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.
Community Health Needs Assessments and Implementation: The Board’s Ongoing Responsibility
Now that the final regulations on the 501(r) requirements were issued, boards should develop a long-term formal compliance and review approach to completing and implementing their community health needs assessment. In this article, Donald Stuart looks at the CHNA process and action steps, involving the appropriate “authorized body,” correcting any errors or omissions, and the board’s ongoing CHNA duties.
By Donald Stuart, Esq., Waller Lansden Dortch & Davis, LLP
Many hospital boards believe that they have satisfied the 501(r) community health needs assessment (CHNA) requirements by completing their organization’s CHNA report and adopting an implementation strategy. After doing that, the board may feel ready to focus on other pressing issues until the next three-year CHNA deadline. However, board members need to be aware that their hospital must also annually provide up-to-date descriptions of the actions actually taken during the year to address the significant health needs identified. The community, advocacy and interest groups, unions, local media, and other interested parties will be keeping watchful eyes on the hospital’s progress with meeting the identified needs. In addition, the IRS will now be shifting to an enforcement phase with the 501(r) requirements and boards need to understand the new rules around correcting any errors or omissions with their CHNA.
The Affordable Care Act imposed several requirements on 501(c)(3) organizations that operate hospitals, including facilities they operate through joint ventures, in order to maintain their tax-exempt status. These requirements (referred to as the “501(r) requirements”) include conducting a CHNA every three years and adopting an implementation strategy to meet the community health needs identified. Other 501(r) requirements focus on establishing financial assistance policies, limiting amounts charged for emergency or other medically necessary care to individuals eligible under the hospital’s financial assistance policy, and refraining from certain collection actions.
With the final regulations on the 501(r) requirements issued at the end of last year and the general sense within the healthcare industry that the Affordable Care Act is now here to stay, any continued thoughts that hospital boards and executives have that the 501(r) requirements may be modified or not survive should now have dissipated. The IRS will be shifting from an interpretation phase of the rules to an enforcement phase with 501(r) and boards need to be shifting from a soft compliance and “wait and see” approach to a long-term formalized compliance and review approach with 501(r).
Hospitals needed to complete their first CHNA before the end of the organization’s first taxable year beginning after March 23, 2012. As a result, by now all hospital organizations subject to the 501(r) requirements (regardless of their particular tax year) should have completed their first CHNA and implementation. The next CHNA would be completed three years thereafter.
Note: The board should verify that their hospital has completed the CHNA process and all action steps for the first year and that the appropriate “authorized body” was involved in the process. Boards also need to review the correction and disclosure procedures for their organization to follow if they fail to meet one of the CHNA requirements.
CHNA Process and Action Steps
The following action steps are required for each CHNA to be completed every three years:
- Define the community the hospital serves.
- Assess the health needs of the community.
- Complete a written CHNA report.
- Formally adopt the CHNA report and document such action.
- Formally adopt written plans for implementation strategies to address each of the identified significant health needs of the community.
- Make the CHNA report widely available to the public (typically through the hospital’s Web site).
- Include a copy of the adopted implementation strategy or a Web site reference to such strategy in the hospital’s Form 990 filed with the IRS.
Note: The date for adoption of the implementation strategy by the board has been extended. What was required to be done at the end of the hospital’s tax year, can now be adopted up until the date on or before the 15th day of the fifth month after the end of such tax year. This due date for adoption of the implementation strategy now matches the due date (without extensions) of the hospital’s Form 990 for the tax year in which the CHNA is conducted.
Do You Have the Appropriate “Authorized Body” Involved in the CHNA Process?
Critical to the IRS’s 501(r) requirements is that an “authorized body” of the hospital must be the party reviewing, making decisions, and approving the organization’s CHNA efforts. This is required not only for adoption of the CHNA report and implementation strategy, but also for the ongoing monitoring required.
Depending on the structure of the ownership and operation of your hospital, several alternatives are available, and the regulations permit some flexibility as to who is the authorized body for 501(r) purposes. Hospitals may decide this is a key item to be kept solely at the board level of responsibility or may decide to delegate that responsibility to another party. A permissible “authorized body” is one of the following:
- The governing body of the organization that operates the hospital (e.g., the board of directors if a non-profit corporation, board of trustees if a foundation, and board of managers if a limited liability company)
- A committee of the governing body (e.g., the executive committee or community benefit committee)
- Another party authorized by the governing body (e.g., authorized senior executives at the hospital)
If the hospital is going to rely on a committee or other party to act as the authorized body, it will need to first verify that they are permitted under state law to act on behalf of the governing body. A single individual could constitute either a committee of the governing body or a party authorized by the governing body to act on its behalf. The board will need to verify that their applicable state law allows a committee or single individual to act in either of these capacities.
