Conflicts of interest aren't just for hospital executives and physicians anymore.
The spate of mergers, acquisitions and joint ventures dominating the healthcare landscape in recent years has created more conflict-of-interest pitfalls for board members.
"I would say the current business atmosphere has created a minefield," says Michael Anthony, a law partner in the Chicago office of McDermott, Will & Emery.
"It's a very common problem, one that is coming under greater examination all the time," says Charles Ewell, chairman of the Governance Institute in La Jolla, Calif.
Barry Bader, a governance consultant in Bethesda, Md., notes that most potential conflicts spring from the financial services industry: "Board members may come from banks, law firms, accounting firms and consulting firms that would be bidders for major contracts covering everything from handling a merger to debt refinancing," he says. "And the industries of those firms themselves have gone through major consolidations."
In the past hospitals might have had a dozen investment banking firms to choose from to handle a transaction, but today there may only be two or three capable of handling multimillion-dollar types of deals."
Local spotlight. Unlike political scandals, trustee conflicts are rarely the stuff of national headlines. But that doesn't mean healthcare conflicts of interest and concern about them aren't all over the local news. An electronic search of local newspapers on the subject is like trawling for salmon in Alaska.
Just a few weeks ago, the San Mateo County District Attorney in California announced an investigation into a possible conflict of interest surrounding whether or not a trustee of the Peninsula District Health Care Board concealed a potential financial conflict before voting to merge the hospital with Mills Memorial Hospital in 1985. The investigation possibly could unravel the deal, which is being challenged in court by the current Peninsula board.
Last September published reports on Leesburg Regional Medical Center in Florida disclosed that five of its nine trustees have business ties to the hospital, including one whose firm handles some of the hospital's investments, and another whose glass company performed much of the glazing work on the hospital's intensive-care unit.
Hospital officials insist that the dealings are aboveboard, noting the trustees make full financial disclosures and abstain from voting on issues in which there is a potential conflict -- in keeping with Internal Revenue Service regulations governing such matters.
Anthony says the IRS guidelines do a fair job: "They're pretty useful, in terms of setting up parameters to follow."
Defining the problem. Unlike many of its tax forms, the five-page IRS policy for conflicts in tax-exempt organizations is rather straightforward, although very general: An interested party is anyone who has ownership or investment interest in -- or receives any type of remuneration, gift or favor from -- a company that does work with the organization governed by the board. The interests must be disclosed, and the remainder of the board must hold discussions and vote to determine if a conflict exists. If there is a conflict, the disinterested trustees must determine if arrangements can be made with another party that doesn't present a conflict.
That the IRS regulations give significant leeway in dealing with conflicts seems to jibe with the observations of many governance experts that there are any number of instances where trustees will have some form of business dealings with the organizations they represent. The phenomenon seems to be more pronounced in rural areas where there are few competing companies.
"The rules have to be individualized for the organization," Bader says. "What might be an unacceptable conflict of interest in a large urban setting -- such as a member of the board doing legal work for the organization -- may not be considered so onerous in a small town where there is only one high-caliber law firm."
The American Hospital Association concurs to some extent. While it advocates a written policy to address conflicts of interest, its official guidelines note that such policies should "be tailored to the needs of the institution and accommodated to local law, to special commitments and organizational aspects of the institution." It does caution, though, that such guidelines should adhere "to unique community standards and expectations that may deal with appearances as well as substance."
Put it in writing. Most observers agree that a written policy is at the core of preventing conflicts.
"It's absolutely crucial and mandatory that institutions have (a written policy). It's an important part of developing legal protections," Anthony says.
In an attempt to weed out potential conflicts, the Governance Institute has developed template documents for boards and trustees. They include clearer declarations than the IRS guidelines as to what constitutes a conflict. (The template considers a conflict to be not only having ties to firms that do business with the trustees' own organization but also having ties to competitors. It states that immediate family members with such ties also present a conflict). A five-page questionnaire asking about past and present conflicts -- including ones that may have occurred up to five years before joining the board -- also has been developed.
But James Orlikoff, a Chicago healthcare consultant, observes that few organizations are aggressive with their policies.
"In my experience, most organizations tend not to prospect conflicts of interest, and they tend to have bland and vague policies to deal with them," he says. "They tend to leave it up to every board member to declare potential conflicts, and they do not distinguish between what is a duality of interest or a conflict of interest."
Orlikoff is concerned, for instance, that mere recusal from a vote is not enough to avoid a conflict.
"Trustees in conflict should not just abstain from the vote. They should also be barred from discussion because they can still influence the outcome," he says.
Further, if trustees have an outside business interest and the board solicits bids from competitors, they should be precluded from seeing the bids. "If they can see how their competitors handle a bidding process, that can put them at a competitive advantage elsewhere," he says.
Penalties. Not only might policies be vague, but they often "lack teeth," Orlikoff and Anthony note.
Indeed, the AHA guidelines do not mention disciplinary action for failure to disclose a conflict. The IRS guidelines say only that the board "shall take appropriate disciplinary and corrective action" in the case of a violation. The Governance Institute guidelines do not suggest disciplinary action for failing to disclose a conflict, but they do state that the board chairman "will ask for the resignation of the individual board member" if there are persistent infractions of the organization's confidentiality agreement.
Orlikoff says he believes discipline should be carried out immediately if there are policy violations. "It must be made clear there are negative consequences, such as censures or the immediate removal of the board member," he says.
Overall, the feeling is that if there is even the slightest potential for a conflict, a trustee should err on the side of caution and recuse himself completely, or risk damaging the public's trust. If he is uncertain that will calm the waters, he should resign.
Ironically, the most visible form of this self-medication recently came from the leader of what is now widely considered healthcare's most ethically challenged firm: Columbia/HCA Healthcare Corp.
Thomas Frist Jr., M.D., who became the company's chairman and chief executive last summer in the midst of investigations of Medicare fraud, holds directorships at other organizations. One was on the Vanderbilt University Board of Trust. He normally recused himself from discussions involving business crossovers, both as a Vanderbilt and a Columbia director. He also took pains to ensure that he did not have too much power at Vanderbilt. In 1995 Frist took himself out of the running to become president of Vanderbilt's board because of potential conflicts.
But Frist resigned completely from Vanderbilt when he assumed his current position at Columbia. Columbia officials say that in his current position, Frist could no longer be insulated from conflict because too many of its hospitals compete with Vanderbilt's.