When the chief executive officer of Clarian Health Partners retired in July 2002, its board of trustees didn't look far for a successor. It didn't even look outside the room.
Clarian Chairman Dan Evans Jr., a prominent local lawyer, was tapped to take the helm of the three-hospital Indianapolis-based system, first as interim CEO and four months later as the permanent chief.
The move defied industry norms, which dictate advancement to top-level management only after years of frontline administrative work. But Clarian's trustees had no qualms about installing one of their own.
A fourth-generation trustee of Methodist Hospital, Indianapolis, who had grown up in the community, Evans was viewed as a trusted healer who could mend broken physician relationships and recalibrate the system's strategic direction.
"The board was looking not so much for management but for leadership," says Vice Chairman Tom Chapman, who led the board's efforts to replace former CEO William Loveday, a career administrator who was the architect of the 1997 merger of Methodist, Riley Hospital for Children and Indiana University Hospital to form Clarian. Chapman says Loveday was asked to leave because of his inability to resolve lingering conflicts with the medical staff.
Although the move from chairman to CEO is unusual in the not-for-profit world, it's not as rare as one might think. Two-hospital Westmoreland Health System, Greensburg, Pa., installed its chairman, David Gallatin, as CEO in April. Gallatin, a local entrepreneur, had served as Westmoreland's acting CEO since early 2003, after the board asked its previous CEO to leave.
And in at least two cases, a chairman-to-CEO move has turned into a long-term gig. The Osteopathic Medical Center of Texas in Fort Worth tapped its chairman, Jay Sandelin, to become its CEO in 1996. Sandelin, a former bank president, retired from the hospital at the end of 2003.
And St. Joseph's Health System in Atlanta named its chairman, Ronald Hogan, a former chief operating officer at Georgia-Pacific Corp., as its chief executive in 1995. Hogan retired in 2002.
In an era when some top hospital-industry leaders are questioning whether young administrators are accumulating the right skills to assume premier jobs, examples of board chairmen hopscotching to the chief executive post could amount to a slap in the face to healthcare administrators who are working their way up the ranks.
It's unusual that a board chairman with no hands-on healthcare experience will have the right skills to run a hospital or healthcare system, some governance experts say. While Modern Healthcare couldn't locate any statistics, James Rice, vice chairman of the Governance Institute, a healthcare consulting company, estimates that in less than 10% of CEO changes, a board member is asked to step in as an interim CEO, and only in rare cases is that interim position made permanent.
"I would certainly not view that as my first choice because the industry is so complicated that you need somebody who has devoted at least 10 years in the field," Rice says, citing the nuances of managed-care contract negotiations, medical staff relationships, capital planning and workforce issues as subjects that can be learned only from experience. "Just being smart in other industries doesn't mean you can hit the ground running," he says.
Risks and rewards
Hazards abound for boards inclined to install one of their own as the CEO. Experts say board chairmen might not always grasp the difficult political choices that CEOs must make, and their motives and skills may or may not match the organization's needs.
"The board chair may be intrigued by hospital work. He might decide that he'd like a change in career. He might feel that he brings something to the table being an owner of or running another business. He may be interested in the remuneration," says John Horty, a healthcare lawyer who served twice as interim CEO at the defunct Central Medical Center in Pittsburgh, during a bankruptcy and after a CEO's death.
But some say that in a few unusual cases there may be excellent reasons to install a board member as CEO, particularly if the organization is going through a financial turnaround or a dramatic change in its strategic direction, such as a sale or merger.
In some cases, a board member is recruited after a CEO leaves abruptly and there is no predesignated successor. For example, St. Joseph's was in talks with two other healthcare organizations about a possible partnership when its system CEO, William Foley, as well as its hospital president, Kathryn McDonagh, resigned unexpectedly in 1995. At the time, Hogan stepped in first as interim CEO and later as the permanent CEO, according to news reports. Hogan did not return calls seeking comment.
Rice is among governance experts who predict fewer chairmen filling CEO jobs as hospital boards and executives accelerate executive succession planning and training to prepare midlevel executives to move up.
Succession planning and leadership development have become industry buzzwords thanks largely to the National Center for Healthcare Leadership, a 2-year-old not-for-profit formed by top healthcare executives with funding from the Robert Wood Johnson Foundation. The NCHL has implemented programs to develop future top-tier leaders and integrate key competency areas at graduate-level university programs.
Other industry groups and consulting companies are prodding CEOs and boards to create succession plans for their executive ranks, as well. Drawing attention to that issue was a survey released by the Governance Institute showing that only four in 10 not-for-profit hospitals and healthcare systems have succession plans (Feb. 16, p. 15).
While not personally familiar with any board-to-CEO leaps, NCHL President and CEO Marie Sinioris says such cases could be the result of an effective board development process. To make that leap, she says, "You've got to have a chair who has the set of competencies that's just right for that kind of leadership role within the system."