Note: Boards need to involve general counsel or other legal counsel to verify that their state law permits such delegation of authority. Bylaws should also be reviewed. States may differ on permissible parties. If it is later determined by the IRS that the committee or individual did not have appropriate authority under state law, the CHNA adoption actions will be essentially “null and void” under the regulations and trigger a violation of the 501(r) requirements.
The board should understand the risk of delegating the CHNA responsibilities to a committee. If that committee or another individual is making CHNA decisions without any oversight by the full board, the board may be jeopardizing their fiduciary obligations. It is better to view the delegated party in an advisory role subject to the ultimate oversight and direction of the full board. The full board needs to be engaged in the CHNA process.
Note: Boards need to be cautious in delegating responsibility of 501(r) CHNA review and approval duties. Consider adopting a specific resolution if you are going to delegate 501(r) CHNA authority setting forth the parameters and limitations. Actions by committees and others on the CHNA should be ratified by the board.
The Board’s Ongoing CHNA Duties
The work is not done after the CHNA action items described above are completed for the year. The CHNA report is not a document to be completed and filed away by the board. It must be a “living” document for the hospital along with the implementation strategy plans attached to it. Although the detailed preparation, compilation, and communication aspects of the CHNA may be delegated or contracted out, the oversight and decision-making responsibilities with respect to the organization’s current CHNA and implementation actions should be kept as a standing review item at regular board meetings. The board, general counsel, and management need to have a clear understanding of the continuing oversight of 501(r) and compliance duties.
The board should make sure it is reviewing and documenting the following items each year:
- A description of the actions taken during the year by the hospital to address the significant health needs identified through its most recent CHNA.
The reasons why no actions were taken, if any, with respect to any identified significant health needs.
This can be deemed the “execution” phase and should include actual steps taken during each year to execute the organization’s implementation strategy. This information will also be required on the Form 990 for subsequent years. The final regulations now require that the next CHNA report the hospital will complete (following the last CHNA report completed) include an evaluation of the impact of any actions that were taken to address the significant health needs identified in the hospital’s prior CHNA reports. The IRS will not be the only party interested in this information. The media, constituents, and other stakeholders, will also be closely watching the actions taken by the hospital in this execution phase. The CHNA is a public document, and the board needs to stay informed about how the organization is meeting the identified community health needs each year and whether any actions need to be added or revised.
CHNA Failures and Corrections
A failure to meet the CHNA reporting requirements or adopt an implementation strategy for a hospital facility will generally result in a $50,000 penalty each year of the failure. Loss of tax-exempt status for the hospital organization is also possible. Recent IRS guidance, however, has provided some beneficial exceptions and relief that the board should understand and be ready to utilize if necessary.
Note: Boards need to be well informed and understand the new rules that provide correction and disclosure procedures for their hospital to follow if they fail to meet one of the 501(r) requirements. These rules can provide the board with certain relief and avoid the adverse consequences from not just an IRS penalty, but also from possible adverse public fallout if they discover an error with their CHNA.
Minor Omissions and Errors
If the hospital does not meet the CHNA requirements due to an omission of required information or an error with respect to the CHNA report or implementation, it will not be considered a “failure” to meet the 501(r) requirements (i.e., no $50,000 penalty) if:
- The omission or error was minor and either inadvertent or due to reasonable cause.
- The hospital corrects the omission or error promptly after discovery.
The board needs to make sure such correction includes the establishment (or review/revision) of hospital practices or procedures that are reasonably designed to promote and facilitate overall 501(r) compliance.
Major Omissions and Errors
If there is a major omission or error with the CHNA, but not willful, and certain procedures are followed, the IRS will not pursue a revocation of the hospital’s tax-exempt status. The $50,000 penalty, however, will still be applicable. The board should take note that a timely correction and disclosure of the CHNA error or omission may be a factor used by the IRS to determine that the failure was not willful. The procedures to be followed include:
- Correction that is reasonable and appropriate for the CHNA failure and that is made promptly after discovery.
- Implementation or modification of safeguards to reduce the likelihood of a reoccurrence.
- Disclosure of the failure on the hospital’s Form 990, including a description of the error, actions taken to correct it, and practices and policies implemented to prevent a reoccurrence.
Hospital boards, executive teams, and general counsel need to work together through the complexity of the 501(r) requirements and ensure that they are continuing to meet the ongoing compliance requirements for their hospital’s CHNA. Adequate board actions, resolutions, and documentation are critical components that can establish the board is meeting its fiduciary duties each year.
