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Conversations on Health Care Governance: Issues Facing Nonprofit Board Members

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In the second episode of this three-part series focusing on health care governance issues, Rob Gerberry, Senior Vice President & Chief Legal Officer, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery LLP, about how board members are handling some of the pressing challenges facing nonprofit health systems. They discuss the board’s role in tackling these challenges; board involvement in environment, social, and governance issues; and how to handle challenges related to charitable status, cybersecurity, and DOJ’s recent pronouncements on corporate compliance. From AHLA’s Business Law and Governance Practice Group.

Listen to the first episode, which discusses the duties of nonprofit board members, here.

Listen to the third episode, which discusses advising nonprofit board members, here. 

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Speaker 1:

This episode of ala Speaking of Health Law is brought to you by ALA members and donors like you. For more information, visit american health law.org.

Speaker 2:

Thank you everyone for joining us for the second part of our healthcare governance series with Michael Perrin For McDermot will, I'm Rob Gerber. I'm a current board member of the HLA and the Chief Legal Officer at Summa Health. Today, we look forward to building on our prior discussion around the fiduciary responsibilities of nonprofit health System Board members. In today's session, we plan to focus on reach and issues that have implicated those responsibilities and how board members are handling some of the most timely and topical challenges, uh, that our industry faces. So Michael, thank you again for joining us.

Speaker 3:

Oh, my pleasure, Rob. Great to be with you.

Speaker 2:

So to start our discussion today, we're seeing many hospitals challenged by a financial downturn in our industry, increasing labor costs, supply chain costs, pharmaceutical costs, and other inflationary pressures. Michael, as you're working with boards and board committees across the country, what are you seeing their roles in helping health systems tackle those challenges?

Speaker 3:

Rob, I'd separated into the strategic and the tactical in terms of these challenges, and I think that there's some comfort in understanding that, that no healthcare system is really untouched by some of these challenges. The strategic issue is an understanding that the board has, has a role here. Uh, I think we often, um, you wonder, and sometimes there's a, a tendency of all of us to take us back seat to the experts when crisis of some kinds hits. And we, and we really don't have that luxury from a governance perspective. Uh, the financial challenges that healthcare systems are facing this year are the type of crisis that the board is expected to have a firm grasp of. It's ultimate responsibility is to maintain the vi, the long term viability of the organizational mission. And it can't do that by taking a hands off attitude. So I think step one is recognizing, and I think this works for both management and the board, that the, that management recognizes that the board by law has a legitimate role to play in this analysis. The second, uh, more tactical way is what's the best way for it to do so? Does it need to hire its own advisors? Does it need to hire its own financial consultants as the separate from the corporation? I'm not sure about that. There may be facts and circumstances at an individual level that would suggest that, yeah, the board needs its own advisors. I would just generally say, uh, that unless in the absence of some extraordinary circumstances or funny facts as we would, uh, say, probably not, that the, the more focused approach is to make sure the board has access to the financial advisors, the, the organization's receiving. And then I think, Rob, that the real action is going to be, uh, enabling the finance committee, uh, to be both educated about the issues and, uh, inform from a perspective of qualifications and support, knowing what questions to ask. We really have a time where the, the governing board's ability to respond to this issue depends in large part on the functioning of a properly educated and prepared, uh, and qualified finance committee or some committee of that, uh, of that, uh, qualification and that title to work directly with management to make sure that the board as a whole is, is in the right position on the economic issues. Uh, bottom line, you can, it can be a variety of different committees, but really the board, uh, is, is welcome to delegate to one of its standing committees, the responsibility for working closely with management. What you can't have, I think, which you shouldn't have as a situation where the board takes a step back, flips up a sand and says, This is way over our head out of our league. We're gonna leave it to the experts, and you can know keep us posted periodically, but otherwise we're gonna take, we're gonna stand back. That's not what the law would expect of a governing board.

Speaker 2:

So Michael, if I could follow up on your comment about a board's responsibility to hire its own advisors and at downturn, like we're seeing now that is implicating really the majority, if not all of health systems, uh, and seeing their balance sheets and financials erode. What's the board's responsibility to intervene with a, um, strategic advisor versus understanding it may be a, an industry downturn overall?

