights were organized by physician, non-physician board member, and manager’s perspectives. The top actions from each group’s perspective are displayed below for your consideration and adaptation for your unique reality.


The Physician’s Perspective1. Build physician loyalty the old fashioned way…earn it with attention to the basics of good

patient care, providing great and happy nursing staff, establishing real seats for doctors at the budgeting-planning table, try listening more than talking, and keep investing in sensible modern technologies.

2. Board must work to strip out fat in administrative overhead cost structures & systems.3. Explore new arrangements for aligning economic interests that enhance quality and do not

conflict with “STARK-style” regulations.4. Develop strategies and resources to support increased urgency for efficient costs of

operation so we can compete in a cost-sensitive market.5. Maximize use of medical technology, while decreasing managerial bureaucracy that seems

to simply justify manager’s existence.6. Invest in actions and systems to excel in patient clinical care outcomes, and “Better-than-

Disney” service satisfaction.7. Banish the politicians who defined payment cuts.8. Invest in new information systems & networks that link physician offices and hospitals for

better (cost-effective) clinical and managed care decision making.9. Develop a 90-day action plan to reduce medically caused morbidity and mortality in our

hospitals.10. Improve our ability to manage chronic diseases.11. Develop clear ways to access the capital we need to keep pace with consumer and doctor

demands for excellence.12. Shift focus to more ambulatory care and leverage physician reputations to lift the

organization’s reputation.13. Invest in aggressive strategies to get us (hospitals and physicians) “wired” for modern

consumers and payers.14. Abandon old hospital–physician arrangements that are driven by command and control

mentalities and mechanisms, and strive for meaningful partnerships for better patient care… economic vitality will follow.

15. Implement 120-day initiative to reduce inefficiencies while enhancing patient care.16. Establish and discuss consequences of scenarios in which patient care rationing occurs as

in UK and Canada.17. Guard against encroachment of capitation arrangements as it will drive a knife into

physician–hospital relationships;18. Get ready for transfer of economic, political, and managerial influence from the hospital

service mind-set to outpatient settings that are more accessible and cost-effective.19. Invest in care management systems and processes that keep us “wired.”20. Develop lobbying game plan that gets government to pay for what they think they need/

want.

21. Others …?

The Non-Physician Board Member’s Perspective1. Stop talking about all the obstacles to good physician–hospital relationships and get

something going in May that rekindles rapport, respect, and reimbursements …(“don’t do nuthin’ cuz we can’t do everything”).

2. Sit down immediately to talk with our physicians and nurses about how to deliver world-class care by investing in and nurturing our scarcest and most important resources … our staff and physician colleagues; they have common sense and we need to listen and respond.

3. Invest in innovative ways to earn “fanatical patient care loyalty.”4. Harness new information technologies that get us “wired”...to our patients, to our

physicians, to our employees, and to our payers;5. Define a clear “capital creating plan” to help improve the chances for achieving our

strategic vision and mission.6. Redefine our local board education programs to talk about these tough issues and

challenges.7. Define sensible plans for population health status improvement among the elderly and

“near-elderly,” and in rural areas.8. Forge aggressive plan for capital access for big needs (e.g., earthquake retrofit, new

joint ventures with specialty physicians, enhanced development of nursing staff, new technologies, and working capital for new information technologies and moves into outpatient service initiatives).

9. Convene meeting of local and state politicians to define ways for funding the under insured and demands for more chronic care for the “boomers.”

10. Conduct complete assessment of our medical and information technology status and then define a sensible budget to continuously improve our status.

11. Ask management to establish “benchmarking relationships” with best practice hospitals and systems to mutually learn ways to excel in cost-effective services.

12. Continue investing in “brand-building” marketing with our marketplace publics and purchasers.

13. Convene immediate meeting of our strategic planning committee with key physician leaders at the table to discuss consequences of this conference.

14. Redefine directions for our hospital-owned physician practices.15. Conduct re-evaluation of our governance structures and systems to see if we are as

effective and efficient as we need to be.16. Continue to pay attention to the bottom line and use technology to get us more efficient.17. Others …?


IMPROVING GOVERNANCE

Insights from Board Membersand Managers

How to Attract Good Committee Leaders1. Choose board members who are active, interested, and informed on the hospital, its ability

to meet the needs of the community, and future success.2. Do an assessment of prospective board members’ interests, then choose committee

members according to their interests and specialties.3. Committees should be chaired by someone with years of experience on board and someone

willing to give the time and effort of leadership.4. Assure leader that all members of the committee are involved with the issues.5. Let prospective committee leaders know when the meetings will be scheduled, and advise

them whether there will be additional meetings if necessary.6. Seek those with a proven ability to hold people on task.

7. Offer education and support relevant to committee’s focus.

How to Increase the Effectiveness of Committees1. Keep committees focused on goals and purposes by making them clear from the beginning.2. Develop clear expectations of what the committee needs to accomplish for each quarter.3. Develop committee work plans to help direct the committee’s work. (Ask board members

to go through this same process at least once a year.)4. Every committee member should be knowledgeable about all aspects of the committee’s

duties and responsibilities.5. Hold ongoing discussions with board members relating to topics of their particular interest.6. Make members feel important about their duties on their committees; delegate specific

tasks to individuals for reporting to next meeting.7. Listen to the public and key stakeholders to improve the quality of discussions in meetings.8. Bring to committee members issues about the hospital which are being talked about in local

community groups.

A group of over 150 board and administrative leaders were recently asked to identify the single most important action:

1. To attract good leaders to head board committees;2. To increase the effectiveness of committees; and3. To improve the effectiveness of board meetings.

Here are 59 practical ideas for the front line to consider in your Governance Enhancement Planning. Have a conversation with your board about how some of these strategies could move your governance into the high performance domain.


How to Increase the Effectiveness of Committees, Ctd. 9. Committee must meet regularly (at least quarterly) with strong committee chair to

facilitate/monitor the focus of the committee.10. Committees should maintain an ongoing dialogue with administration.11. Committee meetings should not be free-flowing; they need to be structured, concise, and to

the point.12. Have frequent Q&A sessions in committee meetings.13. Assign work to everyone on the committee.14. Assume there will be active participation of the committee chair.15. Committee chair must get all individuals involved.16. Name a secretary to keep minutes of meetings so time is not lost in each meeting bringing

members up to speed on past activities.17. Have open discussions at most committee meetings.18. All reports to committee board should be concise and action-oriented.19. Put action items at the beginning of the committee meeting agenda.20. Continuously educate committee members concerning their tasks and responsibilities.21. Spend more time addressing hot issues then arrive at a consensus about the action to take.22. Hand out detailed reports that have a short executive summary, then solicit committee

members’ questions on the topics covered.

How to Improve the Effectiveness of Board & Committee Members1. Make sure meetings are 80% focused on future and strategically important items,

not 80% on review of past history.2. Board meetings can be more effective if participants look at future critical issues

and develop strategies for dealing with expected problem areas.3. Use “dashboards” and graphics to review performance data: 7–10 key measurements

linked to strategic goals.4. Have a planned calendar for the year that defines when key topics and decisions are

planned.5. Maintain a clear-cut purpose for each meeting through careful pre-planning in order to

achieve objectives in limited amount of time.


How to Improve the Effectiveness of Board & Committee Members, Ctd.6. Have a two-part agenda: first, deal with action items from committees; second, open the

discussion to new ideas and plans.7. Have a well-defined agenda that is circulated in advance.8. Ask members at beginning of the meeting if there are any additional items to place on

agenda.9. Information about discussion items should be provided to members a few days before the

meeting.10. Have management liaison present issues with management’s perspective of plus and minus

of action along with specific recommendations.11. Allow a short period at end of meeting to enable board members to express personal views

on the work that the board is doing.12. Educate board members about their duties and responsibilities and encourage them to defer

to committee decisions/recommendations in most cases.13. Meetings should be interesting. Format may need change from time to time to keep

members’ full attention.14. Well-organized but flexible agenda to provide sufficient time for discussion and comment.15. Fewer lengthy reports, more time to discuss and plan for the future.16. Efficiently deal with routine matters; e.g., using a consent agenda, reserving more time for

the important agenda items.17. Ask each board member, in less than one minute, to add something of concern to the

meeting (whether it is a weakness or strength or simply information).18. Encourage members to read/study board info before the meeting.19. Send minutes, committee reports, financial reports, quality reports, etc., to board members

ahead of time. Avoid unnecessary repetition of these reports during meeting, leaving more time for long-range planning and to further refine the organization’s mission.

20. Consider using new technologies to improve flow of ideas and information among all members and CEO, e.g. ,fax, e-mail, special board-eyes-only Web site.

21. Make certain all members have an opportunity to participate in meetings.22. Solicit views from nursing staff and physicians on quality of staff, morale, adequacy of

personnel, and new programs.23. Occasionally bring in more presentations from “real people” such as a patient, a physician,

a community leader, or a competitor.24. Bring in people who represent alternative medicine.25. Stay on track with the agenda and its items. The board chair needs to limit extraneous input,

comments, and personal agendas.


About Integrated Healthcare Strategies

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pensation and benefi t programs tailored precisely to your organization’s need. Our clients include more than 1,200 major healthcare providers, 1,800 hospitals, and 500 physician groups in all 50 states.

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INTEGRATED HEALTHCARESTRATEGIES

How to Improve the Effectiveness of Board & Committee Members, Ctd. 26. Build in Q&A sessions to get board members involved.27. Educate board members to the fact that they have a fiduciary responsibility to act and make

decisions on what’s best for the community, and not individuals.28. Encourage all to listen and be prepared to exchange ideas and then take action.29. Provide better board member orientation and education.30. Better committee reports that have an “easy-to-read” format with a one-page executive

summary.

National Association of Public Hospitals and Health Systems

LEGAL STRUCTURE AND GOVERNANCE OF PUBLIC HOSPITALS AND HEALTH SYSTEMS

National Association of Public Hospitals and Health Systems

legal structure and governance of PuBlIc hosPItals and health systems

larry s. gageanne B. camperrobert falk

washington, dc

copyright © 2006 by the national association of Public hospitals and health systems. all rights reserved. Published august 2006. Printed in the united states of america.

This publication is available as a PDF file which may be downloaded from the publications area of our Web site, www.NAPH.org.

About Powell Goldstein

Powell Goldstein LLP was established in 1909 and has more than 300 attorneys, at offices in Atlanta and Washington, DC, who provide legal counsel to clients in a wide variety of practices. For more infor-mation, visit http://www.pogolaw.com or call 202-347-0066.

About the National Association of Public Hospitals and Health Systems

The National Association of Public Hos-pitals and Health Systems represents more than 100 of America’s most important safety net hospitals and health systems. These facilities provide high-quality health services for all patients, including the uninsured and underinsured, regard-less of ability to pay. They provide many essential community-wide services, such as primary care, trauma care, and neonatal intensive care, and educate a substantial proportion of America’s doctors and nurses. NAPH member hospitals and health systems are also major providers of ambulatory care services, providing nearly 30 million ambulatory care visits annually. NAPH advocates on behalf of its members on issues of importance to safety net health systems across the country. NAPH also conducts research on a wide range of issues that affect public safety net health systems.

Acknowledgments

The authors extend their gratitude to the NAPH member hospitals and health systems that contributed information and feedback for this report. In addition, we thank Barbara Eyman and Charles Luband of Powell Goldstein and Christine Capito Burch, Betsy Carrier, and Lynne Fagnani of NAPH for their insight and guidance in the development of this report.

About the Authors

Larry S. Gage, Partner, Powell Goldstein LLP

Larry Gage focuses his practice in the areas of federal and state health industry legislation and regulation, health policy, litigation, and corporate representation. He is director of the firm’s Washington health practice group and has served since 1981 as president of the National Asso-ciation of Public Hospitals and Health Systems (NAPH).

Anne Camper, Partner, Powell Goldstein LLP

Anne Camper focuses her practice in the areas of health law, health care transactions, and general corporate and business law. She has successfully represented major pub-lic and non-profit hospitals and hospital systems, as well as physician groups and other health care providers, cities and coun-ties, medical schools, technology-based corporations, national trade associations, and other charitable and educational organizations.

Robert N. Falk,

Former Counsel, Powell Goldstein LLP

2006-2007 naPh executive committee

Officers

Sandral Hullett, MD, MPH Cooper Green Hospital Birmingham, al Chair

John W. Bluford, III Truman Medical Centers Kansas city, mo Chair-Elect

Gene O’Connell San Francisco General Hospital san francisco, ca Secretary

John Sideras The MetroHealth System cleveland, oh Treasurer

John A. Benz, MBA Memorial Healthcare System Hollywood, FL Past Chair

At-Large Members

Kirk A. Calhoun, MD The University of Texas Health Center at Tyler tyler, tX

Lynda D. Curtis, MS Bellevue Hospital Center New York, NY

Lisa E. Harris, MD The Health and Hospital Corporation of Marion County Indianapolis, In

Dennis D. Keefe Cambridge Health Alliance cambridge, ma

Stephen W. McKernan University Hospital, The University of New Mexico Health Sciences Center albuquerque, nm

Marvin O’Quinn Jackson Health System miami, fl

Don R. Smithburg LSU Health Care Services Division Baton rouge, la

Mikki Stier, FACHE, MHSA Broadlawns Medical Center des moines, Ia

Thomas P. Traylor Boston Medical Center Boston, ma

Gary W. Wells Los Angeles County Department of Health Services los angeles, ca

Bob Baker (Ex Officio) University HealthSystem Consortium oak Brook, Il

naPh leadership

Larry S. Gage President

Christine Capito Burch Executive Director

contents

Preface vii

1. Executive Summary 1

2. Typical Legal Structures of Public Hospitals and Health Systems 5

Direct Operation 6

Separate Government Entity 8

Taxing District 10

Nonprofit Corporation 12

Variations of Governance Models 15

3. The Role of the Board 20

General Board Duties and Responsibilities 20

Issues Specific to Members of Public Hospital Boards 23

Functionally Dedicated Governing Body 24

Composing a Public Hospital Board 25

Appointment and Removal Processes 25

Conflicts of Interest 26

Training 27

Board Leadership in the Community 28

Board Role in Advocacy 28

4. The Challenges of Governing Public Hospitals and Health Systems 30

Legal, Regulatory, and Political Challenges 30

The Implications of Sarbanes-Oxley for Public and Nonprofit Hospitals 32

Compliance 36

Physician Staffing 39

5. Restructuring Public Hospitals and Health Systems 41

Public Hospital Closures 42

Evaluating the Status Quo and Identifying Needs 45

Consensus on Goals of Change 47

Balancing Factors and Assessing Structural Options 48

Launching the Restructuring Effort 49

contents (continued)

Communication and Education 49

Issues to be Addressed in a Restructuring 52

6. Impact of Legal Structure on Medicaid and Related Reimbursement Issues 62

Medicaid 62

Federally Qualified Health Centers 67

7. Other Financial Issues 70

Fundraising 72

Appendix: Reorganization Task List 74

Glossary 78

Notes 80

NAPH Members 82

naph vii

Effective governance has never been more important for hospitals and health systems generally—or for public hospitals in par-ticular. Throughout the hospital industry, there is heightened attention to the importance of governance. Many of the corporate governance controls set out in the Sarbanes-Oxley Act have now spilled over to the nonprofit sector. The spotlight is also being cast ever more glaringly on hospital governance by key congressional committees and by the legislatures and attorneys general of many states.

It is more vital than ever for hospital board members and senior management to pay attention to the four “hallmarks” of effective hospital governance, and for board members to accept full accountability for their stewardship in each of these areas: Strategic orientation: to articulate the

mission and establish long-term direction Fiduciary duty: to preserve fiscal

viability Public accountability: to represent the

needs of the public and be accountable to the public Advocacy: to represent the hospital’s

needs before the executive and legislative branches and the public.

Yet each of these hallmarks carries addi-tional burdens for public hospitals. Even where there is a separate, dedicated board for a public hospital or health system, responsibility for strategic orientation in the public sector is often shared with political entities and elected officials who respond to competing constituencies and interests that are not always aligned with a

health system. Exercising fiduciary duties also can bring board members into con-flict with elected officials. Developing and implementing budgets often requires nego-tiation with and approval from external authorities. These obligations, in turn, reduce incentives for effective bottom-line management and can include constraints on human resources management, pur-chasing, and other areas—constraints that do not exist in the private sector.

“Public accountability” also takes on a new meaning in the public sector, with board members often responsible to a broader range of constituencies and forced to operate under open meeting and record laws that serve a legitimate public purpose but that, at times, can constrain effective governance. Even the board member’s duty to serve as an advo-cate for the hospital is more complex and multi-faceted in the public sector, albeit more important than ever due to the added external and internal pressures faced by public hospitals.

External pressures include severe, ongo-ing constraints on federal and state funding sources at a time when most public health systems also face increased demand for already under-compensated services. At the same time, most public health systems are confronting internal pressures on a wide range of fronts, including: a compromised ability to recruit and retain key clinical and adminis-trative staff

difficulty gaining access to capital fierce competition for scarce local resources, and

Preface

viii

increased scrutiny from the elected officials who control local funding and policies.

In response to these pressures, many government hospitals and health systems have considered or implemented a reor-ganization of their legal structure and governance in recent years. Their rea-sons for considering such reforms—and the various structures they have elected to adopt—are spelled out in detail later in this report. This report also includes detailed “how to” information for those who wish to consider restructuring.

In weighing the decision to restructure, hospitals first should consider a few notes of caution. Before considering a major reorgani-

zation, it is essential to evaluate the challenges and obstacles that face a given hospital or health system—and to deter-mine which of those challenges can be addressed through improved structure or governance. Restructuring alone will rarely solve all of a hospital’s problems; it can be one essential tool, but other tools likely will be needed. If a hospital has identified problems

that can be solved through a reorganiza-tion of its legal structure or governance, the new structure it adopts must effec-tively address those problems. For example, if civil service or procurement constraints are considered major obsta-cles, the new organization must be able to adopt new rules and approaches. If the creation of a new legal structure

and a new governing board is deemed

necessary, the new board should be given real operating authority and then permitted to use it. Where restructuring has failed to solve problems or meet expressed goals, it frequently has been due to elected officials withholding too much explicit authority or interfering too often in the ability of the new board to exercise authority. In the process of creating a new board,

hospitals should establish a process to recruit and retain highly qualified board members, both initially and over time. A board should be composed of success-ful individuals who possess the range of experience and skills to govern an organization effectively during a crucial transformational period and who fully understand that their primary allegiance when they sit in the board room is to the future viability of the hospital or health system (not to an external constituency). Once such a board has been recruited, the hospital must provide board members with education and ongoing information, must structure their committee and board meetings to permit them to govern effectively without wasting their time, and must provide them with sufficient

“job security” to enable them to make tough decisions with confidence.

Having considered these notes of cau-tion, hospital administrators should be able to draw on the materials laid out in this report to make intelligent and informed decisions about the adequacy of their hos-pitals’ existing structure and governance to meet current and future challenges.

naph

naph 1

The Institute of Medicine 2000 report, America’s Health Care Safety Net: Intact but Endangered, defines “core safety net providers” as having two distinguishing characteristics: By legal mandate or explicitly adopted mission, they maintain an “open door,” offering patients access to services regardless of their ability to pay; and

A substantial share of their patient mix is uninsured, Medicaid, and other vulnerable patients.1

Public hospitals shoulder unique regu-latory and political burdens that result from their safety net missions and their government status. As institutions, public hospitals provide services that are needed in the community but may not generate sufficient revenue to cover costs. Because of the safety net role of these hospitals, as well as their public ownership or financial support, many community constituents feel a vested interest in what services they provide and how they conduct their busi-ness. At the same time, public hospitals face the same fiscal and competitive pres-sures that confront the rest of the health

care industry in America. Consequently, the governing boards of public hospitals face special challenges associated with the mission of their institution and, frequently, their public nature.

The pressure is especially acute for those public hospitals and health systems that rely most heavily on federal, state, and local government funding to pay for their wide range of primary, acute, and public health services. For most such systems, market pressures are intensified by a vari-ety of factors that have far less, if any, effect on their competitors. These include the continuing increase in the uninsured and underinsured population in many areas, reductions in Medicaid funding and local support, the impact of immigration reform, greater competition for Medicaid patients, the explosion in managed care, responsibility for public health and other community services, fettered governance, the obligation to conduct sensitive business in the public eye, and other cumbersome political or bureaucratic obstacles. Many public hospitals have found that public status, in itself, precludes them from imple-menting efficiencies or taking other steps

executive summary

Public hospitals play a crucial role in America’s health care safety net. Although their structures vary, they all provide a significant level of care to low-income, uninsured, and vulnerable populations. They share a commitment to pro-vide access to health care for people who, due to financial or insurance status or health condition, otherwise would have limited or no access to necessary care.

1

throughout this report, the term “public hospitals” is used to refer to public hos-pitals and health systems, which may include health care providers owned and operated by cities, counties, states, universities, non-profit organizations, or other enti-ties. they share a common safety net mission of providing health care to all, regardless of ability to pay.

PUBLIC HOSPITALS

naph legal structure and governance2

that private providers use to improve operating margins.

This report describes organization and governance tools and strategies to aid pub-lic hospitals in carrying out their mission and in operating effectively. It describes different governance structures typically used by public hospitals, providing exam-ples of each and presenting their benefits and drawbacks. It then examines the important role of trustees in today’s pub-lic hospital systems and some of the issues surrounding their appointment, training, and responsibilities. Chapter 4 outlines the challenges that trustees face, focusing on those issues peculiar to trustees of public hospitals. The remainder of the report addresses issues to be considered, first in determining whether a new governance structure is needed and then in pursuing and implementing structural changes.

This report groups typical public hospital structures into three categories, acknowledging that within these general categories there are many variations. Direct Operation by State or Local

Government: The hospital or health sys-tem is directly administered by state or local government, with no separate legal existence or governing board. In certain instances, the health depart-ment of the local government is given an advisory board, but the board does not exercise the full management and oversight functions of an independent corporate board. An advantage of this model is the ability to maintain close integration with public health functions as well as with local government policies.

However, it permits little flexibility and often imposes civil service requirements, procurement rules, sunshine laws, and other constraints that allow the public hospital little autonomy and may curtail its ability to plan strategically and act proactively in competitive situations. Separate Government Entity: The hos-

pital or health system has a functionally dedicated board with full governance authority, typically housed in a separate government entity such as a public benefit corporation, hospital taxing district, or hospital authority, or in a format designed through new state legislation, when the existing legislative options did not ade-quately address the needs of the hospital system. Compared to the first category, a separate public entity has the advantages of greater autonomy and a dedicated board. Compared to a nonprofit corporation, a separate public entity has more public accountability and, frequently, access to public funding. On the other hand, it may be subject to many of the regulatory and other burdens of public status. Nonprofit Corporation: Many urban

safety net hospitals no longer fit the tra-ditional model. Rather, they have been converted to the nonprofit corporate form. The corporation is typically tax exempt under section 501(c)(3) of the Internal Revenue Code and often enters agreement with the local government to provide safety net health services. The local government may or may not retain some degree of control over board appointments or other aspects of the corporation. Transfer of the health system

direct operation by state or local government

separate government entity

Nonprofit Corporation

TyPICAL PUBLIC HOSPITAL STRUCTURES

naph 3

assets may be achieved through a sale, a long-term lease or management agree-ment, or by other means. The activities and characteristics of each corporation, and any characterization under state or local law, should determine whether or not it is deemed to be a unit of govern-ment for various purposes.

A strong, capable and functionally dedi-cated board is very important to a public hospital’s ability to serve its mission. As with other corporations, the three basic duties of the governing board are: Obedience: to adhere to the hospital

or health system’s legal mandates and mis-sion. This requires a solid understanding of the fundamental purpose and mission of the health system. Care: to take all board actions in a con-

scientious and informed manner. Board members must consider all reasonably available and relevant information and act in good faith. Loyalty: to base every board decision

on the best interests of the health system and its mission. The needs of a particular constituency must never override the interests of the health system.

In carrying out these fundamental legal and fiduciary duties, board members must attend to key areas of responsibility: strategic orientation, public accountabil-ity, financial oversight, quality assurance, advocacy, and board development. The likelihood of attaining a capable and suc-cessful governing board is enhanced by an appropriate appointment process and

statement of qualifications, with active recruitment of qualified, dedicated indi-viduals representing a diversity of relevant experiences and professions. Once appoint-ed, it is important to ensure ongoing training opportunities and board devel-opment activities.

Public hospital boards typically bear more complicated responsibilities than those of their competitors or other hospi-tals in the community. Special challenges include legal, regulatory, and political pressures, including an increasing unin-sured and underinsured population; reductions in Medicaid funding and local support; the impact of immigration reform; competition for Medicaid patients; responsibility for public health and other community services; fettered governance; the obligation to conduct sensitive business in the public eye; and other cumbersome political or bureaucratic obstacles. In addi-tion, public hospitals and health systems often differ significantly from community hospitals in their physician staffing arrange-ments. Community hospitals rarely pay physicians to provide medical services. But patients seeking care at public hospi-tals typically lack sufficient insurance or other reimbursement to attract commu-nity-based physicians to provide services. Consequently, many public hospitals employ physicians or use an affiliation with an academic medical center to fill this need. These affiliations often promote excellence both in patient care and edu-cation, but their complexity necessitates strong oversight and communication between the parties.

executive summary


The Sarbanes-Oxley Act, though not directly applicable to nonprofit and public institutions, has created a new set of stan-dards for internal governance; this report provides an overview of relevant aspects of this act. In a separate but related arena, the number of fraud investigations against health care providers and high-dollar set-tlements has led health care governing boards to focus increasing resources on compliance oversight.