The Governance Institute thanks Donald Stuart, Esq., a Partner with Waller Lansden Dortch & Davis, LLP, for contributing this article. Don also serves as the Chair of the Tax and Finance Practice Group of the American Health Lawyers Association. He can be reached at firstname.lastname@example.org.
Back to Top
Mind the Gap: Overcoming the Pitfalls and Challenges of the Interim CEO
Increased CEO turnover is putting extra pressure on boards to focus on succession planning and consider all of the options available to map out a plan for CEO vacancies, including the use of an interim CEO. In this article, Sheila Repeta and Jim Finkelstein look at interim frequency and effectiveness, as well as the importance of successfully communicating the role and timing of an interim CEO to staff and stakeholders.
By Sheila Repeta and Jim Finkelstein, FutureSense, Inc.
Anyone who has ever spent time in the UK on public transport knows to “mind the gap.” The purpose of the statement is to remind riders not to trip during the transition from a platform to the train, or vice versa. In the same way, boards need to be mindful of the transition between CEOs in organizations. It is this precarious transition that can lead organizations to stumble when it comes to performance.
Just how prevalent is CEO turnover in healthcare these days? The most cited source of this data comes from the American College of Healthcare Executives (ACHE),1 which recently reported that healthcare CEO turnover is climbing to close to 20 percent. Deborah Bowen, President and CEO, noted:
“As our data shows, elevated turnover among hospital CEOs seems to be a feature of the current healthcare environment. The continuing trend of consolidation among organizations, the increasing demands on chief executives to lead in a complex and rapidly changing environment, and retirement of leaders from the baby boomer era may all be contributing to this continuing higher level of change in the senior leadership of hospitals.”
No matter the reason, increased CEO turnover is putting extra pressure on boards to focus on succession planning and consider all of the options available to map out a plan for CEO vacancies. There are many options in the transition plan from one CEO to the next, and the use of an interim CEO is a viable option to “mind the gap” for many organizations during this transitory time.
In a BoardRoom Press article, Colleen Chapp, Senior Vice President of the Division of Interim Leadership and Advisory Services at B. E. Smith, highlighted the valuable benefits of engaging with an interim CEO. When used as intended, she explained that an interim CEO can:2
- Fill a mission-margin critical role.
- Provide leadership coverage while recruiting the permanent CEO replacement.
- Provide a smooth transition in order to support success for the incoming leader.
- Typically gain unplanned quality, financial, and operational improvements.
Interim Frequency and Effectiveness
But how often are these interim positions utilized? The jury is still out. Given the fluid definition of the term “interim CEO,” it is hard to identify how frequently this option is leveraged in the marketplace. The best guesses in the literature show a likely 15–30 percent use of interim CEOs as a tool in succession planning and in transitions in organizations.
While used on a regular basis, the research on interim CEO performance remains mixed. Two of the most frequently cited studies both came to separate conclusions about the performance of organizations with interim CEOs. A Harvard Business Review article recently pointed to a survey that demonstrated evidence that organizations utilizing interim CEOs rather than installing permanent ones have lower financial performance.3
On the other hand, The Conference Board’s research team conducted a comprehensive study that evaluated financial performance and market reactions to interim CEO appointments. When discussing this study, they concluded, “It appears that while analysts remain pessimistic about firm performance following the selection of an interim, analysis of multiple measures of performance failed to find any relationship between firm performance and the selection of an interim CEO.”4 A review of other literature provides similar contradictory conclusions. At best, the research offers one solid conclusion: interim CEO effectiveness (or ineffectiveness) varies from situation to situation.
To ensure short- and long-term success with any interim CEO situation, it is imperative that boards communicate regularly and as forthrightly as possible to ensure the messages are clear to all stakeholders, staff, and even the marketplace. When communicating, boards must consider both the role and the timing of interim CEO appointments:
- Role: For example, some organizations retain an interim CEO for his or her ability to come in and train and/or groom an executive team to bring up the next permanent CEO. In these situations, boards should be specific and direct in their communication. Communication should indicate that the interim CEO has a long and successful history of growing and building leaders from within an organization and that the board is excited to have him/her to work with and grow the leadership team. Without naming names, boards can give the staff a better picture of why the “interim” approach was a calculated move, rather than a temporary fix in a difficult situation. This will likely boost their confidence in board leadership and engagement with the organization.
