Conflicts of interest complicate hospital boards

Geisinger has a committee that identifies any potential conflicts of interest across its staff, including its governing board.

Each year, the committee identifies any executive or physician who has a vested interest in a healthcare company that does business with Geisinger. Employees must disclose if their stock in a vendor or the compensation they receive from a business affiliate exceeds a certain threshold.

Individuals may have to recuse themselves from any purchasing decision where they would have a potential conflict of interest, said Dr. Jaewon Ryu, Geisinger’s president and CEO.

“We have a very regimented and focused conflict-of-interest process. That is an absolute for us,” he said. “It’s one of those things like information security where it can never be airtight, but if we look at our peers, we feel really good about our process. It is something I am proud of.”

Geisinger is likely in the minority when it comes to proactive surveillance of board members’ conflicts of interest. While several high-profile cases put a spotlight on the issue, hospitals’ conflict-of-interest policies haven’t kept up with the growing liability associated with their involvement in more businesses.

From 2019 to 2021, fewer subsidiary hospitals with advisory boards adopted protocols requiring an independent review of board members’ potential conflicts of interest, according to the Governance Institute’s 2021 survey. Those hospitals received a 3 on a scale from 1 to 3 in 2019, meaning that the process was widely adopted. That fell to 2.63 in 2021.

“What was acceptable governance 10 years ago is felonious today,” said Jamie Orlikoff, president of Orlikoff & Associates, a consulting firm that specializes in healthcare governance. “Hospitals boards need to be an eight-cylinder engine firing on all eight; anything less will not only drag an organization but inhibit them from survival and success.”

Some not-for-profit health systems are becoming more diligent about potential conflicts of interest their boards face when voting on certain subjects, identifying them prior to meetings rather than putting the onus on members to recuse themselves.

A few health systems Modern Healthcare interviewed restrict the number of external boards their members can serve on to keep them focused on the inherently complicated job of guiding a hospital and curb exposure to potential conflicts of interest.

But many not-for-profit hospital boards lag investor-owned hospital chains when it comes to expertise, compliance and accountability, held back by recruiting challenges and outdated governance models, governance experts said.

“Many board members of small community hospitals end up being rubber stamps for the CEO. More often than not, they just say, ‘OK.’ That is a breach of their fiduciary responsibility,” healthcare consultant Paul Keckley said. “Some CEOs load the board with people they know who will not necessarily act independently.”

A majority of hospitals still operated under an outdated governance model as of 2018, according to the American Hospital Association’s most recent governance survey that polled 1,300 CEOs—largely from not-for-profit hospitals.

More than 75% either did not replace board members during their terms or continued to reappoint them when eligible, resulting in low levels of board turnover, the survey found. Meanwhile, nearly a third did not conduct board, board member or board or committee chair assessments in the prior three years.

“The data is clear—the more outmoded the model of governance is, the more the organization will suffer,” Orlikoff said.

Follow the money

There have been several high-profile cases where healthcare executives had to step down due to conflicts of interest.

University of Maryland Medical System’s CEO stepped down in 2019 after the Baltimore Sun reported that nine of the system’s 30 board members had business deals worth millions of dollars with the system.

The university adopted a policy that required board members to present potential conflicts of interest before the board’s governance committee. It also barred board members from obtaining sole-source contracts with the system and receiving preferential treatment. State lawmakers passed a law in 2019 that overhauled the board.

Memorial Sloan Kettering’s chief medical officer stepped down in 2018 after he failed to disclose millions of dollars he received from drug and healthcare companies included in dozens of research articles. He did not report industry ties in 87% of the papers he published or co-wrote in 2017, a New York Times and ProPublica investigation revealed.

The opportunity for conflicts is increasing as hospitals and executives diversify their businesses and investments, experts said.

“People are much more hesitant to join boards because of the liability and reputational risk,” Orlikoff said.

Only 75% of hospital boards received legal counsel briefings on conflict-of-interest disclosure protocols in 2018, down from 83% in 2014, according to the AHA survey.

“Some of the disclosure doesn’t go as far as it should,” Keckley said. “It is still a gray area.”

Generally, investor-owned chains are more diligent about competence, limiting their service on external boards and potential conflicts of interest.

More than 70% of boards did not have a continuing education requirement for their members as of 2018, according to the AHA survey.

“People who don’t understand healthcare are making very important decisions—to merge or not to merge, form an accountable care organization or not. You may have a jeweler in town making those decisions,” said Lyndean Brick, president and CEO of the healthcare consultancy Advis, adding that the educational onboarding often falls short. “The regulations should change so there is a higher barrier to entry.”

Not-for-profit hospital boards typically operate under the assumption that governing a community hospital should only be performed by members of that community.

“That model is failing,” Orlikoff said. “That model is limited because board members have to make hard decisions about people they live and work with.”

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Frequent fliers

Not-for-profit hospitals’ traditional operating model also has led to their executives serving on multiple boards. But some healthcare leaders are finding that it is hard to keep up.

A cursory search of large health system executives based in the East Coast shows that some board members serve on up to six external boards. Many of those roles are for community-based not-for-profits such as youth baseball, home health organizations, state hospital associations and universities. The vast majority are unpaid.

Restricting the number of external boards their executives can serve on limits their outside time commitments as well as potential conflicts, governance experts said.

But it can also constrain their outreach efforts. Each organization strikes a different balance between time management and community involvement.

Virginia Mason Franciscan Health in the Pacific Northwest does not have a formal policy on external board service. While Ketul Patel, the system’s CEO, tends not to sit on corporate boards as a time-management strategy, he encourages his leadership team to sit on community-based boards.