Speaker 3:

Well, I think there are two questions there, Rob. They, one, if, if it does not see management engaging a strategic advisor to this, I think the board's role is to say, Let's talk about this. Do we need some help here? Would it be useful to have an outside advisor? Uh, it it's very important that the organization not be insular, even though the issues that are affecting individual health systems are, are nationwide, that, that they're, that there are going to be some local issues in the local considerations. Part of the board's oversight is to ask the themselves the question, Do, do we have the right team? Do we need outside advice? Uh, are the, even though the issues are, are known to us, do we have the, the bandwidth? Do we have the, the, uh, bench strength, Sorry to use both those bad metaphors, but, um, to, to really tackle this issue. Do we need the help of an outside, uh, advisor? Should that be for the organization as a whole or just for the board? I hate to see, uh, in a situation like this, it be a strategic advisor to the board. Uh, unless again, that there are some extraordinary facts that suggest that there's an adversarial or, or relationship between the board and management, or there's some kind of divergence of interest. But the board's gotta be the one that says, Ask the question if management doesn't, um, do we need some help? Are we too insular? Do we need a fresh perspective on our finances? And, and if so, let's team together. And who would that be? And hopefully that that person or firm could represent the organization as a whole.

Speaker 2:

So pivoting to our next, uh, topic, we see a lot of board, uh, looking at ESG principles, uh, sustainability, carbon emissions, some of the key societal issues that we're looking at. What do you see most of your boards, uh, doing in that respect? And which committees do you see, uh, that subject matter being housed under?

Speaker 3:

Well, I'll answer that question. As a long time, ESG skeptic and someone who is coming late to understanding the, the, the viability of these issues we look for in the for-profit world. And, and there's still obviously political pushback on this. It has become an election issue. And we also see some issues. There's some interesting surveys in the last week, uh, one survey that shows that CEOs are, are more accepting and more understanding of ESG as a legitimate long term issue where CFOs are pushing back. Um, so I think in step number one is to recognize, you know, what's, what's the organizational understanding and willingness at this time, uh, to, uh, embrace ESG principles, or it's really Rob, I think it's E and s I think the concept of governance is a, as a social environmental issue or companion to that is, that's just a reg is is now being, um, limited. I think there's gen, uh, general recognition that what we're really focusing on are social environmental issues. The government's governance is a regular day to day issue, uh, for a board and for management. Uh, but I think number one, again, it's the organizational receptivity or is it gonna be viewed as just one more issue that management has to deal with during this financial crisis? Or is there an understanding that actually we have no choice, but that, that the outside world is, whether it'd be regulators to investors, uh, is pushing these issues on us and saying, What is your response? What is interesting, uh, in this regard is the extent to which I would say over the last six months, uh, or, or, or thereabouts, a number of issues and developments has a, have arisen, uh, that bring home es concepts directly into healthcare. Um, and I think they range from the following. The Biden administration has made an enormous emphasis on, uh, healthcare equality, on environmental justice, and through, uh, as I think many people as we're listening today, know, CMS has made a major commitment to focusing on health equity issues as part of its fundamental direction and strategy. Uh, the Biden administration last summer, CRE, a summer of 2021, created the Office of Climate Change and Health Equity, uh, which is expected to be given regulatory authority to address issues, uh, in, in terms of health equity in communities. Uh, and then within the Office of Climate Change and, and Healthcare Equity is the Office of Environmental Justice, which is it designed to address issues not just in healthcare, but broadly is to, in terms of whether or not environmental issues are adversely impacting one segment of society over the other. So I would say number one, the Biden administration is jumping in with both feet on E and S issues. Uh, we see, I think a, a very important issue is jco, uh, and perhaps other accreditation agencies are addressing these issues of health equity, uh, and climate change, and the ratings analysis, it's the business that they're making, the business case, uh, excuse me, the, the, the accreditation and quality of care case, which I think is, is, has to be recognized by the governing board. If, if JCO was saying, We're going to evaluate you according to, partly to your response to these issues, the board needs to get serious, and the management team needs to get serious. I think another area in which, uh, there is an increased incentive for healthcare systems to become more focused on ENS principles is now Moody's. The rating agencies are saying, you know, we are going to begin to consider the, uh, the organization's response to environmental and social issues in healthcare as part of our overall rating process, and we're going to prevent, provide a grading system on that. I think it's important that boards, even though they have not historically been engaged with the rating agencies on these issues, understand more about what, for example, Moody's approach is. They're really at the cutting edge of these concepts. So I think from a, a business financial perspective and a quality of care perspective, uh, Moody's entry into this area is exceedingly important. Uh, we see it entering into the executive compensation issue as boards and compensation committees are increasingly identifying the achievement of environmental and climate change and health equity, uh, goals, Uh, as part of, uh, the incentive compensation plan for senior executives. The Internal Revenue Service is increasingly recognizes the contribution of, um, uh, the social determinants of health as part of a long-term, uh, charitable, uh, activity in terms of healthcare. And even attorney generals are becoming more involved in the whole, uh, healthcare, uh, environmental climate change issue. The California Attorney General has been come, has been outspoken, and its inquiry and concerns about how, uh, the evaluation of health equity issues are being undertaken by, uh, he healthcare facilities in that state. I think if you take a step back, uh, you, we will see that over the last six months, there's been an really, an exceptional number of regulatory administrative and, and third party, uh, reporting organization, um, measures that really essentially say, ENS principles are here to stay in healthcare, and it's gonna be incumbent on healthcare management and the governing boards to more formally recognize that comes at a tough time. Rob, as you and I have discussed in the past, uh, it's not like health. Our healthcare organization clients are looking for more issues to trouble them, uh, by, uh, but this is one that I think the, the regulatory and accreditation and, uh, uh, rating agency initiatives say you can't wait. You've, you've gotta recognize this as a board oversight responsibility and as a management responsibility.