- Timing: If you know in advance this is going to be a longer-term interim leader, be sure to communicate this information to staff and stakeholders alike. In some cases, interims may be testing the waters as a contender for a good fit—but if you wait too long to remove the interim title, it can leave employees and stakeholders feeling like the board is “settling” on a CEO or has not executed a robust search for the new CEO. Sometimes “interim” is perceived as a lack of succession planning or a failure on the part of the board to have an action plan. By staying in front of these presumed intentions with a clear message, it can help minimize these feelings from staff and stakeholders alike
In some cases, the “interim” label can lead to a gray area. There are situations when a CEO is labeled “interim” to the staff and stakeholders, but has been given signing power, shows up as CEO on corporate records, and leads both strategically and operationally. When the interim CEO tactically and legally operates like a CEO, the message to staff and stakeholders can be confusing.
This can lead to one of the great challenges with the “interim”: the interim CEO’s ability to execute in strategic decision making. A 2010 study exploring efficacy of interim CEOs and financial performance in organizations found that major strategic decision making was negatively impacted the longer an interim CEO remained in position.5 While interim CEOs can execute upon already determined strategic plans, many times they do not have the authority to move into new strategic directions. This lack of managerial discretion permeates down the leadership pipeline and creates a “leadership vacuum” in terms of organizational decision making.
In addition, when interim CEOs last too long, employees, leaders, and the general public can lose faith in the leadership. It can be interpreted as:
- The board lacking a strong succession plan
- A vote of no confidence in the interim CEO if they ever become permanent
- No qualified candidates
- Burnout for other organizational leaders hoping to grow into the role
If boards find themselves in this situation where the interim has been in transition for a long period of time, they should consider the following questions:
- Have we gotten too comfortable with the interim?
- Has the search fallen by the wayside?
- Is the organization performing well?
- Does the interim CEO successfully lead both strategically and operationally? If so, is it time to remove “interim” from the title?
By leveraging a mindful approach, boards will be able to navigate the CEO leadership gap successfully and set not only the permanent CEOs but also their organizations up for long-term success.
The Governance Institute thanks Jim Finkelstein, President and CEO, and Sheila Repeta, Senior Consultant, of FutureSense, Inc. for contributing this article. You can learn more about their company and work at www.futuresense.com or contact them at email@example.com and firstname.lastname@example.org.
1ACHE, “Hospital CEO Turnover 1981–2015,” March 2015 (available at www.ache.org/pubs/research/ceoturnover.cfm).
2Colleen A. Chapp, “The Advantage of Interim CEO Leadership,” BoardRoom Press, The Governance Institute, October 2014.
3Walter Frick, “What Happens When an Interim CEO Takes Over?” Harvard Business Review, June 12, 2015 (available at https://hbr.org/2015/06/what-happens-when-an-interim-ceo-takes-over?).
4Matthew Semadeni, Christine H. Mooney, and Idalene F. Kesner, “Interim CEO: Reasonable Choice or Failed Selection?” Director Notes, The Conference Board, June 2014 (available at www.conference-board.org/retrievefile.cfm?filename=TCB_DN-V6N12-141.pdf&type=subsite).
5Gary A. Ballinger and Jeremy J. Marcel, “The Use of an Interim CEO during Succession Episodes and Firm Performance,” Strategic Management Journal, Vol. 31, Issue 3, March 2010, pp. 262–283.
Back to Top
What the Tuomey Decision Means to Hospital Boards
The U.S. Court of Appeals decision concerning certain physician contracting practices of Tuomey Healthcare System has many regulatory and governance implications. In this article, Michael W. Peregrine shares some very basic and very important lessons that hospital and health system boards can learn from this case.
By Michael W. Peregrine, McDermott Will & Emery
Hospital and health system boards are well advised to ask their general counsel to brief them on the regulatory and governance implications of the recent U.S. Court of Appeals decision concerning certain physician contracting practices of Tuomey Healthcare System, located in Sumter, South Carolina. This decision has broad implications, not only for how hospitals and health systems comply with the Stark law in the context of physician integration, but also for a board’s fiduciary obligation to provide oversight over those integration practices.
The source of the controversy was a part-time employment arrangement first proposed by Tuomey in 2003 to a number of area physicians. One physician—the ultimate whistleblower—was offered the arrangement in 2005. After some effort at negotiating terms, including the joint engagement by the physician and the hospital of an experienced Stark law outside counsel to assess the legality of the arrangement, the physician turned down the arrangement. Later that year, he filed his False Claims Act complaint, which gave start to nearly 10 years of dispute, investigation, litigation, and a near-ruinous monetary verdict.