“I am a big believer in our leadership team sitting on boards in the community,” he said. “We need to have strong voices from healthcare represented.”

Lawrence Prybil, the retired University of Kentucky healthcare leadership professor who serves on a not-for-profit health system board, is determining whether he will vote to allow the CEO to serve on external boards.

The board is weighing whether it would be beneficial for the system and the external board as well as the CEO. The board will likely allow the chief executive to serve on one or two boards, with disclosures, Prybil said.

“Would the other organization benefit from our CEO’s presence on their board? What is the benefit to the CEO? We also need to think about our own organization, for which he has a fiduciary responsibility. In some cases, it can be extremely valuable, said Prybil, who has written studies showing most boards lack adequate succession planning. “But I cannot imagine serving on a system board where we encourage the CEO to serve on three (external) boards.”

Health systems aim to be more inclusive, which has prompted more requests for people of color to serve on their boards. They aim to hire people of color, women and those who better represent their communities.

“Some boards have expanded or changed their bylaws to accommodate that diversity,” said Dr. Luis Garcia, president of Sanford Health’s clinic division.

Garcia has been getting more requests to serve on boards. But it’s sometimes difficult to pinpoint the organizations’ intentions, he said.

“Do they want me because my last name is Garcia, or do they want me because of my talent? I hope every time I get an offer it is because of my talent,” Garcia said.

Atlantic Health System recently hired an executive search firm to help the integrated system find an executive with payer experience for its board.

About 460,000 of the 1.1 million patients Atlantic Health treats each year are in one of several different pay-for-performance models, said Brian Gragnolati, president and CEO.

“Our board needs to understand population health and risk arrangements, he said, noting that the system is also looking for experts in health equity, quality, finance and community engagement. “We try to educate on where quality metrics intersect with population health efforts—that is a level of nuance a lay board member wouldn’t understand.”

When it comes to internal board service, high-profile health system executives often serve on at least five, according to Modern Healthcare’s analysis. They range from individual hospital boards across the organization and subcommittees related to quality and safety to insurance subsidiaries.

But some are strictly an advisory board and do not have a fiduciary role, experts noted.

“The days of serving on 11 different boards are over. If you are running a business or employed, you can’t be expected to serve on more than three boards and be a good board member,” said Orlikoff, adding that he chairs a health system board and doesn’t have time to serve on others. “It takes more time, especially coming out of the pandemic.

“Strategically, in terms of market and regulatory challenges, there is an unprecedented amount of pressure on boards, calling into question the voluntary model of governance,” he said.

Paid or unpaid?

Not-for-profit hospital board positions are often unpaid, limiting their recruitment efforts.

Around 11% to 13% of board members in not-for-profit healthcare organizations received compensation as of 2018, according to the AHA survey. While that share has increased in recent years, it does not compare with investor-owned hospitals, where pay is more commonplace and substantially higher.

“Not-for-profit hospitals and health systems are beginning to change that,” Orlikoff said, noting that not-for-profit hospital boards compete with publicly traded companies and venture capital boards. “Probably around 20% to 30% now are compensated, and that number is growing rapidly.”

Some healthcare leaders are paid to serve on the boards of large banks, pharmacy chains and fast-food chains. Paying board members can boost accountability and weed out the poor performers, experts said.

“Compensation in the not-for-profit healthcare field tends to be far lower than the general business sector,” Prybil said.

Federal regulations regarding compensation and board service are relatively lenient. The Internal Revenue Service requires that the majority of not-for-profit hospital boards members are independent, meaning they aren’t directly employed by the organization. Some hospitals and health systems have run into trouble regarding employed physicians serving on boards.

While not-for-profit hospitals are advised to assess what types of experience would best serve their organization, there are no legal requirements.

“Clearly the need for expertise has not been met, not just in rural areas but in urban economic centers too,” Orlikoff said.

Time management

Time commitments for board members vary wildly based on the organization.

Some not-for-profit hospital boards can require as little as 40 to 60 hours of service a year. The bigger organizations may require up to 200 hours, Keckley said.

The minimum annual commitment is generally 400 hours for investor-owned hospitals, he said. Education requirements are typically far more rigorous for investor-owned systems, but that can vary by state.

A few states regulate board members’ education. New Jersey requires eight hours of continuing education in the first year of service. Companies in Georgia must demonstrate their board is financially literate, or otherwise pay a fine. There is no healthcare equivalent to the National Association of Corporate Directors certification, which means some board will be more competent than others, observers said.

For-profit boards are typically smaller than not-for-profit boards and tend to be more operations-focused, with expertise in business, finance and private equity, said Stephen Shortell, a health policy professor at University of California, Berkeley.

As fewer independent hospitals remain, the roles of their boards shift. System-owned hospital boards typically have fewer fiduciary responsibilities than boards at independent facilities. Some health systems have eliminated local hospital boards, Prybil said.

That wasn’t the case in Atlantic Health’s acquisition of CentraState Healthcare System, Gragnolati said. CentraState’s board remained intact, participating in most of Atlantic’s committees at the health system level, he said.

“It made sense because it allows us to meet the needs of the community and creates a good level of communication,” Gragnolati said. “The CentraState board controls their own agenda.”

But like most other cases in healthcare, every board’s structure, composition and operating model varies based on the organization.

While some variation is good, there should be better guardrails around board members’ expertise, education and conflict-of-interest disclosures, most governance experts said.

“I would hope the rules change,” Keckley said. “I would think Medicare and (the Centers for Medicare and Medicaid Services) would zero in on competency-based decision-making and be very aggressive about requiring articulate board members. That would be much safer than board members who make a multimillion-dollar bet based on a 20-minute drive-by.”