Sinioris says healthcare leadership studies "definitely point to a need to work effectively with communities to be able to lead strategic change processes focusing on quality. I think those qualities can emerge in a number of different individuals. Whether they are present or not has a lot to do with whether the organization has developed a succession planning process."
Succession planning requires trust between board members and CEOs that is often lacking. At Clarian, Westmoreland and the Osteopathic Medical Center of Texas, chairmen were called on to replace CEOs whose performance had displeased the board.
Sandelin had served on the Osteopathic Medical Center's board for a decade before the board installed him as CEO. He says the hospital was having financial problems, and the board was unhappy with the previous management. "I just felt it was an opportunity for me and for the hospital," Sandelin says.
Moreover, some say visionary leadership trumps industry experience. Running a healthcare system is "on a whole different plane" from running a single hospital or department, says Chapman, who holds a doctorate in managerial learning. That, he says, "challenges many of the educational training programs in healthcare today. It's difficult to train people to be at those elite positions."
Three former chairmen who became CEOs told Modern Healthcare that running a healthcare operation was not as difficult as some of their prevous jobs. None said they increased their income as a result. Sandelin, 66, says running a hospital was a challenge but not completely dissimilar from running a bank. "It's not like you put on gloves and do surgery. It's a business," he says.
Evans, 55, says his primary job is managing conflict-something he says most healthcare managers have not been taught to do. He cites his experience advising large, regulated enterprises such as insurance companies, health plans, financial institutions and utilities; and service as chairman of the Federal Home Loan Banks board from 1990 to 1994, in the aftermath of the savings-and-loan crisis. Evans says cleaning up that scandal was complex and political, a "much harder job" than running a complex healthcare system.
"That's pretty good training to be CEO of a hospital, which is a regulated enterprise that receives most of its money from the federal government, and by and large is not a sustainable business model, much like the savings-and-loan industry in the 1980s," he says.
Likewise, Gallatin says he thought the transition from his own businesses-he's had about a dozen including restaurant franchises, a business mailing service and a beverage distributorship-to the regulatory and political complexities of healthcare would be more difficult that it turned out to be.
But Gallatin, 53, says his 20 years as a hospital trustee, along with the help of a strong executive management team already in place, helped to make the transition easy. "I don't want to disparage anybody who has a career in any field, but I think business principles are the same regardless of the field you are in. I don't think that healthcare is any more difficult than other businesses," he says.
In some cases, a board chairman can bring new ideas to the operation.
For example, Evans, who says he was surprised to be offered the CEO role, offers a harsh assessment of industry leadership, which he says suffers from a "good old boy" club reputation, and is "bereft of ideas and by and large it is not credible with policymakers, payers and employers."
"I want to know why I know more about (the quality of) my car than I do about my doctor. My peer group (of healthcare CEOs) doesn't bring up that question until forced to by customers," he says.
Similar to many hospital executives, Evans says his chief goal is to improve quality. Yet he says Clarian also needed to be "more attuned" to physicians' declining incomes. For example, he says, he's implemented a program to supplement the pay of independent specialists who work at Clarian's trauma unit in order to compensate for fewer paying patients. Chapman says Evans has brought harmony to the medical staff by forging clinical partnership deals.
As a healthcare outsider, Evans has the important advantage of being able to admit when he doesn't know something, Chapman says. "It's very powerful. People really have to explain to you why they're doing what they are doing. It forces them to rethink and maybe come up with a better way to do it," Chapman says.
With the help of an outside consultant, Westmoreland has orchestrated a turnaround since Gallatin began leading the organization in January 2003. It expects to post a small profit for the fiscal year ending June 30, after a $9.1 million loss on net patient revenue of $194 million the previous year. Gallatin has implemented programs to improve customer service and involve employees in decision-making at the system, which operates 232-bed Westmoreland Regional Hospital, Greensburg, and 67-bed Frick Hospital, Mount Pleasant, Pa.
According to Westmoreland board Vice Chairman John Driscoll, Gallatin is expected to become CEO of a new healthcare system when Westmoreland merges with 200-bed Latrobe (Pa.) Area Hospital. The target date for the merger is July 1.
Gallatin and Driscoll, a Westmoreland County judge, acknowledge that theirs is an unusual case, in that Gallatin happened to have the right skills for the job. Gallatin says he had no intention of becoming CEO but happened to be selling one of his businesses when the CEO position became open, and other board members asked him to take the job. Once the hospital began negotiating a merger in mid-2003, Driscoll says the board decided that undergoing an executive search would delay that process and asked Gallatin to stay in the job.
Gallatin, who says he took the job partly as a community service, is being paid less than the hospital's other top executives, Driscoll says. Thus far he has remained chairman of the Westmoreland board.
In the case of Westmoreland, Gallatin says it's worked because of a high degree of trust between him and the rest of the board.
While there's a "fine line between governance and management" that's easy to cross, he wouldn't necessarily recommend it to other not-for-profits. "When you have governance of a not-for-profit board by volunteers, it's very difficult for someone who is an employee to represent the community well as a board chair. Over the long run, it might be flawed."
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