Conflicts of interest on hospital boards, long tolerated as a necessary but manageable evil, are under attack in the era of Sarbanes-Oxley and physician competition.
Among some recent examples of governance overhauls:
* The Detroit Medical Center imposed new conflict-of-interest rules last summer as part of an agreement to obtain $50 million in emergency public funding. More than one-third of the DMC's board left during the course of the year. Among those resigning were a former chairman whose law firm had done millions of dollars in business with DMC; the current chairman, whose accounting firm likewise had a multimillion-dollar DMC contract; and the dean of the Wayne State University School of Medicine, which had been receiving about $88 million annually from the DMC to train medical residents, perform administrative work and treat uninsured patients. The chief executive officer's voting power was removed and decisions over governance issues and contracts were assigned to board members with no financial conflicts.
* Slidell (La.) Memorial Hospital and Medical Center replaced its nine-member board last year after enactment of state legislation that shifted appointment power from the parish council to a diverse appointment authority, which received names from a separate nominating committee. The legislation was passed after distrustful voters rebuffed the 170-bed public hospital's proposed sale to investor-owned Tenet Healthcare Corp.
* Six members of the 14-member Baptist Health System board in Birmingham, Ala., left last year as the system's sponsor, the Birmingham Baptist Association, barred board members from also serving on local hospital committees. The policy change, meant to ensure that trustees don't favor individual facilities or regions, came about as a result of the association's decision to review the system's governance structure after the system's controversial decision to sell its assets to for-profit chain Triad Hospitals.
In each case, changes emanated from outside forces. That's no surprise to governance experts, who say boards usually are loath to clean up their own acts.
Although the 2002 Sarbanes-Oxley corporate accountability law clamped down on conflicts of interest within boards of for-profit companies, requiring the members of key board committees to be completely independent of the company in their business dealings, many not-for-profit boards still insist that such regulations don't apply to them. In addition, not-for-profit boards, which unlike boards of investor-owned companies usually don't offer compensation, often believe the only way to draw talented experts is to give them lucrative business deals.
A long-simmering problem
Conflicts of interest have been an ongoing problem for healthcare boards. Nearly 63% of hospitals and healthcare systems that responded to a 2001 fax poll by the Governance Institute, a healthcare consulting company, reported situations in the previous two years in which a board member was excused from participating in a decision. Conflicts arose most frequently in contract decisions, professional services such as banking and insurance, physician economics and personal gain from insider information.
Conflict-of-interest policies are considered important but are not always enforced. According to a recent survey of CEOs by the Governance Institute, more than eight in 10 boards regularly review conflict-of-interest policies and more than nine in 10 require board members to disclose conflicts. But only 56% said board members who know-ingly violate policies on conflicts of interest and confidentiality are subject to removal.
"Many boards out there have a culture where it's not acceptable for one board member to say to another, 'Excuse me, but aren't you in a conflicted situation?' And that's got to change," says James Orlikoff, president of Orlikoff and Associates, a consulting firm. Orlikoff also is executive director of the American Governance & Leadership Group, which trains hospital boards.
Orlikoff believes that aside from staff physicians and CEOs, who bring unique perspectives, no other board members should have a financial connection to the hospital. At the very least, he says, boards should follow the dictates of Sarbanes-Oxley, which require that only independent board members with no financial connection to the company serve as board chairman or on committees that oversee CEO compensation and evaluation, selection of future board members, and the audit process.
Sarbanes-Oxley also requires that half of all of a company's directors be independent.
Corporate scandals such as those involving Enron and HealthSouth Corp., where five board members stepped down in December under pressure from a judge (Dec. 8, 2003, p. 17), have spotlighted governance conflicts. Some hospital boards also are examining their conflict-of-interest policies as a result of the growing number of physicians who own businesses such as surgery centers that compete with hospitals.
Not-for-profit hospital systems have not been immune to corporate scandals stemming from conflicts of interest on their boards. For example, just before its high-profile 1998 bankruptcy, Pennsylvania's Allegheny Health, Education and Research Foundation repaid an $87 million loan to Mellon Bank, which had three representatives including the bank's chairman on the system's board. At the same time, the Allegheny foundation was not paying its suppliers, according to news reports. And in 2002, the Cleveland Clinic Foundation chalked up huge investment losses after putting its cash in a fund operated by a company that employed one of its board members.
More explicit detail
In the past couple of years, governance practices also have started to be explicitly described in credit reports.
"In the past, governance was like quality of care: It was assumed to be effective unless (rating analysts) came across something that was a red flag that indicated otherwise. It was nothing they looked at actively," says Karma Bass, vice president of membership services at the Governance Institute. "Rating agencies are now looking more closely at what (policies) are in place for a board."
New governance had an immediate payoff at Slidell Memorial, which was able to refinance its debt to reduced interest rates and invest the savings in its cardiology and intensive-care services as a result of a new tax passed by local voters (Oct. 13, 2003, p. 20). The governance overhaul was credited with instilling renewed voter confidence. Hospital spokesman Sam Caruso Jr. says the public hospital could not have wooed bond investors to the deal without the guaranteed tax revenue.