Due to these and other challenges, public hospitals and health systems often contemplate some form of restructuring as a means of improving their viability and competitiveness. In this process, it is important to assess advantages and disadvantages of the status quo, the goals of any change, and the extent to which the available restructuring options will adequately address these goals. Then, the costs of restructuring—both tangible and intangible—must be carefully and objectively weighed against the expected benefits. This report provides descrip-tions of successful and unsuccessful attempts to restructure. It also provides an overview of the key steps in any restructuring process.

In addition to operational implications, hospital structure and governance may critically affect a hospital’s involvement in the Medicaid program. NAPH members and other public hospitals rely heavily on Medicaid and related reimbursement, and their ongoing ability to make inter-governmental transfers and participate

in these programs is critical. The new, restrictive policies of the federal Centers for Medicare and Medicaid Services (CMS) threaten to upend the financial assumptions on which many public hos-pitals were originally restructured. On a prospective basis, the policies threaten to distort the market by discouraging state and local governments from under-taking public hospital restructurings that otherwise would enhance the hospital’s ability to achieve its public mission in a highly competitive marketplace. These policies, their legal ambiguity, their impact, and possible responses are explored in Chapter 6. Chapter 7 examines fundrais-ing, capital access, the transfer of existing debt or reserves, and other financial issues in the context of restructuring.

This report highlights the importance of effective governance in public hospitals and health systems. It demonstrates the many ways in which a public hospital’s legal structure and governing board can assist—or impede—the ability to carry out the multiple missions of these essen-tial providers. Reform of legal structure and governance by itself will not guar-antee viability, especially in a situation where the numbers of uninsured and underinsured patients remain high and sources of funding are inadequate. How-ever, careful attention to the adequacy of structure and governance can be an important tool to assist public hospitals in meeting the challenges they will con-tinue to face in the future.

naph 5

An institution’s description as “public” or “governmental” often depends on the pur-pose of the characterization. For example, a given structure’s designation as govern-mental might vary in determining the applicability of open record or meeting requirements, civil service regulations, procurement codes, etc., and each of these depends on its state or local jurisdiction (see Chapter 4 for more information); still other criteria could apply to designa-tion as public for purposes of antitrust immunity, property or tax law, or Medic-aid regulations. Indeed, whether an institution is deemed governmental for purposes of Medicaid calculations is a highly fact-specific determination based on controversial and sometimes ambiguous criteria, and this designation may diverge from the institution’s status for other purposes. Nonetheless, the characterization under state and local law

should carry substantial weight in any determination. (Medicaid and related reimbursement issues are addressed in Chapter 6.)

This chapter describes the primary models of public hospital governance and offers examples of hospitals and health sys-tems within each category. The range of legal and corporate structures employed by public hospitals can be divided into three main models. Direct Operation: These hospitals are

owned and operated by local governments or by state governments or universities. Separate Government Entity: Hospitals

in this category are governed by a sepa-rate board within a government entity, by a hospital authority or public benefit corporation, or constitute an indepen-dent taxing district. Nonprofit Corporation: This category

typically includes tax-exempt hospitals

typical legal structures of Public hospitals and health systems

There is no such thing as a typical public hospital or health system in America today. Rather, these hospitals and health systems make use of many different legal and corporate structures, each offering unique benefits and drawbacks. The common features, shared to a greater or lesser extent among our nation’s public hospitals, include a clear mission to provide access to vulnerable populations regardless of ability to pay; the actual provision of sub-stantial levels of care to low-income, uninsured, Medicaid, and other vulnerable patients; and historic status as the community’s public or safety net provider.

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typical legal structures of public hospitals and health systems


that may contract with a local government to provide safety net health services. Some maintain government participation in their governance while others are run by third-party, existing health systems. Organizations in this category may or may not be deemed government entities, depending on the circumstances and the purpose of the designation.

These classifications are somewhat arbitrary, since each model can have numerous permutations that may overlap with each other. For this reason, it can be unclear which model most closely describes a specific hospital. In addition, many public health systems have chosen to design their own structures through new state legislation when the existing models did not adequately address their needs. Third-party management and joint venture arrangements represent just such variations. Though they may leave the formal corporate structure intact, these variations can greatly affect system functioning. The discussion below provides descriptions and exam-ples of each model.

Direct Operation

Direct Operation by Local Government

The hospitals or health systems that use this model are directly administered by local government and consequently have no separate legal existence. In cer-tain instances, the health department of the local government is given an advi-sory board, but the advisory board does

not exercise the full management and oversight functions of an independent corporate board. An advantage of this model is the ability to retain close inte-gration with public health functions as well as with local government policies. However, this model permits only the minimum level of autonomy and denies health systems the benefit of a function-ally dedicated governing board. The public hospital system in Cook County, Illinois, and several major county systems in California exemplify this model.

For many years, the Los Angeles Coun-ty Department of Health Services (DHS) has directly operated the county’s system of five hospitals, one multi-service ambu-latory care center, and six comprehensive health centers. The system’s only formal governing board has been the County Board of Supervisors, a body of five elect-ed officials responsible for governance of the entire County of Los Angeles. The chief executive officer of the health system is the director of DHS, who reports to the Board of Supervisors. The director is also responsible for a wide array of public health services and other typical health department functions.

In Cook County, Illinois, the Bureau of Health Services operates the County’s two full-service hospitals (The John H. Stroger, Jr. Hospital and Provident Hos-pital). In addition to the hospitals, the Bureau provides public health services to over five million residents through its operation of the public health depart-ment, a chronic care and rehabilitation hospital, an outpatient center for HIV

Many public health systems have cho-sen to design their own structures through new state legislation when the existing models did not adequately address their needs.

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patients, a network of ambulatory and community health centers, and the largest freestanding correctional health care facil-ity in the country. The sole governing body of the Bureau of Health Services is the Cook County Board of Commissioners: 17 elected officials who serve as the gov-erning policy board and legislative body for the entire county. The president of the County Board of Commissioners appoints the chief of the Bureau of Health Services with the consent of the board.

Direct Operation by State Government

or University

Like health systems in the previous category, these state or university health systems have no legal existence separate from the state or the state university of which they are part. Most of the hospitals are subject to civil service, procurement, and other constraints tailored to a large state government or a university, rather than to a health care system. However, the close relationship facilitates unified planning and allocation of resources, and in the case of university hospitals, it helps integrate the teaching and research missions with the patient care missions. This advantage may account for the large number of state university hospitals that continue under direct operation of the university.

Louisiana State University (LSU) is a state university that directly operates a formerly separate state health care system. In 1997, the state legislature transferred the state-owned Charity Hospital System to LSU following a prior effort to restruc-

ture that system as a quasi-independent authority. Pursuant to the legislation, the Board of Supervisors of LSU assumed control of the nine hospitals. The legisla-tion effecting the transfer requires the board to operate the hospitals “primarily for the medical care of the uninsured and medically indigent residents of the state and others in need of medical care and as teaching institutions.”

The statute created a new Health Care Services Division in the LSU Health Sci-ences Center to oversee the day-to-day operations of the hospitals. This Division is under the immediate direction and con-trol of the LSU Health Sciences Center, subject to overall direction, supervision, and management by the board. The Divi-sion is budgeted as a single appropriation schedule, separate from the appropriation schedules or budgets of other university institutions or schools under the board’s management. The Division is subject to the procurement laws and the budget and planning systems of the state.

The board appoints a Community Advisory Committee for each area served by a hospital in the Division. The com-mittees assist the board in assessing unmet health needs within their communities, reviewing hospital performance, reviewing changes to available health care services, reviewing proposed agreements with other health care providers, safeguarding the patient care mission of the hospital, and assisting with community outreach and education. Committee meetings are subject to state open meetings laws and regulations.



Separate Government Entity

Separate Board within Government Entity

Under this model, a hospital or public health board has authority to manage the daily operations of the hospital or health system. While these separate boards or divisions typically do not constitute a legally independent entity, this structure entails a higher degree of autonomy than direct operation by state or local govern-ment without an intervening dedicated board. However, this structure is some-times deemed inadequate to the tasks facing a public health system today. The San Francisco Health Commission in California exemplifies a separate board within local government.

The San Francisco Health Commission governs the San Francisco Department of Public Health (DPH). DPH is orga-nized in two divisions: the Community Health Network and Population Health and Prevention. The Community Health Network operates all of the DPH personal health care services, with two hospitals and more than 15 primary care centers. The San Francisco Health Commission is a seven-member board appointed by the mayor for four-year terms. Because they may be removed by the mayor only for misconduct, members of the Commission have a layer of insulation from political pressures. The Commission meets twice monthly, setting public health policy and approving DPH budgets. These budgets are subject to the mayor’s final approval before they are submitted to the Board of Supervisors.2

Authority or Public Benefit Corporation

Hospital Authority: While the precise defi-nition of the term may vary from state to state, a hospital authority is typically a dis-tinct government entity, operating with a greater degree of independence from local government. It is governed by a function-ally dedicated board, whose development or ongoing appointments often involve local government. A hospital authority may be organized under generic, statewide hospital authority statutes or may require the enactment of special legislation. During the hospital building boom that followed World War II, hospital authorities were used throughout the country to ease local bond financing of new hospitals.

For example, in 1945, Georgia adopted hospital authority legislation, providing a vehicle for Fulton, DeKalb, and many other counties to build or expand inpatient facil-ities for their growing populations. The Fulton-DeKalb Hospital Authority was established to assume management of Grady Memorial Hospital, taking over as its governing body and building new med-ical facilities. The Fulton-DeKalb Hospital Authority has a volunteer board of 10 members, seven of whom are named by Fulton County Commissioners and three by DeKalb County Commissioners. Grady provides health care services to the unin-sured and underinsured citizens of both counties, and the counties in turn appro-priate funds to Grady. Today, the Authority oversees the hospitals, comprehensive com-munity health centers, and other medical and health facilities that comprise the $615 million per year Grady Health System.3

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In contrast, the Denver Health and Hospital Authority was created under special state legislation drafted and adopt-ed in 1996 to operate the Denver Health system in Colorado. Denver and its Depart-ment of Health and Hospitals, which at that time was responsible for the city’s health care services, recommended and developed the new government Author-ity. Members of the Authority board are appointed by the mayor, subject to confirmation by the city council. They serve staggered five-year terms—reduc-ing the likelihood that one mayor will be able to appoint the entire board—and removal requires an ordinance, further diluting the power of a single individual to control the board. The enabling act spells out the Authority’s public mission and envisions that the Authority will provide health services to city residents, while enjoying funding and in-kind ser-vices from the city. The board is granted substantial financial authority, including the right to control its own budget, issue bonds, and contract on its own. It also enjoys autonomy in civil service, purchas-ing, and other areas.

In 1996, Cambridge, Massachusetts, also obtained special state legislation authorizing a new government Health Commission responsive to its needs.4 The Cambridge Public Health Commission is similar in key respects to an authority. It is a city commission created to operate the city’s government health care facili-ties. The Commission is governed by a 19-member board, appointed by the city manager subject to certain qualifications.

The city manager may remove any mem-ber of the board for cause, which includes failure to ensure that the Commission adheres to its mission. The enabling act specifies the Commission’s purposes, grants it extensive powers, and transferred to it the Cambridge hospital network. One key constraint is that “no contract or agreement for the management of all or substantially all of the operations of the Cambridge hospital network shall be effective without the prior approval of the city manager.”

Public Benefit Corporation: This model is also a function of state law, and its features vary by state and by statute. For the pur-poses of this paper, its more common use as a distinctive public corporate entity pro-viding a benefit to state residents will be assumed.5 It is distinct from a typical non-profit corporation in that it remains a government entity regardless of its corpo-rate form. While several states have a body of law generally applicable to public benefit corporations (PBCs), this is most often a

“designer option,” with unique enabling leg-islation drafted to address the needs of the particular health system. In many instances, a PBC is specifically exempted from cer-tain laws that govern other instrumentalities of the state, but are inappropriate for a hospital system. New York City and the State of Hawaii, among others, have used a PBC structure to operate their govern-ment health and hospital systems.

The New York City Health and Hos-pitals Corporation (HHC) was originally created by enabling statute in 1969 as a



PBC. HHC was explicitly granted the power to borrow money and to issue nego-tiable notes and bonds, invest reserves, construct health care facilities, establish and maintain a capital reserve fund, and execute contracts, leases, and any agree-ment necessary to fulfill its purposes. Its stated purpose was to allow legal, financial, and managerial flexibility and to remove constraints and restrictions on personnel and procurement procedures to allow HHC to make technological advances, physical plant improvements, and facilities expansions. HHC informs the public of its programs and plans in an annual public meeting. Annual reports are filed with the mayor and city council at the end of each fiscal year.

In 1995, the Hawaii Health Systems Corporation (HHSC) was created from an existing state agency, the Division of Community Hospitals. The creation of a new PBC as a government entity was recommended by a broad-based Gov-ernor’s Task Force, appointed in 1994 to assess the structure of the state-owned hospital system. Special enabling legisla-tion was adopted in 1995.6

HHSC is governed by a geographi-cally representative 13-member board, appointed by the governor, with confir-mation by the state senate. Members of the board may be removed for cause by the governor or by a two-thirds major-ity of the board members. The corporate organization is divided into five districts.

The enabling act for HHSC assigned it broad powers to contract, affiliate, create new corporations, prepare and execute

budgets, issue revenue bonds, etc. The HHSC budget is subject to review or approval by the governor only when state general funds or capital improvement funds are requested. Due to their detri-mental effect on hospital operations, HHSC is exempt from state procurement laws, and certain exceptions to the open records requirements are provided. HHSC employees are generally considered state employees for purposes of civil service and collective bargaining. The legislation mandates continuation of direct patient care service levels at HHSC facilities unless the legislature approves reductions.

Taxing District

A hospital taxing district is an independent instrumentality of the state government that has taxing authority and defined geographic boundaries. It is distinct from a hospital authority or PBC in that it has the ability to levy taxes, subject to speci-fied statutory limitations. Most hospital taxing districts have been organized under generic, statewide legislation. They are common in Texas, California, and Florida, among other states.

Parkland Health & Hospital System is operated by the Dallas County Hospital District. Fifty-one percent of the hos-pital’s income is provided by local taxes from the hospital district. Payments to the hospital are made every three to four months, based on an ad valorem tax. In return, Parkland must provide all neces-sary care to uninsured county residents. The tax base is re-established each year.

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The district is governed by a Board of Managers, which is comprised of seven members appointed by the Dallas County Commissioner’s Court, with the hospital administrator as an ex-officio member. The board members have sovereignty under the Texas constitution, resulting in greater autonomy. The County Commis-sioner’s Court reviews the hospital’s annual operating and capital budgets and appro-priates funding through revenue generated by the ad valorem tax.

As a hospital district, Parkland has independent management, procurement, and contracting authority; the ability to issue revenue bonds; and the authority to make necessary expenditures, includ-ing facility construction and repairs. As a political subdivision of the state, Park-land enjoys sovereign immunity and may exercise eminent domain. The hospital is subject to state requirements for open meetings and open records and is pro-hibited from joint ventures with private, for-profit entities.

Recently Approved Taxing Authority

Through much of the 1980s and 1990s, it was rare to see a new grant of local tax-ing authority awarded for public health care. However, from 2002 to 2004, voters in at least seven states or major metropol-itan areas considered such new, dedicated taxes.7 Dedicated sales or property taxes were approved in Alameda County (Oakland, CA), Los Angeles County; Polk County (Winter Haven, FL); and the state of Montana. New health care taxing districts were approved in Travis

County (Austin, TX) and Maricopa County (Phoenix, AZ). In April 2005, Kansas City, Missouri, voters approved a nine-year increase in the property tax to support health services, with two-thirds of the additional revenue going to the Truman Medical Centers.8 New taxes were considered but rejected in Oregon in 2004, where roughly one-third of new statewide property and other taxes would have supported the state Medicaid program; they also failed in Monterey County (Salinas, CA) in 2003, where 62 percent voter support fell just short of the necessary two-thirds approval.

In 2000, Palm Drive Hospital became the Palm Drive Health Care District (also known as the West Sonoma Coun-ty Hospital District), after local voters approved ballot measures to create the district and support it with a tax levy. Pursuant to California law governing hospital districts, the Sonoma County Board of Supervisors and its subcommit-tee for health services governs the Palm Drive Health Care District, and a dedi-cated five-member Board of Trustees oversees the daily operations and man-agement. The initial board members were appointed by the Board of Supervisors, but subsequent members are elected in at-large elections.

Palm Drive Health Care District has statutory authority to levy taxes, upon approval of district voters. The $11.61 parcel tax approved by voters in 2000 to support hospital operations was esti-mated to raise enough revenue to allow the district to issue $5.9 million in bonds.



In 2001, the Board of Trustees returned to the voters with a second parcel tax bal-lot measure, and again the measure passed. This second measure raised the tax from $12 to $75 per $100,000 assessed value, generating an extra $2 million annually, earmarked for emergency room and operating room expenses.

Nonprofit Corporation

Many urban safety net hospitals no lon-ger fit the traditional model. Rather, they have been converted to the nonprofit corporate form. The corporation is typi-cally tax-exempt under section 501(c)(3) of the Internal Revenue Code and often enters into agreement with the local government to provide safety net health services. The local government may or may not retain some degree of control over board appointments or other aspects of the corporation. Also, transfer of the health system assets may be achieved through a sale, a long-term lease or man-agement agreement, or by other means. The activities and characteristics of each corporation, and any characterization under state or local law, should determine whether or not it is deemed to be a unit of government for various purposes.

Newly Created Nonprofit Corporation

with Ongoing Government Participation

The ongoing government role often depends on whether the hospital is trans-ferred to an existing, wholly private health system or whether a new corporation is created for the purpose of operating the

government health system. Depending on the type and extent of government involvement, the new corporation may be deemed private for certain purposes and public for others.

In 1981, the Shelby County Health Care Corporation (SCHCC) was created as a nonprofit corporation to operate the Regional Medical Center at Memphis (The MED), which had previously oper-ated as a hospital authority. Pursuant to the Tennessee Hospital Authority Act and a resolution of the Shelby County Board of Commissioners, The MED’s assets were turned over to SCHCC through a long-term lease, with the county retaining ownership of the land and improvements. The MED is required to make the facility available to all Shelby County residents who are in need of care, regardless of their financial status. Members of the SCHCC are appointed by the county mayor and confirmed by the county commission. While the CEO and board do not direct-ly report to any county officials, the mayor and commission have the power not only to appoint but also to remove board members.

The MED submits its budget and audited annual report to the county, which approves and appropriates The MED’s budget, including compensation for indigent care. SCHCC also receives capital appropriations from the county, though it maintains independent access to other capital markets through revenue bonds and joint ventures. Board meetings are open to the public, but The MED is otherwise exempt from the state sunshine

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laws, as well as the public bidding and procurement procedures. Its employees are not subject to civil service provisions nor are they eligible for county retire-ment benefits.

Reviewing all of these factors, the National Labor Relations Board (NLRB) determined in 2004 that SCHCC is a political subdivision rather than a private employer, and therefore The MED is not subject to NLRB jurisdiction.9

A nonprofit corporation, the Truman Medical Centers (TMC), operates the two government hospitals in Kansas City, Missouri (located in Jackson County). TMC was one of the first public hospitals to convert to nonprofit corporate status, restructuring in 1961 after the failure of legislation to create a separate hospital district with taxing authority. The initial goals of the reorganization included desegregating the facilities, maintaining the public mission, creating a medical school, streamlining purchasing proce-dures and improving the personnel system, as well as attending to pressing capital needs. In large part, the nonprofit model was chosen so that TMC could obtain capital financing using a federal mortgage insurance program, under the restrictive regulations of the time.

TMC is governed by a 33-member board. Three board members are appoint-ed by the mayor, three by the county executive, two by the state university that includes the medical school, two by the hospital medical staff, two by the main faculty physician group, and two by hospi-tal employees; most of the remainder of

the board is “self-perpetuating,” i.e., the board nominates and elects succeeding members. Jackson County retains title to the two hospitals and, along with Kansas City, maintains accountability through contracts and otherwise. The city and county help finance the operation of TMC through annual lump-sum appro-priations from dedicated local property tax levies to help offset the cost of indi-gent care.

Operation by Existing Private

Health System

Some public or formerly public health systems are operated by third parties. Some have been sold or placed under a long-term lease to, or merged with, an existing private nonprofit or for-profit health system. While the health system may continue to offer certain safety net services, local government does not retain a significant role in governance or operations.

In October 1995, Seton Healthcare Network assumed management and control of the city-owned Brackenridge Hospital through a 30-year lease from the city of Austin, Texas. Seton is owned by the Daughters of Charity National Health System, a Catholic health system that operates 46 hospitals across the country. Prior to its reorganization, Brackenridge Hospital was a city hospital with management that reported directly to the city manager and city council. The hospital CEO was the equivalent of a city department head. The hospital had a dedicated board, but it was advisory in

Many urban safety net hospitals no longer fit the traditional model. Rather, they have been converted to the nonprofit corporate form.



nature. Although the city funded only about 12 percent of Brackenridge Hospital revenues, city approval was required for the hospital’s line-item budget, salary scales, procurement, and all capital projects.

In the early 1990s, Austin began con-sidering a reorganization of Brackenridge Hospital to respond to growing operating losses and the fear of increased future reliance on city taxpayer funds. In addi-tion, the hospital wished to avoid certain local and state regulations that made it difficult to attract and retain highly qualified employees and that restricted management’s effective operation of the hospital, affecting personnel, purchasing, and public disclosure. City officials con-vened a Health Care Task Force in 1990 that ultimately recommended Bracken-ridge remain a city-owned hospital but suggested that the city needed taxing authority to help fund indigent care.

The taxing authority proposal was not well received by city officials, who feared that they could not obtain the necessary new legislation and voter approval. The city government authorized a second task force to consider additional options for reorganizing Brackenridge, including a new taxing district, a hospital authority, and an outright merger with a private hos-pital. The task force recommended the hospital authority option in order to allow the city to maintain control of the hospital.

Despite city support, the hospital author-ity option ultimately proved unworkable as a result of conflicts concerning financial and control issues. In the wake of bad publicity about Brackenridge, followed

by aggressive consolidation among other hospitals in the city, the city council adopted as its strategy the merger option it had previously discarded. There were complications related to an outright sale of Brackenridge, including community opposition and public procurement requirements. In the end, a long-term leasing arrangement with a private hospi-tal evolved as the most workable option for Brackenridge hospital and the city. As a nonprofit system with a historic commitment to charity care, Seton was identified as the most desirable partner for Brackenridge.

The city council took nearly a year to approve the proposed lease of Bracken-ridge to Seton. Under the terms of the lease, Seton agreed to continue Bracken-ridge’s mission of providing indigent care and to be monitored by a five-member oversight council appointed by the city. The council holds monthly, open meetings for purposes of evaluating Seton’s perfor-mance in access to care, level of services, and quality. If the council observes that Seton has failed to meet acceptable levels of performance in these areas or in the provision of indigent care, it may recom-mend that the city council withhold indigent care funds from Seton. Pursuant to the lease, Seton also agreed to continue providing certain of the “essential com-munity services” Brackenridge had traditionally delivered, such as inpatient and outpatient pediatric care, emergency and trauma services, and maternity and women’s services. Seton paid $10 million at closing and will make rental payments

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of approximately $2.2 million per year for 30 years.

Variations of Governance Models

Third-Party Operation or Management

In certain instances, the public health sys-tem is placed under the management of an existing health system or management company. The degree of ongoing involve-ment by the local government varies, as does the length of the management con-tract. The details of each arrangement will determine whether or not the health system continues to be considered a unit of government for various purposes.

Harborview Medical Center (HMC) in Seattle is organized under the County Hospital law of Washington State and has been managed by the University of Washington (the state university) under contract since 1984. HMC is owned by King County and governed by a county-appointed board of trustees. Its statutory mission is to provide health care to “pri-ority groups”—defined by the current HMC mission statement as persons incar-cerated in the county jail; mentally ill patients, particularly those treated invol-untarily; persons with sexually transmitted diseases; substance abusers; indigents without third-party coverage; non-Eng-lish-speaking poor; trauma victims; burn victims; and patients requiring specialized emergency care.

The county continues to govern HMC through its board of trustees and through financial oversight. The county executive appoints the 13 HMC board members,

including one from each of the nine council districts, subject to confirmation by the county council. The trustees may be removed only for cause. The board of trustees oversees operation of HMC within budgetary limits approved by the council. The county council sets comprehensive public health policy, monitors board performance, controls capital and long-range planning, and approves the HMC annual operating and capital budgets.

Under the University of Washington management contract, the university is responsible for overall management of the hospital and provides the hospital admin-istrator and medical director as well as medical and other professional services, subject to the approval of the HMC board. The administrator is accountable to the board of trustees, as well as to the Univer-sity Executive Director of Hospitals. The management contract conveys neither financial risk nor benefit to the university. The university employs the medical cen-ter staff and is reimbursed by HMC for salaries and fringe benefits. The manage-ment contract may be cancelled upon a one-year written notice by either party.