Speaker 2:

And I know our boards test us to come up with metrics around diversity, uh, around climate change so that they can properly execute on that oversight responsibility. Do you see the board then taking on this role, or do you see a board committee from a structure perspective?

Speaker 3:

I, I think it's like strategic planning. Rob. I think the board's responsibilities to be aware of what's going on, to be un understand how regulation, accreditation of financial ratings and things of that nature relate to their organization. In other words, they get what it's, what is healthcare specific, and then I think they task management with responsibility to go forth and put in place those systems and guidelines, uh, to implement and respond to, uh, the environmental and social issues that are so critical. The board's responsibility in this regard, uh, is to make sure that the board level, uh, that they are continuing to, uh, uh, maintain, uh, the appropriate turnover to achieve the kind of diversity that's expected. And they're monitoring management's efforts in this regard. So there's enough work here for both management and the board.

Speaker 2:

Great. We mentioned earlier some of the systemic inflationary pressures on our industry. How about some of the new pressures we're seeing related to non-profit hospitals, charitable status and how those hospitals and the board should continue to make sure they distinguish themselves from the for-profit space?

Speaker 3:

This is a real sleeping, uh, giant rob, and it's something that, you know, in my 42 or 43 years of healthcare, I've seen this periodically, uh, uh, rise to the forefront of issues. And I think that there's a, there, there is some sense that, that, uh, this issue is not legitimate. That this issue is just a lot of white noise. Uh, uh, the people who are pushing this issue are crying wolf. Uh, but I think that what we've seen is in, uh, through the news media and other me, uh, efforts, more attention being placed fairly or unfairly in terms of their interpretation of the facts on the extent to which, uh, not-for-profit taxes and health systems are in the minds of some not acting in a truly charitable sense. Some of this arises, in fact, often it arises in the context of collection activity and revenue cycle activity, uh, in, in, uh, charge and rate structures in access to care. Uh, but I think the fund, the legal question is different than I think the reputational and communication question. The legal standards for text stem status under the code, and especially under 5 0 1, are most organizations have well defined co compliance programs to address these, and that there's sensitivity to them. Uh, that's really not the issue. The, the greater challenges as our healthcare system evolves and as the political situation, Washington changes and as the news media cover changes, um, there is a danger that the gap and the difference between what, what makes a tax exempted organization truly special and truly charitable and therefore justifies its tax exempt status. The cap, the difference between that and what for-profit institutions do is really narrowing, and this is especially the case, as you kinda were mentioning, the more that for-profit organizations are adopting environmental and social initiatives, it kind of narrows the gap between what charities say they do that's special and what the for-profits do. So what we have here, and again, the the recent news media coverage, which has been very alarming, and, and major outlets like the New York Times and, uh, and the Boston Globes spotlight feature healthcare systems, not not-for-profit healthcare systems, have to do more to be able to communicate to the public that they are by their conduct, by their actions, by their co uh, culture, by their tone at the top, by their programs. They're not just compliant with the IRS rules regarding tax and status. They are fundamentally functioning as a charitable organization and therefore are distinguishable from their for-profit competitors. I think in large part, that's a recognition by the board and management of the importance of what it means