The chain saws have been slashing away at healthcare providers this past decade: Just take a look at the 1990s' roster of mergers and acquisitions, closures, bankruptcies, outsourcing, staff and service cuts, and executive turnover.
But volunteer governance was one area that seemed to have escaped the slippery blade, because governance boards are cheap, entrenched and make everyone feel like they're part of the decisionmaking process.
But that's no longer the case, governance experts say. Managers have come to believe they can't keep their organizations competitive while having to navigate the often mind-boggling collection of volunteer boards and internal committees that can accumulate through mergers and business expansions.
So governance itself is being sent to the workshop for a nice cutting-down.
"We're seeing fewer boards, smaller boards, fewer committees, less information at meetings and better meetings," says James Rice, president of the La Jolla, Calif.-based Governance Institute, a consulting firm.
"(Streamlined governance) looks better and feels better," says Dennis Pointer, president of Dennis D. Pointer and Associates, another La Jolla-based governance consultant. "Fewer moving parts is better in general."
The aim is to be nimble in a bureaucracy that can take six months to credential a single physician, and where managers devote up to half of their working time preparing for board meetings, observers and system executives say.
"One key issue is management time. The other is the decision metabolism rate," says James Orlikoff, president of Orlikoff and Associates, a Chicago-based governance consulting firm. "The more boards you have, the more time it takes to make decisions, and strategic planning policies tend to be more Byzantine. The reaction to market opportunities tends to be slowed for that reason, and what many system boards find is, they can't tolerate all those drags on efficiencies."
In many instances, system executives can't even say how many boards and committees they must deal with, Orlikoff adds.
Boards are akin to government agencies: easy to create, tough to dissolve. If the institutions they manage merge with another organization, focus is usually placed on the economies of scale that may be achieved by combining purchasing, staff and infrastructure. The governing boards, meanwhile, are folded as easily into the mix as blueberries into pancake batter.
As hospitals branched out into ancillary businesses such as insurance, home healthcare and long-term care, they often created separate corporations--and accompanying boards--to operate each organization.
"Even a single hospital can have a complicated haze of legal entities," Rice says. "There can be one for a home health agency, one for philanthropy, one for skilled-nursing facilities, a separate legal entity just for the hospital, one for medical equipment and oxygen sales and usually at least one entity for joint physician ventures."
Some of the bureaucratic sprawl--the operating companies and their boards--was required by state and federal regulations. But much of it was for other purposes, such as maximizing Medicare reimbursement and protecting the various businesses in case of lawsuits. However, observers believe that the legal protections offered by separate organizations no longer apply, making their individual governing boards obsolete.
"Health systems are so interlinked now that most of the regulatory and legal protections no longer hold water," says Ed Kazemek, a principal at Accord, a Chicago-based governance consulting firm.
Because of the reduced provider reimbursements afforded by the federal government and by managed care, and the increased competition for fewer dollars, hospital systems are taking a harder look at how they're governed.
"It's a fairly natural response in an unforgiving environment," Orlikoff says, adding that such self-examinations are coming none too soon. He notes that bloated governance can be debilitating for a healthcare organization's leadership in the long-term. "It begins to cause burnout among board members, and bending over backward to involve them all can get fairly onerous. And if you feel you can't do anything, you start to find situations where people are unwilling to serve on boards," he adds.
While experts can't pin down an exact figure on what it costs to govern, anecdotes suggest that the more efficient a governance structure, the easier it is for a system to avoid red ink.
In one example, two-hospital Mission St. Joseph's Health System in Asheville, N.C., reported net income of $22.6 million last year. The nearby two-hospital Palmetto Health Alliance in Columbia, S.C., lost $23 million last year (July 3, p. 4).
Governance of Mission St. Joseph's was recently switched to a single system board from the hospitals' two original boards--a change that officials say make it much easier to manage. Palmetto is governed by a system board and two separate hospital boards.
In another example, the merger of 663-bed University of San Francisco Medical Center and two-hospital Stanford University Health Services into UCSF Stanford Health Care was dissolved last March after only 27 months. Losses in the last fiscal year of its operation totaled $78.5 million. A University of California, San Francisco, spokesman blamed governance in part on the failed merger, but he wouldn't provide specifics.
The governance structure of the merged organizations included the board of regents for the entire University of California system, which meant California's governor and various University of California students had indirect say in how the system was run.
Recent examples of systems reducing their governance structure are numerous.
* In 1995, eight-hospital Detroit Medical Center (DMC) slashed its boards and committees by more than two-thirds to 18 from nearly 60. Under the old system, 18 different bodies signed off on the annual budget, a process that was reduced to five.
* In 1995, three-hospital Baystate Health System in Springfield, Mass., cut system governance to two boards with 10 committees from 21 boards with 50 committees. Two separate nonsystem boards tackle physician-related issues and ventures.
* In 1997, five-hospital Oakwood Healthcare in Dearborn, Mich., reduced governance to five boards and five committees that meet about 40 times a year from 10 boards and nine committees that met about 75 times a year, cutting management time spent on meetings to about 15% from about 30%.
* In 1998, four-hospital Legacy Health System in Portland, Ore., reduced governance to a single system from a system board, five subsidiary boards and four community boards.
* In June of this year, Copley Health Systems in Morrisville, Vt., reduced to a single board from its former 11 boards.
Some organizations are even reducing governance as a pre-emptive strike.
