Experts praise centralizing health system control

When it comes to health system governing boards, for the most part, experts agree: Less is more. It's an important message for the hospital industry, which has been slow to shed its bureaucratic layers.

Industry gurus praised St. Joseph Health's recent move to strip key decisionmaking authority from four California hospital boards and shift that control to a regional board, saying it aligns with a governance style that keeps health systems nimble and efficient, even as they add new hospitals.

"In general, the more boards you have and the more layers of governance, the more challenging the governance model is and the more likely it is to add cost rather than adding value," said Jamie Orlikoff, president of Chicago-based Orlikoff & Associates and the American Hospital Association's national adviser on governance and leadership.

Increasingly health systems—ever-striving to cut expenses, standardize quality and lower time spent making decisions—are dumping decentralized governance structures in favor of centralized ones where approvals pass through fewer hoops.

But it's not an easy evolution. Convincing a hospital to join an organization is a delicate negotiation, one that often requires the promise that boards will not only remain intact, but in control. The real problems enter, experts say, when health systems are intentionally or unintentionally vague about the delegation of duties between parent and local boards.

"Virtually everyone I know of falls into that category," said Jack Gleason, an attorney specializing in healthcare with the New York law firm Epstein Becker & Green. "This is not a secret sauce employed by one or two systems. This is very typically how it's done."

It was difficult to glean specifics on how exactly oversight would be split between St. Joseph Health's Northern California regional board and its hospital-level counterparts. A spokeswoman initially said the hospital boards would have "no fiduciary oversight," then retracted that statement. She also said the hospital boards would not oversee hiring or firing of chief executives, but walked that back as well.

The regional board will have ultimate say over big decisions like budget approval, capital planning and joint ventures. Meanwhile, so-called "community boards" at the four Northern California hospitals—Santa Rosa Memorial Hospital, Queen of the Valley Medical Center in Napa, St. Joseph Hospital in Eureka and Redwood Memorial Hospital in Fortuna—will handle things like medical staff credentialing, fundraising, community benefit and quality.

As a governance consultant, Orlikoff frequently asks health system leaders about the role of their hospital board. Later, he asks board members the same question. He rarely gets the same answer.

"We have a saying that is crucially important: Where there is mystery, there is no mastery," he said. "If you have a governance model and it's not clear exactly why it's set up or what it's designed to achieve, there's going to be entropy associated with it."

Conrad "Con" Hewitt, formerly the board chairman of his local hospital, Queen of the Valley Medical Center, said at first there was uncertainty around what would happen when the regional board was created.

"Initially we didn't have a lot of information," he said. "So we didn't know what was going to happen."

Once Hewitt and his fellow directors learned more, they welcomed the change. Hewitt is a director on the newly formed regional board and chair of its finance committee.

"It's been a good thing because we're slenderizing some of the accounting procedures to make it easier for everybody, trying to centralize our purchasing in the region," said Hewitt, who served as chief accountant for the U.S. Securities and Exchange Commission between 2006 and 2009.

There's a natural tendency to want to retain local control when hospitals are acquired by systems, but some experts say that can stifle the efficiencies such deals are expected to achieve.

Local residents argue that no one understands healthcare better in their communities. But Orlikoff said that's not necessarily true. The movement toward population health means using health disparity and disease data to drive decisionmaking, rather than geographic and political boundaries, he said.

For mergers to work, there must be alignment on the system's goals, said David Wildebrandt, managing director of the Berkeley Research Group.

"What we've seen time and time again is failed integrations, where it's a loose federation of hospitals that really are doing their own thing in each market regardless of the system objectives, and really not operating together as a system," he said. "A lot of that is because it's decentralized points of control."

Pam Knecht, CEO of the Chicago-based governance consulting firm Accord Limited, said there is no one-size-fits-all approach to health system governance; leaders should consider their strategic plan and core values. If the organization is prioritizing cost-cutting, then system-level governance could work best. But if the system wants to ensure maximum local responsibility and input, then a local or regional board model might work better.

"The movement is toward more of the hybrid model or more of the centralized model because we're trying to lower costs and improve quality, and we're trying to do so in a consistent way," she said.

Hartford (Conn.) HealthCare collapsed up to 18 boards throughout its health system, including five hospital boards, into three regional boards in 2015, a move CEO Elliot Joseph said brought the system from 96 governance meetings per year to 16. The system added a fourth board in January when it affiliated with Charlotte Hungerford Hospital. "It's often a difficult set of conversations, but typically you have many board members who put the needs of their community in front of their egos," Joseph said.

Experts also highlighted Kaiser Permanente as a large system that uses centralized governance. Kaiser operates a single governing board for its hospitals in California, Oregon and Hawaii.

Analysts with Moody's Investors Service and Fitch Ratings said governance structure alone won't tip a system's bond rating one way or another, but it can be among factors that influence a rating. A high-functioning board generally yields better financial results, which means the organization is more likely to repay its debt on time and in full, said Kevin Holloran, a senior director with Fitch.

"An effective board means effective numbers, which means effective payment, which means a good bond rating," he said. "Ineffective boards usually mean the opposite of that."