AHLA's Speaking of Health Law
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AHLA's Speaking of Health Law
Health Care Corporate Governance: The Important Role of the Finance Committee
Rob Gerberry, Senior Vice President and Chief Legal Officer, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery, about the role of the Board, and the Finance Committee in particular, of monitoring the financial affairs of health care organizations, especially after the enactment of the One Big Beautiful Bill Act (OBBBA). They discuss the Finance Committee’s responsibilities, how the Finance Committee should exercise oversight in light of the OBBBA’s potential impact on the financial situation of health care organizations, and the “zone of insolvency” concept.
Watch this episode: https://www.youtube.com/watch?v=qc3BdGKhkvM&feature=youtu.be
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SPEAKER_01:Hello, everyone. This is Rob Gerber. I'm the Chief Legal Officer of Summa Health and the President-Elect Designate of the American Health Law Association. I'd like to welcome you to the latest in our continuing series of podcasts. on corporate governance issues affecting healthcare organizations. Today's topic gets us into an issue made current by the enactment of the Big Beautiful Bill Act, the role of the board's finance committee and the broader role of the governance function in monitoring the financial affairs of an organization. Most of our members listening to this podcast have their own stories of the financial impact that Medicaid's changes will have on their own institution or on their clients. Whatever the actual numbers are, We know that many healthcare providers are in for a big financial hit and are wondering exactly how it's gonna play out for their organization. For many, it's tough sledding ahead, and some may flirt with insolvency. Management has a tough job ahead in navigating the organization through this challenge, and the board's got an equally big job in monitoring that effort and supporting management wherever possible. And for most organizations, the logical way for the board to best conduct that monitoring and oversight role will be through a committee charged with a specific responsibility for monitoring the financial affairs of the organization, whether it be called the finance committee or by a similar name. As the leaving governance advisor to the board, the general counsel likely teaming with the chief governance officer is well situated to brief the board on its basic finance monitoring obligations, how they're enhanced in the current environment, and how the committee structure can be helpful in proceeding. As always, we're joined by our HLA friend and colleague, Michael Peregrine of McDermott, Will and Emory, who's also an HLA fellow and a fellow of the American College of Governance Council. So Michael, what's the big deal here as we look at this month's topic? Most of our members' clients already have a finance committee in place. So why are we having today a special podcast to talk about something that may already be implemented?
SPEAKER_02:Rob, I think the point today isn't that the board needs a finance committee or another committee like that. Rather, it's that the prospect of significant financial turmoil, and for some, as you've mentioned, real distress, heightens the board's oversight duty. If we look at the big, beautiful Bill of Acts provisions, the board's got to be able to demonstrate that it's on top of what may be ahead. Whether it does that as a committee of the whole or through a discrete committee is up to its own business judgment.
SPEAKER_01:So a moment ago, Michael, you said heightens the board's oversight duty as if there's an existing responsibility. What would you highlight that duty to be? Because there isn't a specific job of the chief financial officer and is there her staff?
SPEAKER_02:Yeah, Rob, I think you've hit the nail on the head because this is frequently, in my experience, an area where there's particular concern about micromanagement by the board. But it's pretty well recognized that the board has a fundamental responsibility to monitor the organization's operating performance, stability, and long-term viability. So it really isn't duplicating the effort of the financial management team. Rather, it's monitoring their effort and their actions and the results.
SPEAKER_01:So if we were to be asked by our colleagues as far as some specifics as what that may entail, what would you share?
SPEAKER_02:Sure. You know, there's absolutely no one size fits all charter for the finance committee or for, again, for any committee that's tackling financial matters, but it normally includes making decisions on and monitoring such things as, you know, Significant financial matters, financial policies, matters of corporate finance for a big picture. Significant investments, including M&A activity. Management's capital allocation decisions is always a biggie. The retirement of debt and compliance with debt covenants is also another important task of the committee. Being aware of upcoming maturities and liquidity needs. certainly credit ratings and rating strategy, revenue cycle management and related activities. As always, going back to our Sarbanes history, the integrity and clarity of financial reporting and related disclosures, operating budgets and plans prepared by management and their implementation. And then I think coordinating with the Risk Management Committee on practices to evaluate liquidity, credit, market and pricing and other financial risks. And the from a big picture perspective, the tax planning strategies of the company. I want to emphasize, Rob, it's not the committee's responsibility to come up with these strategies and come up with the data. It's to monitor the preparation of it and to confirm and be comfortable that it's accurately prepared and to understand where the data and the information fits within the organization's broader profile.
SPEAKER_01:That seems to be a pretty comprehensive list. What else would you expect of a committee before they take steps that may be seen as micromanaging the CFO?