From one perspective, the court’s ruling is somewhat technical; i.e., the Fourth Circuit upheld the decision of a lower court to allow a second trial in a whistleblower case brought against Tuomey for allegedly violating the False Claims Act, in which the second jury concluded that Tuomey’s physician contracting violated both the False Claims Act and Stark law. From another perspective, the ruling is fairly black and white; i.e., Tuomey was hit with a $237 million jury verdict for violating those laws—a verdict that reportedly exceeds its annual revenues.
There are several very basic and very important lessons that hospital and health system boards can learn from Tuomey.
1. This Involves Core Activities
The Stark law, which was determined to have been violated by Tuomey’s employment contract model, is implicated by most kinds of financial arrangements entered into between hospitals and physicians. The legal analysis of most hospital–physician integration relationships will focus, substantially, on Stark law compliance. So, it’s not some “out of left field” kind of law that pops up “once in a blue moon.” It is a serious focus of contracting compliance.
2. Focus Internal Review Protocols
What should really concern the board is the complexity of the Stark law. The Tuomey opinion (especially the concurrence) describes Stark as “an impenetrably complex set of laws and regulations” and “a booby trap rigged with strict liability and potentially ruinous exposure.” Wow, what do you do with that? Well, especially given Tuomey, the hospital’s board should confirm that the organization is prepared to deal with the legal risks posed by its physician integration proposals. This could involve, among other steps, ensuring a) a review process worthy of the Stark law’s complexities, b) procedures for the development and compliance evaluation of proposed physician arrangements, c) periodic board supervision of the effectiveness of those procedures, and d) direct board review of extraordinary proposals, with a degree of attentiveness consistent with an organizational commitment to legal compliance.
3. Don’t Blow off Whistleblower Risk
Some will say that the risk of whistleblower-based False Claims Act complaints is simply a “cost of doing business” in healthcare and should not cause the inordinate attention of corporate leadership. Maybe so, but know this: the Tuomey controversy was prompted by the concerns of one physician who expressed concern with the Stark law implications of Tuomey’s proposed part-time employment agreement. One can imagine the cost and distraction to this health system from the ensuing 10 years of investigation and litigation.
4. Monitor Material Controversies
The board has an obligation to monitor significant litigation, government investigations, and enforcement actions to which the hospital or health system may be subject. This involves an agreement that management and the general counsel will identify, and keep the board aware of developments in, critical litigation and related matters. It also involves the board staying on top of what’s going on in these cases by asking questions and by receiving regular status reports. Such a framework is especially relevant given the regulatory controversies and complex litigation that hospitals and health systems may confront.
5. Relying on Reliance of Counsel
The Tuomey case also contains a significant warning to healthcare boards about the limits of their ability to rely on the advice of legal counsel in their exercise of fiduciary duties. The Tuomey court found that, by not providing outside counsel the facts of the implicated contracts and also the views of other counsel, the health system failed to meet the basic requirements of the advice of counsel defense. The defense was further undermined by what the court suggested was the appearance of “opinion shopping” (i.e., Tuomey pursuing additional opinions that would approve of the core employment agreements while “ignoring negative assessments”). This ruling is notable given that healthcare systems will sometimes seek more than one legal opinion on issues that involve complex application of healthcare laws.
Some very competent and capable industry observers are likely to recommend against placing too much emphasis on the Tuomey verdict, describing it as somewhat of an “outlier” decision involving some highly unusual and very controversial facts. And there’s more than a little logic in support of such a view.
But there’s another view out there, one that suggests that there are 237 million reasons—one for every dollar of the jury verdict—why the Tuomey decision should get the board’s attention. It goes to the core obligation of the board to monitor the risk profile of the organization. If the Stark law, so significantly implicated by hospital–physician arrangements, is indeed a (judicially described) “booby trap,” the board just can’t ignore its related responsibility for ensuring compliance with the law. Questions may indeed be in order with respect to how the hospital or health system deals with oversight, checks and balances on management proposals, and its “reliance on counsel” in connection with Stark-affected contracting proposals. The subject is worthy of a conversation with the general counsel.
The Governance Institute thanks Michael W. Peregrine, Esq., Partner, McDermott Will & Emery LLP, for contributing this article. He can be reached at email@example.com. For further information on this decision and its governance-related implications, see Michael Peregrine, “New Developments May Prompt Board Compliance/Risk Recalibration,” BNA’s Health Law Reporter, July 23, 2015; Michael Peregrine, “Fourth Circuit Rejects ‘Advice of Counsel’ Defense,” Corporate Counsel, July 20, 2015; and Michael Peregrine, “The Health Care Governance Implications of Tuomey,” Law360, July 16, 2015.
Back to Top