Wishard Memorial Hospital in Marion County, Indiana, has been managed by the Indiana University School of Medi-cine (a state institution) since 1975. Under this management structure, the hospital’s chief executive/medical director position is filled by a faculty member of the medi-cal school.10 The hospital is owned by the Health and Hospital Corporation of Marion County, a municipal corporation



formed in 1951.11 The public corporation operates both Wishard Health Services, which includes Wishard Memorial Hos-pital and its community and specialty health services, and the Marion County Health Department.12 A seven-member board of trustees governs the corporation. Three are appointed by the mayor of the city of Indianapolis, two by the City-County Council, and two by the County Commissioners. All members are appoint-ed to four-year terms.13 The board has the authority to make and adopt ordinances that constitute the Code of the Health and Hospital Corporation of Marion County. The board also has authority to levy property taxes, though any tax levy must be approved by the State Board of Accounts.14 The City-County Council must approve the Corporation’s budget, though changes made by the Council can be appealed to the state.15

Joint Venture

In certain instances, public hospital servic-es have been preserved by joint ventures with other entities in the community. These arrangements can take different forms, ranging from joint clinical projects to full mergers.

The Boston Medical Center (BMC) provides an example of a comprehensive joint venture. BMC was created as a nonprofit corporation in July 1996, to consolidate and manage the public Boston City Hospital and the private nonprofit Boston University Medical Center Hos-pital (BUMC). As part of this process, the city created a new government agency,

the Boston Public Health Commission. The city then transferred to the Commis-sion the responsibilities of the Boston Department of Health and Hospitals, including its public health function and ownership of Boston City Hospital. BMC entered into a long-term lease arrange-ment with the Commission, which retains title to the former Boston City Hospital.

The Massachusetts state legislature approved, and the governor signed, a necessary home rule petition.16 The City Council granted its approval in July 1997. The legislation required BMC to con-tinue the City Hospital’s public functions, which BMC does under agreement with the Commission: to provide accessible health care

services to all, regardless of insurance status or ability to pay

to maintain a commitment to vulnerable populations

to maintain a full range of primary through tertiary care

to serve urban and suburban communities in a “culturally and linguistically competent manner”

to enhance its role as a major academic medical center

to provide managed care services to its community.

BMC must prepare and file with the city an annual report on its provision of health care services.

BMC is governed by a 30-person board of trustees whose original membership included 10 representatives each from the City Hospital and BUMC; four represen-

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tatives from community health centers; the executive director of the Commission, the dean of Boston University Medical School, the president and CEO of BMC, the president of the BMC medical staff, the BMC physician in chief, and the BMC surgeon in chief. The chairman is appointed by the mayor. Under the legis-lation, the merged hospital is deemed to retain the government status held by the City Hospital for the purposes of certain state and federal safety net reimburse-ment and medical assistance programs.17

The Commission is a unit of govern-ment.18 A seven-member board governs the Commission, including the CEO of BMC and six members appointed by the mayor, subject to the approval of the city council. The mayoral appoint-ments must include two representatives of community health centers affiliated with BMC and one representative of organized labor.19 The legislation explic-itly authorizes the Commission to issue bonds and notes, with approval of the city council and the mayor.20

The University of Louisville has gone through a series of joint ventures to pre-serve its public hospital and indigent care services. The state university owns, and until 1981 operated, the University of Louisville Hospital (University Hospital). The hospital was in a state of financial distress, receiving insufficient funding for unreimbursed care and often running large deficits. When the university informed the Commonwealth of Ken-tucky that it could not afford to open the new public hospital facility then under

construction, the Commonwealth turned to the Humana hospital management company. Under the terms of the man-agement contract signed in 1981, Humana would manage the hospital, assume all financial risks, and pay 20 percent of its pre-tax profits to the University of Louis-ville. Indigent care would be reimbursed each year from a combined local, county, and state fund, with any costs exceeding the available funding for the year being carried over to the following year. In 1983 the new hospital building opened.

In 1993, Columbia Healthcare Group (later Columbia/HCA after a 1994 merger with Hospital Corporation of America) acquired Humana’s hospital company and the management of University Hos-pital. A renegotiated contract was signed in 1994, under which Columbia would continue to provide indigent care in exchange for a fixed government payment, make improvements to the emergency room and cancer center, and locate its headquarters in Louisville. A year into the contract, Columbia/HCA decided to move its headquarters to Nashville, Tennessee, and the Commonwealth can-celled the management contract.

The Commonwealth turned again to experienced providers to manage the hos-pital, and after several legal battles with Columbia/HCA, the hospital trustees voted in October 1995 to enter a man-agement agreement with the newly created, nonprofit University Medical Center. University Medical Center (UMC) is a partnership of the University of Lou-isville with Jewish Hospital HealthCare



Services and Norton Healthcare.21 The agreement provided for governance by a 12-member board—six appointed by the university and three by the two other partners. Under the contract, the univer-sity would retain UMC net revenues, and the partnership would expand the emer-gency room, improve the cancer center, and maintain health care education pro-grams. UMC also agreed that University Hospital would continue to provide indi-gent care and that the university would retain stronger control over academic programs than it had under prior man-agement agreements.

Public-Private Partnership

In certain situations, public and private entities have come together in creative ways to preserve a safety net hospital for a community. Healdsburg General Hos-pital in Sonoma County, California, is an example of a public-private partnership developed to preserve a formerly private safety net hospital.

Healdsburg General Hospital has been owned and operated by nine different entities in its 100-year history. In 1995, Columbia Healthcare, Inc. acquired the hospital along with its owner, Health-care Trust, Inc. Despite major renovations, Healdsburg General faced ongoing losses. Columbia initially intended to spin off the hospital into a separate corporation, but in 1998, announced its plan either to sell or close the hospital. A local busi-ness group created Nuestro Hospital, Inc. and purchased the hospital from Colum-bia for $3.7 million to prevent its closure.

Nuestro Hospital continued operating at a loss, ultimately generating a $2 million deficit. In 2000, the owners sought to lease the facility to a local hospital system, but negotiations fell through.

In November 2001, local voters approved two separate ballot measures related to the hospital: Measure G created the North Sonoma County Hospital District and provided the district with a $10 mil-lion appropriations limit, and Measure H allowed the district to levy a parcel tax of $85 per $100,000 assessed value. Nuestro Hospital, Inc. then donated the facility to the newly formed district.

As a public hospital district, the North Sonoma County Hospital District remains under the supervision and control of the Sonoma County Board of Supervisors and its subcommittee on health services. A dedicated board of trustees oversees hospital operations and management. Pursuant to California law, the initial five trustees were appointed by the Board of Supervisors, but their successors are elect-ed by district voters in at-large elections. The board of trustees has subcommittees on budget, planning, operations, and community relations. Day-to-day opera-tions are handled by the chief executive officer of the facility.

More limited public-private partner-ships also can prove advantageous for public hospitals, particularly when the private partner can provide much-needed capital or management resources (capac-ity as well as specialized expertise) for the new venture. In return, the hospital may offer a large and diverse patient base,

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highly skilled physicians, and, in many cases, clinical differentiation and a strong

“brand name.” A recent study of joint ven-tures in academic health centers revealed that in the majority of cases, these ventures result from unexpected opportunities instead of proactive strategic planning; this underscores the importance of a flexible management culture open to innovative ideas.22 It is also important to consider tax and other regulatory conse-quences when structuring a joint venture.

Examples of specialized public-pri-vate partnerships include an ambulatory imaging center jointly owned by the

In the majority of cases, joint ven-tures result from unexpected oppor-tunities instead of proactive strategic planning.


University of Virginia Health System and a for-profit specialty imaging firm, and staffed exclusively by the health system’s faculty. Using a different model, the University of Michigan Health System paired with various community hospitals to create radiation oncology partnerships. The health system provides the clinical staffing and expertise, and each local hos-pital provides the facility, patient base, and administration. A key benefit of these ventures is to allow the public hos-pital to take advantage of new business opportunities that otherwise would have been beyond reach.23


General Board Duties and Responsibilities

Public hospital board members have duties and obligations similar to those of board members of other corporate entities. However, they also face unique challenges. This section addresses the duties and obligations generally applica-ble to board members and examines the challenges members of public hospital boards may face.

From a corporate perspective, board members of any entity are said to have three fundamental legal and fiduciary duties, or guiding principles: obedience, care, and loyalty. Obedience: This duty requires board

members to adhere to the legal mandates set forth when the organization was estab-lished. That is, they must ensure that the health system operates in conformance with its organizational documents (e.g.,

its enabling act, charter, or articles of incorporation) and its mission. To do so, board members must have a solid under-standing of the fundamental purpose and mission of the health system. Care: The duty of care requires board

members to act in a conscientious and informed manner with respect to all board decisions. They must be aware of and consider the reasonably available and relevant information prior to making a board decision. They must act in good faith and with the care that an “ordinarily prudent businessperson” would exercise in similar circumstances. For example, each board member is responsible for reviewing and understanding background documents, such as financial analyses, provided by staff. If any element seems inconsistent or raises questions, the board member should not take it at face value but must follow up until the questions are satisfactorily answered.

the role of the Board

As institutions, public hospitals provide services that are needed in the community but may not generate sufficient revenue to cover costs. In addition, because of the safety net role of these hospitals, as well as their public owner-ship or financial support, many community constituents feel a vested interest in what services they provide and how they conduct their business. Consequently, the gov-erning boards of public hospitals face special challenges associated with the mission of their institution and, fre-quently, with their public nature.

3

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Loyalty: Most important, the duty of loyalty requires that every board decision be made in the best interests of the health system and its mission, rather than in the interests of individuals or external constituencies. This can be difficult or confusing since public board members are often selected from a particular con-stituency. In this case, the needs of the constituency should be considered in the context of the organization’s overall mission; they must never override the interests of the health system.

As with any complex organization, a public hospital needs a strong and inde-pendent board to bring vision, leadership, and perspective to bear on present opera-tions and future needs. The public hospital can be strengthened if board members bring a variety of relevant expertise as well as a range of experience and perspectives. Above all, it is critical that the board members be dedicated to the health sys-tem and its mission, placing its interests above any others in the conduct of their fiduciary duties.

In carrying out these fundamental legal and fiduciary duties, board members must attend to key areas of responsibility: strategic orientation, public accountabil-ity, financial oversight, quality assurance, advocacy, and board development.

Strategic Orientation: Board members should be actively involved in shaping the strategic orientation of the health system, including reviewing and approv-ing a strategic plan that is consistent with the health system’s purpose and mission.

To make informed decisions regarding strategic orientation, board members should keep up to date on the health system’s regulatory and competitive environment, including health system trends, opportunities, and threats. Once strategic priorities are set, they should be reassessed regularly and the health system’s progress towards those goals monitored regularly. Public Accountability: Public account-

ability refers to the responsibility of board members to assess the short- and long-term needs of the community and the health system’s patient population and to monitor the fulfillment of these needs. The board may accomplish this by facilitating regular communication with political leaders, the press, relevant organizations, and the public at large. Board members must coordinate these communications within the health sys-tem, rather than undertaking them haphazardly or on their own. They also should ensure that the health system is in compliance with all applicable laws and regulations. Financial Oversight: Financial oversight

responsibilities include reviewing and approving financial plans, evaluating organization goals, and ensuring that internal and external independent finan-cial audits are completed on a timely basis. Board members also should be prepared to participate if needed in negotiations with the local government and to monitor the health system’s investment strategies and otherwise ensure protection of invested assets. It is helpful to have comparative

Public hospitals need a strong and independent board to bring vision, leadership, and perspective to bear on present opera-tions and future needs.

the role of the board


numbers such as historic performance or the performance of comparable insti-tutions, to gauge the health system’s financial status. Quality Assurance: The board must

ensure that an effective quality improve-ment system is in place, with ongoing, systematic assessment resulting in action plans to strengthen performance. A board member’s responsibilities include regu-larly reviewing quality performance data, holding management and clinical staff accountable for patient safety and quality of care, and ensuring that resources are available for these purposes. Quality goals should be linked to performance ratings and incentives and staff privileges. Through continuous quality manage-ment, an effective board can decrease the likelihood of adverse outcomes and encourage a culture of quality and patient safety.

Advocacy: A governing board has the responsibility to engage in advocacy on behalf of the health system. Members of the board should identify proactively both informal and formal opportunities for advocacy. Specific goals should be set with respect to public advocacy, and the role of the board in fund devel-opment and philanthropy should be articulated. Board members should have a common understanding of the health system’s goals, needs, and key issues. Equally important is the ability of the board to present a unified message. The board or its chair should therefore establish a protocol as to who may speak on behalf of the board and when, both

generally and in the context of a specific advocacy agenda. Board Development: A separate yet crit-

ical board responsibility pertains to board development and self-assessment. Board members should routinely assess the health system’s bylaws to identify areas that need improvement. Additionally, mechanisms should be established to evaluate the per-formance of individual board members. Board education also should be a regular aspect of the board’s activities.

In addition, hospitals seeking accredi-tation from the Joint Commission on the Accreditation of Healthcare Organizations (JCAHO) have to meet the specified leadership standards.24 Most hospitals seek JCAHO accreditation because it is recog-nized by the Medicare program as a means of confirming that the hospital meets cer-tain required conditions of participation. JCAHO standards with respect to leader-ship require the hospital to: Identify its governance structure Define governance responsibilities in writing

Designate an individual or individuals responsible for operating the hospital in accordance with the authority con-ferred by governance

Have leadership engage in short-term and long-term planning

Have leadership develop and monitor an annual operating budget and long-term capital expenditure plan.

There are many additional require-ments. JCAHO accreditation surveys

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focus heavily on documented activity. Consequently, the governing body of the hospital not only has to perform these activities, but it also needs to document its process and action steps.

Issues Specific to Members of Public Hospital Boards

Public hospital board members might experience certain pressures that make it seem harder to honor their general board duties. First, public hospital board members may be appointed by elected officials. Those officials may have the ability to remove the member or at least refuse to reappoint that member. In cer-tain instances, the political appointment process may encourage greater loyalty to the appointer than to the institution. Even when the appointed board member defines his or her primary allegiance to the institution, the threat of removal or non-renewal may color the board mem-ber’s decision making. He or she may be more likely to compromise a position if the political appointer desires a differ-ent outcome.

Similarly, certain board members may be appointed to a public hospital board as a representative of a specific constituent group. Certain board seats may be reserved for clients of the institution, for members of certain ethnic communities, or for representatives of other organizations. Because of their appointment from these constituencies, these board members may feel their primary allegiance is to the group from which they came.

Local or state “open meeting” laws also may complicate the board delibera-tion process. Local news organizations frequently cover the community public hospital and may attend board meetings routinely. Board members of numerous public hospitals indicate that the presence of media dampens the candor of their discussions and curtails their ability to debate crucial issues.

In many instances, the cycle of politi-cal and constituency-based appointments may produce a less stable board structure. If the political appointment process leads to frequent turnover in board positions, especially when there is a new elected administration, the board may lose expe-rienced members who have invested significant time in understanding the institution’s complex needs. Also, it is possible that some of the appointees will not have experience serving on boards. This turnover effect may require more frequent board training and rebuilding of relationships among the board mem-bers themselves.

On the other hand, a public hospital often can benefit from the diversity and the political connections of its members. In particular, the political appointment process may give the insti-tution direct lines of communication with highly placed elected officials. This connection may be especially impor-tant if the hospital needs to renegotiate financial support from the local govern-ment entity. The connections may extend to the state level as well, which may be especially valuable if the state is



restructuring its Medicaid reimbursement program or other potential funding.

Functionally Dedicated Governing Body

Many public health systems lack a func-tionally dedicated governing board with responsibilities limited to the governance of the medical center. Instead, this role may be filled by an elected body with broader responsibilities, the members of which are subject to competing demands for their time and attention.

An example of this structure is the five-hospital Los Angeles County Department of Health Services. The governing board for this system is the Los Angeles County Board of Supervisors—five officials who were elected to govern the entire county, with an estimated 10.2 million residents.

Similarly, in Cook County, Illinois, the 17 elected officials who compose the county’s Board of Commissioners govern a health system that serves a population of more than five million people and includes three hospitals and the largest freestanding correctional health care facility in the country. This board serves as the governing policy board and legisla-tive body for the entire county, which includes the city of Chicago.25

In many instances, hospitals without dedicated governing bodies report special problems arising from their governance structure. First, elected officials for a local jurisdiction have many other programs to oversee. Consequently, they may not have adequate time to oversee and provide

direction to the hospital or health system. Further, members of the governing body are not held accountable to the public solely on their management of the safety net provider. Rather, the electoral process may force them to focus on the hot issues of the day and not on developing a long-term vision for the public health system. Given that local governments increas-ingly face severe financial constraints, the elected official structure may leave the hospital without a dedicated advocate. Public officials facing difficult budget-ary decisions may choose to reduce hospital funding in favor of other local programs. Finally, elected officials rarely have undivided allegiances, as other com-peting hospitals and health systems in the jurisdiction also may be important con-stituents to the elected official.

Sometimes hospitals structured as operating divisions of local government are given advisory boards. While these boards have no formal power to oversee management or provide direction to the hospital, they can serve a number of use-ful purposes. First, they establish a body of individuals who can serve as dedicated advocates for the hospital. Second, they can be a mechanism for gathering the diversity of interests served by the pub-lic provider to ensure that there are direct lines of communication from various communities to hospital management. In some cases, they conduct effective strate-gic planning for the health system. Finally, they can help the hospital access com-munity leadership and expertise to assist with its mission.

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Composing a Public Hospital Board

Public hospitals and health systems often must balance three forces: the demand for responsiveness by the local govern-ment; the need to maintain institutional and financial integrity; and the demand to be responsive to key local constituents. These tensions are frequently reflected in and addressed through the composition of the public hospital board.

In many instances, a public hospital may be a legal entity separate from a local government, yet highly dependent upon it for financing uncompensated or under-compensated care. Also, many public hospitals and health systems that currently operate separately were formerly operated directly by a local government. To ensure accountability, many local governments retain the authority to make appoint-ments to the board of the public hospital; often, this authority is laid out in the hospital charter. There are a number of variations on this theme. For instance, at one point members of the governing board for the Regional Medical Center at Memphis were nominated by existing board members but appointed by the county mayor and confirmed by the county commission. Truman Medical Centers has a 33-member board, of which three members are appointed by the mayor, three by the county executive, and two by the state university that includes the medical school.

In an effort to make hospital gover-nance more robust, some public hospital boards are composed to ensure an ade-

quate diversity in relevant professions. A hospital’s enabling act or bylaws often include guidelines on the characteristics to be sought in board members. For exam-ple, in Westchester County, New York, voting directors of the public Health Care Corporation are to possess relevant expe-rience and knowledge and a high degree of interest in the corporation; specifically, the board should include a diversity of perspectives and experience in areas such as business management, law, finance, and the health sector.26

Other boards require a certain num-ber of board positions to be reserved for representatives of consumers or other key constituent communities. For exam-ple—to ensure that the board includes perspectives from each region—nearly half of the members of the governing board of the Hawaii Health Systems Cor-poration must be from specified regions of the state.27

Appointment and Removal Processes

Although no selection process can guar-antee continued excellence in board performance, certain mechanisms can improve the chance of success. One method of fostering independence and a balance of perspectives is to broaden the appointive powers so that no single individual or body appoints most or all of the board. Also, the appointing entity can be required to appoint from nomina-tions made by an independent source; most often by the board itself but some-


One method of fostering indepen-dence and a balance of perspectives is to broaden the appointive powers so that no single individual or body appoints most or all of the board.


times from various community groups or other constituencies. For example, under the 1990 enabling act of the (now defunct) Louisiana Health Care Authority, the leaders of specified agencies and organizations (such as the Louisiana Medical Association, chambers of com-merce, bar associations, voluntary councils on aging, and medical societies) were designated as a “regional nominating council” for each facility. The regional nominating council submitted nominees for appointment to the local boards. When a vacancy arose, the governor appointed a new board member from a list of three names submitted by the local board.28 One advantage of permitting the board to nominate candidates is that the board is likely to be keenly aware of the spe-cific skills or experience required at a given time.

Self-perpetuating boards—those that not only nominate but appoint succeed-ing members—also can be effective. This alternative is often used by hospitals struc-tured as nonprofit corporations, including those that converted from direct opera-tion by a local government. For example, Truman Medical Centers is a nonprofit corporation, part of whose board is self-perpetuating. Self-perpetuation is less common in more traditionally structured public hospitals.

The power of removal also affects the independence of the board. If a board member can be removed from office at will by the appointing officer or body, he or she may be pressured into voting for or against an issue simply through

fear of removal. There have been instanc-es when a mayor has announced that he would not reappoint any board member voting against his wishes on a key issue, regardless of the best interests of the hospital system; the pressure is more intense if immediate removal is threat-ened. For this reason, it is generally preferable to permit removal only for cause or only on approval of a super-majority of the board, rather than by a separate appointing entity acting alone. For example, board members at Parkland Memorial Hospital, a public teaching hospital in Dallas, can only be removed by the Dallas County Commissioner’s Court for cause. A trade-off here is accountability, though this can be achieved by other means including public meetings (with appropriate exemptions), annual audits and reporting, and reasonable conflict of interest provisions. In any case, the enabling act or bylaws should specify the conditions under which a board member may be removed.

Conflicts of Interest

Many forces are leading governing bodies of all varieties to adopt formal conflict of interest standards. Publicly traded for-profit entities are guided by the conflict of interest provisions of Sarbanes-Oxley. The Internal Revenue Service (IRS) strongly advises nonprofit entities to adopt conflict of interest provisions. Further, in many instances, state and local public entity laws impose their own conflict of interest standards.

naph 27

No matter what the structure of the governing board, a clear conflict of inter-est policy is an important mechanism to ensure that personal or business conflicts do not taint a board member’s decisions. A conflict of interest policy, applicable to corporate officers and board members, should include the following: Provisions related to identification and disclosure of financial or other interests and related material facts

Procedures for determining whether an individual’s interest may result in a conflict of interest

Procedures for addressing the conflict of interest after one has been identified

Procedures to ensure adequate record-keeping

Procedures ensuring regular distribu-tion of the conflict of interest policy.

Many institutions find the IRS model policy a useful starting point.29 However, this model can serve only as a starting place because any particular policy will need to comply with all applicable state and local laws, such as those governing public officials. The Sarbanes-Oxley Act provides further guidance on appropriate standards for disclosure, recusal, review, documentation, and other details.

Public hospitals sometimes face addition-al challenges when they develop a conflicts policy. In many instances, certain board members are appointed by virtue of their affiliation with constituency groups. For instance, two positions on the Truman Medical Centers board are reserved for hospital medical staff, two for the main

faculty practice plan, and two for non-management hospital employees. In circumstances like this, where board con-flicts will arise frequently, it is important to ensure that the process is workable. Further, board members who are appoint-ed from designated groups may be in particular need of clear guidance regarding their fiduciary duties to the organization and what role they may play in decisions affecting their constituent groups.

Training

Board member education is both required by JCAHO and highly advisable. For newly created boards, an initial board education and orientation retreat should be planned and should include participa-tion by senior management. This retreat provides an opportunity to ensure that all stakeholders are “on the same page” with respect to their roles in governing and managing the health system. After the initial orientation retreat, the gov-erning board and senior management development sessions are typically con-ducted separately, although periodic joint meetings may help unify organizational leadership and goals.

Orientation sessions, as well as ongoing educational updates, should cover the fol-lowing areas: Obligations associated with duties of obedience, care, and loyalty

Roles and responsibilities of board, officers, committees, and members

Financial management of the organization



Governing policies and procedures, including bylaws and articles of incorporation.

Public hospital board training and development may need to address issues not typically covered for other boards. For instance, if the institution is covered by open meetings and open records acts, board members will need to learn what constitutes deliberative discussions and when and how these may occur. On the other hand, they will need to understand when they can meet in private or execu-tive session and what activities can be undertaken at those times.

Board Leadership in the Community

One important function of a board and its members is to serve as advocates for the hospital in the community. The hos-pital may be threatened with cuts in local funding, or it may need access to addi-tional capital in order to take advantage of new opportunities. Often, this means convincing the public or elected officials to permit the issuance of bonds.

Board leadership on behalf of the public hospital may take many forms. Some board members may feel comfort-able going directly to legislators and executives to plead the hospital’s case, particularly if they have personal con-nections with those officials. Other board members may have a background in grassroots organizing and may be particularly skilled in going into the gen-eral community to explain the hospital’s

need for financial support. In many instances, public hospital boards can profit from member experience in public relations as the institution formu-lates a media campaign strategy. As the institution tries to compose an effective board, search committees may want to reach out to potential new board candi-dates with these skill sets.

Board Role in Advocacy

In addition to advocating for their facil-ity in the community, a vital responsibility of board members is to serve as advocates in the public policy arena. Board mem-bers can play a critical role in educating policymakers about key issues affecting public hospitals and their communities. As with any public communication by a board member, it is critical that both the content and the mechanism of these messages be carefully coordinated with management and the board.

Often, issues that affect public hos-pitals are determined in our nation’s capital and in state capitals across the country. It is essential that public hos-pitals actively participate in these public policy debates.

In addition to hospital personnel, board members can be an important link to information for policymakers. Policymakers receive information from many sources on any given issue. One of the most important sources of infor-mation is from constituents, especially highly credible, knowledgeable, and respected voices. Board members are

naph 29

uniquely situated as community leaders to provide just such a voice on behalf of the hospital.

There are a variety of ways board mem-bers can be an effective advocate for their hospital. At minimum, board members should contact their own senators and representative to educate the policymak-ers about the importance of the hospital. Other activities may include: meeting with policymakers when they visit the hospital

visiting with policymakers or their staff in their local district offices to discuss the hospital

sending a letter or contacting policy-makers by phone to convey the importance of a particular issue

traveling to Washington, DC, or to the state capital to meet with legisla-tors to discuss important policy issues.