Some boards have imposed new rules on themselves. Five of 19 trustees have resigned voluntarily at Licking Memorial Hospital and its parent corporation in Newark, Ohio, which enacted a policy prohibiting anyone who does business with the 165-bed hospital from serving on the board. The policy takes effect April 1.
Departing were an employee of a regional bank that does business with the hospital, a lawyer whose partner did work for the hospital, the president of a real estate development company from which the hospital leases space, a physician employed by the hospital, and another physician whose radiology practice has a contract with the hospital to provide services.
Previously Licking Memorial had a policy that barred board members from participating in decisions in which they had a business interest. However, many board members became convinced that not only was the policy awkward-trustees had to direct a board member to leave a meeting when an issue touched that person's financial interests-but also hospital President William Andrews says the policy didn't go far enough.
"The board said they wanted to eliminate even the perception of conflict," Andrews says. "They said, 'We're going to be as clean about this as we possibly can.' "
Not all institutions have been so strict. DMC's new policy allows up to three nonindependent trustees on its 26-member board. Nonindependent board members would include DMC employees including the CEO and anyone whose company does business with the medical center. "We saw no need for a (complete) bar," says Stanton Beatty, a vice president in charge of corporate compliance and governance, adding that a person could be a "very valuable member" of the board even if he or she had to withdraw from some decisions because of a financial conflict.
Beatty says all current DMC board members are independent.
The traditional argument against requirements for board independence, particularly in small markets, is that there is a limited pool of qualified candidates on which a hospital can draw, especially since trustee positions at not-for-profits generally are unpaid. But the experiences of hospitals that have imposed conflict-of-interest rules don't bear out that concern.
At Licking Memorial, board members had worried about finding competent replacements in the county of 140,000 about 20 miles east of Columbus, particularly since the hospital is among the county's five largest employers, Andrews says. But they had no difficulty. New recruits include a retired school superintendent, a former insurance company executive, a food company executive, a former manufacturing executive and a small-business owner.
"They are interested in giving their time and talent to run the hospital," Andrews says.
Likewise, members of the nominating committee for Slidell Memorial's board wondered whether they would be able to fulfill the dictates of legislation that require representation from seven community members, including residents of each of four wards in the hospital's service area, as well as two staff physicians. It says that preference should be given to candidates who were experts in areas such as healthcare law and finance.
Under the state ethics law, those doing business with the hospital cannot serve on the board, Caruso says. The nominating committee also decided that it would not pick relatives of hospital employees or employees of competing facilities, he says.
"They didn't want a perception from the general public that there were any political connections involved," Caruso says. "It might have eliminated some good candidates."
But despite the ban on business connections, more than 40 people applied to serve on the nine-member board including some with impressive qualifications. The board chairman is a chief operating officer for a container and warehousing company, and the co-chairman is a business development director at Lockheed Martin Aeronautics Co. The chairman of the finance committee, a key post, has experience as a municipal banker.
Caruso says there was particular concern about finding a lawyer with healthcare experience who would not have a client that posed a conflict for the hospital, but even that was easily resolved.
There are three physicians on the board, reflecting the community's interest in "making sure physicians had a real voice in the workings of the hospital," Caruso says.
Physicians in the spotlight
Still, the presence of staff physicians on hospital boards poses increasing controversy in many markets. Some hospitals are removing physician board members who have ownership interests in businesses that compete with the hospital, such as specialty hospitals and diagnostic facilities.
Others are passing policies that will block such physicians from serving in the future. A few are barring all physicians who practice at the hospital.
Medical staffs aren't pleased. In October, trustees at Eastern Maine Medical Center, Bangor, ousted a cardiologist who had served on the board for 11 years, citing his ownership interest in a practice that competes with the hospital's diagnostic testing business. The move prompted another physician to resign from the board in protest, according to a report in the Bangor Daily News. Board Chairman George Eaton declined to be interviewed by Modern Healthcare.
A few hospitals, such as Licking Memorial, have gone so far as to bar any physician on the medical staff other than the medical staff chief from board service, whether they own a competing facility or not. The medical staff chief, who has an automatic nonvoting seat, is the only doctor on the board.
Andrews believes most staff physicians would prefer to have more of their own in governance, but the not-for-profit hospital's board believes its job is to represent the community, not physicians or hospital employees.
"The decisions the board makes have the potential to impact referral patterns and affect incomes of physicians. It's not different than the owner of a local company that does business with the hospital," Andrews says.
Still, the general perception seems to be that physicians deserve at least one place at the table. Gordon Clark, president and CEO of the Governance Institute, believes hospital boards must weigh the potential benefits of having staff physicians on the board-such as physicians' insight into quality and financial issues-and also consider the risk of alienating physicians.
"There are a lot of issues at the board level that can benefit from the knowledge of physicians, who are of course community members in their own right. They want to see the community well-served," Clark says. "You can get into a witch hunt with a conflict-of-interest policy. I think it can be taken too far."
