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E-Briefings – Volume 14, No. 5, September 2017

Welcome to The Governance Institute’s E-Briefings!


This newsletter is designed to inform you about new research and expert opinions in the area of hospital and health system governance, as well as to update you on services and events at The Governance Institute.


Click here to download the full PDF version.

Addressing the Root Causes of Parent–Subsidiary Dysfunction


Matters of distrust, disagreement, discord, and other forms of dysfunction between the health system parent and its primary subsidiaries can threaten the strength and sustainability of the system, if not forcefully addressed. The ability to prevent such dysfunction depends on many factors, the most fundamental of which may be an understanding of the historical root causes of system dysfunction. This article by Michael W. Peregrine explains why an awareness of the traditional root causes of parent–subsidiary dysfunction can help parties be proactive in their attempt to defuse a potentially incendiary situation.

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By Michael W. Peregrine, McDermott Will & Emery LLP


Matters of distrust, disagreement, discord, and other forms of dysfunction between the health system parent and its primary subsidiaries can threaten the strength and sustainability of the system, if not forcefully addressed. The ability to prevent such dysfunction depends on many factors, the most fundamental of which may be an understanding of the historical root causes of system dysfunction.


With the extraordinary consolidation of the inpatient healthcare sector, the vast majority of hospitals are operated as corporate affiliates of regional, interstate, or large national health systems. (This is particularly the case with non-profit providers.) Many of these systems were developed and have grown through acquisition, membership substitution, merger, or other forms of affiliation. The essence of these corporate relationships is that the hospital, foundation, and/or other major entity is controlled by the health system parent corporation through any one of a number of legally appropriate control mechanisms.


The potential for dysfunction arises when material disagreement occurs between the leadership of the parent and the leadership and related constituencies (e.g., community, donors, medical staff) of the subsidiary as to the purpose, intent, and binding terms of the legal and programmatic relationship. This, notwithstanding the fact that the substance of the relationship is likely the subject of binding legal agreements that were heavily negotiated in good faith.


“Triggers” of Dysfunction


Acute dysfunction can lead to legal and operational conflict, manifested through public dispute, governance discord, missed corporate opportunities, possible fiduciary breaches, and legal confrontation. At its most extreme, such dysfunction can threaten the long-term sustainability of the health system. Examples of “triggers” of dysfunction can include:

  • Culture: The most subjective of factors can often serve as the most obvious expressions of conflict. “They’re not like us”; “We don’t share the same values”; “They just do things differently.” Clashes of culture can manifest themselves broadly (e.g., in problem resolution, risk tolerance, executive evaluation, decision making, and the board–management dynamic.
  • Perpetual legacies: The inability to successfully integrate business organizations, their leadership, and their strategic goals following an affiliation can be a “ticking time bomb.” The proliferation of “legacy” or similar constituent interests can be toxic to an organization and its ability to come together as a cohesive, united enterprise. Legacy relationships can in some situations distort reasonable lines of corporate authority and frustrate the achievement of legitimate system goals.
  • Lack of detail: Brevity has its virtues, except perhaps when it comes to memorializing the terms and conditions of a definitive transaction agreement. “Kicking the can down” rarely works in the negotiation process, as there is often little appetite or incentive to address tough issues post-closing. The failure or unwillingness to address the details of sensitive yet important provisions can leave the parties without any form of guide on “how things are to work” on key post-closing organizational matters. That creates a void in which dysfunction can flourish.
  • Leadership losses: The departure from the system of key affiliation executive and board leaders can create a major gap in institutional knowledge of the rationale for the relationship and the related goals and expectations of the parties. The failure to “institutionalize” such knowledge can rob the health system of a historical perspective when disagreement subsequently arises.
  • Change in focus: A change in the health system’s strategic direction, particularly as it affects the subsidiary, can often prove a lightning rod for subsidiary discontent, particularly if it was not well explained in advance and if it results in a significant change in the level of programs or services provided by the subsidiary.
  • Unclear duties: One of the most common of all causes of discontent is a basic lack of understanding by the subsidiary board of its duties and authorities. It is axiomatic that health systems will seek to centralize authority and streamline decision making across all boards in the network. Such centralization may be essential to achieving efficiencies and eliminating redundancy in governance. While in most situations this leaves the subsidiary with important, if limited powers, the failure to clarify this—and the related benefits of the arrangement—can lead to significant discontent.
  • Capital misdirection: Increasingly, the “consideration” provided to a hospital to join a larger system is the promise of access to capital, usually manifested through capital commitments contained in the definitive transaction agreement. Yet these commitments are often premised on meeting specific system capital budget approval processes. The failure of particular subsidiary capital initiatives to satisfy such processes can create controversy at the subsidiary level.