Given their stature and leadership role in the community, board members can be effective advocates even if they do not have a personal relationship with legislators. This leadership status is an important part of their role as a board member. In addition, board members should help the hospital by engaging other influential community leaders, especially those that are politically involved, to help reach out to policy-makers on behalf of the hospital.

Policymakers need to hear from con-stituents, and there is no one better positioned than board members to convey the extraordinary contribution public hos-pitals make to their communities. Among the many responsibilities of a board mem-ber, advocating to policymakers is one of the most rewarding and most important in helping the hospital continue its success.



This chapter will examine certain legal, regulatory, and political challenges largely peculiar to public hospitals, as well as phy-sician staffing issues of concern to public health systems. Given their importance in today’s environment, regulatory compli-ance issues and the implications of the Sarbanes-Oxley Act also will be examined.

Legal, Regulatory, and Political Challenges

A landmark study released in March 2000 by the Institute of Medicine clearly summarizes the situation of safety net hospitals (see sidebar).

The last decade has seen a dramatic transformation of the role of the hospital in our nation’s health care system, with a profound impact on every important element of that system. From the way we purchase and pay for health coverage, to where and how we provide needed care, the metamorphosis has been swift and intense. New systems and networks spring to life overnight, mergers and acquisitions dramatically shrink the number of players, and traditional pay-ment mechanisms turn upside down in a heartbeat.

These trends have resulted in a number of health system changes with implications

for the financial viability of all hospitals. For example, purchasers (public and private) continue to form ever-larger coalitions to demand health cost reduc-tions. And despite some notable failures, in many parts of the country successful providers have responded by developing fully integrated region-wide delivery sys-tems. Ultimately, only the strongest and most thoroughly integrated systems will survive; the ability to control costs and gen-erate strong patient satisfaction will be key.

The pressure is especially acute for those public hospitals and health systems that rely most heavily on federal, state, and local government funding to pay for their wide range of primary, acute, and public health services. For most such systems, market pressures are intensified by a variety of factors that have far less, if any, effect on their competitors. These include: the continuing increase in the unin-

sured and underinsured in many areas reductions in Medicaid funding and local support

the impact of immigration reform greater competition for Medicaid patients

the explosion in managed care responsibility for public health and other community services

fettered governance

the challenges of governing Public hospitals and health systems

Public hospitals face the same fiscal and competitive pres-sures that confront the entire health care industry in America. However, they also shoulder unique burdens that result from their safety net missions and their government status.4

“the funding and organization of the safety net have always been tenuous and subject to the changing tides of poli-tics, available resources, and public policies. despite their precarious and unstable in-frastructure, these providers have proven to be resilient, resourceful, and adept at gaining support through the political process.

“Today, however, a more competitive health care mar-ketplace and other forces of change are posing new and unprecedented challenges to the long-term sustainabil-ity of safety net systems and hold the potential of having a serious negative impact on populations that most de-pend on them for their care.”

SOURCE: Institute of Medicine, America’s Health Care Safety Net — Intact but Endangered (Washington, DC: National Academy Press, 2000).

CHALLENGES TO THE SAFETy NET

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the obligation to conduct sensitive business in the public eye

other cumbersome political or bureaucratic obstacles.

Many public hospitals have found that public status, in itself, precludes them from implementing efficiencies or taking other steps that private providers use to improve their operating margins. These barriers may include the following:

Decision Making: Many public hospital systems are subject to multiple layers of strategic or operational decision making, which often preclude a rapid response to critical issues. In a swiftly evolving regula-tory and competitive environment, public hospitals often lose out on important opportunities for want of quick, decisive action. While a multi-level approval pro-cess enhances accountability and serves as an important check on the prudence of engaging in such endeavors, the lack of speedy consideration can result in loss of valuable opportunities.

Budgetary Inflexibility: Close budgetary oversight sometimes deprives the hospital of needed flexibility to deploy resources effectively and to respond to constantly changing needs. Further, with the amount of state or local funding often dependent on the size of the hospital deficit, the incentive to maximize rev-enue may be inadequate.

Capital Access: Although many major public hospitals have an outdated or

deteriorating capital infrastructure, gov-ernment entities often are subject to constraints on their ability to raise capital (such as limits on total bond capacity). In other cases, the hospital’s legal struc-ture or its fiscal relationship with local government may preclude access to vari-ous capital financing options.

Strategic Planning: Confidential decision making is critical for effective strategic planning in a competitive local health market. While open meeting and records requirements associated with public sta-tus may be an important aspect of public accountability, in many cases they also preclude confidential planning. Public hospital systems often are required to hold even strategic planning meetings in public, allowing the competition to sit in and listen to their most sensitive plan-ning, marketing strategy, recruiting goals, and other information. This can place the public hospital at a serious dis-advantage vis-à-vis private competitors in the same market. Moreover, public providers often lose opportunities to contract or venture with private practices and providers because the private entities do not wish for their transactions to be subject to these laws.

Joint Ventures and Entrepreneurial Activity:

Legal constraints often prevent public hospitals from entering into affiliations or joint venture arrangements that may be necessary or beneficial. Success or even survival in today’s market hinges on cost containment, patient satisfaction,

the challenges of governing public hospitals and health systems


demonstrated quality, and the ability to offer payers either a fully integrated health system or one or more of its criti-cal components. In order to respond to the challenges of managed care and greater patient choice, today’s public provider must be able to recruit the highest quality physicians and to estab-lish for them an integrated system with private partners that offers the best fit in terms of services, location, culture, and other factors. However, for reasons rang-ing from restrictions on uses of public funds to a potential partner’s reluctance to deal with a public provider or a par-ticular unit of government, public hospitals often suffer from an inability to contract with their ideal affiliates.

Civil Service and Collective Bargaining: Complex civil service ordinances often impede hospitals from recruiting, pro-moting, or retaining qualified health care personnel. Pay scales or benefits frequently cannot be adjusted quickly enough to respond to the local market, and health care professionals, frustrated with a lengthy and cumbersome application process, may choose to apply elsewhere. This is an increasingly important issue, given the current shortage of registered nurses and pharmacists.

Procurement: Many local government procurement constraints may be man-ageable for typical government activities, but they are unsuitable for the hospital industry. Under most procurement stat-utes or ordinances, the hospital cannot

independently purchase necessary medi-cal equipment because these high-cost items exceed statutory thresholds. Access to discounts typically enjoyed by private hospitals, through group purchasing organizations or otherwise, is often limited. Acquisition delays impede the efficiency of hospital operations and occasionally compromise patient care. In certain instances, procurement rules actually may raise costs by rewarding equipment leasing at prices below certain thresholds rather than outright purchase.

The Implications of Sarbanes-Oxley for Public and Nonprofit Hospitals

The American Competitiveness and Corporate Accountability Act of 2002, commonly known as the Sarbanes-Oxley Act (or SOX), was enacted in order to protect investors and restore public trust in U.S. capital markets, after several corporate and accounting fraud schemes were exposed in 2001 and 2002. Although only a small subset of public-ly traded corporations are subject to SOX, most for-profit companies are implement-ing similar audit and compliance policies in an effort to demonstrate financial accountability and responsibility.

Nonprofit and public institutions are not required to comply with Sarbanes-Oxley standards. These organizations are not directly governed by SOX, and many of the initiatives required of publicly traded corporations would be prohibi-tively expensive for them to implement. Nonetheless, many nonprofit and pub-lic institutions are looking towards SOX

Nonprofit and public institutions are not required to comply with Sarbanes-Oxley standards. None-theless, many are looking towards standards to im-prove transparency and accountability.

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standards as reference points for their own internal efforts to improve transpar-ency and accountability in their internal governance. Many are incorporating SOX-like features into their own policies and procedures, and for this reason, we provide an overview of the act and its requirements.

Adopting SOX “best practices” may lessen potential liability for board mem-bers, e.g., by documenting diligence in oversight and other board duties. In addi-tion, adoption of best practices may be useful in recruiting potential board mem-bers, who may hesitate to serve in an organization that lacks these safeguards.

Audit and Compliance

The Sarbanes-Oxley Act imposes many new financial and accounting require-ments on publicly traded companies subject to the legislation, with the expec-tation that these new requirements will strongly influence the “best practices” standard for many other organizations.

Audit and Compliance Committee:

A key element of SOX is the establish-ment of an audit and compliance committee of the board to oversee the organization’s financial and auditing procedures. Public and nonprofit health systems should maintain board commit-tees closely resembling the audit and compliance committees that SOX envi-sions. These audit and compliance committees, comprised of independent members of the governing board, are intended to be free of influence from

management and others. Accordingly, these committees have the authority and autonomy to work directly with internal and external auditors, as well as with legal counsel hired in connection with the corporation’s auditing process. Other responsibilities can include fol-lowing up on recommendations to revise internal financial processes and controls, as well as serving as a resource by which employees can raise ethical questions and concerns directly to the governing board. In some companies this committee also assumes responsibil-ity for overseeing non-finance-related compliance issues.

Auditor and Accountant Oversight: To avoid conflicts of interest for an accounting firm auditing an organiza-tion, many corporations now prohibit their auditor from simultaneously engaging in non-audit services for the corporation. Some policies go so far as to require pre-approval by the audit and compliance committee of all non-audit-related engagements, to ensure that no conflicts of interest could thwart financial (or non-financial) assessments of corporate activities. If it is anticipated that a public or nonprofit health system will engage its current or future auditor for non-auditing services, the board should consider developing and imple-menting formal auditor oversight policies to avoid conflicts of interest.

Rotating Leadership by the Independent

Auditor: Corporations subject to SOX



must rotate the lead partner of the com-pany’s audit team every five years. In addition to providing a check on the relationship between a corporation’s management and the leader of the audit team, this policy provides a natural time for the auditor and audit and compliance committee to review the policies and procedures used to evaluate the corpora-tion’s finances; the policy is highly recommended for public and nonprofit health systems as well.

Audit Follow-Up and Resolution: Many cor-porations have set up a formal policy to periodically review internal accounting pro-cedures, including the implementation of recommendations from the auditor. Some companies delegate these responsibilities to the audit and compliance committee; some assign them to senior management, with oversight authority resting with the audit and compliance committee. If a similar process is not already in place, the board should promptly review and improve its internal audit processes and follow up on auditor recommendations.

Financial Disclosure Policy: Another significant element of SOX is companies’ obligation to disclose and explain any inaccuracies in financial statements and reports, as well as to disclose related internal policies and procedures that the company has adopted. Examples of these policies include: a code of conduct for senior financial management regarding conflicts of interest, as described below

knowledgeable certification by senior management that financial reports are accurate and are not misleading and that the company has complied with applicable financial regulations

timely disclosure of any errors in financial reports and of the controls implemented to preclude their repetition.

Knowledgeable, personal certification of the accuracy of financial reports by one or more members of senior man-agement (e.g., the president, executive director, or CFO) is advisable, if this is not already done. The duties of the audit and compliance committee should include explicit review of any reporting errors or other financial errors or irreg-ularities and approval of remedial action.

Adequate and Accurate Documentation: As part of their new finance-related poli-cies, many corporations are instituting documentation policies to ensure that all financial data are presented in accordance with Generally Accepted Accounting Prin-ciples (GAAP), Governmental Accounting Standards Board requirements, or other applicable principles. Some of these poli-cies further specify that all financial, accounting, and cost data must be capa-ble of being audited, consistent with good business practices and to the extent this is both effective and efficient for the corporation’s operations. Although many health systems have adopted these practices, board members should con-sider adopting a formal policy requiring

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ongoing compliance with GAAP or other specified accounting principles.

Ethics and Conflict of Interest

The Sarbanes-Oxley Act requires the adop-tion of several reforms related to ethics and conflict of interest. Many organiza-tions not covered by SOX are adopting similar reforms.

Codes of Ethics: Companies subject to SOX must adopt a code of ethics for senior management responsible for corporate financial matters. Many organizations have taken the opportunity to institute a code of ethics applicable to all employees, officers, and directors. Boards of public and nonprofit health systems are encour-aged to adopt similar codes of conduct that apply to all individuals who engage in activities on behalf of the organization, regardless of their positions.

The code of ethics should establish standards to promote: honest and ethical conduct the avoidance of conflicts of interest full, fair, accurate, and timely disclo-

sure of annual reports and other financial statements

compliance with all applicable gov-ernment laws, rules, and regulations

accountability for adherence to the code.

In addition, the code of ethics could address issues such as the acceptance of gifts and honoraria. As with all governing documents, the code of ethics should be updated regularly, especially as applicable laws, rules, and regulations are amended.

Conflict of Interest: Under SOX, companies must adopt policies prohibiting actual and potential conflicts of interest in decision making. Conflict of interest policies reduce the risk of “insiders” such as officers, board members, and shareholders making deci-sions that may benefit themselves rather than the best interests of the corporation. Public and nonprofit health systems have similar concerns, and most have adopted compliance programs with conflict of interest policies. The SOX conflict of inter-est provisions go deeper than the “board only” provisions described in Chapter 3 in that these policies also need to extend deep into the organization to reach employees.

The conflict of interest policy should obligate employees of the organization to comply with specific guidelines address-ing actual or potential conflicts of interest. Employees should be required to disclose any actual or potential conflict of interest, and business transactions that result in special fringe benefits, bonuses, or other windfalls also should be addressed. Such a policy is especially critical at a health care organization, where patients or other health care consumers may be adversely affected by business decisions motivated by self interest.

General Governance

The Sarbanes-Oxley Act inspired several significant non-financial reforms that are likely to be beneficial for public and nonprofit health systems.

Confidentiality/Anonymity Policy: SOX requires that companies subject to its



provisions establish procedures for employees to submit complaints, includ-ing anonymous complaints, to cultivate a culture for the prevention, detection, and resolution of activities or events that do not comply with laws, regulations, and corporate policies. These companies also must establish procedures to follow through on all submitted complaints.

The most common approach that cor-porations have adopted is a confidential

“hotline,” although a small organization may find this approach impractical. Nonetheless, the board should establish a method by which employees may submit comments and complaints, anon-ymously if desired. The responsibility for receiving such comments may be placed with a member of the audit and compli-ance committee, perhaps as an additional alternative to reporting to a member of management. This could help minimize any reluctance to speak out and ensure an outlet for complaints involving the designated member of management.

Non-Retribution Policy: To further encourage employees to report question-able accounting or auditing matters, SOX prohibits firing, threatening, or otherwise harming any employee on the basis of the employee’s participa-tion in an investigation into potential violations of SOX or other corporate responsibility laws. Nonprofit organiza-tions have adopted similar policies to protect employees from retaliation or retribution. Such policies must be drafted with care, as they typically

entitle whistle-blowers to reinstatement, back pay, and special damages in appro-priate circumstances.

Record Management Policy: Many com-panies also have implemented policies on the retention and management of the organization’s documents, both elec-tronic and paper. These policies are often intended to address documentation related to financial statements, implementation and management of the confidentiality policy, and any investigation that occurs as a result of these policies. It is also important to address the retention of less formal documents such as emails. For example, many organizations have chosen to delete email archives regularly. Not only does this reduce necessary storage space, but it can help avoid any demand to conduct a costly review of a multitude of trivial emails in the event of a lawsuit. Document management and retention policies must carefully balance the need to retain important information against the potential price of retaining large and unnecessary archives.

Compliance

Given the proliferation in the number of fraud investigations against health care providers and in high-dollar judgments and settlements, health care governing boards are focusing increasing resources on compliance oversight. Effective over-sight of a compliance program requires a governing board to apply duty-of-care principles to the compliance function,

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and to ensure that an adequate reporting system exists and is enforced. This allows boards to measure the effectiveness of—and establish accountability for—the ongoing operation of the organization’s compliance program. This is not a light load to carry, especially in this era of increased corporate responsibility. The first compliance program guidance publi-cation from the Department of Health and Human Services Office of Inspector General (OIG) points out that executing an effective compliance program requires a substantial commitment by all the members of a health care organization’s governing board.

A governing board must take reasonable steps to ensure that the organization’s management appropriately carries out its responsibilities and complies with the law. A governing board is likely ask the man-agement most involved with the compliance function—usually the compliance officer—to explain the organization’s compliance program and, in particular, the board’s responsibilities with regard to it.

Given that most members of a hospital or health system governing board will not have previous knowledge of compliance principles and infrastructure, it is impor-tant to conduct training programs for the board in general and especially for the relevant board committees such as audit, finance, and compliance. Although there are some very general aspects of compli-ance education and training that can be covered through education and training seminars, the effective implementation, operation, and oversight of a compliance

program extends beyond merely under-standing its general components. Therefore, in addition to understanding the general elements of the compliance program, a governing board should have knowledge of the responsibilities of the various involved parties, as well as of resources, risks, standards, and reporting procedures associated with compliance.

Board Responsibility

A board should understand that an orga-nization’s compliance function is not necessarily a separate component from a health care organization’s business opera-tions; rather, compliance encompasses all the organization’s existing business operations. The board’s oversight of the compliance program will require an adjust-ment in the board’s existing monitoring responsibility for the organization, not nec-essarily an addition to that responsibility. In most instances, the existence of a com-pliance officer and a compliance program should provide the board with some assis-tance in carrying out its existing fiduciary responsibilities to the organization.

Compliance Officer Responsibilities

Directly tied to the board’s understanding of organizational compliance is the board’s understanding of the role of the compli-ance officer and of those who provide daily support in carrying out the compli-ance program. In addition to clarifying his or her responsibilities, the compliance officer also should discuss his or her goals in developing an effective compliance structure within the organization.


A governing board must take reason-able steps to ensure that the organiza-tion’s management appropriately carries out its responsibili-ties and complies with the law.


Compliance Program Resources

In order for the compliance program to reach its goals, the board must ensure that sufficient resources are dedicated to set up and operate the program. The board will need to determine the extent of resources to dedicate to the compliance program, in terms of personnel and financial support. As it comes to understand the compliance structure within the organization, the board should be able to effectively moni-tor whether the resources devoted to compliance are adequate.

Allocation of Responsibility

Although the compliance officer is the focal point of the compliance program, the board should be aware that the com-pliance officer cannot implement the compliance program alone, and that oth-er management personnel have essential compliance-related responsibilities. If responsibility for a compliance program is not allocated efficiently, implementation will suffer, possibly resulting in deficiencies that could have been avoided. For instance, in those health care organizations with internal legal counsel, that counsel will play an extremely important role in man-aging issues of legal compliance, issues essential to promoting the overall com-pliance program. In some organizations, legal counsel may have compliance-relat-ed responsibilities commensurate with those of the compliance officer to pro-mote the effective implementation of the compliance program. Therefore, it is imperative that the board assess the roles of management beyond the compliance

officer in both setting up and operating the compliance program. In addition, the board will need to ensure that manage-ment is accountable.

Organization Risk Areas

Another important measure of compliance program effectiveness will be the board’s increased awareness of risk areas within the health care organization. The board should understand that risk areas evolve with changing rules and regulations applicable to health care organizations, and it should also understand the benefits of regular risk assessment. A risk assessment may be performed by the organization’s internal audit function or anyone desig-nated by the compliance office, and it is essential to the board’s awareness of new organizational challenges. A risk assess-ment also will inform the board’s evaluation of management priorities and the best method for allocating resources within the compliance program.

Written Standards

Whether or not the governing board is the final adopter of the written standards that support the compliance program, includ-ing the code of conduct and compliance policies and procedures, the board should maintain a full set of written standards as a compliance program reference. The board should be familiar with the contents of these written standards and should monitor them to determine whether they provide an adequate foundation on which the compliance program can operate. As the compliance program develops, the

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board should gain a better understanding of the program’s functions and may use this understanding to suggest revisions or modifications to written standards or the compliance program, as necessary.

Reporting

The compliance officer is a direct link between the compliance program and the board and should regularly report to the board on the development of the compliance program. Whether the compliance officer reports to the board quarterly or more often, that officer and the board should establish criteria for other circumstances when it would be appropriate for him or her to report to the board, such as when the findings from an investigation require reporting to a regulatory or law enforcement agency.

Feedback

Feedback from the board in the form of comments, suggestions, and questions should be encouraged because it indi-cates the level of board investment in the compliance function. The compliance officer also can use feedback to determine both the board’s level of understanding of the compliance program and the areas in which the board may need additional information. However, while feedback is important, absent extenuating circum-stances, the board should not involve itself directly in the management of the compliance program.

The governing board should expect the compliance officer to assist it in per-forming its compliance oversight duties.

It should feel entitled to general education on compliance issues, the right to approve any compliance action plan developed,

periodic reporting on the status of the compliance program, and

direct communication with designated committees when significant compli-ance issues arise.

Once the board understands the role of compliance in the organization, and its own responsibilities with regard to the compliance function, it will be able to invest in and lend its support to developing an effective and efficient compliance program.

Physician Staffing

Public hospitals and health systems often differ significantly from community hospi-tals in their physician staffing arrangements. In most community hospitals, physicians are neither employees of the hospital nor independent contractors. Rather, they are independent providers on the hospital’s medical staff who use the hospital as their

“workplace” for complicated procedures. Generally, community hospitals work with their physicians to establish governing bylaws that dictate who can practice in the hospital and the rules governing that practice. However, outside of certain admin-istrative duties or certain hospital-based specialties such as radiology or anesthesia, community hospitals generally do not pay physicians to provide medical services. Physicians at these hospitals generally bill



patients or third-party payers for medical services rendered.

Public hospitals, in contrast to com-munity hospitals, often serve a high proportion of uninsured or underinsured patients. The payer mix of the patients may be insufficient to attract community-based physicians to provide services. Consequently, many public hospitals have to develop alternative strategies for obtaining physician services.

Employing physicians is one option for obtaining professional services, and many public hospitals do employ physicians in certain service areas. However, it can be very expensive to staff an entire hospital with physician employees. Most public hospitals facing this issue have historically affiliated with a medical school to obtain professional medical services.

Under an academic medical center affiliation model, the hospital typically will acquire the services of faculty physi-cians and residents to provide medical services. Residents are medical school graduates who are licensed physicians enrolled in post-graduate specialty train-ing programs. The residents may be the employees of the hospital or of the medi-cal school, but typically they can only provide services under the supervision of a physician with a faculty appointment in a designated training program. Resident salaries are typically much lower than inde-pendently operating physicians. Further, the Medicare and Medicaid programs typically provide enhanced reimbursement to hospitals that serve as training centers for graduate medical education.

The academic medical center affiliation has potentially significant advantages and disadvantages for the hospital. On the plus side, the relationship typically allows the hospital to acquire a higher caliber of physician, in the form of faculty, than would otherwise be willing to serve the hospital’s patient base. Further, the overall cost of acquiring physician services can be lowered significantly by employing resi-dents. Finally, the academic medical center status can add prestige to the institution.

On the other side of the ledger, the training program structure creates certain inefficiencies for the hospital. First, resi-dents tend to order many more tests than experienced physicians, raising hospital costs. Second, the requirements of training programs are not always completely aligned with best principles in customer care. Many patients view the academic staffing model, which often does not provide continuity of care, as being unfriendly or difficult to navigate. Third, individual faculty members may rotate through other hospitals or have other interests such as research, which may divert their attention from patient care services.

The public hospital-medical school rela-tionship has a long history of promoting excellence both in patient care and in edu-cation. However, because these relationships are often exceedingly complex, they require significant oversight as well as maintenance of strong lines of communication with medical school partners. A public hospital board should expect that it will be consult-ed from time to time about changes to or issues arising from ties to medical schools.

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Some form of restructuring is often con-templated as a means of improving the viability and competitiveness of public hos-pitals. Such steps are not always part of an offensive strategy, however. Sometimes state or local government entities seek to restructure or “privatize” their public hospi-tal systems out of fear of growing subsidies, regardless of the implications for the health system’s multiple missions. In other cases, external parties have promoted reorgani-zation as a means to their own ends, such as gaining control over a competitor or gaining entry to new markets. For instance, a competing hospital system may propose acquiring or managing the local public hospital. In any case, the concept is often provocative, galvanizing employees, medi-cal staff, or patient advocates into strenuous and protracted opposition. Even where there is general consensus and strong political support, many restructuring ini-tiatives have failed for lack of adequate planning or resources or the relative weak-ness of one or both parties.

Notwithstanding these concerns, restructuring can be an important tool to help level the playing field for public hos-pitals and health systems. Reorganization

can take many forms, from simply restruc-turing a hospital (or a city or county agency) into a separate public organiza-tion, to privatizing through sale, merger, or lease with an existing private nonprofit or for-profit health system.

The key goals of a public hospital reor-ganization, whatever form it may take, often dictate the structure selected. Moti-vations range from the defensive (e.g., fear of the need for increasing funding or fear of fierce competition) to the constructive (a desire to improve the efficiency and competitiveness of a public system). Most often, it is a mixture of the two.

It is important to note at the outset that the reasons for a proposed restruc-turing must be sufficiently compelling to justify the costs of implementation and outweigh the loss of the benefits and pro-tections that the current government status affords a hospital or health system. For example, in some cases a government structure provides sovereign immunity protections or easier access to capital through the issuance of lower-cost tax-exempt “general obligation” government bonds. Also, public entities in some states are given extra benefits under Medicaid

restructuring Public hospitals and health systems

With traditional sources of public revenues evaporating and with new competitors for many of the services they historically have provided, public hospitals and health systems frequently feel the pressure to rely on aggressive reforms to keep pace and to continue financing their multiple missions.

5

restructuring public hospitals and health systems


reimbursement methodologies. On the other hand, being structured as a state, county, or city agency or department, with no independence, may subject pub-lic hospitals to unacceptably burdensome constraints such as slow and cumbersome decision making, ill-suited civil service requirements, complex procurement rules, or sunshine laws that prevent effec-tive planning. These constraints can lead to severe fiscal and competitive disadvan-tages. They may ultimately diminish the financial viability of a public system and its ability to carry out its mission without increased taxpayer funding. The careful balancing of these public benefits and constraints must play a critical role in decisions to restructure.

