Michael W. Peregrine & J. Peter Rich, McDermott Will & Emery, LLP

In response to the enactment of the Patient Protection and Affordable Care Act (PPACA), the governing board of a tertiary medical center meets to plan the implementation of new integration strategies, including an accountable care organization (ACO) and medical home. The board includes six physicians on the medical staff of the medical center. One physician owns part of a competing imaging center, but that ownership has been fully disclosed to the board and the physician recuses herself from confidential discussions involving that service and the center contracts with the hospital to provide imaging services at lower cost under managed care contracts. However, another physician director is affiliated with a competing hospital and secretly uses his insider position to transmit confidential information to that competitor—which then entered into exclusive contracts with key primary care physicians, clinics, and other providers in the market, effectively hamstringing the medical center’s integration efforts.

A far-fetched scenario? On the contrary, similar events have occurred frequently, and once led to a 1995 California jury award of nearly $14 million in damages to a hospital in a lawsuit against two former physicians who were alleged to have similarly exploited their governing board positions to build their own competing facilities and steer patients to them.^[1]

In the wake of the PPACA and its renewed emphasis on hospital–physician integration, hospital governing boards need to be particularly sensitive to such confidentiality, conflicts of interest, and related fiduciary issues involving physician directors, which can profoundly compromise the successful implementation of effective hospital–physician integration strategies.

There is no doubt that physician directors make essential governance contributions to hospitals, by sharing with lay members of the board the physicians’ informed perspective on a multitude of matters related to the effective delivery of quality patient care and related community health needs. However, physician directors who have competing interests may present serious problems for the hospital.

All hospital/health system directors have a fiduciary duty that obligates them to exercise their powers in good faith and in the best interests of the hospital and its mission, as opposed to their own personal interests or that of a third party. The principal elements of this “duty of loyalty” include the duties to (a) avoid relationships that could create a conflict of interest (and to fully and promptly disclose to the board any such relationships immediately when they arise); (b) avoid taking advantage of a business opportunity that the director reasonably should know may be of interest to the organization, without prior board approval; and (c) maintain the strict confidentiality of all information regarding the activities of the organization until those activities are disclosed to the public.

Duty of loyalty issues for physician directors most commonly arise due to conflicts of interest and related confidentiality concerns relating to medical staff membership or outside investment interests. The physician director must, at all times, act solely in the best interests of the hospital, and not in favor of any conflicting interests of themselves or their family members, friends, business associates, the medical staff, disciplined physicians or their competitors, or anyone else. For example, duty of loyalty issues are present when a physician director is a majority owner or executive officer of an enterprise that competes with a hospital service, such as an independent ambulatory surgery center, imaging center, heart hospital, or other outpatient facility. Hospital governing boards must adopt effective mechanisms to address those situations in a manner that will allow for meaningful physician participation in key board matters while ensuring that physician directors (a) will not participate in discussions or votes regarding competing ventures or (b) otherwise have access to or disclose confidential information that might be used for their competitive advantage.

The PPACA’s promotion of ACOs, medical homes, and other integrated delivery systems should prompt all hospital boards to give increased consideration to new hospital–physician integration models. Although boardroom input from physician directors on these integration issues is not just desirable but absolutely essential, governing board consideration of new proprietary strategic integration models can place the physician director in the “conflicts crosshairs.” Specific board strategy discussions regarding integration issues will likely implicate the medical practices and businesses of individual physician directors; indeed, in theory, ACOs can be organized by physicians alone, though coordination of care and capital requirements militate strongly in favor of hospital–physician integrated ACOs. Discussions relating to possible physician practice acquisitions and the selection of particular physicians or medical groups with which the hospital may align in developing ACOs, medical homes, and other integration options will likely have direct or indirect financial implications for physician-directors.

The effective implementation of such an integration plan could be substantially undermined if its development were influenced by physician board members with potential bias or other conflicting interests in its structure and implementation. Such potential conflicts of interest are not necessarily problematic in all cases, but physician directors must strictly maintain the confidentiality of such plans and promptly disclose to the board all conflicts of interest. In most cases, physicians who are in direct competition with the hospital should not serve as members of the governing board or committees with access to competitive information; at the very least, such physician directors should recuse themselves from any such sensitive board discussions as well as the voting process.

With respect to physician directors who are directly or indirectly participating in a business transaction with the hospital, such as an ACO or related medical practice acquisition, such “self-dealing” must be fully disclosed and, depending on applicable state law, the physician director either should not participate in any board discussions related to the transaction or, at the very least, should not have his or her vote counted in the board’s majority that approves the transaction.^[2]

So that all such conflicts of interest can be identified and managed effectively, the governing board should work with its legal counsel to develop a conflict-of-interest disclosure, identification, and management plan. Such a plan should require every director’s to complete an annual board conflict-of-interest questionnaire, to be updated by directors immediately when any new conflicts arise. A physician director who fails to disclose any such conflict should, at a minimum, be counseled; if done repeatedly or knowingly and in a manner that compromises the hospital’s interests, the physician should be removed from the board and appropriate legal action considered by the hospital.

The objectives of such a plan include:

• General board education on applicable state law regarding the director’s duty of loyalty and self-dealing
• Targeted briefing of the board’s conflicts committee and of physician directors on the potential duty of loyalty issues arising from consideration and implementation by the hospital of integration based strategies
• Careful monitoring of board and committee agendas in order to identify, in advance, discussion items that could present confidentiality, conflict, or other duty of loyalty issues for the physician directors
• Making the hospital’s legal counsel available to physician directors for consultation on specific duty of loyalty issues
• Assisting the board’s conflict-of-interest committee on the resolution of disclosed potential physician director duty of loyalty issues, including the adoption of specific conflicts management plans

The governing board’s failure of address such physician-director duty of loyalty, confidentiality, and conflicts issues in an effective manner can threaten the successful implementation of the crucial hospital–physician integration strategies needed to respond effectively to the PPACA, and thus undermine the otherwise essential hospital governance contributions that can be made by physician directors.

The Governance Institute thanks Michael W. Peregrine and J. Peter Rich, partners, McDermott Will & Emery, LLP, for contributing this article. They can be reached at mperegrine@mwe.com and jprich@mwe.com, respectively.

[1] “California Hospital Wins Case Against Docs,” Modern Healthcare, October 23, 1995 (http://www.modernhealthcare.com/article/19951023/PREMIUM/520230309&Template=p); and “California Physicians to Appeal Award,” Modern Healthcare, November 6, 1995 (http://www.modernhealthcare.com/article/19951106/PREMIUM/511060322&Template=p)
[2] See, e.g., Cal. Corp. Code § 5233.