SPEAKER_02:Well, you know, as we've talked about in these podcasts periodically, when we start looking at how a board satisfies its recognized fiduciary responsibilities, like oversight of finance, you got to do so through the lens of the prevailing facts and circumstances. And those circumstances are, as you mentioned at the top of the program, pretty challenging. If you look at the Wall Street Journal from last week, I think it is, they're reporting that over the next 10 years, payments to hospitals will be reduced by nearly$665 billion, which is roughly an 18% decrease. And on top of that, the journal reports that uncompensated care costs are expected to increase by about$84 billion. That's just simply stuff that the board has to be aware of, has to understand, and has to understand what the responsive measures are.
SPEAKER_01:So what's the plan in the case we do face those headwinds? What should the general counsel be advising the CFO and the board to do?
SPEAKER_02:Well, actually, I think that's a good point that you make, Rob. It's really saying what should be the general counsel saying. And I think in... Part, the general counsel has to make sure that the financial management team understands the board's responsibility, first and foremost. We don't want any friction there. And the management team, financial management managers have to understand that it is a critical role of the board to work with them and to monitor what's going on. And in these particular circumstances, the advice and the information to both the financial team and the board is that the board of directors is well advised to assume they're likely going to need to up their game on financial oversight unless or until the Medicare challenge recedes. But again, it's a question of the board's got to show that it's upped its game in terms of monitoring financial matters.
SPEAKER_01:So Michael, what does up your game mean in this context? Isn't the board already performing at a high level? How much more do they need to do to show they're meeting the standards that we're outlining today?
SPEAKER_02:Rob, I think there's a lot of practical issues here, and we're going to get into the area where creditors' rights intersect with fiduciary duty. I think the basic answer to your question is the board's got to take what they believe to be good faith steps to demonstrate heightened overstep. In other words, let's create a record. Let's implement a series of steps that are intended to put the board in a situation, in a position to be effective partners with management as management develops responsive financial strategy. strategies in monitoring the warning signs of financial distress. It's all about being an effective partner to the management team on these, and you can't be an effective partner to management if you are not up to speed on what's going on. It's that firm finger on the financial pulse of the organization.
SPEAKER_01:So, Michael, I feel like I'm deposing you in this month's podcast, but can you elaborate more on just what some of those steps might be?
SPEAKER_02:Sure. And again, this podcast, there are a lot of kind of note-taking issues here, and so I'll go slow on these. But I don't think there's a master list of what good faith efforts might be. But again, I want our listeners to think of this in terms of setting a record that the board earnestly and efficiently tried to address their responsibilities here. So I think if we make that list, it would encompass the following. Number one, I think absolutely the board's got to be familiar with the ACTS Medicaid provisions, the timing of their implementation, the impact on the organization, and management's responsive plan. That's a biggie. In other words, they don't have to be experts on every line of the BBA. Or is it BBB? I can't remember. But they've got to be able to be conversant on what the act does to the Medicaid program. It's elevator talk. It's whatever. But they've got to understand what that's doing, what's its impact on the organization, and the timing. That's where the role of the Finance Committee comes in taking the primary responsibility for that. But even if there is a finance committee, Rob, I think the board has to have some kind of basic working knowledge of what's going on. Another thing I think is very important is to make sure everybody's clear on the sufficiency of the management to board reporting on financial matters, as well as specific protocols on reporting what we would call mission-critical financial risks. I think oftentimes these are the kinds of things that can fall through the cracks. The board and management should be in lockstep with each other in terms of information flow. Then I think along the same lines, the board's got to be able to have access, not that it doesn't already have, but perhaps enhanced access to its financial management team, as well as to its outside financial and strategic advisors that may have been engaged on a general basis or also to help with respect to the Medicaid response plan. the board needs to be able to tap these outside advisors as their deliberations and their monitoring suggest. Then I think we have to make sure that the finance committees, or again, whatever committee is responsible, that their role and scope on specific Medicaid oversight matters is spelled out. Again, part of building a list showing what we've done, making sure that the committee charter specifically includes oversight of the organization's response to the Medicaid changes in the big act. I think it's very important that the whether it's the finance committee or other committee, includes members with a sophisticated financial background, people who can talk the talk with the financial management team. It's important not only from the perspective of comprehension and reporting to the board. I think it's also important in terms of making sure that the financial management team respects the finance committee and what it's trying to do. One area, Robin, I'm always going to be a compliance guy at heart. I think it's important that the finance committee or the board as a whole crank up compliance oversight over those new management initiatives designed to generate new lines of revenue that potentially implicate the anti-fraud and self-referral laws. We know they're coming. We've got to find new revenue. We'll come up with creative ideas. Sometimes those creative ideas have increased legal risk. We want to make sure that there's a process that those new revenue-generating initiatives designed to provide new lines of income to the organization are prepared and implemented consistent with compliance with the fraud and abuse and self-referral law Then, you know, it's something as simple as formalizing the process by which the board or the finance committee meets to address financial matters. We're looking at that list. We're looking to say what we've acted in good faith and making it very clear in writing how often the board and the finance committee meet on financial matters and how often they're sending information back and forth is in the record. Then I think it's really important, especially as we get into the question of creditors' rights, really important that the chief legal officer continues to brief the finance committee and the full board on developments that address fiduciary responsibilities for financial oversight and creditors' rights. Again, I think it's essentially a fairly general approach, but it's important that there's something new that comes out in the case law following the enactment of the Big Beautiful Bill Act. It's important that the board knows what are the rules of the game here? What am I expected to do? What will the courts expect of our conduct in terms of supervising So, Michael, that's a lot to ask from our board members. The job's not getting any easier, is
SPEAKER_01:it?