Powerful justifications exist for restruc-turing when a host of legal, administrative, and financial obstacles have an adverse effect on the patient care mission of the hospital or place the public hospital system at a disadvantage in relation to its private counterparts. While most government rules, regulations, and constraints exist for valid reasons, the operation of a health system—including acute care hospitals, stand-alone clinics, managed care, and medical education functions—is funda-mentally different and often far more complex than most of the government functions for which such legal and administrative controls were created. Institutionally, a hospital comprises a set of intricate and interrelated programs and functions operating in close proximity.

In sum, in response to these pressures, the goals of reorganization are usually

multifaceted and include at least some of the following: Enhance competitiveness Maintain public/safety net mission Reduce or stabilize dependence on tax dollars

Reduce financial risk to local government

Create a dedicated board for nimble decision making

Improve personnel system Maintain public accountability Streamline purchasing Reduce bureaucracy Enhance access to capital Enhance professionalism/managerial autonomy

Depoliticize operations Retain public funding

Public Hospital Closures

Since 1979, the United States has expe-rienced a number of public hospital closures. Typically, public hospitals in smaller, rural areas have been most at risk, but some large urban hospitals also are struggling. Many factors have contribut-ed to these closures. For example: Public hospital revenues have been

suffering since the 1990s, when fiscal pressures began to intensify due to public programs and managed care, which cut payment levels and reduced admissions. Medicaid managed care transferred

patients to lower-price settings, and competition has increased for Medicaid patients due to cutbacks under private managed care.

naph 43restructuring public hospitals and health systems

Expenses are high due to rising costs of health care generally and to the increasing numbers of uninsured patients seeking out public facilities. Public hospitals often have high costs

due to low-income patients with poor health status, high staff-to-patient ratios, and outdated facilities. Public hospitals often have less man-

agement flexibility and access to capital, and they have greater difficulty respond-ing to challenges than their private competitors. Localities are averse to raising taxes.30

Philadelphia General Hospital and District of Columbia General Hospital are examples of large public hospital closures. The 1977 closure of Philadel-phia General Hospital, the oldest hospital in the United States and among the most prestigious teaching hospitals in the country, was one of the most studied and debated public hospital closings in the past several decades. In the 1950s, medical school residency programs began to favor affiliation with public hospitals, and in 1958 Philadelphia’s Democratic adminis-tration pushed through an affiliation plan that involved five area medical schools in the operation of Philadelphia General Hospital. Although the goal was a reorga-nized hospital under private management, in practice no one—including the munic-ipal government—remained ultimately responsible for Philadelphia General. The last years of the hospital’s operation were marked by declining patient volume, deterioration of the physical plant, and

lack of interest on the part of the city and the medical community. The hospital’s closure in 1977 was accompanied by the establishment of six outpatient centers, the Philadelphia Nursing Home, and continued outpatient services at Philadel-phia General for an additional year. Nonetheless, it remains unclear whether the hospital’s patients were absorbed by other facilities, or whether their health care needs simply went unmet.31

More recently, the closure of DC Gen-eral Hospital, the only public hospital in Washington, DC, shows that legal and governance restructuring alone will not necessarily save a troubled medical cen-ter. In the 1950s, DC General was owned and directly operated by the District of Columbia as the major provider of care for indigent residents in Washing-ton, DC. After serious ongoing financial and patient care problems, as well as a loss of accreditation from JCAHO from 1975 until 1978, it was restructured in 1977 by the addition of a dedicated board, operating until 1996 as the DC General Hospital Commission.32

While the new board improved the situation, the hospital did not thrive, and by 1996 the city decided to create the quasi-independent DC Health and Hos-pitals Public Benefit Corporation to operate the District’s public hospital and community health clinics with significant autonomy. Unfortunately, the District was experiencing a major financial cri-sis at that time, and before the new PBC began operations, a federal Financial Control Board was granted broad powers


over all components of District govern-ment. The PBC was never able to use much of its legislated authority, and as a result of this inability, together with man-aged care, decreasing population, and other difficulties, the PBC was unable to turn around the performance of the city’s health system. DC General experienced declining admissions, administrative and quality issues, rising costs, a deficit of more than $95 million, and an out-of-date physical plant that would have cost $110 million by 1999 to renovate. At that point, more than two-thirds of the city’s uninsured were going elsewhere for hos-pital care.33

Despite opposition from the City Council, hospital employees, private hos-pitals, and community activists, the PBC was dismantled and DC General Hospi-tal was closed as an inpatient facility. The hospital’s inpatient services and trauma care were to be transferred to Greater Southeast Community Hospital.34 The DC HealthCare Alliance, a public-private partnership between the city and pri-vate health care providers led by Greater Southeast, replaced the PBC in 2001.35 A dozen DC General outpatient depart-ments and a satellite emergency room, run by Greater Southeast, remained open until 2003. Immediately follow-ing DC General’s closure, nearly every private hospital in the area experienced an increase in emergency room visits.36 Ironically, the exception was Greater Southeast, which was expected to pick up the slack when DC General closed. However, plans for a new trauma center

at Greater Southeast never came to frui-tion, and Greater Southeast and its parent company filed for bankruptcy protection in late 2002.37

In 2003, the Council of the District of Columbia passed a resolution directing DC Mayor Anthony Williams to negoti-ate with Howard University to develop a public-private partnership to build a new state-of-the-art teaching hospital on the grounds of the former DC General Hospital. An agreement was signed by the Mayor and the President of Howard in January 2005. Under this agreement, which was submitted to the District Council for approval, the University and the District would split the estimated cost of $400 million to build the new hospital, which is to be called the National Capi-tal Medical Center (NCMC). While it is clearly intended to provide inpatient and outpatient services (including trauma care) to the under-served residents of the parts of the District previously served by DC General, the 230-bed medical com-plex “[would] not be a poor person’s hospital,” according to the Mayor. Rather, the NCMC would have multiple mis-sions and would be intended to serve a broad range of populations, including the insured. At this writing, the proposal has become bogged down in a fierce debate, fed in part by the opposition of other District hospitals with which the new hospital would compete. The District Council itself appears to be almost evenly divided on the issue, with some members arguing that an ambulatory care facility or free-standing emergency room would

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better meet the needs of the local popu-lation.38 As of May 2005, Mayor Williams has appointed yet another task force to assess the city’s participation in the hospi-tal venture.39

Evaluating the Status Quo and Identifying Needs

Many public hospitals and health systems explore reorganization or restructuring from time to time. The driving factor is often a culminating event following a series of long-standing frustrations. The hospital may have experienced a sig-nificant challenge, lost a political battle, or missed a significant opportunity. Either management leadership or the governing body may see restructuring as the solu-tion to a litany of problems.

However, a restructuring initiative will rarely solve all of an institution’s problems. At best it will remove certain barriers to success. Further, undergoing a restructuring can generate significant costs, in terms of both financial outlays and good will with core constituencies. The process merits careful deliberation.

The first substantive step in this process should be to examine the public health and hospital system as it is now. What are its strengths and weak-

nesses? What functions does it perform well? What functions are more difficult to fulfill? What aspects of its legal structure

enhance its ability to attain its goals and what aspects hinder its performance? For example, in some cases the public entity

structure provides easier access to capital through the issuance of lower-cost tax-exempt government bonds. On the other hand, the public structure may be subject to sunshine laws, civil service require-ments, or procurement procedures that lead to inefficiencies. What are the system’s operational

strengths and weaknesses? For example, the dedication of staff may be one of the greatest assets. Any change that is per-ceived to impair compensation, benefits, or job stability could have a significant negative impact on morale. On the other hand, a decaying infrastructure and insufficient capital to renovate may be infringing on the institution’s ability to attract and retain patients. How does the corporate culture affect

operations? Operationally, perhaps the safety net mission has enabled the insti-tution effectively to reach out to sectors of the community that are neglected by other providers. On the other hand, a longstanding mission of serving all who walk through the door may impede behavioral changes required among staff to operate in a managed care environment.

It is often helpful to catalog the system’s strengths and weaknesses in an organized fashion as a starting point. Ideally, such a catalog is developed with the input of many individuals connected with the health system. Many hospitals have found it useful to have outside assistance in interviewing key stakeholders to solicit their views on the institution. Sometimes, when assured that their remarks will not


A restructuring initiative will rarely solve all of an institution’s problems. At best it will remove certain barriers to success.


be attributed, these individuals are more willing to open up to outsiders who can therefore elicit more accurate and pen-etrating observations. In any case, soliciting widespread input should lead to a more useful assessment of the status quo (and at the same time serve some of the commu-nication goals discussed below). Once such a list is developed and agreed on, it can serve as a basis for comparison of proposed reorganization options.

Another major consideration in the restructuring process is ensuring the per-ceived objectivity of the decision makers. In most cases, one or more of the key constituencies, such as patient groups, advocates for the poor, physicians, and hospital employees, will be deeply suspi-cious of any potential change. Even if the decision makers ultimately identify the best solution for local needs, the restruc-turing may be doomed politically if there hasn’t been sufficient community “buy-in.”

Consequently, the first step in reorga-nizing a public hospital generally involves laying out a rationale for the change and developing credible support for it. Often the process is begun through the appointment of a public commission. For example, the merger of Boston City Hospital (BCH) and Boston University Medical Center (BUMC) grew out of a 1994 report of a mayoral commission.

In some cases an internal task force or committee with a lower public profile than a public commission may be desir-able, particularly where it is not yet clear whether reorganization is the desired outcome. In this case, if the internal

process leads to a decision to move for-ward, a more public process subsequently can be established to lay the political groundwork. Indiana University Medical Center convened a 14-member joint steering committee composed of key administrative personnel from institutions, physicians, and the respective board chairs. The charge to the committee was to con-sider the feasibility of aligning the hospital with Methodist Hospital of Indiana.

Some institutions find it helpful to have an independent body study the hospital’s situation and make strategic recommenda-tions. The objectivity of an independent body can lend needed credence to its recommendations. The danger in such an approach, however, is that without sufficient political will to implement the recommendations, the study will have little impact. For example, at least nine separate studies were conducted on the New York City Health and Hospitals Corporations before a fiscal restructuring agreement was concluded in 1992.

As a preliminary matter, those consider-ing restructuring should consider whether no action is the best action. Even the process of considering restructuring can impose costs on an institution. Key man-agers must devote significant time to the evaluation process, diverting them from other duties or opportunities. Further, a significant investment in public relations and outreach is needed to ensure that the public has adequate knowledge of the process. Threatened stakeholders may commence opposition campaigns that exacerbate existing friction. For

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instance, labor unions may use the restructuring discussions to galvanize members to oppose not only the change being contemplated but other issues as well. Similarly, fearful members of the dependent patient community may seek opportunities to challenge the hospital’s agenda with local government. Finally, the uncertainty of possible change almost inevitably takes some toll on employee morale.

Given the costs of considering and then implementing change, decision makers must carefully consider the advisability of maintaining the status quo or making minor modifications to the existing structure. Strategically, after creating the inventory of issues arising from the hos-pital’s current structure, it may be useful to rank them in order of importance. In certain instances, hospital leadership will decide that certain issues must be resolved, while other issues are of secondary impor-tance. Other hospital leaders have stated that they try to identify opportunities where addressing 20 percent of the issues will give 80 percent of the benefit. In this context, there may be opportunities to live with the status quo.

In many instances, minor modification of local laws can help the hospital avoid the trauma of major restructuring. For instance, if cumbersome procurement restrictions are perceived to be a signifi-cant handicap, it is possible that the solution may be separate local legislation giving the hospital independent procure-ment authority or at least the ability to use group purchasing organizations. Sim-

ilarly, it is possible that a hospital could work within local civil service restric-tions if the local government human resources authority is flexible enough to create job titles and compensation packages that reflect industry standards. In addition, the local governing body such as the city or county council may be able to grant the hospital greater bud-getary autonomy by focusing on net revenue and net expenditure budgets, rather than budgeting by line item.

On the other hand, the hospital may operate under so many significant limita-tions that maintaining the current structure will, at best, continue to hobble the institution or, at worst, lead it down the path to failure. Decision makers eval-uating the possibility of restructuring should keep two principles in mind. First, not all change is inherently good or will solve problems. Second, institutional leadership needs to focus on issues that are important over the long term, wheth-er or not they are urgent today. Even though structural barriers may not create a crisis on any given day, they can, in the long term, cause the institution to dete-riorate to the point where it can no longer compete.

Consensus on Goals of Change

It is important that early in the process, key players achieve a consensus on the goals of the reorganization. The goals may flow from an assessment of the strengths and weaknesses. For example, a key goal may be to maintain the health system’s



mission, which is deemed its greatest strength. Or it may be to address weak-nesses by enabling the hospital to affiliate or consolidate with other facilities.

In any case, it is often worth investing time and energy to attain consensus on a list of explicit goals for any change. With-out such explicit agreement, the players may find themselves pursuing conflicting ends without even recognizing the differ-ence of opinion. Early acknowledgement of goals can help facilitate subsequent decisions on the details of the reorganiza-tion, as the options can be analyzed against clear criteria.

Balancing Factors and Assessing Structural Options

After developing a firm understanding of the strengths and weaknesses of the hospital system’s current structure, and having agreed on the goals and objectives of a reorganization and any non-nego-tiable constraints, the next task is to determine which restructuring options, if any, will meet the institution’s needs. As Chapter 2 described, there are today a wider variety of legal structures among the nation’s urban public (or formerly public) hospital systems than in any other segment of the hospital industry. Within each category, variations can be devel-oped to tailor the model to each system’s unique needs.

However, restructuring options need to be considered in the context of local legal and political considerations. Many states have defined procedures to establish

public hospitals or to convert them from one form to another. In these states, local public hospitals can, if desired, undergo conversion without the action of the state legislature. For instance, California has a statutory process for establishing a hospital district.40

However, in other jurisdictions, special state legislation would be required at a minimum, and in certain instances, state constitutional amendments have been required. In Texas, for example, the state constitution authorizes the creation of hospital districts. From the time this pro-vision was adopted in 1954 until 1962, six hospital districts were created, each through adoption of a new section of the consti-tution creating the single district.41 A 1962 constitutional amendment finally granted the legislature authority to create hospital districts directly. A 1989 amendment to this section clarified that these districts could be created “by general or special law,”42 and today hospital districts contin-ue to be created through both means.43

In the context of evaluating options, decision makers need to take into account what level of state government would have to be involved in the restructuring. In many states, legislatures are not in ses-sion at all times and may only consider new legislation at the start of the legislative session. To the extent that the proposal requires action at the state level, the pro-cess could be significantly delayed.

Similarly, political realities need to be taken into account. In many jurisdictions, the local hospital is a major employer, and hospital employees as voters may have

It is often helpful to catalog the sys-tem’s strengths and weaknesses in an organized fashion as a starting point.

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significant clout with elected officials. In these instances, it may be politically infea-sible or cost too much political capital to seek a restructuring that dramatically affects employee compensation, benefits, or rights. In numerous instances, restruc-tured hospitals have assumed employment obligations either identical or similar to civil service systems that were part of their previous operations.

To get a full perspective on the options, it is important to present the status quo as an option warranting full consideration.

Launching the Restructuring Effort

Although the substantive content of a reorganization plan is of paramount con-cern to those affected by it, the experience of many public hospitals indicates that the process by which that plan is developed also will be important to its ultimate success or failure. Laying the proper groundwork can significantly increase the likelihood that a reorganization will take place. Following is a description of some of the steps that can be involved in this process and the factors to consider in carrying out those steps.

Communication and Education

Ensuring proper communication with key constituencies greatly improves the likelihood of success in most reor-ganization projects. While every system (and every community) is unique, most successful reorganizations have been based on some degree of enfranchise-

ment of key constituencies. In the rare case where reorganization was effected without widespread community support, implementation took longer and success was harder to achieve. Moreover, in some such cases, the reorganization was plagued by litigation and instability.

The abortive restructuring of one pub-lic hospital in the early 1990s provides a telling example. Unanticipated litigation and resistance of key members of hospital leadership delayed the University of Col-orado Hospital’s transition from a unit of the University of Colorado Health Sciences Center to a separate hospital authority. The hospital sought to reorga-nize in response to financial difficulties, believing that it could be profitable if it were freed from the state purchasing sys-tem and personnel system, permitted to develop partnership and joint ventures freely, issue debt, and build financial reserves. In 1989, the Colorado Legislature passed legislation permitting operation of the University of Colorado Hospital as a private nonprofit corporation. However, the constitutionality of the legislation was challenged by the Colorado Association of Public Employees. In December 1990, the Colorado Supreme Court held that the initial legislation gave the University Regents so large a role that the hospital in fact remained a public entity for pur-poses including the civil service status of its employees. As a result, the initial reor-ganization had to be unwound after a year’s operation.

The state legislature then passed legislation establishing the University



Hospital Authority as a separate political subdivision of the State. The legislation authorized the regents of the university to execute a lease and transfer agreement to the new authority. While the hospital now had the necessary legislative author-ity for the transition, failure to attain the active support of internal hospital stake-holders posed an additional challenge to reorganization. While the president of the university and the chancellor of the health sciences center strongly sup-ported the change, the regents resisted it. The reorganization could be implement-ed only after the regents’ support was secured. As the financial situation of the hospital continued to erode, it became necessary for the governor to intervene to resolve the crisis. Though the process of reorganization was ultimately a success and the financial position of the hospital improved, much delay and controversy might have been avoided by securing adequate support of the hospital system’s stakeholders, both the employees and the leadership.

Communication is not a “one-shot deal.” It is not sufficient, for example, to hold a community meeting and consider the obligation to solicit community input fulfilled. Rather, the need to inform and be informed by key constituencies must be considered at every step of the reor-ganization process. For example, when deciding how to identify the goals and objectives of a reorganization, consid-er who will contribute to the process. Should the medical staff be given a for-mal role? The employees? The unions?

The patients? The community at large? Should the press be invited into the pro-cess? Should the goal-setting be blessed or even initiated by the local political leader or legislative body?

This is not to suggest that every step of the process must be completely open. For strategic, logistical, and other rea-sons, too much openness can be harmful. Nevertheless, take care to consider incor-porating broader constituencies into each step where it is possible without too great a sacrifice of efficiency or necessary confidentiality.

Who are the key constituencies to be consulted, informed, or enfranchised? The answer will vary from system to system, but at a minimum, they would typically include the following: Local Political Leaders: Because of their

ultimate power over the fate of most public hospitals, the support of local pol-iticians is an obvious must. The head of the executive branch of local government (the city mayor, the county administra-tor, the governor if it is a state-owned institution, etc.) is key, as well as his or her top health aides. Local legislators (city councilors, supervisors, etc.), particu-larly those with special responsibility for health affairs, may also be essential. If state legislation will be necessary to implement the desired structure, then it is important to inform or involve the relevant state legislators, as well. Clinical Staff: No reorganization can

be implemented without the coopera-tion of the medical staff. Bringing physicians, nurses and other clinicians

KEy CONSTITUENCIES OF REORGANIzATION

local Political leaders

clinical staff

non-clinical employees

Patients

Business and community leaders

other Providers

local Press

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into the process early on will help ensure both that they accept and support the decision to reorganize and that the new structure will meet their needs. In a teaching hospital affiliated with a medi-cal school, the appropriate University personnel also should be consulted. Non-Clinical Employees: Non-clinical

staff should be involved in the process as early as feasible, including any unions that may represent them. Public health systems tend to be major employers in their communities, and workers are likely to have significant concerns about any reorganization. Allowing rumors to fester without direct communication can only harm the process. Regular updates at staff meetings and in employee news-letters, and even a hotline or anonymous question/suggestion box have been used to encourage internal communication. Patients: Obviously, patients will be

directly affected by the change. Given that the hospital’s mission is to serve their needs, it is worth the effort to solicit their input. Particularly where the hospital is the primary safety net facility in the community, it may be necessary to allay patient fears about ongoing access to care. Patient advocacy groups, neighborhood groups, health advocates, advocates for the poor, representatives of relevant minority/ethnic groups, and similar organizations should be educated and consulted. Business and Community Leaders: The

community at large also will be con-cerned about the future of their local public hospital. Hospitals generate

significant economic activity and affect the local quality of life, so local business and community leaders will be inter-ested in the outcome and should be kept informed. Further, if members of this group do not already serve on the health system’s board, this may be an ideal opportunity to secure the informed involvement and support of community leaders. Other Providers: Although other pro-

viders in the community need not be brought into the decision-making pro-cess, they should be briefed on the reorganization plans as early as is consis-tent with strategic goals (particularly if a goal of the privatization or restructuring is to enable the system to partner or affiliate with others). Other providers may have concerns about the reorganiza-tion, such as the new entity’s ongoing commitment to indigent care, the con-tinuation of specialty services not readily available elsewhere in the community, and the enhanced competitiveness of the reorganized institution. For more than one public hospital, the opposition of a local competitor has derailed a reorgani-zation at the eleventh hour; for others, such as the Louisiana Health Care Authority, major providers desiring to safeguard safety net services offered criti-cal support. To the extent it does not compromise its competitive position, the health system can allay unwarranted fears by giving other providers accurate information about the reorganization. Local Press: Although it would be

unwise to conduct all the details of the



planning process in the press, open communication with the media can be important, given their influential role in shaping public and political opinion. To the extent possible, be responsive to the press, maintain good relations, and be sure that the information they have is accurate. Judiciously dispensed, off-the-record briefings, open meetings, interviews, and op-ed pieces are effec-tive tools.

How should these constituencies be involved? There are a variety of means to ensure their input. Regular formal meetings serve a purpose but are not sufficient in and of themselves. Repre-sentation on advisory or decision-making bodies (such as commissions, task forc-es, etc.) is one option. Staff (whether hospital/government staff or outside consultants) should consult with each of the affected groups early in the pro-cess to gain an understanding of their perspective on the status quo and their objectives in a restructured environment. If desired, the groups can be given an opportunity to review or comment on proposed reorganization models. In some cases, hospitals have circulated week-ly newsletters to employees and other interested parties to keep them updated. Without making the process too costly or unwieldy, the goal should be to pro-vide these constituencies with maximum opportunity for input, both to enhance their commitment to the reorganization and to ensure that the structure devel-oped is substantively sound.

Issues to be Addressed in a Restructuring

This section provides a framework for addressing some of the central issues in the design and implementation of a pub-lic hospital reorganization. Specifically, it addresses the following topics: Mission/Safety Net Responsibilities Accountability, Managerial Flexibility, and Autonomy

Governance Personnel Funding

The treatment of these issues will be shaped by the overall character of the reor-ganization. A fundamental consideration is the degree of the local government’s ongoing influence on and involvement in the operation of the resulting entity. This can range anywhere from significant involvement to a hands-off transfer. Another key factor is whether local deci-sion makers intend to join two or more previously independent hospitals into a system, or whether they simply wish to convert the public hospital into a new freestanding hospital or health system.

Although the general form of the reor-ganization will influence how the mission, accountability, governance, and funding are addressed, it is also true that issues in each of those categories will substantially influence the overall structure selected.

Mission/Safety Net Responsibilities

While it must be recognized that some public hospital reorganizations are under-

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taken by government entities in order to reduce taxpayer funding and exposure to the cost of indigent care, the primary goal of many reorganizations is to preserve and enhance the mission. Your system’s mission may include (1) ensuring access to care for uninsured indigent patients; (2) ensuring community access to certain essential services, such as trauma, burn units, neonatal intensive care units, etc.; (3) providing community-wide preven-tive and public health service; and (4) providing medical education. While restructuring or privatization is typically intended to increase the competitiveness of the system (e.g., broadening its payer mix beyond the typical “public” patient), a variety of mechanisms can help ensure that the mission continues to be fulfilled.

Defining an Enforceable Obligation:

If control over the public health system will change hands, it is generally desir-able to make adherence to the mission enforceable in some fashion. However, given the inevitable tension between the potentially boundless costs of ful-filling a broadly stated mission, and fiscal reality, it is critical to draw a reasonable balance in crafting the new system’s obliga-tions. For example, a broad requirement to provide medically necessary care to all, regardless of ability to pay, could either bankrupt a system without general tax revenues to rely on, or subject it to a costly lawsuit if it tried to limit such care. On the other hand, an overly general statement may not be treated as enforce-able, thus also defeating the initial intent.

This highlights another source of ten-sion in defining such obligations. It is important to set out the obligation with sufficient specificity to ensure that it is enforceable. However, the needs of the community may change over time, so there is a danger of locking in requirements that soon cease to serve their purpose. Simi-larly, there is a tension between the need for standards, which can change with community needs, and the desire to make it difficult to eviscerate the mission in the future through amendment.

In short, the challenge is to memori-alize the mission so as to protect it from those who may wish to abandon it in the future, while providing adequate flexi-bility and discretion to address unforeseen needs and financial limitations.

One method of addressing some of these issues, at least where reorganiza-tion is accomplished through legislation, is to include broader language—perhaps a statement of mission or purposes—in the statute, while reserving specific obli-gations to a contract. In addition, the financial stability of the new health system can be protected contractually, by tying its uncompensated care obligations to the receipt of payments by the local gov-ernment, though this does not in itself guarantee that the needed levels of service will in fact be funded.

