How hospital boards can withstand close scrutiny

Since Enron, Worldcom, HealthSouth and the Sarbanes-Oxley Act--Congress' legislative re-sponse--the public perception, as described in news reports and discussed by business pundits, is that the corporate world is infested with conflicts of interest. And no one, the thinking goes--not the outside auditors or the lawyers or the inside directors or CEOs--is doing anything about them. The perceived "tainted" corporate environment is making the public wonder whether they can trust any boards of directors to conduct business at arm's length and help--or at least not harm--their companies and stakeholders.

"Everyone has 'Enronitis.' The public doesn't differentiate between for-profit and not-for-profit structures," says John Leech, principal with Dynamis Healthcare Advisors Inc., Cleveland. "They just see multimillion-dollar budgets and a hospital industry that says it's not being reimbursed enough. They think the marketplace is charging too much and providing too little service." And the public is growing more cynical about the trustworthiness of the governance process in making appropriate decisions about how those dollars are spent.

What are the most common pitfalls that might lead to real or perceived conflicts of interest, and how can hospital boards avoid them?

1. INADEQUATE MANAGEMENT OF EXISTING CONFLICTS OF INTEREST

Some hospitals may believe they've adequately complied with their conflict-of-interest policy simply by developing forms that ask trustees about their conflicts, then collecting and filing that information. But that's just the first step, says Samuel A. Friede, manager of the Governance Initiative, Health Policy Institute at the University of Pittsburgh. The real challenge is to have a process for managing that information.

Especially in small communities where there may be a limited pool of board talent, some trustees will inevitably have conflicts of interest. Hospitals in these areas need to be sure they are managing actual and potential conflicts at several stages of the board decision-making process. On the most basic level, hospitals should not allow conflicted board members to cast a vote on any decision that may lead to their personal gain. In addition, boards should not permit a conflicted trustee to participate in a meeting or even remain in the room during a discussion if the chair or other trustees believe that the trustee's body language could influence the eventual vote, Friede says.

Conflicts should be managed not only when an issue is up for a final vote, but also during planning phases when the board is considering whether it has sufficient re-sources to proceed with a project. If Mr. Jones' firm stands a good chance of getting the contract for a new construction project, for example, voting in favor of the project may very well constitute a conflict of interest for him, Friede says.

2. RELUCTANCE TO CHANGE CORPORATE CULTURE

"Some [board members] think, 'We're not Enron or HealthSouth. So why do we need to go through any kind of internal, gut-wrenching self-analysis about conflicts?' " says Monte Dube, partner and head of the health law department at McDermott Will & Emery, Chicago.

But, says Pam Knecht, vice president of Accord Ltd., Chicago, many hospital boards operate in a culture that ignores uncomfortable issues. When board members think "Joe" has a conflict related to an upcoming discussion item, they often lack the nerve to ask him about it straightforwardly. And they don't have a process for tactfully bringing up the question.

Boards can develop tools to make addressing conflicts of interest less personal. They can prepare a booklet or add a specific section to their board manuals that defines their overall policy on dealing with conflicts of interest and lists specific steps that should be taken when someone may be conflicted on an issue. For example, a board member could invoke "Procedure 103" and say, "I'd like to stop the conversation now and vote as a board on whether or not we think Joe has a conflict of interest and should be allowed to participate in further discussion."

Creating a new policy on conflicts of interest--or revising an old one--gets boards thinking about how they can change their culture to recuse a member from voting, discussing, or even being present during debate on a controversial issue. "When the full policy is put before the board for approval, it notifies the members that, 'We are going to change our way of doing things and we are doing it for good reason,' " Friede says.

3. INADEQUATE LEADERSHIP

Policies governing conflicts of interest don't actually specify what constitutes a conflict; that determination must be made when an issue arises. And it ultimately falls to the board chair to ask an individual, openly or privately, if a conflict exists. It's the chair who asks a conflicted trustee to abstain from voting or to leave the room during a discussion. It's the chair who decides to reopen an issue if a conflict may have unduly influenced a board decision.

"One of the most important things that any chair does is to be certain that board members use due diligence in the performance of their duties and that they have loyalty to the hospital," says John Horty, managing partner of Horty, Springer and Mattern, Pittsburgh.

The board chair consequently has to be knowledgeable about conflicts of interest and savvy about group process. The chair also should be willing to obtain a legal opinion when it's unclear whether a conflict exists. He or she should seek outside help from a consultant if the hospital is unable to resolve a conflict of interest on its own, and the board needs education, facilitated discussion, and action planning, Knecht suggests.

4. INADEQUATE VETTING

Hospital boards often don't think about conflicts of interest when they're evaluating prospective members. They fail to be sufficiently wary of individuals who have considerable investments in competitive ventures or who represent the only game in town when it comes to bank loans, legal advice, architectural design or construction.

But astute governance or nominating committees are looking deeply into each candidate's potential conflicts of interest and limiting their choices to individuals who have the fewest outside, competitive interests. These committees are also weighing the candidate's personality and willingness to discuss conflicts openly, while explaining carefully the board's policy for handling them. "The governance committees that are doing this job well set clear expectations about what actually will happen if someone with a potential conflict of interest comes on the board. They are realizing that dealing with conflicts of interest can't be kept on the back burner any longer and that they have to get ahead of it in terms of selecting and educating board members," Knecht explains.