to be a charity, uh, by the importance of the board's obligation to supervise the, the, uh, the charitable mission com. It's the, you know, the obedience to mission issue, and it's also the importance of communication. It's one thing if we all know within an institution that we're really acting as a charitable manager, man manager, but if we are not communicating that externally, if the public doesn't see the difference, then there's a problem. And I think what you're seeing is some folks who are starting to speak out and say, We need to do a better job of communicating to the public why we are charitable, why we justify we, uh, are appropriately considered tax exempt. Because if we don't do that, we may lose this status, may all of a sudden come up in a tax act and, and, and we may lose it. So I think that's the issue right now. That's, again, it's an, it's not timely. No one wants to review this issue in the midst of everything else. Um, but, but when you have ProPublic and the New York Times and, and the Boston Globe all focusing on these issues, you, it, you really can't ignore it.

Speaker 2:

And then, Mike, will you layer that on top of, you know, the discussion going on in many boardrooms around how do you sustain your mission right now with services, what locations to keep open and led us some of the financial challenges we're having? So what would you advise boards that are going through that analysis to do in light of some of the recent news coverage around charitable status?

Speaker 3:

Well, again, number one, I think they need to assure themselves that fundamentally they satisfy the IRS standards for, uh, tax exempt status, which they will do. The number two is that they understand that what it means to be charitable under tax, under state law, and what are the broader public, uh, perceptions of, of charitable status. Number three, I think they need to look within their organization. In my experience, Rob, with our client base, I, I'm always amazed at the steps that organizations are taking quietly within themselves to address some of these access to care issues and others that they're population health issues, that they're working hard, and they really have, um, measures that are necessary to, um, uh, to show that they are acting, uh, out of the best interest of their constituency. And they're providing charitable services in a broad perspective. So knowing what you've got going within the system helps. But I do think that there is a fundamental concern to recognizing that, um, uh, access to care is an issue that the politicians truly focus on, and it is a concern. You and, and and I and all those who, uh, who are listening to us today, we all have our own horror stories about how long it takes to access quality of care services, uh, how long it takes to get in to see our specialists, things of that nature. I do think the board needs to kind of roll up their sleeves a little bit and say, if we're, we're, how are we doing on this score? What are we doing in terms of physician resignation? What are we doing in terms of improving access to care? What are we doing in terms of the ability of a patient to actually make contact with the human being and schedule appointment? Those are the kind of bread and butter issues that they're still absolutely the obligation of the board. And I think they need to recognize that that's where the politicians will engage with health systems on a direct basis if they hear from their constituents and the electorate that the healthcare systems are failing them in terms of whether it relates to inoculation, uh, whether it relates to population health, whether it relates to the patient care and safety. Those are, those are issues where the regulators will say, It's in our best interest to get involved. Boards need to understand that,

Speaker 2:

Well, let's turn to another large enterprise threat that we see many health systems facing. And that's the continued challenges around cyber security. We see new threats that are opposing themselves. We see new case law around board oversight responsibilities around this topic. What are you seeing in that space?