SPEAKER_02:You're absolutely right there. Absolutely right. It's a lot. And that's why the smart play is to delegate those responsibilities to a committee with the expertise and the bandwidth to take them on. Like the finance committee, but I want to be clear, I'm not saying it has to be a committee that says finance. You can create a special committee, however you want to do it. What I would avoid, Rob, is a situation of adding this responsibility on to an already busy committee like the audit committee, which is unlikely to have the bandwidth to take on these duties with the kind of attention that I think is needed.
SPEAKER_01:So, Michael, you mentioned the zone of insolvency concept that we've heard about over the years. How do you feel that kicks in?
SPEAKER_02:It's one of my favorite phrases in my entire practice and getting the kind of questions about it's like some kind of outer space thing. The zone of insolvency is actually a theory of board conduct that suggests that the director's fiduciary duties actually shift in whole or in part as the organization approaches financial distress or insolvency. And at that time, those duties begin to be owed to creditors, whether in whole or in part. It's all part of the concept Rob, that when you get into financial distress, the creditors actually have a piece of the action and their rights need to be protected. And so again, the theory is at that point, the board has to be thinking about how this decision and oversight affects the interests of the creditors, as well as the organization's mission. It's a concept that's garnered a lot of attention a number of years ago, but I don't think from my perspective, it really gained broad traction with the courts.
SPEAKER_01:So has the courts evolved their thinking on this at all? Are you seeing anything current or recent?
SPEAKER_02:The leading case from Delaware, and it's not a new case, that provides that when a solvent corporation is navigating in the zone of insolvency, the focus for directors, at least under Delaware law, doesn't change. Directors have to continue to discharge their duties to the corporation and its shareholders, or for a not-for-profit, its mission, by exercising their best interests. business judgment in the interest of the company for the benefit of its shareholder owners, or again, for a not-for-profit, its mission. What does that mean? Business judgment rule, you know, with enough focus to reflect the financial situation the organization is in. But we're just not seeing a lot of cases that confirm broad application of the zone of insolvency.
SPEAKER_01:So from what I'm hearing, you say the boards then do have some slack to navigate this?
SPEAKER_02:I wouldn't go that far. I think the basic message to boards is to be smart, to be practical, to recognize the reality of the projected financial situation and to monitor it closely, to know enough about the causes of the problems and possible solutions, to be a good partner to management, to be able to say we own the situation and we've stayed on top of it.
SPEAKER_01:And so circling back, the finance committee can play a role here without overstepping?
SPEAKER_02:Oh, absolutely. They can get into the weeds of it all. By keeping, again, using the analogy, their collective finger closely on the pulse of financial matters, they're going to be able to reflect those good faith steps that I think are absolutely critical to protecting directors from exposure. they'll know and be able to advise the full board when the company may be approaching insolvency. And Rob, I think that's the most important trip wire here. I'm not suggesting that the organizations that our listeners serve are in danger of tripping into financial insolvency because of the act, but it's so critical that there has to be a system in place that the full board knows, A, what would be the warning signs of financial insolvency? And B, is there a reporting system that's going to let us know when we get near there so we can take appropriate action above and beyond that which we've already done? That, I think, more than anything else is the most important part. Can it be done by the finance committee, a dedicated finance committee? You bet. Can it be done by another committee? Sure, as long as that committee has the time and effort and expertise to do it.
SPEAKER_01:Well, Michael, thank you for throwing out all this guidance and advice as our boards and our management team members navigate these current headwinds that we're facing. Next month, we'll look at another topic we'll dig into, which is the latest developments around the bismuth judgment rule, what it means not only for board members, but for officers of organizations as well. As we can see, the current environment is not getting any easier. Michael, we thank you for your expertise.
SPEAKER_02:Rob, thanks again for having me. I appreciate it.
SPEAKER_00:Thank you. you