Photo captions on the cover of the Jan. 30 print edition of Modern Healthcare and the accompanying Cover Story (p. 6) incorrectly identified those pictured. Robert Urciuoli, former president and chief executive officer of Roger Williams Medical Center, Providence, R.I., is the person farthest left in the cover photo. The photo on p. 6 identified as being that of Urciuoli shows his attorney, Robert Flanders. The photos and incorrect caption information were supplied by the Associated Press.
The hospital industry's grip on self-regulation appears to be eroding at the hands of increasingly aggressive state legislatures.
Recent healthcare scandals have prompted states to move a step ahead of federal regulators, who so far have shown a close interest in not-for-profit healthcare governance but haven't taken any significant action.
This year, states such as Rhode Island and New Jersey are on the forefront of a movement designed to bring more transparency to not-for-profit governance. Last year, California legislation went into effect requiring many not-for-profits to establish audit controls; hospitals only escaped being covered by the law after heavy lobbying. At least 17 other states considered legislation that would extend provisions similar to the federal Sarbanes-Oxley Act of 2002 to not-for-profits, according to EthicsPoint, a governance think tank. Also as part of the movement, many states' attorneys general have established guidelines that outline best practices for not-for-profit boards. Charity care is also under scrutiny at the state level (See related story, p. 7).
The goal is to reduce the chances that not-for-profit healthcare executives would take advantage of their positions, as they allegedly have in Rhode Island and New Jersey.
"In any large entity, sometimes people at the top get the impression that these companies or office they hold is theirs," said Rhode Island Lt. Gov. Charles Fogarty. Fogarty said executives can get too comfortable in their positions and work without public accountability, which can lead to problems.
Fogarty is behind a Rhode Island bill, likely to be introduced in February, which would establish a code of ethics for hospital boards and be aimed at bringing more transparency to hospital boards and management. Reports of expense account abuses by Robert Urciuoli, the fired and indicted former president and chief executive officer of Roger Williams Medical Center, Providence, R.I., and alleged bribes paid to a state lawmaker are the catalysts of the Rhode Island movement.
Oversight of not-for-profits is a hot issue on Capitol Hill, where lawmakers have held hearings and requested information on executive compensation and oversight. In June 2005, the Panel on the Non-Profit Sector, a coalition of industry experts and leaders, urged Congress to give regulators more power to suspend charitable organizations' tax-exempt status and make it easier to go after boards that approve unreasonable pay or benefits for CEOs (June 27, 2005, p. 6). A year earlier, the Senate and House held hearings and grilled hospital executives on not-for-profits' tax-exempt status, charity care and compensation (June 28, 2004, p. 4).
But Congress hasn't yet followed through on those moves, leaving the states to take the lead in making related laws.
Fogarty said the Rhode Island bill would be modeled after a law that similarly established a code of ethics for Blue Cross and Blue Shield of Rhode Island. The state had enacted legislation establishing criteria for the Blues in response to rising premiums, large reserves and excess executive compensation (May 17, 2004, p. 4).
The Rhode Island hospital bill would require hospital boards to both establish a system that evaluates board performance measured against the charitable purpose of the organization, and to hold an annual public meeting. The Blues legislation includes both of those ethics guidelines for the insurance company's board.
Because the Rhode Island Blues is chartered by the state, some have argued that the state had more of a right to regulate the Blues than it does hospitals. Fogarty said that adherence to ethical codes will help ensure that board appointments are made appropriately.
At what cost?
Unsurprisingly, not all healthcare industry executives said they were eager for added regulation. Richard Wade, an American Hospital Association spokesman, questioned how the bill that's being discussed in Rhode Island would help. "What kind of law could you write?" that would make someone honestly fill out an expense report, Wade asked.
And he noted the irony of the situation: a call for legislation intertwining the government and hospitals because of allegations a hospital was working too closely with a lawmaker. Wade said efforts designed to improve governance shouldn't be ignored, but most hospitals already have a code of ethics.
Karma Bass, a senior research executive with the Governance Institute, a research group for healthcare organizations, said legislation could be an added bureaucratic burden for hospitals that costs more than it gets back. She said that the vast majority of boards are doing a good job and hospital executives get squeamish when one-size-fits-all bills are introduced because of one facility's alleged misdeeds.
Even if the legislation were well-intended with the aim of improving governance, asking boards to comply with new regulations could unintentionally sap their time and deter them from doing their jobs, Bass said.
States also are studying taking control of hospital boards. While the Rhode Island proposal would likely not try to take control of board appointments, the New Jersey bill does.
Rhode Island's existing Blues law gives the state power to select six of its 18 board members, but Fogarty doesn't want to see the hospital legislation go that far.