Speaker 3:

Two different things in this regard. One, I think that the board should be comforted that, that the every, uh, new case that comes out there, at least for the time being continues to support the Caremark, uh, doctrine in terms of board oversight liability, ie. It's a very, very, very difficult, um, uh, bridged across in terms of demonstrating that the board has acted in bad faith with respect to its oversight of cybersecurity. We just aren't seeing cases where boards are held responsible and cyber breaches, uh, for failing to have an appropriate cybersecurity program in place. So that's the good news. And I think it also telegraphs to the board that, you know, they may, it's kind of like compliance. There's a lot of boards, unfortunately, are tired of hearing their advisors speak about compliance, and they're tired of hearing their, their, uh, advisors speak about cyber security. But the simple fact of it is, is that they must maintain Vince and that continued vi vigilance on cyber security, the continued folks at the board level cyber security, the continuing interaction between the board of management and cyber security is exactly the kind of of, uh, reporting, uh, and management board relationships that supports, uh, uh, as an organization's defense in these cybersecurity cases. And so I think that there is a very clear message from the most recent case law coming out of Delaware in cybersecurity cases that effective board structures and effective board management to board communication plans on cyber security provide an extraordinarily strong defense at this time. You know, absence, some wacko fact pattern, uh, there the boards are highly motivated to make sure those systems are in place and that they don't lose interest in cyber security, even though they've been hearing about it from every source over the last five or 10 years.

Speaker 2:

So many organizations are conducting tabletop exercises to practice how they respond to these threats. Do you see the needs for board members to be a part of those with some of the

Speaker 3:

Totally, absolutely. I, I think the board, you know, the board has to be, so much has been made of this, uh, the board has to make sure that management is appropriately prepared and that the board is aware of what's going on as well. And there's been so much government focus on this as well in terms and direction from the Biden administration. The board doesn't need to act like management, but they really have to have their finger on the pulse of what management has, uh, in fact, in place in terms of cyber serv security protections. Because we all know from some of the ransomware and other attacks that board level decisions may need to be made in terms of how to respond to these. And they can't just simply delegate it all to management. It's too important. Is it a mission critical risk? Could be. And that really requires board response.

Speaker 2:

When we look at, uh, new board responsibilities, we look at the Department of Justices recent pronouncements around corporate compliance and the oversight responsibilities there. What would you share with our audience that's, that's just a change in that space versus traditional responsibilities?

Speaker 3:

Well, I think it's a doubling down of what we've heard since, um, Sally Yates came out and what was a 2015 with the HS memo whi, which basically smacked people's across the side of their head and saying that they're really serious about individual accountability and corporate responsibility. So at one level, I think that the latest, uh, uh, the MoCo, uh, message, so to speak, from, uh, the Deputy Attorney general last month, it just confirms what's always been the government's philosophy that they will look to hold individuals accountable for corporate wrongdoing. But I think what's important now is that they're doubling down on the, the, on the indicia of compliance mechanisms. And they are, uh, they are specifically looking at executive compensation as a, as an vehicle by which, uh, compliant conduct can be achieved in the management, uh, ranks. And what, what I think is gonna be the most important challenge here, Rob, and it's going to be a challenge, and I think it's, there's a potential for conflict with the lower KC between the board and management and between, let's say, the executive compensation committee and the compliance committee, the Department of Justice is saying, as part of an effective compliance plan, we want to see organizations incorporate in their executive compensation programs both deterrents measures that will deter executives from engaging in a non-compliant behavior, and those that will incentivize, uh, uh, compliant behavior. And they look, they talk about in saying, how about clawbacks? And you will hear the executive compensation lawyers and the executive compensation consultants saying, Whoa, hold on. Uh, you know, you are, that is absolutely a bridge too far, and we are not ready as a board or as executive compensation committee or as a management team to accept and tolerate clawbacks, uh, with whether they're client compliance related or financial control related. Now, the for-profit health systems are having to deal with this because the SCC is, um, is, is pushing much more, uh, harder on the SAR based provisions on clx, but what you've got is an interesting internal conflict on management. Certainly doesn't wanna see their, um, and not unfairly, so their compensation subject to compliance, bladed clawbacks, um, but in the executive compensation committee doesn't wanna go down that road because they're not ready to, and they don't see the need to. But the compliance committee is saying, Hey, you want us to have a effective compliance plan here, The Department of Justice saying we want to see this. That's going to be the subjects of some very important and interesting discussions internally, Rob, where this Chief legal officer, I think can, uh, take an important role in making this size come to an intelligence solution. Um, it's going to become more acute within the next couple of months when the Department of Justice issues, its additional, it's pro what's promised to be additional detail on what it wants to see in terms of executive compensation related compliance issues. It's gonna be really interesting because you'll have legitimate concerns by both management and the executive compensation part of the board and the compliance officer, chief legal officer, and the audit and compliance committee side of the board. How's that gonna be resolved? Both parties have good arguments, um, and it's, it's right now a toss up and we're gonna, but we're gonna be needing to deal with it, uh, because the Department of Justice, at least for the next two years, is not going to back down on this issue.