5. DIFFICULTY DEALING WITH PHYSICIAN TRUSTEES

Over the last 20 years, physician participation on hospital boards has grown significantly. At one time, only the president of the medical staff was an ex officio, nonvoting board member of Jewish Hospital and Healthcare Services, Louisville, Ky. Now physicians comprise 15 percent or more of the voting membership.

Physician involvement on hospital boards was at least manageable when physicians and management tended to work more as partners, says Henry "Sonny" Altman Jr., chair and lifetime trustee of Jewish Hospital and Healthcare Services and chair of the American Hospital Association's Committee on Governance. But as circumstances in the health care environment have shifted--turning physicians and hospitals into adversarial competitors in the outpatient services market--trustees increasingly have to wonder whether the physician sitting across the conference table is considering a competitive venture and whose best interests are at top of mind when listening to the board conduct hospital strategic planning.

Governance experts acknowledge that it's beneficial to have physicians serve on hospital boards; some advocate that physicians occupy 25 percent of board seats. But hospitals in small communities often have a difficult time finding physician board members who aren't currently competing with them, or who aren't planning to do so.

"Whether physicians have a culture of trying to cooperate with the hospital or a history of being very independent and doing whatever the heck they want to do, [the sentiment] 'forget about the hospital,' varies from community to community," says Ed Kazemek, chairman and CEO of Accord Ltd. Overall, however, "there's a real need for physicians to protect their incomes, which are being threatened by low-pay payers. And they're doing it in a variety of ways, many of which are in direct competition with the economic well-being of the hospital, such as putting an MRI in an orthopedic office, starting a for-profit am-bulatory surgery center or specialty hospital."

Physicians who get a seat on the board when they become chiefs of staff may be understandably confused about their board role, Dube says. "Many times, the chief of the medical staff will say, 'I'm here because I represent the medical staff, so my votes will be in the best interests of the medical staff.' " But the obligation of not-for-profit boards is to act in the best interests of the entire organization, which does not always coincide with those of the medical staff. For example, an anesthesiologist who wishes to vote on every decision to grant privileges to other anesthesiologists may be doing the hospital a disservice by protecting his specialty from additional competition.

There's no easy answer to managing conflicts of interest that arise with physician board members. "Trying to get physicians, boards and management to work together for the well-being of the community and the hospital is, in fact, the Mount Everest issue in health care," Kazemek says.

Some boards have considered asking their physician members to give up their votes and attend meetings simply as advisers. Kazemek's immediate reaction is to refrain from that route because it may create distrust among the physicians. Instead, he advises working harder to have frank discussions with physician board members, explaining conflict-of-interest issues and loyalty to the organization in detail, as well as the need to exclude them from discussions about sensitive issues, such as plans for an outpatient surgery center.

After all, if physicians are going to enter into a business venture that is contrary to the well-being of the organization they have sworn to protect and oversee as trustees, they at least should comply with a rigorous conflict-of-interest disclosure policy. "Instead of going behind the back of the board and setting up or investing in an ambulatory surgery center or specialty hospital, physician board members should inform the board of their intention to do so," Kazemek says.

Kazemek advises boards to screen prospective physician members much more closely, not only in terms of their character and knowledge, but also for the likelihood that they may end up competing with the hospital.

So that physicians understand and buy in to their legal responsibilities, board chairs should have a dialogue with them before they join the board, Dube suggests. Physicians need to learn, just as other prospective board members do, the full extent of their fiduciary duties and responsibilities.

6. A HIGHER STANDARD

Some hospital boards are conducting comprehensive audits that assess how well they comply with the state and federal laws governing conflicts of interest for private companies. These boards also are looking at Sarbanes-Oxley and other laws that affect publicly traded corporations to find germs of ideas that could be translated into best practices or higher standards than they are legally required to meet.

The net result is a policy that gives trustees a choice: They can serve on the board and not conduct business with the hospital, or they can decline to serve on the board at all.

Dube has worked with increasing numbers of hospitals, particularly in urban settings where there are plenty of vendors to choose from, that prohibit outright business dealings with current directors. "They believe that trustees ought not to leverage or potentially leverage their status in the organization into a business-making opportunity with the corporation, even if a transaction may be at arm's length, at fair market value, and of very high quality," he says. "They don't want their organization to be second-guessed by the public, so they'll find someone else to do business with rather than a board member."

Hospitals that are addressing the issue proactively realize it isn't enough just to reveal conflicts of interest and have those members with potential conflicts abstain from voting on certain matters.

"The recent regulations promulgated by the Securities and Exchange Commission and the New York Stock Exchange are sending the message that if something has the appearance of a conflict, if it can't 'pass the smell test,' don't do it," Kazemek says. "In conferences with health care board members, we're seeing this same kind of heightened awareness that they're all operating under a microscope, and we're moving into the era where hospital and health system boards are going to be much more sensitized and restrictive in their dealings with board members."

"The appearance of conflicts can be just as harmful from the stakeholders' perspective as actual conflicts," Dube says. Therefore, boards are trying to be totally transparent. Kazemek adds, "Hospitals are trying to raise the awareness of conflicts of interest so everyone knows what they are supposed to do, and in the process they're shining a bright light on the issue."

Karen Sandrick is a health care writer based in Chicago. This article was originally published in the July 2003 issue of Trustee Magazine.