Activist investors push healthcare firms to add seasoned leaders to boards

Dr. Lynn Massingale, executive chairman of TeamHealth, and his board of directors had to make some tough strategic calls over the past nine months.

Twice last autumn they rejected merger advances from rival AmSurg to create a giant in physician-staffing services at hospitals and post-acute-care facilities. AmSurg ended up agreeing to merge with Envision Healthcare in June in a $10 billion deal.

Then in February of this year, New York hedge fund Jana Partners bought an 8% stake in publicly traded TeamHealth and demanded three board seats. The activist investors at Jana claimed they wanted to set the company on the right course to improved shareholder value.

Rather than fight a messy proxy battle, the then nine-member board acceded to Jana's demands and added to the board former Caremark boss Edwin “Mac” Crawford and Jana partner Scott Ostfeld. And Nancy Schlichting will join the board in January after retiring as Henry Ford Health System CEO. “We were not in the midst of a board search,” Massingale acknowledged last month when Jana made its overtures.

Welcome to the new era of healthcare governance in the for-profit sector, said David Nash, founding dean and professor at the Jefferson College of Population Health at Thomas Jefferson University in Philadelphia.

Healthcare firms in the for-profit and not-for-profit sectors face tremendous organizational and leadership challenges as they respond to the tectonic changes roiling the industry. Payers are demanding providers move toward value-based reimbursement and away from fee-for-service. That shift creates a need for board members with broad knowledge of the information technology, big data and population health initiatives their firms should pursue to keep pace, Nash said.

Boards at investor-owned healthcare companies face the added challenge of navigating this transformation with powerful investors and institutional investment services looking over their shoulders. “Our industry is in the bull's-eye of change,” Nash said.

The question is how well-equipped are the boards of publicly traded healthcare firms. The answer varies firm by firm.

Every board needs to be constantly asking itself: Do we have the right skill sets at the table that can assist and challenge management while representing the interests of employees and the communities they serve, said Larry Prybil, an author on governance issues and a professor at the University of Kentucky.

Getting there demands frequent training and often an influx of new blood—members with experiences and talents attuned to the changing healthcare landscape, Prybil said.

Modern Healthcare examined the composition of boards at the industry's four largest physician-staffing companies and the nine large hospital companies that make up the Modern Healthcare Hospital Stock Index to determine how long directors had served and their ages.

The physician staffing companies were AmSurg, Envision and TeamHealth along with Mednax of Fort Lauderdale, Fla. The hospital companies are household names, such as HCA Holdings, Tenet Healthcare Corp. and Community Health Systems.

The 2016 proxies of the companies revealed a wide variation in average length of service.

For example, the average length of service at TeamHealth, even before the two new Jana Partners appointments this year, was less than six years. The Knoxville, Tenn.-based company was co-founded by Massingale 37 years ago. It went public in 2010.

The longest-serving board members on average are at Mednax, the nation's largest contract provider of neonatal physicians to hospitals, along with a variety of specialists. The average tenure of the 10-member Mednax board is 16.4 years, even after the election last year of a new director.

Prybil recommends that boards limit directors to no more than three consecutive terms of service of not more than four years. That's a rule of thumb to help keep boards fresh and creating enough turnover to open spots for new governance insights, he said.

The board of Tenet quickly got younger this year when it, like TeamHealth, was asked for board seats by a big investor wanting to see changes happen more quickly at the Dallas-based company. In this case, Glenview Capital Management, Tenet's largest shareholder, was granted two newly created board seats, which were taken by partners Randolph Simpson, 46, and Matthew Ripperger, 44.

Those additions, coming after the election of Tammy Romo in 2015 and Dr. Freda Lewis-Hall in December 2014, dropped the average length of service on Tenet's 12-member board to seven years. In contrast, Community Health Systems of Franklin, Tenn., has changed only one of its nine board members since 2009. The average length of service on the board is 11 years.

Representatives for Tenet and Community Health declined to comment.

Massingale, 63, who has announced his intention to step down as TeamHealth chairman in 2018, said Jana representatives Ostfeld and Crawford have been positive additions. Ostfeld brings experience from Walgreens Boots Alliance, where Jana also has board seats.

That understanding of retail pharmacy will be a tremendous boon to TeamHealth's efforts to manage costs for its thousands of hospital clients, Massingale said.

Crawford, 67, joins the board already knowing a great deal about physician staffing generally and TeamHealth specifically. For a short time in the late '90s, TeamHealth was owned by MedPartners, an Alabama company headed by Crawford that also owned Caremark, a giant physician service company that became CVS Caremark.

But even before Jana bought into the firm this year, TeamHealth was systematically adding skill sets and influence to its board to position the company for the changing healthcare environment, Massingale said. Its recruiting ground has been the ranks of former CEOs at not-for-profit healthcare systems. Last year, TeamHealth recruited board members Patrick Fry, former CEO of 24-hospital Sutter Health in Northern California, and Kenneth Paulus, former CEO of Allina Health, a Minneapolis-based system with 13 hospitals and about 1,500 employed physicians.

Massingale said that about 80% of the 18 million patients that TeamHealth physicians treat annually are seen at not-for-profit hospital systems such as Sutter and Allina. “They are a voice of the customer,” Massingale said of several TeamHealth board members.

Board member Vicky Gregg brought the payer perspective when she was recruited to the TeamHealth board in 2013. She had served for several years as CEO of Blue Cross and Blue Shield of Tennessee, Massingale said. A year earlier, Mary Grealy was brought aboard to provide political insights after serving as president of the Washington, D.C.-based Healthcare Leadership Council, a coalition of the nation's leading healthcare companies and organizations.

For-profit companies place fewer restrictions on their board members than their not-for-profit counterparts in healthcare. A 2015 study by the Governance Institute found that 86% of not-for-profit healthcare systems limit the number of consecutive terms that a board member can serve. Only 8% specify a maximum age of trustees.

Prybil said that though terms of service are best capped at 12 years, the age of a director doesn't matter. He pointed to HCA's nomination and election to the board this year of Charles Holliday Jr., 67, former CEO of DuPont and current chairman of Royal Dutch Shell. He would be an asset to any company in the world, Prybil said. What really counts in the boardroom is professional expertise, a diversity of voices, dedication to the organization's mission and a willingness to challenge management and each other in a productive and respectful way.

But most important of all is a willingness on the part of top management to constantly bring in a fresh perspective to serve on boards. “What may be a perfect cluster of talent this year may not be in two or three years,” Prybil said.