The Georgia Legislature recently passed House Bill 321 (the Act) adding a new code section (O.C.G.A. §31-7-22), which imposes significant financial and business transparency requirements on certain hospitals in Georgia, including non-profit hospitals. Beginning October 1, 2019, non-profit hospitals operating in Georgia will be required to post links in a prominent location on their homepages. These links must direct the individual to a plethora of detailed information, including, among other items, audited financials, Form 990’s, the salaries and fringe benefits of the facility’s ten highest paid administrative positions and notably, each facility’s completed annual hospital questionnaire. Posting the annual hospital questionnaire will provide an easy to access record on the facility’s populations served, services provided, outcomes, payment sources and staff employed. This information was previously available through a complex database on the Georgia Department of Community Health’s website. Now, it will be available to every visitor to the hospital’s website advancing transparency and setting the stage for increased accountability. Transparency is being embraced at the federal level as well – an executive order is expected to be issued this month to compel disclosure of healthcare prices.
The passage of the Act and the anticipated executive order should be viewed by non-profit hospital boards as a harbinger of future initiatives and an opportunity to adapt their governance systems to best practices in advance of mandates. Over the last twenty-five years, we have seen the fiduciary expectations of directors dramatically expanded by legislation, case law, regulatory action and stakeholder demands. To date, this increased accountability and scrutiny has applied primarily to the boards of public companies, but with the push for increased transparency in non-profits, including hospitals, and with the enactment of the Act, these obligations will likely be imposed on the boards of non-profits as well. Hospital boards should take steps now to implement improved governance practices both to effectively serve the institutions that they are entrusted to oversee (studies have shown that good hospital board governance results in superior performance metrics) and to shield their members from potential fiduciary vulnerabilities.
For years, hospital operations have faced increased regulations and compliance demands, but thus far, the demands have remained below the board “firewall.” Thus, trustees and directors have not borne direct accountability. Historically, public companies regulation was largely the same. Prior to the Enron collapse and enactment of the Sarbanes-Oxley Act (SOX), directors were frequently part of a CEO-centric culture, lending their networks and industry experiences, but rarely participating in independent oversight of company management. In the last twenty years, however, regulations for for-profit and public companies have extended to board activities and caused board culture and practices to shift from a CEO-centric model to a model of increased independent director accountability. Today, for-profit directors are being held accountable, and they act accordingly. Potential board members are carefully considering the increased risk – understanding that board service, while noble, comes with significant personal and reputational risk. The most effective directors require good governance in their organizations, so they can fulfill the duties which are required of them. We have witnessed firsthand directors who were prepared and stood tall when the unthinkable crisis hit their company and others, who had not fulfilled their oversight duties, were left vulnerable when a crisis occurred. The quality of an organization’s board governance practices dictates the quality of oversight and is the first determinate of how well a board will respond in a crisis.
Our work with non-profit boards has confirmed that the old corporate board model of scant oversight too often exists in the non-profit sector. While the Office of Inspector General of the U.S. Department of Health and Human Services (OIG) has provided guidance on compliance programs and board oversight thereof, such programs are frequently siloed and not integrated as part of a comprehensive top down commitment. As non-profit hospital boards are often composed of volunteer leaders whose contributions are primarily fundraising, community stature, political networks, or expertise in the services being delivered, the organizational oversight provided by the board is often limited. As a result, the board chair or an executive committee provide the sole management and outside auditor interface with the remainder of the board having high-level or no involvement in oversight. In light of developing changes, this model is no longer sustainable.
The fiduciary duties of care and loyalty apply equally to the non-profit board and its individual members. While there are federal and state laws, including in Georgia, that serve to limit the liability of non-profit board members, these protections generally only extend to directors that have acted in good faith and using the care of a prudent person. Given current governance trends, the “prudent person” standard likely now requires more attention to governance than previously required. Non-profit boards should take note of the best practices used by corporate boards and begin to install those practices in their organizations to fulfill their duties and mitigate the personal litigation and reputational exposure that may exist if board members fail to carry out their duties. Based on current expectations in the for-profit sector and the OIG’s guidance for an effective hospital compliance program, every hospital director should be actively informed regarding:
- oversight, and approval, of long term strategy,
- oversight of the hiring, firing and compensation of senior management and the installation of a sound enterprise-wide compensation system,
- risk management, ensuring that the proper systems are in place and working adequately to identify and mitigate compliance, data governance (security, privacy, allowable usage) and other significant risks,
- establishing an organizational culture, by setting a tone at the top that extends ethical behavior throughout the organization, and
- board governance best practices, including the selection, evaluation, accountability and retention of directors.
While some of these obligations are rightfully delegated to board committees or subcommittees, all board members should be kept abreast of the happenings. While the oversight objectives are straightforward, installing best practices to achieve them is not a simple one-size fits all exercise. The practices installed must be tailored to the organization, taking into account not only its history but its culture. The process should be iterative and wide-spread support from both senior management and the board must be garnered. Outside resources are often helpful in this process, as a neutral arbiter to bridge any divides in the applicable stakeholders.
The Act and the anticipated executive order are a demonstrative a signal that, just as has happened in the public company sector, greater demands will be placed on hospital boards. Other states have and will follow suit. Ultimate accountability resides with boards, not management. No longer should hospital board service be viewed just as an honor. It is now an important and challenging job where the right skills and full involvement are critical. Governance practices of non-profits must evolve to meet the changing expectations.