There are certainly other examples of dysfunction triggers. Yet they all seem to be based on a fundamental misunderstanding, an original failure to achieve a meeting of the minds during the negotiation process, lack of intra-system communication, or the lack of an established intra-system process for resolving leadership disputes.


Additional Causes and Considerations for Parent–Subsidiary Dysfunction


Of course, there are more objective factors that apply in dysfunctional situations, which can often work to support the purposes and legal interests of the parent company. These include the presence of a system-wide, uniform charitable purposes clause; the terms of the original definitive affiliation agreement; clear provisions in articles of incorporation and bylaws; and membership rights under state law. Such provisions are often used to support system cohesiveness and uniformity in decision making.


Yet, the situation can become complicated if state law impresses fiduciary obligations on the parent to support the interests of the subsidiary; if unique geographic service area, religious sponsorship, or community interest based provisions in the purposes clause of the articles of incorporation of the subsidiary—or similar unique rights or powers—are present in legal documents. Fortunately, only a handful of state courts recognize such a duty.


Parent–subsidiary dysfunction represents a high form of frictional cost. If not thoughtfully addressed at its incipiency, it can evolve to levels of extraordinarily costly contention, which can overshadow the reputations of the organizations and individuals involved and frustrate the achievement of their underlying healthcare mission. In extreme situations, it can also prompt the involvement of the state attorney general, acting to protect the underlying charitable assets.


Ultimately, no “silver bullet” exists to resolve instances of dysfunction, especially when some or more of the parties have difficulty engaging in good faith discussions. Yet an awareness of the traditional root causes of dysfunction can help parties be proactive in their attempt to defuse a potentially incendiary situation.


The Governance Institute thanks Michael W. Peregrine, Partner, McDermott Will & Emery, for contributing this article. His views do not necessarily reflect the views of McDermott Will & Emery or its clients. He can be reached at mperegrine@mwe.com.



From Legacy to Relevance: Leveraging Service Lines to Effectively Compete in the Value-Based Care Environment


The days of “business as usual” for key service lines at hospitals and health systems are long gone. Increasingly, competitive market dynamics, changing payment methodologies, and ongoing pressures to deliver consistent, high-quality care at lower costs have forced hospitals and health systems to abandon their traditional “silo” approaches in favor of integrated service offerings just to maintain relevancy in the marketplace. As patients, employers, government, and insurers continue to emphasize value over volume, this article by Danielle Sreenivasan, M.H.A., and Peggy Crabtree, RN, M.B.A., serves to answer the question: What do we do next to ensure our organization and its service offerings are at the forefront to effectively manage population health across care settings?

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By Danielle Sreenivasan, M.H.A., and Peggy Crabtree, RN, M.B.A., Premier, Inc.


The days of “business as usual” for key service lines at hospitals and health systems are long gone. Increasingly, competitive market dynamics, changing payment methodologies, and ongoing pressures to deliver consistent, high-quality care at lower costs have forced hospitals and health systems to abandon their traditional “silo” approaches in favor of integrated service offerings just to maintain relevancy in the marketplace. As patients, employers, government, and insurers continue to emphasize value over volume, boards and CEOs are challenged with the difficult question: What do we do next to ensure our organization and its service offerings are at the forefront to effectively manage population health across care settings?


Infrastructure and Resources


Hospitals and health systems must invest in the right infrastructure and resources to effectively manage service lines—and population health—across the care continuum. Despite the fact that different performance metrics are tracked across various service lines, most of the infrastructure and resources needed to support high-performing organizations are scalable across multiple service offerings and care delivery sites, regardless of whether the organization is a stand-alone hospital or integrated delivery system.


Data Analytics Platforms with Disruptive Potential


Data analytics providers are debuting clinical and financial platforms designed for specialty medical practices moving towards value-based care. These organizations are capitalizing on the fact that many specialists are unprepared for the value-based care era, and are offering software and information technology that purport to help physicians monitor performance and use that data to negotiate payer contracts, enhance patient experience and outcomes by actively engaging them in their care, and establish exclusivity arrangements with hospitals.