Speaker 2:

So, as board members are looking to further educate themselves around their governance responsibilities, I think you and I would both agree the National Association of Corporate Directors, uh, recently release report titled A Framework for Governing in the Future had a bunch of, uh, key principles for both public and private board members. Are there key takeaways from there that you'd wanna highlight to our audience?

Speaker 3:

I think three. Number one, it's an important resource for those of us who, who are advising our internal or external clients on corporate governance. Um, we haven't had a statement of governance principles, ooh, for three or four years since the Common Sense principles 2.0 came out in 2018, and the, and the, uh, the old standby, the business round table hasn't, uh, weighed in on governance principles since 2016. So that's a timing is welcome. What's interesting about, uh, there are two things that's, that are really interesting about the NA c d framework. Uh, one is that they speak to and confirm the concept of the board management relationship is a partnership, collegial, respectful, cooperative. The board is a, is a resource and it's a support to management. Um, on the other hand though, and this is gonna be gonna be challenging at a lot of institutions, is is boards turn to the framework as a basis for making their own internal governance changes. Uh, the framework speaks very, very strongly for and engaged and empowered board. Uh, and, and they are doing that in the basis of everything that we've heard over the last couple of years of other, uh, thought leaders and in the courts saying, we expect boards to be more engaged in the, in the activities of their organizations like health systems, which are very large, sophisticated organizations. A board that has its hands in more things in terms of oversight and decision making than is previously been expected in the past. That's absolutely the way the law is going. The problem is, is that, is that the, the NA CD is recommending across the board a number of measures which are gonna make management uncomfortable, uh, in the sense that it, whether it relates to information flow, whether it respects to ed self education, whether it's spec relates to involvement by, uh, the board in terms of decision making, uh, across the board, the expectation is that the board will be more engaged, more involved, not necessarily crossing the line into management activities, but a much more forceful present in the operation of the, the business. And that's going to take, as those measures are implemented, that is going to take some careful collaboration, communication between the board and management on, we're gonna still stay on our side of the line. I think management has a reason to be concerned that some of these measures will, they will perceive to be an intrusion into their turf. So the, I think the fundamental takeaway from the, the framework of N A C D is great document, really needed, highly welcome, tremendous resource, but it's going to create ultimately some, some of its principles will create tension between the board and management, uh, that need to be addressed in advance of any kind of governance refinement that's based on these principles. Uh, if you do it blindly without some, uh, kind of softening of the beachhead, management's going to be really concerned that the board is going to be, is overstepping their boundaries, when in fact, um, they're just simply doing what the law is exp asking them to do, which is being more visible and being a stronger force in the oversight of corporate affairs.

Speaker 2:

Great. Well, as we go through the dynamics of our industry right now, what you're rapidly changing, we really appreciate your insights and thoughts today for our audiences. They look to council, board members, uh, who are helping their organizations best navigate these challenges. So thank you Michael.

Speaker 3:

Thank you, Robin. Thanks to hoa.

Speaker 1:

Thank you for listening. If you enjoyed this episode, be sure to subscribe to a HLA speaking of health law wherever you get your podcasts. To learn more about ALA and the educational resources available to the health law community, visit American health law.org.