Role of the Board

Is Healthcare a Charity, Social Service, or Business?

Board members of independent hospital companies are in the cross-hairs. They govern during a time of intense industry and societal change. Situated at the center of a national struggle, they contend with front-page news, and tweets, daily. Directors are challenged not only by these major economic and political issues but also by the tremendous volume of day-to-day operational detail involved in running a complex enterprise.

Peter Drucker famously argued that hospitals were the most complicated form of economic organization.¹ Certainly, managing the large number of stakeholders—federal, state, and local governments, insurance companies, physicians, nurses, employees, unions, patients, local news outlets, and more—is a herculean task.

Fifty years ago, well-intended community members volunteered for hospital board responsibilities, agreed to meet quarterly, raised philanthropy, and served as a link to the community. The demands were relatively modest. Local awareness and prestige were high. It was more Rotary Club than highstakes corporate boardroom drama. These were the golden years of the middle class— manufacturing output, civic involvement, patriotism, Elks Clubs, bowling leagues, corporate loyalty, pension plans, JFK Democrats, NASA. Bureaucracy that worked. All of that changed in the past decade.

September 15th, 2017|Role of the Board|

Partnership Road Map: Navigating Health System Integration


The decision to align with another health care organization is among the most important, if not the most important, undertakings for a hospital board. Selecting the right partner, strategy, timing and structure all play important roles in determining the ultimate success of an organization and a partnership.

In forming a partnership, choices are made (even in initial conversations) that help determine how an organization will meet the health care needs of its communities for years to come. These choices may also influence whether the organization will be successful in meeting its objectives. Complexities inherent in these choices can make the process overwhelming, akin to approaching a five-way intersection without a map. Following are a few rules of the road that can provide safe passage and aid leadership in finding the route that leads to the desired destination.

Identify your destination. Organizations often make their first mistake while they are still in the driveway.  They do this by identifying a given structure – independence, loose affiliation, full integration into a health system of a specific size, or others – as their destination.

Instead of single-mindedly driving toward a specific

September 12th, 2016|Role of the Board|

Assessing Independence

Assessing Independence CoverSeveral recent surveys indicate that nearly 80 percent of non-profit hospital boards are assessing their independence. This means they are determining whether to affiliate, combine, or remain independent. Only 15 percent of boards were considering this a few years ago. This is the Affordable Care Act’s (ACA) greatest impact on non-profit hospital boardrooms today, and much more so than the “flood” of mergers widely described in periodicals.

In September 2014, a New York Times article described the FTC’s wariness of mergers amongst hospitals.¹ In this, an economist suggested that the ACA has “unleashed a merger frenzy” and that she saw antitrust enforcement as a tool to slow the “march toward conglomeration.” Perhaps these assertions were intended to be forecasts. In any event, they are very common misstatements. In fact, mergers are being completed at a tepid rate of 70 to 80 small transactions per year, far below the annual rate of nearly 150 in the early and mid-1990s. The hospital industry remains the most fragmented major industry in the U.S.

This article focuses on the disconnection between the much-discussed and presumed impact of the ACA, or the “merger

January 15th, 2015|Role of the Board|

The Role of the Nonprofit Hospital Board in Consolidation Transactions

The Role of the Nonprofit Hospital Board in Consolidation TransactionsAs the hospital consolidation market continues to grow, most consolidation transactions involve nonprofit health systems.  Nonprofit boards of directors should prepare well in advance to evaluate consolidation opportunities in a timely and informed manner, consistent with their fiduciary duty.

The hospital consolidation market continues to gain steam.  The year 2013 saw a total of 87 consolidation transactions, following 105 in 2012.  This volume represents a significant increase over 58, the median number of transactions completed each year between 2001 and 2011.  Consolidation transactions offer the possibility of achieving economies of scale, better access to capital, geographic expansion, and improved quality and clinician expertise.  The vast majority of consolidation transactions involve a nonprofit health system.  In such cases, ultimately it is the nonprofit board’s decision whether, and under what terms and conditions, a hospital pursues a consolidation transaction.

It is critical for a nonprofit board of directors to prepare in advance to evaluate a consolidation opportunity in a timely and informed manner, consistent with its fiduciary duty.  Doing so requires the board to, at a minimum, undertake the following preparation:

  • Be informed about the fiduciary
March 19th, 2014|Role of the Board|

Community Considerations for Hospital Transactions

When evaluating change-of-control transactions, hospital boards need to be cognizant not only of their fiduciary duties to the corporation, but also of how their decisions will impact the broader community. Selling a hospital, especially to an out-of-town buyer, is a politically charged issue that frequently brings emotional responses from the community. If not handled correctly, public concerns can gain momentum and derail transactions that boards have specifically structured to meet the long-term healthcare needs of their communities. There have been repeated public relations disasters in which communities rightly or wrongly concluded that their hospital was sold out from under them without adequate disclosure or community input. To ensure a successful outcome, it’s important to design a transaction process that anticipates community concerns and addresses them proactively and transparently.