What does this mean for hospitals/health systems? These data analytics providers are contracting with hospitals to integrate inpatient data with the specialty medical group’s data. But make no mistake, they are working for the medical groups, positioning hospitals as a commodity and they may be even disincentivizing physicians from practicing at your facility. Hospitals and health systems can get ahead of this trend and preserve their market share by implementing their own data analytics platform that links with specialty practice EMRs and provides these physicians with comparable analytics, or by employing physicians directly. Additionally, many hospitals are evaluating ways to compliantly provide information technology infrastructure support as part of their physician alignment strategy.


Other Infrastructure and Key Resources Essential for Success


In addition to robust data analytics platforms, boards and CEOs should consider deploying the following strategies to ensure they have the right infrastructure and resources in place to support high-performing service lines in the value-based care era:

  • Engage physicians and multidisciplinary care teams at the front-end of the process—before the patient even enters the hospital.
  • Evaluate clinical care protocols and identify ways to minimize variation, and share best practices and lessons learned across the organization.
  • Collect and analyze timely data for pre-, acute, and post-acute care. Identify cost savings opportunities and standardize this approach across the organization. This will result in decreased costs for supplies, reduced length of stay, and incent appropriate use of post-acute care services by modality, among others.
  • Implement centralized pre-habilitation clinics for elective surgical cases to proactively prepare patients for surgery, resulting in faster recovery periods and shorter hospital stays.
  • Identify post-acute care partners and develop a strategy that engages multidisciplinary providers to manage patients across care settings.
  • Invest in care management resources, including nurse navigators for care coordination, centralized call centers for patient support, and utilization management teams that work across the pre-, acute, and post-acute settings.

Provider Clinical and Financial Alignment


The Medicare Access and CHIP Reauthorization Act (MACRA), mandatory bundled payment models, Medicare Shared Savings Program (MSSP), and other value-based payment models are all opportunities for hospitals and health systems to partner and align with their primary care base, as well as specialists. All the critical success factors and infrastructure for successful service line performance are foundational to success in these new payment models, regardless of payer.


However, the hospital-led care models are facing new competition in developing physician partnerships. Population health management companies and other investor-backed organizations are emerging to advance these models, and are intentionally excluding hospitals as participating members. Instead, these companies set up capabilities for physicians, only working with hospitals to secure set pricing for specific diagnoses and procedures (e.g., total joints or coronary artery bypass graft procedures). These organizations earn a percentage of the value-based payment model’s performance-based cost savings as their reward, while the hospital is a vendor to the model.


What does this mean for hospitals/health systems? Healthcare organizations can respond to this emerging trend by:

  • Ensuring that clinical service lines include the full continuum of care, versus being “hospital- or inpatient-centric.” This can be achieved by working with primary care providers to integrate chronic disease management programs into the service line strategy. This will create alignment with a critical mass of primary care providers and position the hospital to manage population health across clinical service lines.
  • Supporting primary care physicians with the investment required to successfully participate in MACRA, and aligning with these providers through the MSSP or another value-based care payment model. This strategy could preemptively block new entities from entering the market, particularly those that may seek to minimize the hospital’s role. Many organizations are using information technology connectivity and technical support as part of this alignment strategy.

Market Positioning


Market share isn’t earned in just an open market anymore. During a time in which providers are rewarded for value over volume, hospitals and health systems have started to develop strategic relationships to secure the volume they need to support high-quality clinical service lines. These relationships include:

  • Direct-to-employer agreements with large organizations
  • Bundled payment arrangements with commercial payers for selected services or procedures (e.g., total joints)
  • Narrow networks with payers, based upon demonstrated high-quality clinical outcomes and lower costs
  • Center of Excellence designation by a commercial payer, where patients are incented to seek care at specific facilities for selected services and/or procedures based on demonstrated outcomes

What does this mean for hospitals/health systems? To be considered for one or more of these arrangements, hospitals and health systems must be able to demonstrate value—performance that is supported by robust data analytics platforms, care coordination, and utilization management resources and infrastructure, as well as strong physician alignment. These organizations often have a rigorous selection process that includes a review of: 1) performance based on defined, service line performance metrics, and 2) the hospital’s use of evidence-based clinical protocols and ability to ensure their consistent use. These arrangements offer hospitals and health systems volume guarantees in exchange for discounted pricing, and are advantageous for facilities that operate in highly competitive markets.


