New Governance Study Highlights Areas for Improvement for Boards of Nonprofit Hospitals and Health Systems

EXECUTIVE SUMMARY

Background

A major study of the board structures, processes and cultures of large, private, nonprofit health systems in the United States has just been completed by Lawrence Prybil, Ph.D., President of Commonwealth Center for Governance Studies, Inc., and his research team, which included Rex Killian, President of Killian & Associates (“K&A”) and Of Counsel to Hall Render.  Hall Render was a sponsor of the study and will make printed copies of the Report available upon request.  K&A and Hall Render will issue a series of articles addressing the purpose and methodology of the study, the governance benchmarks used to evaluate boards, key findings, selected features of system governance models, practical uses and recommendations.  What follows is an executive summary of the study, which included participation by 14 of the nation’s 15 largest health systems accounting for 460 (or roughly 25%) of the 1,876 nongovernmental hospitals affiliated with private, nonprofit systems; on-site interviews with all CEOs and 57 board members; review of system documents; development of nine contemporary benchmarks of effective governance and related indicators; and scoring each system’s information against the benchmarks to determine where they are being met, where there are gaps and where there are opportunities to strengthen board performance.

The study was prompted by several developments, including intense scrutiny by public and private organizations with oversight responsibilities for nonprofit and public hospitals and health systems, such as the Internal Revenue Service (“IRS”), Health and Human Services (“HHS”), Office of Inspector General (“OIG”), The Joint Commission, Bond Rating Agencies and payors.  Key stakeholders are calling for more accountability of boards, greater transparency and better performance.

Objectives

The objectives of the study were to:

• Increase knowledge and understanding of governance in large health systems;
• Identify and describe some examples of “exceptional governance features”;
• Identify areas where governance could be improved; and
• Produce information that can assist CEOs and boards in assessing and enhancing board effectiveness.

Benchmarks of Effective Governance

Based on review of previous studies, current literature and consultations with experts in governance, the research team formulated nine contemporary benchmarks of effective governance and several indicators for each benchmark against which the health systems were scored.  Later articles will discuss these benchmarks in greater detail and identify how they can form the basis for an effective board evaluation process.

Key Findings/Areas for Improvement

The study identified several features of strong board structure, practices and culture.  Some of the key findings that suggest areas for improvement include:

• Board Terms & Term Limits – Most, but not all, of the systems have terms and term limits with the most common being three-year terms and a limit of three terms with a maximum of nine years.
• Board Size – Median size of the boards is 15, which is substantially larger than public boards.
• Board Composition – While 82% of board members in secular systems were “independent” (IRS recommends that a majority of the board be independent), only 49% of board members in faith-based systems were independent.
• Board Committees – In assessing the effectiveness of committees, there was a wide variance of opinion between the CEOs and board members.
• Board Accountability – Where the board is accountable to a higher body (such as a Corporate Member or Sponsor), the processes and mechanisms through which the board fulfills its accountability are not well defined in several systems.
• Board Responsibilities – While nearly all of the systems have a written document specifying the allocation of responsibility between the system and local organization, less than half of the systems believe the allocation is widely accepted by both system and local leaders.
• Board Evaluation – While nearly all of the system boards conduct an evaluation annually or every other year, less than half of the trustees believe that the evaluation resulted in specific actions that changed governance practices, and only one-third of the trustees believe that the board evaluation is thorough and has substantially improved board performance.
• Board Succession Planning – Less than half of the system boards have succession plans in place for both the board and senior management.
• Board Meetings – Only one-third of the trustees interviewed believed that board meetings are “well-organized and are focused principally on strategic deliberations, rather than receiving reports.”

Recommendations

The study’s findings clearly show gaps between current practices and contemporary benchmarks of effective governance.  As a result, the team recommends that board leaders of nonprofit health systems and other health care organizations take the following actions:

1. Board Responsibilities – Conduct a review of their board’s roles and responsibilities in the context of recent and anticipated changes in the health care environment and in the communities they serve.  All board members need to clearly understand the impact of these changes on their individual and collective duties.  Organizations also should prioritize among the principal opportunities for improvement and develop a concrete strategy for making desired changes.
2. Board and Committee Meetings – Re-examine board and board committee agendas and practices with a focus on how meetings are structured, how topics are selected, expectations as to board and committee materials and steps that can be taken to devote more time and energy to strategic deliberations, rather than receiving reports.
3. Board Evaluation – Engage in a thorough assessment of the existing board evaluation process with the intent of developing a vibrant, outcome-oriented evaluation process that generates action to improve the effectiveness of the board.  The benchmarks and evaluation process used in this study might be helpful in this initiative.
4. Community Benefit and Community Health Needs – Charge a standing board committee with oversight responsibility for system-wide community benefit policies and programs and the organization’s role and priorities in the realm of population health.  It is time for a fresh look at traditional practices and relationships – and for new approaches that will serve communities better and more efficiently.
5. Public Accountability – Collaborate with professional associations and legal experts in developing better methods and practices to enable the organization to be properly accountable to the communities and population they serve.  The process needs to provide greater transparency and new metrics.
6. Patient Care Quality and Safety – Define more clearly the roles that boards and board committees can and should play with respect to the oversight of patient care quality and safety.  With the movement towards evidence-based medicine, value-based purchasing programs and increased scrutiny by public and private bodies, there is broad recognition that the overall quality of care is uneven and needs to be improved.  In this context, the quality of care information (volume, content and format) that will facilitate board members’ understanding and ability to perform their duties effectively should be identified and provided.
7. Board Succession Planning – Make the development of board, board leadership and senior management succession planning a system-wide strategic priority.
8. Board Culture – Undertake an objective appraisal of the boardroom culture that currently prevails, and determine steps that can be taken to make it healthier and more effective.  Boards that demonstrate commitment to high standards, mutual trust among board members and management leadership, robust engagement in the work of the board and willingness to take action are likely to perform better than other boards.

The American Hospital Association (“AHA”) has issued an announcement describing the study’s findings and recommendations, and the study’s authors hope to make further information and suggestions from the study available to AHA member hospitals and others in the months ahead.  More details will follow.  Additionally, the AHA’s Center for Healthcare Governance is making the Report available at their website.  Hall Render has also provided access here.

K&A and Hall Render will issue a series of articles addressing the key findings and recommendations in more detail.  If you have questions regarding the study, please contact Rex Killian at Killian & Associates at 314-504-2213 or rkillian@killianadvisory.com, Jeffrey Carmichael of Hall Render at 317-977-1443 or jcarmichael@hallrender.com or your regular Hall Render attorney.