There are a number of approaches for preserving the mission. Legislation cre-ating the Denver Health and Hospital Authority, for example, used both the statutory statement of mission and con-tractual obligations. The statute sets out



a four-part mission including “access to quality preventive, acute, and chronic health care for all the citizens of Den-ver regardless of ability to pay,” and further requires that transfer of assets to the Authority be conditioned on a contract by which the Authority agrees to fulfill this mission. The contract, on the other hand, is expected to quantify the Authority’s obligation as well as the City’s responsibility to fund it. In the case of St. Paul-Ramsey Medical Cen-ter (now Regions Hospital located in St. Paul, MN), state legislation included an unquantified requirement to pro-vide care for indigent patients, as well as a commitment to provide “major or unique” services currently provided by the hospital (e.g., trauma center and burn unit) for a five-year period, and thereaf-ter, to the best of its ability.

The mission may, of course, be pro-tected through contractual agreement, whether or not statutory purposes are enacted. For example, Harborview Medi-cal Center had defined in its management contract 11 categories of medically vul-nerable populations that were to be given

“priority for care within the resources avail-able.” In many cases, specific requirements are set forth in long-term documents, such as a lease or other transfer document that requires the consent of both parties to amend. This can create an adequate safeguard for important service obligations while permitting the flexibility to alter them if needed.

It also may be desirable to assign respon-sibility for monitoring compliance through

statutory or contractual obligations. For example, when Austin, Texas, contractu-ally transferred city-owned Brackenridge Hospital to a nonprofit competitor in 1995, a community board was created to monitor the required access to care, qual-ity, and patient satisfaction. Failure in any of these areas could jeopardize the city’s payment of indigent care funding. Simi-larly, in Boston, one of the duties of the Health Commission is to monitor com-pliance with contractual obligations in the operation of Boston Medical Center.

Funding the Mission: As suggested above, the difference between good intentions and full implementation of the public mission may be the commitment of funding from the local government. Continued local funding is typically necessary for a reorganized hospital or health system, at the very least on an interim basis, particularly if the system undertakes to continue costly aspects of its mission. Because the health system’s ability to uphold its mission depends on both “good policy” and adequate fund-ing, the methodology used to determine payments will be important.

Whether a city or county is legally obligated to fund the hospital typically depends on whether state law places responsibility for indigent care on its doorstep. Of course, even in the absence of statutory obligations, the local gov-ernment may undertake financial responsibility for indigent care through contractual agreement or on an ad hoc basis through its annual budgeting process.

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Once it is established that the local government will provide funding for the health system, the method of calculating the amount of funding must be deter-mined. Typically, funds are provided in one of two ways: An ad hoc basis through annual appropriations

Formal payment for services rendered, with or without a ceiling

The method chosen will depend on the degree of oversight the local gov-ernment wishes to exercise, the political backdrop for the reorganization, and the financial incentives desired for the system. There is often a preference for provid-ing payments for services rendered. This helps increase the managerial autonomy of the health system, create appropriate incentives to provide cost-effective care, and enhance the system’s patient care rev-enues and thus its access to credit.

Ad hoc appropriations were most common in earlier reorganizations. Here, the annual payment or “subsidy” to the health system is set during the city or county’s annual budgeting process. It may be based partly or wholly on the pro-posed budget of the health system, the projected level of uncompensated care, the prior year’s deficit, or other factors. While in some cases, annual appropria-tions provide a measure of security for the hospital that its deficits will be filled, this method often fails to provide appro-priate management incentives and may leave the local government, as well as the hospital, with an unacceptable level

of uncertainty. Importantly, avoiding this predicament may be a primary motive of local governments for spinning off direct-ly owned hospital systems. The annual appropriations approach also can make it difficult for systems to build needed reserves or fund balances.

The second method, formal payment for services rendered, may be more desirable, provided that reasonable limits can be placed on the city’s potential lia-bility for funding while maintaining a reasonable level of payment for these services. However, it may be a consider-ation that the Centers for Medicare and Medicaid Services (CMS), in a 2004 letter from CMS to Senator Charles Grassley (R-IA), appears to place critical importance on a local government’s legal obligation to fund the health sys-tem’s liabilities without necessity of a contract between them. This position and its ambiguities are discussed in detail in Chapter 6.44

In designing a formal payment sys-tem, the following approaches can be considered: Fee-for-service Discounted charge, cost plus, or other basis with or without annual ceiling

Fixed fee contract Capitated rate

The fee-for-service method may be desirable for coupling the local gov-ernment’s funding with the volume of services. Fee-for-service payments may be figured on either a charge basis or a cost basis, and there also may be



a fixed annual ceiling. (If the ceiling is too low, it may constitute a de facto fixed fee contract.) Often the fees paid by the city for indigent care reflect a modest mark-up over cost. For example, until 1990 the Memorial Medical Cen-ter of Savannah, Georgia, received cost plus 3 percent for services provided to those certified under the county indigent care program. Similarly, the city of Austin, Texas, reimburses Seton Medical Center for charity care up to a capped amount. Seton Medical Center assumed man-agement and control of the city-owned Brackenridge Hospital in 1995.

The fee-for-service method has the advantage of increased fairness and objec-tivity, but it may not afford the budgetary certainty desired by local government. This can be addressed by an annual ceil-ing or fixed fee contract, but that can end up eliminating the relationship between payment and level of services. And though the health system’s obligation may be limited to a fixed annual payment, in practice, services are often provided even after the designated funding has been exhausted, because the institution remains mission-driven regardless of its legal structure.

Another alternative is a per capita payment for covered lives, similar to reimbursement to health maintenance organizations. This mechanism has the advantages of predictability for the city and creation of incentives to provide cost-effective health care and preventive care. But this alternative is impractical unless there is sufficient data on the

covered population to set appropriate capitation rates.

Accountability, Managerial Flexibility,

and Autonomy

A fundamental challenge in reorganizing public health systems today is to retain a bold and capable management team and ensure that it is empowered to carry out its vision with a minimum of interfer-ence but with appropriate oversight and governance. The strategy for account-ability may differ depending on whether a public or private structure is chosen, or whether new state legislation is adopted.

Reducing the Burden on Public Entities:

A reorganized but still public health sys-tem must be able to avoid the exposure of sensitive information to competi-tors (based on “sunshine” laws), delays due to multi-layered decision mak-ing or lengthy approval processes, and otherwise becoming involved in the complexity associated with public endeavors. It takes a sensitive hand to accomplish these goals while maintain-ing adequate public accountability.

A number of potential strategies are available to ensure a reasonable level of accountability, particularly where public funding or the use of public assets contin-ues. In most cases, these problems can be eliminated or ameliorated, even for a public health system, through statutory exemptions. For example, though it may not be practical (or even desirable) to elim-inate all open record and open meeting requirements if the hospital remains public,

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it may be possible to extend exemptions to include competitively sensitive issues in addition to the more typical sunshine law exemptions. Westchester County, New York, adopted this strategy in draft-ing legislation to reorganize its Medical Center, by including an explicit sunshine exemption for certain marketing strategies and strategic plans.

If the decision is to undertake a less radical reorganization through non-statu-tory means, it may be more difficult for a public health system to obtain relief from many of these constraints. Sunshine, competitive bidding, procurement, civil service, and other consequences (positive and negative) of being a “public employ-er,” and other statutory requirements generally continue to apply. Even so, it may be possible to amend certain of these constraints through contract or through local ordinance or resolution.

Ensuring the Accountability of Private

Entities: Full conversion to private status should afford complete relief from “pub-lic entity concerns.” However, given the desire to provide accountability for the continuation of the health system’s mission and for use of public assets, it may be advisable to include contractual requirements. To ensure that these requirements are enforceable and remain in effect over time, they are most often included in the lease or other transfer documents. Alternatively, these condi-tions may be part of a service agreement requiring certain public services, gener-ally in exchange for public funding.

Accountability should be tied to funding in this way only if it is acceptable to relinquish public accountability if and when the health system relinquishes public funding.

A number of additional strategies for enhancing the accountability of the reor-ganized health system require that the city or county government retain the right of approval of certain key decisions. For example, the local government may retain some degree of control over board appointments through nominating or appointing one or more board members.

Similarly, local government may retain approval of certain key acts, such as sale of the facility, approval of management contracts or elimination of certain safety net services. The health system also may be subject to periodic reporting requirements and annual audits. One common requirement, in effect at the St. Paul-Ramsey Medical Center, is that the Center must provide its annual financial statement to the county, as well as an annual report on improvements to county property. Another common mode of accountability is reversion of the facility and other assets to the government upon dissolution of the corporation or the breach of certain critical statutory or contractual requirements.

Board Structure

A strong and independent board brings crucial vision, leadership, and perspective to bear on a health system’s present oper-ations and its future. A balanced board, whose members exercise independent


A fundamental challenge in re-organizing public health systems to-day is to retain a bold and capable management team and ensure that it is empowered to carry out its vision.


judgment unimpeded by conflicting loyalties, is essential to any system’s opti-mal functioning. The board should include a variety of relevant expertise and a range of experience and perspectives; and above all, it is critical that the mem-bers be dedicated to the health system and its mission.

Selecting Individual Board Members: Many issues regarding the governance of a reorganized health system are specific to the type of reorganization being undertaken. For example, a merger of existing hospitals creates unique issues involving the control and composition of the resulting system’s board. In contrast, if the reorganization involves the transfer of the public hospital’s operation to an existing system, the acquiring system’s board may take over without internal change. If the restructuring occurs with-out combining with another system, the central concern is to retain the best of the current board and ensure that new appointments are strong.

The most important element in the success of a board is, of course, the indi-viduals who serve at a given time. A number of issues are central to the selec-tion and composition of governing boards, including: Independence: responsiveness to the mission of the health system, rather than to political or parochial interests

Qualifications: the necessary range of expertise and an appropriate balance of perspectives

Accountability: through power of appointment and removal, and length of term

Stability and Continuity: as opposed to substantial turnover each time a new city or county administration is elected

Dedication: willingness to place the needs of the health system above potentially conflicting interests and to devote energies to the system and its mission.

Appointment and Removal: Although no selection process can guarantee contin-ued excellence, certain mechanisms can improve the chances of success. For example, independence and a bal-ance of perspectives can be fostered in a number of ways. One method is to broaden the appointive powers so that no single individual or body appoints all or most of the board. Also, the appoint-ing entity can be required to appoint from nominations by an independent source; most often by the board itself, but sometimes from various community groups or others.

On the other hand, self-perpetuating boards can be effective. A solely self-per-petuating board is uncommon among public entities because more direct public accountability is generally desired.

Another method to enhance board independence concerns the power of removal. A board member who can be removed only for cause or only by a supermajority of the board, rather than by a separate appointing entity, may be better able to exercise independent judg-

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ment than one who can be removed at will. A trade-off here is accountability, though this can be achieved by mandat-ing public meetings, annual audits and reporting, and reasonable conflict of interest provisions.

Other Strategies: Staggered terms con-tribute to stability and continuity on a board and can enhance independence when board members are appointed by a single official, such as the mayor or council chair. The mode and relative importance of accountability may depend on the extent to which the sys-tem remains in the public sector; that is, in a system viewed as primarily public, direct accountability to public officials is typically expected, while a system regarded as private may be held account-able more broadly to the public, its patients, etc.

Mandatory qualifications can provide the board with necessary expertise as well as contributing to a breadth of perspec-tives. However, it is important to avoid rigid qualifications for too large a portion of the board, as this can interfere with the selection of the best person avail-able when a vacancy arises. In addition, it is important to avoid the balkaniza-tion and conflicting loyalties that can arise when members feel that they have been appointed to the board to represent specific outside groups or interests. The board and its members must recognize and respect the delicate balance between providing a particular perspective and representing an outside interest.

Perhaps the most constructive element is to establish an ethos among the com-munity, the person or body responsible for board appointments, and the board itself, that the health system board is a place for experience, excellence, and ded-ication rather than political patronage or outside agendas, and that each member is expected to take the position seriously. The appointment of persons known and respected in the community, so-called

“heavy hitters,” can contribute to this, as long as they are indeed willing to be active board members rather than win-dow dressing. This level of involvement is most likely to occur when the board is invested with real authority, for example, when the CEO is directly responsible to the board and the board is empowered to set and implement policy in central areas of health system operations.

Personnel Issues

A positive and effective relationship with personnel can be the critical element in a health system’s success. The labor force constitutes by far the largest single expense for a health system, and in this era of cost competition, efficient use of personnel is critical in containing costs. But even more important than their efficiency are the employees’ performance and dedica-tion. In a service industry like health care, the employees are a critical element in patient satisfaction, quality of care, and the system’s overall success. Moreover, the support of the personnel is often critical in successfully adopting and implement-ing the reorganization effort.



Many public health care systems find themselves constrained by a civil service system designed for other sectors of the government and by collective bargain-ing agreements negotiated with little input from the front lines of the health system—i.e., from hospital and clinic management or personnel. As a result, a common goal of reorganization is for the health system to remove its personnel from civil service altogether or, at a mini-mum, to obtain direct control of its civil service system and to direct its own col-lective bargaining.

Civil Service Status: Health systems that will retain public status will generally also remain subject to civil service. One strategy to ease the burdens that may be associated with this status is to create an independent civil service system directly administered by the health system. Similarly, separate bargaining units can be created either automatically (by the creation of a separate employer) or through legislation to permit separate negotiation of collective bargaining agreements for health sector workers. Nonetheless, as long as a health system retains its public status, it is generally impossible—whether for legal or practi-cal reasons—to eliminate the application of civil service altogether.

Transfer of Employees: Although civil ser-vice requirements will not pertain to a private employer, a privatized health sys-tem may opt to provide certain benefits or guarantees to transferred workers. For

example, the hospital may guarantee that transferred workers will receive the same positions, pay, or certain terms of employment. Pension rights, senior-ity, and accrued vacation and sick leave also may be transferred. This approach has been taken in a number of hospital reorganizations, including the transfer of Detroit Receiving to a private corpora-tion in 1980. In that case, while positions in the new organization were not guar-anteed, to the extent that positions were available, employees were guaranteed the same rate of pay and transfer of seniority with respect to retirement and other benefits. Even so, labor vigorously challenged this organizational change, including a legal challenge heard in Michigan’s Supreme Court.

In a number of cases, the employees of reorganized hospitals have been given the option of retaining their status as local government employees. The Uni-versity of Colorado Hospital Authority, for example, agreed to lease from the state those employees who chose not to transfer to the Authority. (As an aside, this concession was made in the University Hospital’s second attempt to restructure. The first attempt involved a 1989 conver-sion to a private, nonprofit corporation. The employees’ union successfully sued to overturn this, claiming that the initial legislation gave the University Regents so large a role that the hospital in fact remained a public entity. The reorganiza-tion was reversed, and new legislation was passed creating a public hospital authority to operate the medical center.) In other

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cases, employees wishing to remain employ-ees of the local government have been reassigned to positions outside the hospi-tal setting.

In general, offering employees the right to retain current personnel status can be beneficial because hostile employ-ees can be formidable opponents to a reorganization, while those who are comfortable with their own options are more likely to support its implementation. It is important to recognize, however, that compromises resulting in dual, co-existing systems not only increase expenses but can greatly complicate the operation of the health system. Managers who super-vise health system employees as well as those leased from local government must be conversant with two sets of personnel rules, and friction can arise among per-sonnel who resent differences in pay or other treatment.

Other Considerations: Another important consideration is the treatment of various subgroups of employees. For example, moving out of the public sector can improve the ability to provide cafeteria benefits and other benefits typically desir-able to highly compensated employees. This also may permit the use of various recruiting incentives to attract non-employee physicians.

Implementation Process: Once the parameters of the reorganization have been decided and adopted by the rele-vant decision-making bodies, the real

work begins. Most find that it becomes more manageable if a comprehensive implementation plan is developed with clear assignment of responsibilities for tasks or groups of tasks. Specialized con-sultants, e.g., with legal or accounting expertise, may offer valuable assistance at this stage whether or not they have been used earlier in the process.

Some institutions have appointed a series of committees or task forces with responsibility for implementing discrete portions of the reorganization. For exam-ple, task forces might be useful in such areas as personnel, finance/budgeting, legal, procurement, capital/strategic plan-ning, and information systems. The task forces should include administrative and clinical staff with particular expertise in the relevant area. It is also helpful where feasible to select individuals whose investment in the process might be par-layed to encourage the support of their peers and co-workers. Each task force can be delegated responsibility for developing a detailed implementation plan in its respective area. It is challenging for criti-cal personnel to staff implementation task forces while continuing their full-time responsibilities, though consultants may reduce the burden by coordinating and focusing task force activities, provid-ing relevant information from similarly situated hospitals or conducting other research, and drafting task force reports. A limited number of site visits to (or from) other reorganized public systems also can be beneficial.



Impact of legal structure on medicaid and related reimbursement Issues

In addition to operational implications, hospital structure and governance may critically affect a hospital’s involve-ment in the Medicaid program. Many state Medicaid programs provide supplemental payments to hospitals that deliver special services or a high volume of care to low-income patients.

6NAPH member hospitals depend sub-stantially on these payments. However, participation in these programs may be explicitly or implicitly dependent on a hospital’s ability to finance the non-fed-eral share of Medicaid payments. Under federal regulations, only “public funds” may be used as the non-federal share, including funds transferred from or certified by “public agencies.”

Traditionally, public hospitals, including restructured public hospitals, have contri-buted to the non-federal share of Medicaid expenditures and have therefore been able to access Medicaid funding that has been crucial to maintaining their public mission. Recently, however, the federal Centers for Medicare and Medicaid Services (CMS), which oversees the Medicaid program at the federal level, increasingly has ques-tioned the government status of many of these hospitals and their ability to provide non-federal-share Medicaid funding. CMS has not, however, clearly and definitively articulated in regulations or other official guidance the criteria by which it deter-mines whether a particular provider is public enough to participate in Medicaid funding. The resulting legal ambiguity

threatens to upend the financial assump-tions on which many of the hospitals were originally restructured. On a prospective basis, the new, more restrictive CMS poli-cy on Medicaid financing threatens to distort the market by discouraging state and local governments from undertaking public hospital restructurings that other-wise would enhance the hospital’s ability to achieve its public mission in a highly competitive marketplace.

In addition, designation as a Federally Qualified Health Center (FQHC) can lead to enhanced Medicaid reimbursement. However, the rules that determine which entities qualify for this status contain restrictions on how the provider is struc-tured and governed. In many instances, public hospitals desiring to take advan-tage of FQHC status must restructure or enter into contractual arrangements with other entities.

Medicaid

Medicaid provides health care services for over 52 million low-income and uninsured individuals. Federal and state governments share in paying for Medicaid,

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and states administer the program within broad federal guidelines. Since the origi-nal enactment of the Medicaid program in 1965, the statute has required that financing for all Medicaid payments include a “federal share” and a “non-fed-eral share.” The non-federal contribution to Medicaid spending currently ranges from 33 to 50 percent, depending on state per capita income.

States have never been required to provide the non-federal share strictly from state general revenue funds. Rather, the Medicaid statute has always autho-rized the use of local funds as a source of financing for the program, and states may derive up to 60 percent of the non-fed-eral share from local sources other than state general revenues. Federal laws and regulations permit public hospitals—as well as cities, counties, and other pub-lic entities—to use intergovernmental transfers (IGTs) and certified public expenditures (CPEs) to claim federal Medicaid matching payments for public funds spent on Medicaid services.

An IGT is the transfer of funds from a state or local government entity to the state Medicaid agency, for use as the non-federal share of Medicaid expenditures. The non-federal share is matched in a defined percentage by federal Medicaid funds. Similarly, CPEs are certifications by public entities that they have expend-ed funds on items and services eligible for federal match under the Medicaid program. The federal government recog-nizes the local government expenditure as a matchable non-federal Medicaid

expenditure and provides the federal share to the state Medicaid agency.

Although CMS acknowledges the fact that states may use local funds as the non-federal share, the agency has become increasingly suspicious of IGTs and CPEs since they allow states to draw down federal Medicaid funding without com-mitting state general revenue funds to the program. As a result, CMS has sought to restrict the use of IGTs and CPEs in a variety of ways, including narrowing the definition of government entities that are capable of providing the non-federal share of Medicaid funding.

Medicaid Supplemental Payments

Hospitals that do not retain their govern-ment status when they are restructured may lose access to key supplemental pay-ments that are an integral and frequently longstanding piece of public hospital budgets. Often, a state’s ability to provide supplemental payments depends on the availability of local funding (such as IGTs or CPEs) to serve as the non-federal share of the payments.

Local funding has enabled many states to establish a variety of Medicaid supple-mental payments that support the various safety net roles that public hospitals (including reorganized public hospitals) typically play. Probably the most common supplemental payments are Medicaid disproportionate share hospital (DSH) payments, which are used to help offset the enormous cost of providing uncompensated care. States also provide supplemental Medicaid payments to

impact on medicaid and related reimbursement


hospitals to subsidize their role in provid-ing access to graduate medical education, trauma care, pediatric specialty services, and a host of other specialized services that are important to the community. Other states attempt to target supplemental pay-ments to hospitals with high volumes of Medicaid care or in hard-to-reach rural or urban areas. In most cases, these sup-plemental Medicaid payments provide key financial support for services and mis-sions that are not always recognized and compensated in the commercial market.

Medicaid payments, including Med-icaid DSH and other supplemental payments, provide 40 percent of the net patient revenues of NAPH member hos-pitals.45 Medicaid DSH payments, which support provision of care to large num-bers of uninsured and Medicaid patients, finance 23 percent of NAPH mem-bers’ unreimbursed care. In 2003, NAPH members received $4.3 billion in Med-icaid DSH payments. NAPH members provided over $2 billion in IGTs, some of which funded the non-federal share of DSH payments. Without Medicaid DSH and other supplemental payments, NAPH member margins in 2003 would have been an unmanageable negative 11.4 percent, instead of the 0.5 percent margins they experienced with these payments (which itself is significantly less than the industry average at 4.8 percent).

Impact of Hospital Structure and Govern-

ance on the Ability to Finance the Non-

Federal Share of Medicaid Expenditures

Federal regulations, which have remained

unchanged since at least 1977, authorize states to use “public funds” from “public agencies” as the source of the non-federal share of Medicaid expenditures.46 These terms have not been further defined. In 1991 legislation, Congress specifically prohibited CMS from restricting states’ use of funds “derived from State or local taxes (or funds appropriated to State uni-versity teaching hospitals) transferred from or certified by units of government within a State as the non-Federal share of expen-ditures under this title, regardless of whether the unit of government is also a health care provider.”47 Historically, CMS has deferred to states in determin-ing whether an entity or a provider is sufficiently public to provide “public funds.”

CMS policy with respect to IGTs and CPEs has undergone dramatic changes in recent years, however. Without modi-fying the current regulation or issuing formal or informal policy statements, CMS no longer accepts state assuranc-es that a particular entity is sufficiently public to provide “public funds” and has begun to apply a new set of standards to make this determination. Because CMS has not made these standards public, however, it is extremely difficult to know whether a particular entity meets the criteria or not.

CMS has indicated, however, that it believes there is a difference between a

“public” entity and a “unit of state or local government,” and that only the latter is able to make “protected” IGTs (i.e. IGTs or CPEs of the type Congress has prohib-ited CMS from regulating).48 According

naph 65

to hospitals that have been the subject of CMS scrutiny in recent years, CMS does not consider public ownership of a hos-pital sufficient to establish its ability to contribute to Medicaid funding. CMS therefore has questioned the govern-ment status of hospitals operated as public authorities, as public benefit corpora-tions, and those operated by a 501(c)(3) entity but owned by a local government. In some of these circumstances, the state involved eventually convinced CMS that the provider was sufficiently governmen-tal to provide IGTs; in others the dispute is still unresolved.

The one publicly available document that sets out CMS policy in this area is a letter to Senator Charles Grassley of Iowa in 2004.49 In the letter, CMS asserts that in order to make a “protected” IGT or CPE, a provider must be part of a unit of state or local gov-ernment and

have access to state or local tax reve-nues either through : (1) direct taxing authority or (2) the ability to access funding as an integral part of a gov-ernment unit that does have taxing authority and that is obligated to fund the provider’s expenses, liabilities, and deficits so that no contractual arrangement is necessary to receive such funding.

In investigations, CMS has even questioned local funding that cities or counties are providing to the state Medicaid agency in order to support hos-pitals that historically were part of that

local government jurisdiction. Relying on regulations and guidance that have weathered more than 25 years, NAPH continues to assert that local public fund-ing, whether provided by a historically public hospital or its supporting local government, may be used as the non- federal share of Medicaid payments.

Restructuring Analysis: Protecting

Hospitals’ Ability to Participate in

Medicaid Financing

CMS efforts to determine whether a hospital is properly able to make an IGT may have significant implications for public hospitals that are evaluating their corporate structures and considering governance changes. The continued abil-ity to make an IGT or CPE may be an important issue to address when reform-ing hospital structure and governance. At the same time, hospital structures that pose the least problem regarding contin-ued ability to provide Medicaid financing through IGTs or CPEs may not be ideal from other financial or management perspectives. When public hospitals reorganize into separate public entities, hospitals may wish to consider ways to protect their public status and their ability to make IGTs and CPEs.

From the CMS perspective, hospi-tals with direct taxing authority present little question about their ability to make IGTs. However, taxing authority may not be feasible or even desirable in many cases. At the same time, including in the restructuring statutes the ability to levy taxes might be extremely helpful in



FIGURE 1 Hospital Margins, 2003

SOURCES AHA Annual Survey 2003; NAPH Hospital Characteristics Survey, 2003

6%

4%

2%

0%

-2%

-4%

-6%

-8%

-10%

-12%

-14%

All Hospitals Nationally NAPH Members NAPH Memberswithout DSH or UPL

4.8%

0.5%

-11.4%

ensuring that CMS considers the hos-pital able to make IGTs, even if there is no current intention of using the ability to tax. Another option is to ensure that the enabling statutes clearly state that the hospital will have direct access to state or local appropriations after it is reorga-nized (again, even if there is no current intention by state or local government to provide those appropriations).