Conclusion


High-performing clinical service lines are fundamental to successful performance in today’s world of value-based care. Governing boards must assess the strategic implications and evaluate the current infrastructure and performance to identify gaps, set priorities, and develop cross-continuum strategies that optimize population health now and in the future.


The Governance Institute thanks Danielle Sreenivasan, M.H.A., Director, and Peggy Crabtree, RN, M.B.A., Principal, of Premier, Inc.’s Strategic Advisory Services practice in Los Angeles, California, for contributing this article. They can be reached at danielle_sreenivasan@premierinc.com and peggy_crabtree@premierinc.com.



Governance Institute Advisor Spotlight: Marian C. Jennings


For this series, we are spotlighting each of The Governance Institute advisors to give you a look into their roles, expertise, and experience in the industry. In this article, we highlight Marian C. Jennings, M.B.A., President of M. Jennings Consulting, Inc.

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In this series, we are spotlighting each of The Governance Institute advisors to give you a look into their roles, expertise, and experience in the industry. The advisors are healthcare experts, each with their own areas of focus, who work with members to help them solve their governance challenges—everything from developing leadership skills to building a competency-based board to assuring best-fit strategic plans and partnerships. Our advisory services include:

  • Board education and development retreats
  • Independent governance review and redesign processes
  • BoardCompass® consultation and self-assessment retreats
  • Phone and email consultations
  • Specialized consultations

In this article, we highlight Marian C. Jennings, M.B.A., President of M. Jennings Consulting, Inc. Watch for future articles in this series to learn more about each of our advisors.


Industry Expertise


With over 30 years of consulting experience, Marian is a skilled, well-known advisor to boards and executive management of not-for-profit hospitals, health systems, and other healthcare organizations across the U.S.


Her areas of expertise include strategic planning—with a particular focus on integrating strategic and financial planning, governance restructuring and alignment, and developing effective partnering strategies. Additionally, Marian is an accomplished facilitator with the ability to foster generative discussions that lead to practical solutions.


She has served as a consultant to hundreds of hospitals, healthcare systems, and other healthcare organizations during her career. They range from small independent hospitals to among the largest not-for-profit healthcare organizations in the nation. She has become a trusted advisor to her clients, resulting in consulting relationships that have spanned years—and even decades—working on multiple, diverse projects.


Some of her typical engagements with boards and healthcare executives include:

  • Strategy development
  • Board visioning and planning sessions
  • Governance restructuring and alignment
  • Partnership/affiliation strategies
  • Integrating strategy and financial planning

Work with The Governance Institute


Marian is a regular contributor to BoardRoom Press and other Governance Institute newsletters and publications. Most recently she wrote articles on driving value through strategic alliances, moving beyond the basics of strategic planning, streamlining information flow to the board, having effective committee meetings, clarifying board roles, and keeping boards engaged between meetings. She also authored a section of the Board Orientation Manual, Fifth Edition, on the board’s role in strategic planning. Last year, she presented a Webinar on “Evolving Roles and Responsibilities of Boards in Health Systems,” which identified emerging health system governance best practices—including consolidation, streamlining, and unification—and implications for roles, responsibilities, and board processes.


Since 2002, Marian has spoken frequently at Governance Institute conferences. She presented at the 2017 Leadership Conferences on “System Governance: Streamlining Structure & Board Roles” and “Driving Value & Growth through Strategic Alliances.” These presentations outlined a process by which health systems can identify whether and how they need to change in terms of structure, processes, and behavioral expectations, and explored how to forge strategic alliances to drive growth and value. She also spoke at the Governance Support Forum on “System Governance Integration” where she discussed how and why systems are more fully integrating their governance structures and processes.


In addition, Marian provides on-site governance consulting, governance support to members, and is a board retreat facilitator. This year, she helped Governance Institute members improve their governance structures and processes including: clarifying roles and responsibilities, enhancing information flow to the board, better organizing and aligning the work of their committees, and implementing processes to achieving a competency-based board within three to five years.


For more information or to schedule an advisory service, contact The Governance Institute at info@governanceinstitute.com or call (877) 712-8778. A detailed list of our advisory services can also be found on our Web site at www.governanceinstitute.com/AdvisoryServices.


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