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BY JAMES M. FASONE, ARM, RPLU, a Centennial, Colo.-based senior vice president with Alliant Healthcare Solutions

An increasing number of studies indicate that healthcare boards that are more knowledgeable in corporate governance can not only improve the financial performance of their organizations but can reduce their risk as well.

These include: cost reduction strategies, regulatory change, fraud and abuse mitigation, disaster planning, social responsibility, and keeping up with technology.

Board members of healthcare organizations are increasingly called upon to respond to more complex episodic events that tend to evolve into unique compliance requirements. These additional requirements not only call for immediate attention and oversight, they are a matter of fiduciary obligation by all trustees.

This derives from a core principal of the obligatory duty of care for all board members and, for charitable institutions, an additional duty of obedience to their respective organization's charitable mission. The inherent risks of noncompliance have increased dramatically, in part fueled by the growing number of government resources dedicated to support identification of healthcare fraud and abuse.

These increased responsibilities and corresponding liabilities have restricted opportunities to attract and retain qualified trustees, as many individuals view the risks associated with board service far outweighing the personal and professional benefits.

Increased consumerism and the evolution of transparency, on both quality and cost of services, demanded by various constituents has provided a compelling argument to reassess the skills required for current and prospective board members.

Long gone are the days of the trustee selection criteria revolving around fund raising and community support. Another factor having an impact on the role of the healthcare director is the surge in demand of quality measurements and patient safety, no doubt fueled by the 1999 Institute of Medicine report on medical errors.

Historically, the governing board of a healthcare organization was far removed from direct accountability for patient outcomes and quality initiatives, as this "clinical" function fell squarely on the shoulders of the medical staff.

The correlation between quality measurements and corporate governance is duly noted in an article released recently by the U.S. Dept. of Health and Human Services Office of Inspector General and the American Health Lawyers Association.

"An understanding of clinical quality measurements, the ability to read quality scorecards and spot red flags, and an appreciation of quality of care as a corporate governance issue may be critical to an effective board," the authors write.

In the world of publicly traded healthcare companies, directors are faced with additional scrutiny and oversight from the Securities and Exchange Commission. The SEC, in an attempt to maintain some order of efficiency and protections in a changing world financial market, constantly proposes amendments to existing laws and new regulations to protect the rights of the average shareholder.

Even though private and not-for-profit organizations are not required to comply with SEC regulations, many find it prudent to adopt similar governance standards, as they have proven effective.

New SEC disclosure requirements effective Feb. 28, 2010, that directly affect the selection process and qualifications of boards include the extent of the board's role in the oversight of risk; the board's consideration of diversity in the process by which directors are considered for nomination to the board; and the background and qualifications of directors and nominees for director, describing the experience and skills that the led the company to choose the director or nominee for the board.

Faced with more responsibilities and regulatory influence, many directors are seeking qualified sources and meaningful education tools to keep up with their ever-expanding job descriptions.

Director Education Commitment

Without question, the competency of today's healthcare trustee has increased significantly. Despite this progress, we continue to move toward more accountability and almost zero tolerance for mistakes, especially with respect to the delivery of healthcare services. Therefore, there is an increased sense of urgency to pursue further educational opportunities for healthcare directors to improve operating efficiencies, financial performance, and patient outcomes.

Yet, according to the 2009 Grant Thornton Governance Study, "fewer than half of the community health systems have a standing committee with oversight responsibility for board recruitment, orientation, education, and evaluation even though those are critically important activities."

The quest for the right mix of skill sets for healthcare board members might seem like an ominous task. Trustees must have a strong desire to learn and embrace complex subject matter without being perceived as ignorant or too embarrassed to ask the tough question as is common in group-think settings.

This growing trend toward improving board performance and accountability, usually through some form of self-assessment process, has many organizations looking within to determine if they have the appropriate skills at the board level to carry out their mission. Should healthcare leaders elect not to develop specific plans of their own volition, outside agencies may instruct them to do so in the very near future.

Today, numerous states are developing voluntary programs that provide incentives for hospital board members to participate in ongoing education involving corporate governance or quality-related educational content. Many of these state board certification programs related to quality initiatives are established in cooperation with health insurers motivated to help plan members reduce healthcare expenditures. Clearly these initiatives have developed to improve patient outcomes and reduce costs, furtherr validating the correlation of these goals with excellence in corporate governance.

When studying publicly traded organizations, there is preponderance of evidence from sources that support the link between corporate governance and firm performance.

In studies commissioned by Institutional Shareholder Services (ISS), Lipper/GMI Research, and the National Bureau of Economic Research (NBER), better governed firms are relatively more valuable, more profitable, and provide more return on shareholder investments than firms with poor governance, particularly over longer periods of time.

The ISS even stated that "taken as a whole, the empirical evidence shows that governance matters in reducing the risk of fraud, and restoring trust if fraud is discovered." This statement is insightful in that strong corporate governance practices not only improve traditional financial and operational metrics, but provide other more obscure benefits to the organization such as mitigating reputational risks.

While it is often more difficult to measure the effectiveness or value to a not-for-profit or privately held organization, there is a strong inference that these institutions would reap similar benefits with improved corporate governance.

With proper validation of continuing board education and appropriate measurement against peers, numerous constituents could benefit from a lower risk in doing business with organizations determined to have the highest caliber of board members.

Some examples include bond-rating agencies, Medicare's Office of Inspector General, hospital licensing authorities, joint-venture partners, hospital and medical staff, Joint Commission on Accreditation of Healthcare Organizations, quality rating agencies, consumers of healthcare services in the community, various underwriting organizations.

While the focus of every not-for-profit hospital system should be on its core mission, healthcare trustees that invest time in their own capabilities increase their chances of success in achieving their mission.

As continuing education requirements for other service professionals are commonplace in the insurance, accounting, legal, and medical professions, shouldn't board members, who have the ultimate accountability in delivering high quality healthcare services to our communities, have measurable educational standards?

The Blue Ribbon Panel on Healthcare Governance stated that a healthcare board's core responsibility is "to earn and maintain the public's trust in and commitment to the healthcare organization." There is no better way to earn the public's trust than being identified as having a highly motivated and educated leadership team, particularly at the board level, all working together to lower every measurable aspect of the organization's risk.

May 1, 2010

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