The merger last month of 580-bed Saint Vincents Hospital and Medical Center, four-hospital Catholic Medical Centers and two-hospital Sisters of Charity Healthcare System in New York was marked by the dissolution of the four governing boards and several advisory boards that the systems brought into the deal. The new Saint Vincents Catholic Medical Centers of New York is governed by a single system board formed even before the merger was completed. The board has five trustees, although that number will grow to more than a dozen during the next 18 months (Sept. 4, p. 20).
"It allowed us to quickly pull together individuals who really had the entire system at interest here as opposed to individual institutions, since there were (various Catholic) sponsors coming into this," says David Campbell, president and chief executive officer of the new system. "They saw this as the best way to enhance the mission, and they saw the mission at stake if this merger didn't work."
Combined, the three groups lost $20 million in 1999.
Campbell is no stranger to streamlined governance--he came to the Saint Vincents system from DMC, where as its CEO he spearheaded the governance diet there five years ago.
Under the old structure, a physician wanting to practice within the DMC system had to receive a credential at every hospital within the system--a process that included separate applications and reviews by several committees within each hospital.
"It wasn't a physician-friendly environment, and that couldn't be the case if they wanted to practice within a managed-care system," Campbell says. "It was delaying our ability to be competitive and operate as an integrated delivery system."
Generally, there are models for system governance. The broadest allows representational governance--through which every organization in a system has a say through its own boards or committees. That model tends to be the most complicated and least workable, experts say. A more streamlined version is the regional model, whereby each operating region is represented by a board. Although such a version can work reasonably well, it tends to leave the system with regional variations in costs and efficiency. The most streamlined method is the functional model, through which governance is segregated by logical functions as opposed to branches of business.
"The right model depends on the type of system," says consultant Pointer, who notes that a statewide hospital system may be better served by a regional model than would a system with a few hospitals in a single city. The critical point, he adds, is to make sure the various boards are on the same page in terms of vision and goals.
The Baystate reorganization is an example of a move from representational to functional governance. Responsibilities are divided among two 17-trustee boards. The Baystate Health System Board addresses global issues such as finance, governance and community health. The Baystate Health System Health Services Board governs issues occurring at the individual hospitals, as well as issues involving hospice and home healthcare. The numerous slots for regional trustees were removed as part of the revamp.
"We were simply too representational," says Donna Ross, Baystate's senior vice president of strategy and development and the executive in charge of the streamlining process. Under the old system, upward of half the executive staff's time was devoted to meeting planning--an expenditure that's been reduced by about a third. "We also have time to focus on the more important issues," Ross adds.
Baystate did keep two smaller boards to address physician issues. One governs the 57-physician Baystate Affiliated Practice Organization, and the other oversees the 208-physician Baystate Medical Education and Research Foundation, which runs a multispecialty group practice but also supports Baystate's educational and research arms.
Oakwood reorganized along similar lines. It has one system board and three subsidiary boards. The parent board addresses policy and strategic issues; the care delivery board focuses on issues at the hospital level; a third board specializes in for-profit ventures involving physicians and other third parties; and the fourth board is in charge of managed care and other risk-bearing contracts.
"I believe in sound governance, and we needed to be tuned in to market conditions," says Gerald Fitzgerald, Oakwood's CEO.
Although Baystate and Oakwood officials say their governance is far less onerous than in the past, there are always pitfalls in streamlining. It can alienate members of boards that were dissolved and make the communities served by individual hospitals question whether their best interests are being kept at the fore.
The results can lead to a deterioration of community goodwill that may have taken decades to build--and even an erosion of philanthropy.
"There have been some systems that have pulled philanthropy up to the system level, and they found out they lost some connections to mind and heart on philanthropy," says Rice, although he declined to give specifics.
"It's tough, and it requires a lot of communication," says Campbell of Saint Vincents and formerly of the DMC. Not all of the DMC streamlining went smoothly; two hospital boards voted against taking action, while a third refused to vote at all. But DMC was able to put even a greater focus on philanthropy after the governance revamp took place, Campbell adds.
At Legacy, $10 million was earmarked for community health initiatives, and a subsidiary community health committee admits members who aren't on the system board. Four former hospital trustees sit on the committee.
"There was a sense of loss for community leaders, but the community health committee's bottom line was not to make the reorganization feel like a take-away but to address the needs in a new way so the sum was greater than the parts at the end," says Barbara Zappas, Legacy's senior vice president of operations and the executive who oversaw the streamlining.
Hard feelings among ousted board members can be addressed by graciousness and diplomacy. Recognition dinners are usually a good way to handle it, consultant Orlikoff says.
At Baystate, "overseer groups" were created for former board members. The overseers continue to receive information about the system's governance process, although they no longer actively participate.
But even when a streamlining goes successfully, some executives concede that opportunities can be missed.
Oakwood's Fitzgerald admits that by being aggressive in streamlining his system's governance, the changing business models of healthcare delivery may have been overlooked.
"Instead of cranking up increased investment in acute care, we spent a lot of time building primary-care networks and methods of delivery," he says. "It wasn't the right thing to do."
As a result, Oakwood recently sold its stake in 350,000-enrollee managed-care plan SelectCare. Fitzgerald believes the missteps cost Oakwood upward of $50 million in unrealized revenue.
"If you do change governance, you need to know what the actual focus is," he says.