Beyond access to state or local tax rev-enues, hospitals may wish to consider ways to retain ultimate state or local gov-ernment responsibility for funding any hospital deficits or liabilities. If the restruc-tured hospital is solely responsible for its debts, CMS may be more likely to view the entity as non-public and, therefore, not authorized to make an IGT. Hospitals also may wish to consider other indicia of

government status, such as the owner of the hospital license, the name on Medicaid provider agreements, corporate registra-tion status with the Secretary of State, etc. Hospitals also may consider requesting an IRS ruling confirming public status.

The unwritten, ambiguous, and evolv-ing CMS criteria regarding the ability of public entities to participate in Medicaid financing have complicated efforts to restructure public hospitals. Because of the importance of Medicaid supplemen-tal payments, CMS policy on this issue cannot be ignored, yet this policy is not always consistent with the best interests of the local community in meeting its safety net health care needs. NAPH has urged CMS to adopt flexible standards on public entity status that recognize and support the ongoing safety net role

naph 67

played by historically public hospitals. Until it does so, however, hospitals con-sidering restructuring and wishing to preserve their ability to finance the non-federal share of Medicaid expenditures should consult with attorneys who prac-tice in this area. It may even be wise to consult with CMS directly regarding proposed new structures and their gov-ernment status.

Federally Qualified Health Centers

In certain instances, public hospitals and health systems have considered modify-ing their governance structure in order to qualify certain outpatient services for FQHC or FQHC look-alike desig-nation. Under federal law, FQHCs get preferential “cost”-based Medicaid reim-bursement for outpatient services, rather than Medicaid fee schedule rates. How-ever, one of the conditions for FQHC status is that the governing board be composed of at least 51 percent of active users of the provider. Many public enti-ties—for example, those operated directly by a local government and governed by elected officials—may not be able to meet this test. In these instances, the pub-lic hospital might choose to create or partner with a local community-based organization for the provision of outpa-tient services.

The Health Services Resources Administration (HRSA) allows public entities to apply for FQHC look-alike status with a co-applicant, whereby the public entity and the co-applicant

together meet federal FQHC require-ments (including those for governing boards). In this co-applicant model, the public entity generally receives FQHC look-alike designation, and the co-applicant board serves as the health center’s board.

Health Center Boards

A health center’s governing board must have between nine and 25 members, and at least 51 percent must be active users of the center’s services and must reason-ably represent the individuals served by the health center in terms of such factors as race, ethnicity, and gender. No more than half of the non-user members may be health professionals (i.e., individuals who derive more than 10 percent of their income from the health care industry).50

The board must be chosen through a selection process, subject to approval by HRSA, that is prescribed by the bylaws of the health center. An individual’s leadership role in the community and functional expertise should be major criteria in selecting non-user members. HRSA, however, prohibits “other enti-ties” from participating in actions relating to board members of the health center. For example, other entities are prohibited from selecting a majority of health cen-ter board members, and only those board members selected by an outside entity may be removed by an outside entity.51 There remains some ambiguity, however, about how restrictions imposed on “oth-er entities” may be applicable to public entities in co-applicant situations.52



Authority and Responsibilities: The gov-erning board is legally responsible for ensuring that the health center is operated in accordance with federal, state, and local laws and regulations. Governing boards also must retain specific duties and authorities, which include: Approval of the selection and dismissal of an executive director of the health center

Selection of services provided by the health center

Approval of the health center’s budget Approval of the application for a sec-ond or subsequent grant or FQHC recertification

Adoption of health care policies including scope and availability of services, location, hours of service, and quality of audit procedures

Assuring that the health center is com-pliant with federal, state, and local laws and regulations

Evaluating health center activities including service utilization patterns, productivity of the center, patient sat-isfaction, and development of processes for resolving patient grievances.53

There must be a clear explanation of how governance responsibilities are divided between the public entity and the co-applicant. Recognizing that state and local laws frequently require public entities to retain control over particular aspects of their governance, HRSA pro-vides some flexibility for public entities in relation to the co-applicant governing board. In particular, HRSA public enti-

ties may retain “general policy-making authority.” Public entities also may “share” in the exercise of the governing board’s duties and authorities listed above.

HRSA also allows public entities to retain sole authority in certain areas without providing individual justification. These include: establishment of personnel policies and procedures, including selection and dismissal of employees, salary scales, employee grievance procedures, and equal opportunity practices

development of management and control systems, including conducting audits for fiscal integrity, approval of the annual health center budget, and establishment of systems for eligibility determinations, billing and collections, and long-range financial planning.

For any other areas in which the public entity seeks sole authority, it must pro-vide some legal basis for the exclusion of the governing board.54

Strategies for Meeting Governance

Requirements

Given the flexibility HRSA provides to public entities with co-applicant boards, there are a number of strategies public hospital-based clinics may use in apply-ing for FQHC look-alike status. The following discussion highlights some of the issues to consider when formulating these strategies.

Financial Control: While public entities generally must cede authority over certain

naph 69

operations of health centers to co-appli-cant boards, public entities may retain significant control over the financial management and budget development process. Particularly to the extent that the public entity funds operations of the FQHC, this allows a substantial degree of practical control. For example, the governing board must have ultimate authority to select or expand services rendered at a health center, though the public entity may play a role. But, if the services chosen by the board are incon-sistent with the public entity’s objectives, the public entity is not required to fund these selections. In other words, the public entity could reduce (or propose to reduce) its budget allocation to the health center based on its concerns about the service mix.

Decision Making: As explained above, the public entity may share the govern-ing board’s responsibilities in an “active joint decision-making process.” This joint decision-making process may apply to a number of board functions—selec-tion of services, approval of the center’s

budget, selection or dismissal of the cen-ter’s chief executive officer, adoption of health care policies, ensuring compliance with applicable laws and regulations, and evaluation of center activities.

Although it is difficult in today’s changing FQHC regulatory environ-ment to predict what limitations HRSA may impose on mechanisms for “sharing” responsibilities between public entities and co-applicant boards, there appear to be some clear opportunities. For example, public entities may assume a significant role in an activity (such as the develop-ment of the center’s budget or selection of CEO candidates), as long as there is a mechanism in place for final approval by the governing board. Such mechanisms may include proposals or review of center activities conducted by both the public entity and the governing board. In anoth-er option, the public entity makes the initial proposal or review and the govern-ing board gives final approval (with the ultimate check imposed by the public entity’s decision on whether to provide funding for the board’s action).



other financial Issues

Typically, funding issues are responsible, partly or wholly, for the underlying need to reorganize. Although a number of factors influence decisions related to funding, some of the considerations central to a health system’s long-term stability following reorganization include the need to provide the system with sufficient operating funds to fulfill its mission; provide the system with enough funding to weather the normal cyclical demands of the marketplace through its own reserves; and ensure ade-quate access to capital.

7

A financial feasibility study is typical-ly part of the reorganization analysis. This feasibility study will assess the total financial picture of the reorganized health system, including payments from the local government for indigent care (see discussion in Chapter 3),

additional operating revenues antici-pated as a result of the added efficiency and flexibility of the new structure,

capital needs, and capital access.

The long-term success of the system, its degree of autonomy, available services, and the quality of care are all closely linked to financial stability of the institution.

Transfer of Reserves and Debt: As part of the reorganization process, the parties need to negotiate the treatment of reserves and debt. The two are related;

that is, the necessary level of reserves depends in part on the level of debt undertaken by the reorganized system. The local government can increase the likelihood of the reorganization’s success by permitting the health system to retain adequate financial reserves. Without adequate working capital and reserves, the health system cannot be expected to function independently—especially if it can no longer rely on tax revenues, access to general obligation (GO) bonds, etc.

It is not unusual for the amount of rental or purchase payments from the new entity to the local government to equal the remaining debt service on any outstanding bonds. However, this is not always the case. For example, when Detroit General Hospital was transferred from the city in 1980, the parties agreed that $1,000,000 per year was the maxi-mum realistic level of debt which Detroit

naph 71other financial issues

Medical Center could assume; this left the city to pay the remaining $6,000,000 per year from its own resources. In recent years, hospitals operating as enterprise funds often have been faced with either accrued operating debt to the local gov-ernment, or the flip side, a significant level of accumulated reserves. In the for-mer case, there is inevitably discussion of whether the debt is appropriately relat-ed to the hospital or whether it reflects past city or county decisions to under-budget for hospital operating expenses; and regardless, whether it is practical to saddle the reorganized system with this debt. When the hospital has accumulated reserves, their source may be dispropor-tionate share payments or other health revenues, but it may nonetheless be tempt-ing for a cash-strapped local government to refuse to transfer them into an indepen-dent health care entity.

Service Revenues: Another important area of negotiation is the amount of pay-ment the local government will give and the payment method it will employ to compensate indigent care (see the discus-sion in Chapters 5 and 6). The requisite financial support depends also on the volume of uncompensated or under-compensated services that must be provided, as well as the scope and avail-ability of state and federal programs for indigent patients, including Medicaid funds for disproportionate share hospitals.

Capital: When designing a financial strategy, an important goal is to maxi-

mize the reorganized system’s access to capital. One common advantage of direct city or county ownership is access to GO bonds. In some states, an inde-pendent public entity still can use municipal GO bonds, but this is an issue that must be explored on a case-by-case basis. Generally, private entities cannot access GO bonds, even through statute, as this violates state constitutional prohi-bitions on the gift of public funds, also known as “anti-donation” clauses.

Nonetheless, where the local govern-ment’s credit rating is poor or where it is near a formal or informal capital ceiling, legal access to GO bonds carries little practical advantage. In this case, access to capital, typically in the form of reve-nue bonds, may be a key motivation for reorganization. Independent public entities (such as authorities or public benefit corporations) and even private, nonprofit hospitals either can issue tax-exempt revenue bonds through a state financing authority or can issue taxable revenue bonds.

Because a freestanding health system may not have the revenues to support a strong credit rating, credit enhancement may be required. Credit enhancement refers to any sort of insurance or guar-antee issued by a highly dependable financial institution, quasi-government agency, or government entity. Common forms of credit enhancement include pri-vate mortgage or bond insurance, letters of credit, and mortgage-backed insur-ance issued by the federal government pursuant to Section 242 of the National


Housing Act and backed by the full faith and credit of the United States.

Fundraising

In many instances, a public hospital will want to augment its revenues through a charitable giving program. Historically, safety net hospitals operated as part of a government entity have perceived that their public nature would deter donors from making financial contri-butions. However, a number of public hospitals have built vibrant charitable giving programs.

Public hospitals seeking to establish a charitable giving program must apply for and maintain 501(c)(3) nonprofit status from the Internal Revenue Service. Not only does this status exempt the hospital from federal taxation, but it also allows donors to deduct their contributions on their individual or corporate tax returns. While local government entities are generally exempt from federal tax, they should still apply for 501(c)(3) status to encourage private donations.

Many public hospitals have established or cooperated in the establishment of par-allel charitable foundations whose sole purpose is to support the mission of the hospital. These foundations are by no means a requirement of a charitable dona-tion development program, but they can offer some strategic advantages. First, in many states, any funds that are donated directly to a public entity become “public funds” whose use is encumbered by con-stitutional “anti-donation” clauses. If the

foundation’s assets do not constitute public funds, there will be much more flexibility in putting the charitable con-tributions to use. Also, even if the public hospital is subject to sunshine laws, such as open records or meetings acts, the foundation may not be subject to such restrictions. This might prove advanta-geous for certain capital campaigns. Further, many hospitals and other chari-table organizations may load their boards with individuals who are either capable of making large contributions to the organi-zation or of generating large contributions. In many instances, the composition requirements (formal or practical) for public hospital boards may preclude the hospital from placing as many major donors on its board as would be ideal from a charitable contribution perspective. Further, in light of the complexity of governing a hospital, many community leaders may be reluctant to serve on a hos-pital board. By creating a parallel charitable foundation as a separate entity, the board of that organization can be composed largely of local leaders who are capable of generating revenue for the hospital but who need not make the time com-mitment or do not have the skills required of regular hospital board members.

There are strategic issues that must be addressed when establishing a charitable foundation. First, the parties involved must decide what overlap, if any, there would be between foundation board members and either the hospital board or the hospital management. The more overlap there is, the more likely it is that

naph 73other financial issues

hospital priorities will be the foundation’s priorities. Second, before promoting a separate foundation structure, the hospi-tal needs to seriously consider whether it wants to cede control of donated funds to an independent entity. It is possible that such a foundation might at some point decide to restrict the use of its funds to projects that are not top priority for the hospital. Finally, the two entities will need to establish mechanisms to coordi-nate fundraising campaigns, messages, and donor targets in order to maximize the effectiveness of the donor program.

Next, the parties need to consider the operational issues. Often, the chari-table foundation will rely on the hospital to provide the day-to-day staffing and

financial management for the foundation. While these arrangements are permit-ted, they need to be well documented. Because the hospital and foundation are legally distinct entities, there cannot be any commingling of funds. The parties need to establish procedures that ensure that donations to the foundation are deposited into a separate bank account and tracked through separate ledgers. Further, the responsibilities of employees who perform services for both the hos-pital and the foundation must be clearly defined. If the hospital provides any direct or indirect support for the foundation, this relationship should be document-ed in writing, even if no compensation changes hands.


This task list is intended to give an over-view of the issues that will arise in several key areas during reorganization.

A. Personnel

The personnel task force should include employee representation. It is wise to have ongoing communication with employees (e.g., regular meetings, newsletters, etc.) throughout the imple-mentation phase to ensure that they are accurately informed, to dispel fears, quell rumors, etc.

Depending on the circumstances and the personnel decisions made in structur-ing the reorganization, some or all of the following tasks may be necessary: Negotiate/discuss outstanding personnel issues with unions.

Draft the policies, contracts, and other materials needed to execute decisions regarding any transfer or payout of em-ployee benefits (pensions and accrued leave, as well as accrued seniority).

To the extent that employees are offered choices (e.g., whether to transfer to the new entity or remain with current employer; whether to cash out benefits; etc.), develop a realistic timetable and ensure that full, clear information is distributed well in advance of deadlines and that financial or other relevant counseling is available.

If employees will remain in the civil service but hospital administration is to be brought in-house, develop an appropriate civil service system and in-house administrative capabilities.

Develop a new personnel system. Draft personnel policies and procedures. Develop new job descriptions where necessary.

Establish employee performance crite-ria and/or incentive plan.

Determine the management structure and prepare/revise the organization chart including clear lines of authority.

Develop or modify as necessary an employee relations program.

Develop a payroll system or contract out for one.

Conduct training/retraining where necessary.

B. Finance/Budgeting

Financing and budgeting issues could be significant in the implementation efforts, depending on the degree of for-mer dependence on local government and the degree of financial indepen-dence to be attained. For example, if the institution was previously deficit-funded (i.e., local government funding simply filled any budget shortfalls) and has now assumed bottom-line budgeting responsibility, substantial preparation will be necessary to handle the increased financial autonomy (and risk). Even where the change will be less dramatic, most or all of the following tasks will be necessary: Create a budget development and approval process.

Develop a budget monitoring process, including an early detection and adjustment system for deviations from budget.

Reorganization Task List

appendix

naph 75

Analyze impact on third-party reim-bursement, including Medicaid and Medicare.

Prepare short- and long-term budget projections for the reorganized entity.

Develop pro forma financial statements. Develop new accounting systems, records, and methods of accounting, as appropriate.

Adjust pricing if necessary.

C. Capital/Strategic Planning

Enhanced autonomy should permit more efficient and effective planning—both capital and strategic. Capital planning will become easier if the approval process has become less bureaucratic, and access to capital may be improved. Freedom from some of the typical government restrictions (such as limitations on the ability to joint venture, geographic limi-tations on area of operation, restrictions on forming subsidiaries, etc.) should improve flexibility and creativity in stra-tegic planning.

Effective capital and strategic planning typically includes some or all of the fol-lowing steps: Determine the impact of the reorga-nization on access to capital.

Explore various prospects and costs for capital funding.

Establish or revise the process for devel-oping and approving capital plans.

Conduct a capital needs assessment. Develop short-term (three-year) and long-term (ten-year) capital plans.

Develop a monitoring process for the capital plan.

Review strategic planning processes and determine any needed changes.

Develop or modify short- and long-range strategic plans.

Develop a monitoring process for measuring progress toward strategic goals.

Establish methods to ensure consis-tency among capital, strategic, and financial plans.

D. Legal

As health system reorganization is typically a complex process from a legal perspective, it will be important to have an experi-enced legal team in place. Not only must numerous legal documents be developed and drafted, but multi-faceted issues must be explored, filings accomplished, and details attended to in order to ensure a smooth and successful transition. When assigning responsibility for these tasks, particularly for drafting agreements, it is important to keep in mind that, while such drafting can be burdensome, time-consuming, and costly, having its own internal or outside counsel assume pri-mary responsibility will provide the health system with maximum control over the terms and subtleties of the arrangements being memorialized.

Below are examples of the legal tasks involved in implementation: Assist in developing or negotiating overall terms of restructuring, including property transfer, ongoing obligations between local government and restructured system, board struc-ture, etc.

appendix


appendix


Draft necessary implementation docu-ments (agreements for transfer of real and personal property and intangibles, service or indigent care agreements, articles of incorporation, etc.).

Draft board bylaws and rules. Review medical staff bylaws and revise as necessary.

Review all outstanding contracts to determine any modifications required, including assignment.

Determine federal, state, and local licensure requirements (e.g., hospital, pharmacy, laboratory, x-ray, radioac-tive materials, federally controlled substances, food services, incinerator, boiler, elevator, special services) and file as required.

Negotiate and draft any necessary agreements with government agencies for services.

Analyze any local, state, or federal tax implications and comply with filing requirements.

Analyze local, state, or federal employment law implications and comply with filing requirements.

Notify officials of change in status as needed, e.g., JCAHO; Secretary of HHS, for Hill-Burton purposes; etc.

Obtain new provider numbers if necessary.

Comply with any state and local business filing requirements (e.g., nonprofit corporation status).

E. Information Systems

Greater independence from the local government may mean that the health

system is no longer wedded to the infor-mation systems chosen and used by the rest of the government. If most key sys-tems (personnel, financial, accounting, medical records, etc.) are now indepen-dent of the local government, it may be time to reevaluate information sys-tems. If the health system has merged with another provider, then the need to address information systems issues is not a luxury but a must. Here are some of the steps involved: Conduct an information systems needs analysis.

Identify and address compatibility issues.

Develop an information systems capital budget (in conjunction with capital planning process).

Assess and select appropriate system(s). Develop acquisition and implementa-tion plans if necessary, including staff training program.

F. Procurement

The existing government procurement bureaucracy is often a motivating factor for reorganization. If the new structure provides greater control over purchasing, several steps should be taken to exercise this new responsibility effectively: Develop new written procurement policies and procedures.

Develop/update inventories. Develop an oversight process to ensure procurement policies are being appro-priately implemented.

Develop a training program in new pro-curement procedures for all relevant staff.


appendix

naph 77

G. Miscellaneous

There are many other tasks which, while not falling into any of these subject areas, are critical to successful implementation. These tasks include:

Conduct board training and orienta-tion. If a new board is created, its members must be brought up to speed; where an existing board is being given enhanced powers and new responsi-bilities, training also will be important.

Determine the impact, if any, on the medical education program and any medical school affiliation agreements.

Determine the impact, if any, on the mix of services.

Where the new structure creates a multi-facility system, issues will arise regarding allocation of responsibilities between a central office and the facili-ties themselves. These will need to be carefully addressed in each of the sub-stantive areas set forth above.

Determine what services are best to contract out, if only on a transi-tional basis, and what services the system is capable of performing in-house (e.g., payroll).

Determine and reserve new name, if any, and design new logo, signs, stationery, etc.

appendix


appendix


Centers for Medicare and Medicaid

Services (CMS). Federal agency within the U.S. Department of Health and Human Services that administers the Medicare, Medicaid, and State Children’s Health Insurance programs.

Certified Public Expenditures (CPEs). Expenditures by public entities on items and services eligible for federal match under the Medicaid program. Upon certification of these expenditures, federal matching funds are provided for the federal share of the expenditures. Unlike IGTs, CPEs do not involve an actual “transfer” of funding to the state Medicaid agency. Instead, the federal government recognizes the local government expenditure as a matchable Medicaid expenditure and provides the federal share to the state Medicaid agency.

Disproportionate Share Hospital (DSH)

Payments. Made either by Medicare or by a state’s Medicaid program to hospitals that serve a “disproportionate share” of low-income or uninsured patients. These payments are in addition to the regular payments that hospitals receive for providing care to Medicare and Medicaid beneficiaries. Medicare DSH payments are based on a federal statutory qualifying formula and pay-ment methodology. For Medicaid DSH, there are certain minimum federal criteria, but qualifying formulas and payment methodologies are largely determined by states.

Federally Qualified Health Center (FQHC). FQHC services are primary care and other ambulatory care services provided by community health centers and migrant health centers funded under Section 330 of the Public Health Service Act, as well as by “look-alike” clinics that meet the requirements for federal funding but do not actually receive fed-eral grant funds. States are required to include services provided by FQHCs in their basic Medicaid benefits package.

Intergovernmental Transfers (IGTs). Non-federal public funds transferred from a local government entity (including a local-ly owned hospital or nursing facility) to the state Medicaid agency, or from another state agency (including a state-owned hospital) to the state Medicaid agency. These transfers are usually made for the purpose of providing the non-federal share of a Medicaid expenditure in order to draw down federal matching funds. IGTs are often used in connection with payments to DSH hospitals and UPL transactions.

Medicaid. A jointly funded program by the federal and state governments to provide health coverage to those who qualify on the basis of income and eligi-bility, e.g., low-income families with children, the low-income elderly, and persons with disabilities. Many states also extend coverage to groups that meet higher income limits or to certain “med-ically needy” populations. Through waivers, some states have expanded coverage even further.

glossary

naph 79

Medicaid Upper Payment Limits (UPLs). Limits set by CMS regulations on the amount of Medicaid payments a state may make to hospitals, nursing facilities, and other classes of providers and plans. Payments in excess of the UPLs do not qualify for federal Medicaid matching funds. The UPL generally is keyed to the amounts that can reasonably be esti-mated would be paid, in the aggregate, to the class of providers in question using Medicare payment rules.

Medicare. Provides health coverage for individuals 65 and over, and for cer-tain disabled individuals under age 65. In contrast to Medicaid and the State Children’s Health Insurance Program, Medicare is a purely federal program. The program provides coverage for hospital care through what is known as “Part A” and physician and other ambulatory care through what is called “Part B.” However, the program leaves major gaps in coverage, including many preventive services.

National Association of Public Hospitals

and Health Systems (NAPH). Represents more than 100 hospitals and health sys-tems that together comprise the essential infrastructure of many of America’s larg-est metropolitan health systems. Since its inception in 1980, NAPH has culti-vated a strong presence on Capitol Hill, with the executive branch, and in many state capitols. NAPH educates federal, state, and local decision makers about the unique needs of and challenges faced

by member hospitals and the nation’s most vulnerable populations.

Safety Net Provider. Health care provider organization with a mandate or mission to deliver large amounts of care to unin-sured and other vulnerable patients. Examples include community health centers, clinics, public hospitals, and some teaching hospitals.

Sarbanes-Oxley Act (SOX). Strengthened existing legislative audit requirements and briefs organizations on appropriate auditing and accounting practices and corporate responsibility. Enacted to pro-tect investors and restore public trust in U.S. capital markets, after several corpo-rate and accounting fraud schemes were exposed in 2001 and 2002.

glossary


1. Marion Lewin and Stuart Altman, eds. Institute of Medicine, America’s Health Care Safety Net: Intact but Endangered (Washington, DC: National Academy Press, March 2000).

2. San Francisco County and City Charter, § 4.110; www.sfdph.org.

3. The system’s 2004 cash-based revenues were $614,766,031 million. Grady Health System, Grady Highlights At-a-Glance, at http://www.gradyhealthsys-tem.org/financial.asp.

4. 1996 Mass. Acts ch. 147.

5. Please note that, in contrast to the usage in this paper, California corporate law uses the term, “public benefit corporation” to refer to a private, non-membership, nonprofit corporation. Cal. Corp. Code §§ 5110-6190 (2005).

6. Haw. Rev. St. § 323F.

7. Betsy Carrier, Jennifer Cromwell, Using Ballot Initia-tives to Fund Uncompensated Care and Safety Net Services, (Washington, DC: National Association of Public Hospitals and Health Systems, March 2005).

8. “KC Voters OK Increase in Health Levy,” Kansas City Business Journal, April 6, 2005, available at http://www.bizjournals.com/kansascity/stories/2005/04/04/daily20.html?t=printable.

9. Shelby County Health Care Corporation d/b/a/ The Regional Medical Center at Memphis, 343 N.L.R.B. No. 48 (2004).

10. Jeff Swiatek, “Pay is Healthy for Hospitals’ Execu-tives,” The Indianapolis Star, Feb. 6, 2005 at 1D.

11. Ind. Code § 16-22-8 (2004); Health & Hosp. Corp. of Marion Cty., Background on Health & Hospital Corpora-tion, at http://hhcdatamart.com/mica/who.html.

