How to Transform Corporate Governance for Your Hospital Board

Nicholas J Price

Our society is experiencing the greatest transformation in healthcare ever. The transformation in how healthcare providers administer and bill for services calls attention to two other issues ' the profitability of hospitals and the quality of care. The governance of hospitals has an overarching effect on profitability and quality of care. These issues have policymakers and hospital boards questioning how hospital boards must transform governance to increase profitability while providing the highest quality of health care possible.

The length of board director service and the frequency of meetings, as well as the size of hospitals, affect governance. From a legislative perspective, the Sarbanes-Oxley Act has had a major influence on the functioning of hospital boards. Governance in the health care industry is evolving, as it is in other industries. Transforming governance for hospital boards means continuing to improve the factors that focus on profitability and quality of care.

The Impact of the Sarbanes-Oxley Act on Governance in Hospitals

Most people think of publicly traded corporations when the topic of the Sarbanes-Oxley Act (SOX) comes up. It's easy to forget that hospitals are corporations and many of them are for-profit organizations. As it pertains to hospitals, the intent of SOX seeks to improve hospital governance by redirecting hospital boards' focus on the overall performance of the hospital.

The statutes found in SOX require hospital board directors to understand and approve all financial reports to protect shareholders and to preserve long-term sustainability. Under SOX, and best practices for corporate governance in general, hospital boards must establish and maintain internal controls. Hospital boards are also responsible for ethically managing conflicts of interest, providing full disclosure in financial reports and complying with state, local and federal rules and regulations.

As hospital board directors work to comply with SOX, they must be careful to stay in their own lanes and not let financial oversight cross over into financial management.

Transforming Hospital Governance and the Effect on Quality of Care

As governance practices for hospitals transform, it's important to evaluate the potential effects on the quality of care. A 2010 study of about 1,000 hospitals that explored the expertise, perspectives and clinical quality of their healthcare efforts showed some distinct differences in how hospitals prioritize the quality of care. The survey also highlighted some important differences in the quality of hospital care related to the size of the corporation.

First, the survey revealed that less than half of the hospital board directors rated quality of care in their top two priorities. A minority of board directors acknowledged that their staff had received training in quality of care. About 75% of board chairs described their boards' expertise in quality of care as moderate or substantial.

High-performing hospitals fared better than low-performing hospitals. High-performing hospitals also offered training more often than low-performing hospitals. Less than half of board chairs responded that clinical quality isn't one of the top two priorities in evaluating the hospital CEO. The differences between high- and low-performing hospitals are sending a red flag to policymakers about improving governance for all hospitals.

What Will Hospital Governance Transformation Look Like?

An earlier study in 2009 looked at the role of governance in financial performance. The outcome of the study suggests that hospital boards should meet less frequently, perhaps every other month. This gives them time to gather data about critical indicators of performance for comparison and review.

The study also suggests that board directorships should be nontenured and have a limited number of terms. The study concludes that refreshed boards make boards more accountable and gives them a greater sense of responsibility toward the community.

The study also indicated that there is some connection between director remuneration and higher profits. In light of this study, governance transformation will mean tying director remuneration to well-defined parameters.

According to Becker's Hospital Review, hospitals should be following at least 10 new trends in corporate governance, including:

  1. Standard of care. Board directors must equate the standard of care with their fiduciary duties as the scope of hospital operations and charitable contributions increases. Boards need to take their responsibilities seriously and to engage in strong oversight of management.
  2. Level of engagement. Board directors will need to devote more time to their board duties. They must be actively attentive and engaged, and be willing to ask probing questions for clarity and insight in important decision-making. Directors also need to place a heavier focus on how technology can aid effectiveness and efficiency.
  3. Strategic planning. Strategic planning is a key activity for all boards. Hospital boards will need to place stronger oversight on development and implementation of their planning efforts. Boards would do well to pay close attention to the impact of the Patient Protection and Affordable Care Act.
  4. Board composition. Hospital boards will need to assess board director nominees for the necessary skills and competencies to ensure that they are fit to serve. New appointees should be well-versed in some competency in IT, operations, insurance, quality or other specific skills.
  5. Compliance oversight. Hospital board directors should be aware of any potential issues that may cause legal action against the hospital. Board directors must place heavy oversight on how the hospital approaches legal risks.
  6. Risk reporting. Hospital directors need to develop trust with managers so that they can work together successfully on emerging risks and crises. Hospital board directors should work toward creating an environment in which managers don't hesitate to report bad news.
  7. Governance structures. Boards need to evaluate their long-standing frameworks, placing a focus on board size, board composition, committee development, reporting relationships and members that have reserved powers.
  8. Heightened involvement. Some matters and challenges require a joint response from the board and management. Boards need to find the balance between providing oversight and knowing when a matter requires more direct involvement.
  9. Conflict awareness. Board directors need to be aware that their business relationships, initiatives and other relationships in their social, personal and civic realm can constitute a conflict of interest in addition to any financial conflicts of interest.
  10. The role of general counsel. As hospitals diversify their financial portfolios, they may face new legal implications. The board must work with managers to oversee the ethical considerations regarding the general counsel's role as guardian of the corporation and their role in partnering with management.

Additionally, hospital boards should be looking for the right boardroom technology to help improve corporate governance. Using the right technology can ensure that the board is fully up to date on all issues and all board meeting issues.

At Diligent, we believe that technology can greatly improve governance.''Board directors are obligated to perform a host of varied duties and responsibilities. Diligent developed a suite of governance tools to help them fulfill their responsibilities accurately and efficiently. The Governance Cloud ecosystem of products includes:

As board directors, leadership teams and general counsels continue to express their needs to digitize governance processes, Diligent will be the partner to grow with them. Collectively, these tools enable corporations to achieve a fully digitized and integrated governance ecosystem to mitigate risk, plan for strategic growth and ultimately, govern at the highest level.

Final Thoughts on Hospital Governance Transformation

SOX will continue to have an impact on hospital governance, so boards will need to explore the relationship between SOX and hospital governance as it relates to hospital performance moving forward. SOX may have a larger impact on ruling hospital effectiveness in the near future.

Additionally, boards will need to continue to assess such issues as safety, quality of care, access to care, costs and standing within the community.

The fact that large numbers of hospitals don't view quality of care as a top priority is concerning. The intent is that the transformation of hospital governance will lead to better healthcare overall.

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Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.