However, governance-related legislation in New Jersey calls for the governor to select board members for the University of Medicine and Dentistry of New Jersey in Newark. The bill was prompted by allegations of improper Medicare and Medicaid billing and the awarding of no-bid contracts. Officials at the university, which includes a teaching hospital, have accepted a deferred prosecution agreement and can avoid charges if the pact is followed.
New Jersey Gov. Jon Corzine last week told the Newark Star-Ledger that he would like leaders at the university to step down, allowing for an overhaul. The school has operated "out of control" for years, he told the paper.
The New Jersey bill, which has been referred to the state Assembly's higher education committee and affects only that university, calls for abolishing the school's board of trustees and establishing a board of governors. The state's governor would select the 11 voting board members, according to the bill.
The AHA doesn't like to see states selecting members for community hospitals' boards. Wade said publicly appointed members have plagued county-owned hospitals for years and he wouldn't suggest more government-appointed board members. "Maybe in a small state like Rhode Island it's doable," Wade said. "But not in states like Texas or California."
Moreover, many hospitals have run into trouble with county-appointed boards because appointees are subject to favoritism by the elected officials who make the appointments, according to Bass of the Governance Institute. She said a better way to help ensure proper behavior for not-for-profit governance is for officials to recommend guidelines. "Hospitals are hungry for best practices," she said.
The American College of Healthcare Executives has a code of ethics and an ethical tool kit that establishes a step-by-step outline on what to do when an ethical conflict arises. However, in light of recent corporate scandals, politicians are justified in calling for more guidelines, said Thomas Dolan, president and CEO of the ACHE.
Indeed, the attorneys general of many states have established guidelines for not-for-profit boards and they are enforceable under common law, according to Fredric Entin, a partner with law firm Foley & Lardner.
Many of the guidelines are vague, though. For example, one of the guidelines in New York's 15-page document for not-for-profit board members said, "Make sure there is a conflict-of-interests and code-of-ethics policy in place and that it is updated annually."
Still, the guidelines have had their desired effect, Entin said. Hospital boards are conducting business with more diligence; they are creating subcommittees to handle issues such as compensation and audits when the resources are available; and they are being more selective when appointing members with specific areas of expertise to round out the boards, Entin said.
Mark Pastin, chairman and president of the Council of Ethical Organizations, said hospitals are wise to follow their state attorney general's guidelines because it will provide some insight on what areas may be investigated. However, he added that the bond-rating agencies may provide the biggest motivation for not-for-profit hospitals to improve governance practices.
The three major bond-rating agencies are applying pressure, issuing statements or revising ratings criteria with respect to not-for-profit corporate governance issues for healthcare institutions. Continued pressure is expected from those agencies, according to a report by the law firm Fulbright & Jaworski.
Establishing a conflict-of-interest policy can be difficult because board members aren't always comfortable discussing what constitutes a conflict, Entin said. He added that board members who are the subject of a conflict-of-interest issue should not only refrain from voting on whether or not a conflict exists, but should also not be present during the discussion.
Conflicts in Rhode Island
Conflict-of-interest issues have certainly been raised in the Roger Williams case, even with regard to the investigation of the hospital itself. Before the indictment, Urciuoli still held his executive and board positions at the hospital, but some wonder if the hospital could have avoided indictment if Urciuoli had been removed earlier. Last week, federal prosecutors announced a deal to defer criminal charges against Roger Williams for two years and then drop them completely if the hospital cooperates in the government's investigation and agrees to various changes. Repeated requests for comment from Roger Williams and its board members were not returned. Urciuoli was a board member until mid-January, but was placed on administrative leave in December 2005 before being fired.
Also indicted were Frances Driscoll, a former senior vice president, and Peter Sangermano, who ran an assisted-living facility affiliated with Roger Williams. Both pleaded not guilty.
The hospital's indictment was portrayed as potentially counterproductive by Rhode Island Gov. Donald Carcieri. Since the indictment, the state's health department has scheduled a hearing on the hospital's license and Standard & Poor's lowered its credit rating of the hospital.
With some states gearing up oversight of hospitals, and Congress and federal agencies such as the Internal Revenue Service also scrutinizing not-for-profits, more legislation is likely on the way. Michael Peregrine, a partner with the law firm McDermott Will & Emery, said boards will continue to face "disproportionately high regulatory pressure" to refine their governance policies relating to executive travel and benefits such as automobiles and housing. But Rhode Island's Fogarty would argue that state-rather than federal-legislators are better positioned to devise laws that would improve the board member selection process.
"In my judgment, states are better able to deal with issues of oversight," he said. "State government is closer to the front line."
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