This article suggests a number of strategies to ensure that community concerns are appropriately addressed in the design and implementation of a process, before they put transactions at risk. Within the context of the board’s fiduciary duties, we will review the role of community leaders (including the often conflicting objectives of boards, management, staff, local government, physicians, and business leaders), securing investments in the

September 1st, 2011|Role of the Board|

The Board’s Role in the M&A Process: Meeting Fiduciary Obligations

The Board's Role in the M&A Process CoverChances are that most non-profit hospital boards will be called upon to evaluate a merger/acquisition proposal at some point in the very near future. Healthcare reform is prompting hospitals across the country to reevaluate their market strength and competitive posture given the new regulatory dynamic. Local healthcare markets are increasingly fluid, as providers and physician groups are anxiously wondering whether there will be a chair remaining when the reform-styled music stops playing. Alignment with a complementary provider- whether as partner, seller, or buyer may be the favored strategic option. Whether, and under what terms and conditions, the provider pursues such alignment ultimately should be the board’s decision.

For that reason, it is increasingly critical that executive management properly prepare the board to evaluate an M&A opportunity in a timely and informed manner, consistent with its fiduciary duty.  Questions to ask include:  What is our role?  What should we be looking at?  How involved are we to be? State law expects the board to closely oversee the transaction process in order to preserve the value of the corporate assets and protect the charitable mission.  Absent management-directed preparation, however, will increase the odds of a fiduciary misstep. 

December 1st, 2010|Role of the Board|

The Strategic Alignment Committee

Hospital boards are encouraged to form a  “strategic alignment” or similar committee to facilitate the governing board’s ability to evaluate the many business opportunities that will arise for  provider organizations in the wake of seismic health reform legislation. The expectation is that the entire spectrum of healthcare organizations— not just hospitals and health systems, but also  insurers, specialty facilities, medical groups, and  physician networks—are actively considering both  vertical and horizontal relationships of varied sorts in order to better position themselves to respond to health reform-prompted economic opportunities.

In such a unique environment, it is incumbent upon the hospital board to shed its reputation for inertia and assert a proactive response to such unique opportunities. The purpose of the strategic alignment committee is to evaluate, on behalf of the board, business proposals and risks early in the opportunity cycle—as opposed to condemning them to the queue of the normal board agenda. The expectation is that the work of this committee will favorably position the full board to respond quickly and in an informed manner to meaningful alignment opportunities.

W hat’s At Stake

It should be no surprise to the hospital board that reform legislation has dramatically

September 1st, 2010|Role of the Board|

Non-Profit Boards and the Merger Market: Preparation, Organization, and Approach

This article is Part 2 of our series on the hospital merger market. Part 1 (October, 2007) discussed hospital industry dynamics that have led to many of the change-of-control (“merger market”) transactions in this decade and encouraged non-profit boards to be more proactive in their use of this market.

Two Views: For-Profit vs. Non-Profit
Few, if any, large industries have two major groups with such widely divergent views and approaches to the merger market as the hospital industry. For-profit and non-profit systems approach change-of-control dynamics and transactions in entirely different ways. For-profits view the merger market as an ongoing component of their business; non-profits often approach it in an ad hoc manner. This latter view can compromise mission and business interests of the non-profit. This is particularly true in the current environment, which favors non-profit buyers. Historically, non-profit boards have focused on operating and local-market issues. Today, however, many non-profits recognize that they are operating in an industry where:

  • Change is occurring to the structure of the industry and the complexity of the business has increased dramatically.
  • Both for-profit and non-profit companies are participating in this change, but often with different approaches.
  • For-profit
December 1st, 2007|Role of the Board|

Non-Profit Hospital Boards and the Merger Market

Non-Profit Board and the Merger Market Cover - 1 of 2During this decade, non-profit boards have been confronted increasingly with the potential for merger and change-of-control (“merger market”) transactions. There has been a dramatic increase in the need for non-profit organizations to consider macroeconomic industry conditions and the resultant role of the merger market. Hospital and health system boards of directors must be proactive and take into account their business and financial circumstances in relationship to this phenomenon. This article explores the industry dynamics that have contributed to this trend and notes an emerging view that may contribute to future merger transactions.

Historically, non-profit hospitals and health systems have focused on operating and other microeconomic issues and have considered the merger market only after experiencing financial trouble for several years. As a result, mission and value are often eroded. Today, however, the boards of some of the most successful systems are carefully considering the impact of fundamental changes in the structure of the hospital industry and are becoming more offensive in their thinking about the merger market. We suggest that boards consider the merger market in a proactive way, regardless of their circumstance.

October 1st, 2007|Role of the Board|

The Fiduciary Duties in the “Zone of Insolvency”

Directors of healthcare organizations normally owe fiduciary duties to their shareholders or, in the case of nonprofits, to the charitable mission of the organization. As an organization descends to bankruptcy, however, the board’s duties may shift. At some point, the board may be imposed with different and often conflicting obligations to the corporate enterprise as a whole, with a primary criterion being the interests of creditors. In this article, the authors analyze the murky areas of the Zone and give guidance as to when the board’s duty may shift-and as to how directors should proceed both in determining their duties and in working to fulfill them.

The “Zone of Insolvency” (the Zone) is not the title of a B-grade science-fiction film; rather, it refers to an important but little-known concept of corporate law that may have a dramatic impact upon the manner in which healthcare corporate directors exercise their fiduciary obligations in situations of corporate financial distress.  During the time period a corporation is in the Zone, the duties and obligations of the corporation’s directors undergo a fundamental shift designed to benefit the corporate enterprise as a whole, and particularly to benefit