12. Health & Hosp. Corp. of Marion Cty., General Information, at http://www.hhcorp.org/hhc_geninfo.htm.

13. Ibid. One of the members appointed by the City-County council serves only a two-year term, as re-quired by Indiana Code §16-22-8-9(c) (2004).

14. The Lewin Group, Inc., Revisioning the Delivery of Health Care Services to Uninsured Patients in Harris County: Executive Summary, June 2004, at 6, available at http://www.saveourers.org/SOE.ExecutiveSummary.pdf.

15. Ind. Code § 36-3-6 (2004); Ibid.

16. 1995 Mass. Acts ch. 147.

17. Ibid., Section 5(f ).

18. Ibid., Section 3(a).

19. Ibid., Section 3.

20. Ibid., Section 7(b).

21. U of L Health Care, History, at http://www.uof l-healthcare.org/a_ab_history.html (last updated Nov. 10, 2004).

22. Make, Buy, or Partner? The Role of Joint Ventures in a Revenue Strategy (Oak Brook, IL: University HealthSys-tem Consortium, 2005).

23. Ibid.

24. See generally, Comprehensive Accreditation Manual for Hospitals: The Official Manual, Joint Commission on Accreditation of Healthcare Organizations, 2004.

25. Cook County Bureau of Health Services, http://www.cchil.org/Cch/bureau.htm. The Bureau of Health Services is charged with administration of the health care institutions under the board’s jurisdiction.

26. N.Y. Pub. Auth. Law § 3303(1)(c).

27. Haw. Rev, Stat. § 323F-3 (2004). A bill was intro-duced in the Hawaii House on January 27, 2005, that would remove this regional requirement for board members and instead require the governor to select board members from lists of candidates nominated by the Speaker of the House and the President of the Senate. H.R. 922, 23rd Leg., Reg. Sess. (Haw. 2005). The bill was referred to the House Committees on Finance and Health on January 31, 2005.

28. Act of July 24, 1990, 1990 La. Acts 855 (repealed 1997).

29. Available at http://www.irs.gov/instructions/i1023/ar03.html.

30. R. R. Bovbjerg, J. A. Marsteller, and F. C. Ullman, “Health Care for the Poor and Uninsured after a Public Hospital’s Closure or Conversion.” The Urban Institute: Occasional Paper Number 39, 2000. Also see: E. Fried-man, “Demise of Philadelphia General an Instructive Case; Other Cities Treat Public Hospital Ills Different-ly,” JAMA 257 (1987):1571-1575.

31. E. Friedman (1987), see full citation in note 30.

32. The DC General Hospital Commission Act of 1977 (DC Law 1-134)

notes

naph 81

33. P. Offner, “Politics and the Public Hospital in Our Capital,” Health Affairs 20 (2001):176-181.

34. Ibid.

35. A. Goldstein, “End at Hand for D.C. General; Monday Shutdown a Major Gamble for Patients, City and the Mayor,” The Washington Post, June 24, 2001, Page A01.

36. Editorial, “A Health Emergency,” The Washington Post, September 16, 2003, Page A18.

37. A. Goldstein, “Proposal Targets ER at D.C. Gener-al; Hospitals Oppose Shift to Non-Emergency Care; 6 Clinics Would Close,” The Washington Post, January 17, 2003, Page B04.

38. L. Montgomery, “D.C. Has a ‘Deal’ To Build Hospital; Howard U. to Run SE Medical Center,” The Washington Post, February 17, 2005, Page B01. E. M. Weiss, “Hospital Proposal Criticized; Mayor, Howard U. Faulted at Hearing,” The Washington Post, February 18, 2005, Page B03.

39. E. M. Weiss, “Panel Named to Study Hospital Alternatives, Some Advocates of New Facility Question the Task Force’s Intent,” The Washington Post, April 20, 2006, Page B06. “In His Own Words: The Mayor on His Decision to Rethink Hospital Backing,” The Wash-ington Post, April 20, 2006, Page DZ08.

40. Cal. Health & Safety Code §§ 32000-03 (2005).

41. Tex. Const. art. IX, §§4-8.

42. Tex. Const. art. IX, § 9 (amended 1989); David E. Brooks, Hospital Districts: Constitutional and Statutory Basis, 36 Tex. Practice Series § 26.20 (2d ed. 2002).

43. Tex. Health & Safety Code Ann. §§ 281.001-283.136, 286.001-951 (2005); Vernon’s Ann.Texas Civ.St. Art. 4494q (2005). For example, West Medical District was created by a special act of the Texas state legislature in 2001. H.R. 3691, 2001 Leg., 77th Sess. (Tex. 2001).

44. Letter from Mark McClellan, CMS Administrator, to Sen. Charles Grassley (April 28, 2004).

45. Jennifer Huang, et al., America’s Public Hospitals and Health Systems, 2003: Results of the Annual NAPH Hospi-tal Characteristics Survey (Washington, DC: National Association of Public Hospitals and Health Systems, October 2005).

46. 42 CFR 433.51. See 42 Fed. Reg. 60564 (Nov. 28, 1977).

47. 42 U.S.C. § 1396b(v)(6)(A).

48. Letter from Mark McClellan, CMS Administrator, to Sen. Charles Grassley (April 28, 2004).

49. Ibid.

50. Ibid.

51. BPHC PIN 97-27.

52. See BPHC PIN 99-09. HRSA states that require-ments relating to selection and composition of board members and limitations on third parties apply to “the public entity applicant as well as other third parties.” Nevertheless, in this same PIN, HRSA states that the

“health center” is both the public entity and co-appli-cant together. Thus, it remains unclear how HRSA would enforce restrictions applicable to “third parties” upon public entities and co-applicants applying for FQHC look-alike status.

53. Ibid.

54. Ibid.

notes


Alameda County Medical Center oakland ca

Arrowhead Regional Medical Center colton ca

Boston Medical Center Boston ma

Broadlawns Medical Center des moines Ia

Cambridge Health Alliance cambridge ma

Carolinas HealthCare System charlotte nc

Central Georgia Health System Inc. macon ga

Community Health Network of San Francisco san francisco ca

Laguna Honda Hospital & Rehabilitation Center san francisco ca

San Francisco General Hospital san francisco ca

Contra Costa Health Services martinez ca

Cook County Bureau of Health Services chicago Il

The John H. Stroger, Jr. Hospital of Cook County chicago Il

Oak Forest Hospital oak forest Il

Provident Hospital of Cook County chicago Il

Cooper Green Hospital Birmingham al

Denver Health denver co

Erlanger Health System chattanooga tn

Governor Juan F. Luis Hospital and Medical Center st. croix vI

Grady Health System atlanta ga

Halifax Community Health System daytona Beach fl

Harborview Medical Center seattle Wa

Harris County Hospital District houston tX

Ben Taub General Hospital houston tX

Lyndon B. Johnson Hospital houston tX

Hawaii Health Systems Corporation honolulu hI

Hale Ho’ola Kamaku Hospital honokaa hI

Hilo Medical Center hilo hI

Ka’u Hospital Pahala hI

Kauai Veterans Memorial Hospital Waimea hI

Kohala Hospital Kapaau hI

Kona Hospital Kealakekua hI

Kula Hospital Kula hI

Lana’i Community Hospital lanai city hI

Leahi Hospital honolulu hI

Maluhia Long Term Care Health Center honolulu hI

Maui Memorial Hospital Wailuku hI

Samuel Mahelona Memorial Hospital Kapaa hI

Health Care District of Palm Beach County West Palm Beach fl

Glades General Hospital Belle glade fl

The Health and Hospital Corporation of Marion County Indianapolis In

Wishard Health Services Indianapolis In

Hennepin County Medical Center minneapolis mn

Howard University Hospital Washington dc

Hurley Medical Center flint mI

Jackson Memorial Hospital miami fl

JPS Health Network fort Worth tX

Kern Medical Center Bakersfield CA

Los Angeles County Department of Health Services los angeles ca

Harbor/UCLA Medical Center torrance ca

Martin Luther King/Drew Medical Center los angeles ca

LAC+USC Healthcare Network los angeles ca

Olive View-UCLA Medical Center sylmar ca

Rancho Los Amigos National Rehabilitation Center Downey CA

LSU Health Sciences Center Health Care Services Division Baton rouge la

Bogalusa Medical Center Bogalusa la

Earl K. Long Medical Center Baton rouge la

Huey P. Long Medical Center Pineville la

Lallie Kemp Regional Medical Center Independence la

Leonard J. Chabert Medical Center houma la

Medical Center of Louisiana at New Orleans New Orleans LA

University Medical Center lafayette la

Dr. Walter O. Moss Regional Medical Center lake charles la

Maricopa Integrated Health System Phoenix aZ

Memorial Healthcare System Hollywood FL

Joe DiMaggio Children’s Hospital at Memorial Hollywood FL

Memorial Hospital Miramar miramar fl

Memorial Hospital Pembroke Pembroke Pines fl

Memorial Hospital West Pembroke Pines fl

Memorial Regional Hospital Hollywood FL

naPh members

naph 83naph members

naPh members

Memorial Hospital at Gulfport gulfport ms

The MetroHealth System cleveland oh

Natividad Medical Center salinas ca

New york City Health and Hospitals Corporation New York NY

Bellevue Hospital Center New York NY

Coler-Goldwater Memorial Hospital roosevelt Island ny

Coney Island Hospital Brooklyn ny

Cumberland Diagnostic & Treatment Center Brooklyn ny

Dr. Susan Smith McKinney Nursing and Rehabilitation Center Brooklyn ny

East New york Diagnostic & Treatment Center Brooklyn ny

Elmhurst Hospital Center elmhurst ny

Gouverneur Nursing and Diagnostic & Treatment Center New York NY

Harlem Hospital Center New York NY

Jacobi Medical Center Bronx ny

Kings County Hospital Brooklyn ny

Lincoln Medical and Mental Health Center Bronx ny

Metropolitan Hospital Center New York NY

Morrisania Diagnostic & Treatment Center Bronx ny

North Central Bronx Hospital Bronx ny

Queens Hospital Center Jamaica ny

Renaissance Health Care Network Diagnostic & Treatment Center New York NY

Sea View Hospital Rehabilitation Center & Home staten Island ny

Segundo Ruiz Belvis Diagnostic & Treatment Center Bronx ny

Woodhull Medical and Mental Health Center Brooklyn ny

North Broward Hospital District fort lauderdale fl

Broward General Medical Center fort lauderdale fl

Coral Springs Medical Center coral springs fl

Imperial Point Medical Center Imperial Point fl

North Broward Medical Center Pompano Beach fl

The Ohio State University Hospital columbus oh

Parkland Health & Hospital System dallas tX

Regional Medical Center at Memphis memphis tn

Riverside County Regional Medical Center riverside ca

San Joaquin General Hospital stockton ca

San Mateo Medical Center san mateo ca

Santa Clara Valley Health & Hospital System san Jose ca

Schneider Regional Medical Center st. thomas vI

Roy Lester Schneider Hospital st. thomas vI

Myrah Keating Smith Community Health Center st. John vI

Shands HealthCare gainesville, fl

Sinai Health System chicago, Il

Stony Brook University Hospital stony Brook ny

Thomason Hospital el Paso tX

Truman Medical Centers Kansas city mo

TMC Hospital Hill Kansas city mo

TMC Lakewood Kansas city mo

TMC Behavioral Health Kansas city mo

UMass Memorial Healthcare System Worcester ma

UMDNJ-University Hospital Newark NJ

University Health System san antonio tX

University HealthSystem Consortium oak Brook Il

University Hospital, The University of New Mexico Health Sciences Center albuquerque nm

University Medical Center of Southern Nevada las vegas nv

University of Arkansas for Medical Sciences little rock ar

University of Chicago Hospitals & Health System chicago Il

University of Colorado Hospital denver co

The University of Kansas Hospital Kansas city Ks

University of South Alabama Medical Center mobile al

University of Texas System austin tX

The University of Texas Health Center at Tyler tyler tX

The University of Texas M.D. Anderson Cancer Center houston tX

The University of Texas Medical Branch at Galveston galveston tX

VCU Health System richmond va

This publication is avaliable as a PDF fi le which may be downloaded from the publications area of our Web site, www.NAPH.org

1301 Pennsylvania Ave. NW, Suite 950 Washington, DC 20004202 585 0100 tel / 202 585 0101 fax

1

Governance

Enhancement:Transparency and

Accountability in Era of Expanding

Stakeholder Scrutiny

Lee Memorial Health SystemSeptember 10, 2010

Enhanced Governance in Era of Intense Scrutiny

Objectives:

The current Environment for Governance in Public Health Systems

The current regulatory challenges facing Hospital Systems

Approaches to Successful High Performance Governance in light of these Challenges

Enhanced Governance in Era of Intense Scrutiny 2

What is great

governance, who

are players?

Great governance is an effective and efficient process to develop policies that set the strategic directions for the healthcare enterprise, and then helps assure that resources are assembled and deployed for the successful implementation of the plans Players are physicians, other community leaders and senior management within and from out of the regions served by the organization


Many pressures driving

stakeholder scrutiny of board

effectiveness

4


Board Work is Not Easy:

Need stability

with growth

Geographic distance and

demographic diversity

Many decision makers in

continuum of care

Complex

regulatory

compliance

issues

Competition for stakeholders’

loyalty

Large capital

requirements

Tough fiscal

pressures

Press to deliver on

economies of scale

Need to deliver on promise of

mission for caring and curing

in era of consumerism and

chronic disease

Calls for enhanced

quality and safety

that squeeze

physician colleagues

and boards

Press for experiences & engagement

of our physicians, staff, volunteers, &

donors

Growing IRS, media, and donor

scrutiny of our performance

Calls for faster,

smarter, and more

cost‐effective

decision‐making

processes

Governing in Sunshine Fishbowl

Many Regulatory Challenges

Florida’s unique Public Entity Sunshine Transparency Challenges

Conflicts of Interest

Relationships with Referral Sources

Executive Compensation and Board Involvement

IRS 990 and other Focus Areas including some comments on enforcement focuses

Congressional Focuses on Nonprofits

Tax Exempt Bond Focuses

High Level Discussion of the concept of Fair Market Value and its importance and focus across multiple regulatory schemes (i.e.: physician relations, executive compensation, referral sources etc.)

The Federal and State enforcement environment generally at a high level


7

Follow the headlines …

Will IRS take role of SEC for

Tax exempt hospitals?

990, RAC, and others eager

to “Help”


8

Besieged from all sides: Threat is real.

Storm clouds building for past decade


9

Growing Scrutiny: Regulators and Media


From Coffee to Latte: Consumerism and

Lee Memorial Health System

11Enhanced Governance in Era of Intense Scrutiny

13

Why should a

hospital care about

context & mission?

What should a

hospital board do?

Context matters.

Mission matters.


19

1998

Obesity Trends Among U.S. Adults

1990, 1998, 2007

(*BMI ≥30, or about 30 lbs. overweight for 5’4” person)

2007

1990

No Data <10% 10%–14%

15%–19% 20%–24% 25%–29% ≥30%


23

Unforgiving Capital Markets


24

Where will we secure our capital?


25

Protecting and Growing the Franchise:

A focus on finance fundamentals is essential for

long term economic vitality

• More service volume

• Better payment per each unit of service volume

• Less costs to deliver service volumes

• Lower cost of capital

• More philanthropy


27

Leverage. Legends. Leadership.

Noisy Markets: Raising Friends.

Raising Funds.

28

How can our boards raise the bar on our strategies and systems to earn friends and funds?

29

Who do we

compete with for

philanthropic

support?

Especially for

high income

households.

The Center on Philanthropy at Indiana University 550 W. North St., Suite 301 Indianapolis, IN 46202‐3272 317‐274‐4200 www.philanthropy.iupui.edu

30

Will and Bequests Charitable Estate Planning Tax Aspects of Charitable Giving in the USA Charitable Trusts Pooled Income Funds Charitable Gift Annuities Gifts of Real Estate, Cars and Stock

New tools

New relationships


31

The Lucky Seven

1. Clear strategic roadmap toward vision

2. Culture with 3 attributes: •

Patient Centered, Performance Driven, Values Based

3. Superior physician alignment and rapport

4. Good payer mix plus philanthropy

5. Competitive costs

6. Respected leadership: board, physicians, executives

7. Exemplary governance model

Key Attributes for Hospital Vitality in these Challenging Times


32

Great governance:

more than great process

The enterprise must perform better.

Goals are more likely achieved.

The community is better served.

The enterprise’s vitality is stronger.


33

Basic Building Blocks:

Ongoing

Assessment

and

Refinement

Board

Composition

KSA Matrix

Size &

Structure of

Board

Excellent

Committees

Board

Information

System

Great

Meetings:

Calendars

Agendas

Board Job

DescriptionsTerrific

Orientation

Process

Excellent

Ongoing

Education

Program

Market

Needs &

Strategic

Plans

The Governance Enhancement Plan should adopt best practices in all these areas.

Enhanced Governance in Era of Intense ScrutinyEnhanced Governance in Era of Intense Scrutiny

34

What promises

should board

members make and

keep?

Superior Patient

Experiences


35

We promise to follow best

practices of high

performing boards

Three Fiduciary Duties:

Duty of Care

Duty of Obedience

Duty of Loyalty


36

1. Determine the future of the organization

2. Ensure the quality of clinical care and customer service

3. Protect the financial health of the organization

4. Ensure effective executive leadership and management

5. Develop, improve, and perpetuate an effective governance function

6. Reflect the community served and strengthen relationships with key

stakeholders

Six Core Board

Responsibilities:


37

Common board problems:

Performance Problems:Dysfunctions of groups: rivalries, domination by a few, one‐way communication, bad chemistryDisengaged: not well informed, not much desire to learn, weak participation, poor attendanceDo not know roles & responsibilities. Lack job description

Purpose Problems:Not just confused, but dissatisfied with their roleSome work very episodic (meeting is not governing)Some work intrinsically unsatisfying (fiduciary often passive)Some work undemanding (ceremonial Monarchy)Some rewarding but not encouraged (strategy development‐execution…micro‐management)


38

Perhaps now is

the time to

step back and

develop your

G.E.P. ?


39

Competency Mapping

Market needs drives strategic & financial plan

Strategic & financial plan drives competencies neededBoard, Executives and Physician Leadership

Competency assessment and gap analysis

Gaps? Recruit and educate to fill gaps.


40

Governance Time Audit

Number of meetings and events

Number of staff

Number of board members

Prep time

Time in meetings

Time to summarize meetings

Then... Quality of time in meetings. Balance of strategic focus?


Enhanced Governance in Era of Intense

41

Board Portals

45

Strategies for Enhanced

Effectiveness & Efficiency:

Quality board meetings;Quality committee meetings, with annual workplans;More clearly understood calendar of meetings and events;More non‐board members on committees;Broader invitation of stakeholders into strategic planning;Clearer board and board member roles, responsibilities, & expectations;Board member term limits, national pattern has been 3 three year terms;Enhanced board member orientation & educational opportunities;More effective staff focus on strategic and operational challenges;Better and more accessible information for board work, including reliance on BoardNet web access and archival information:

24/7 access to mission, vision, values, and strategic plans‐budgetsCalendars of meetings and eventsBoard roles & responsibilities materialsBoard education resourcesEasy access entity unit plans & budgetsQuick definitions of our performance goals and measuresCommuniqués from managementPhoto bios of managers, physician and board membersMeeting minutes

How are boards refining their governance models ?


Boards Most Important Role?

Help Set Culture & Direction

Board must champion a culture that is:

patient centered

performance driven

values based

46

47

Lead periodic conversations about what we mean by a “performance supportive culture”

Boards can make a difference, but boards

themselves can not make it happen; only create

the climate and culture to increase the

probability that the performance behaviors

happen, are nurtured, celebrated and

continuously refined.


48

What do we mean by “performance”

•Quality & safety•Service volume & market share growth•Earned leverage with payers•Support for medical education •Physician pride & productivity•Employee pride and productivity•Cost effective service delivery•Continuous improvement


49

Performance Supportive Culture

How can boards & leaders best do it?

Acknowledging differencesCelebrating past heritagesRemoving barriersDefining performance goalsMeasuring progress Celebrating progress

Easy as ABC ...


50

How can boards best do it?

Easy as ABC …

Ask about progress

Barrier‐removal

Celebrate progress

A.1 Ask to learn where we are

A.2 Ask to encourage innovation

& engagement

A.3 Ask to remind all about

importance of initiative

A.4 Ask to focus professionals in

dashboards and score cards

A.5 Ask to strengthen resolve


51


Easy as ABC …

Ask about progress

Barrier‐removal

Celebrate progress

B.1 Understand common

barriers to change for peak

performance

B.2 I.D. factors that frustrate

positive culture for

performance

B.3 Apply AIKIDO problem

solving to barriers &

frustrations


52

Easy as ABC …

Ask about progress

Barrier‐removal

Celebrate progress

C.1 Model the values &

behaviors

C.2 Measure the progress

C.3 Creative, continuous &

customized celebration

C.4 Build performance into

executive pay



53

Three Modes of Governance:

New research from Harvard’s Chait,

Ryan and TaylorGovernance as Leadership: Reframing

the works of Nonprofit Boards,

(Wiley,2004)

Type 1 Fiduciary

Goal: protect assets.

Ensure resources used

efficiently &

effectively in pursuit

of mission

Type 2 Strategic

Goal: guide

organization from

present to preferred

future

Type 3 Generative

Goal: shape the other two modes.

Define the future. Frame the

questions. Look for cues and clues


54

Comparing Type 1 and 2 Modes:

•

Type 1 Governance:–

Management defines problems

and opportunities; develops

forma plans. Board listens and

learns, approves and monitors

–

Board structure parallels

administrative functions

–

Board meetings process driven.

Protocol rarely varies

–

Staff transmits to board large

quantities of technical data from

few sources

•

Type 2 Governance:–

Board and management

think together to discover

strategic priorities and

drivers

–

Board structure mirrors

organization’s strategic

priorities

–

Board meetings content‐

driven. Protocol often varies.

–

Board and staff discuss

strategic data from multiple

sources


55

Type 3 Mode: Seeking meaning

Strategic partnership with management, but not micro‐managementAssuring that the agenda of meetings are more qualitative discussion, less reports; the venue (meeting on a bus), the sources of information (invite in patients and care givers)Boundary spanners: inside and outsideMaking sense of past to shape the future


56

It boils down to “The Q Factor”

The art of asking probing questions

“Sense‐making” with management

Great boards seek first great questions rather than rushing to fast answers

What are some of the great questions for modern hospital and health system boards?


57

Fiduciary Role Questions

What do we hold in trust, and for whom?What are the fiduciary, but non‐financial roles of our boards and committees?How do we know the organization is fulfilling its mission?Does a proposed initiative effectively advance our mission?What safeguards do we have in place to avoid well publicized fiduciary failures?If we held an annual stakeholders meeting, what would we say about the fiduciary performance and the board’s effectiveness as a steward?What is the evidence that we are a trustworthy organization? What are some examples of times in which we earned the title “trustworthy”?What are our major financial vulnerabilities? What are we doing as an organization and a board to address them?Even though we are not bound by Sarbanes‐Oxley, are there some provisions we should adopt?


58

Strategic Role Questions

Is the business model of this healthcare system viable over the next 10‐15 years? If not, what has to change?

What forms of healthcare should we emphasize as an organization with multiple missions (care, teaching, research, employer, capital mover)

Can we flourish in a neighborhood in decline? If not, do we move or stimulate re‐development? Do we know our neighbors?

Do we remain frustrated with Stark Laws that strangle innovation with physician relationships or lobby for change in the ground rules?

How do we make an impact on health gain as well as health care when few payers pay us to do it?

How fast do we adopt new science to enhance our quality, versus invest in process improvements and optimizing use of our current technologies?

How can we assure we don’t just satisfy, but actually delight our patients, visitors, physicians, payers, politicians and employees?


59

Generate new thoughts

by new questions

Generate new questions by occasionally conducting different style meetings, retreats‐advances, study tours, participants, town hall meetings, White Coat visits to clinical areas, “Community Plunges”, “Meetings‐on‐a‐Bus”,Learn from modern group engagement tools and techniques. High “EQ”, not more than IQ (Engagement Quotient)


60

Generative Questions:

Build time for reflection and sense‐making:What three adjectives or short phrases best characterize this organization?What will be most strikingly different about this organization in five years?What do you hope will be most strikingly different about this organization in five years?On what list, which you can create, would you like this organization to rank at the top?Five years from today, what will this organization’s key constituencies consider the most important legacy of the current board?What will be most different about the board or how we govern in five years?How would we respond if a donor offered a $50 million endowment to the one organization in our field that has the best idea for becoming a more valuable public asset?If we could successfully take over another organization, which one would we choose and why?What headline would we most like to see about this organization?What is the biggest gap between what the organization claims it is and what it actually is?What should be atop the board’s agenda for next year?What external factors will most affect the organization in the next 24 months?Are we using the best balanced scorecard to rack our performance?Are we benchmarking against the right comparative players?What is the most valuable action we could take to be a better board, committee or member?

Promote “Robust Dialogue”, not always Robert’s Rules of Order


61

Muscle Meetings:

Agendas Matter (calendars, flip the flow, quality content, consent agendas can help)

Venues Matter (touring, community town halls, meeting on a bus)

Information Matters (Type, source, amount) BoardNet samples …


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999 Action Plan Follow‐through & follow‐up to enhance our

embrace of outside in thinking for

Governance Engagement and Enhancement

Next 9 Days

Next 9 Weeks

Next 9 MonthsOf all the ideas discussed today, what

are the essential few that will move us

forward ...


lmhs board of directors governance … shell, 275 estero blvd, ft ... ﬁ duciary duties and its six...

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