Philip Betbeze, for HealthLeaders Media , December 18, 2015
With important strategic decisions increasing in frequency, boards need specific skills and experience to help evaluate their options and avoid mistakes.
This article appears in the December 2015 issue of HealthLeaders magazine
Hospitals are evolving. Indeed, where many of them used to be focused exclusively on high-acuity care and strategies to improve volume, today’s metrics that matter are shifting under the feet of both leadership and boards. Even as the leadership team seeks to remake the hospital into something far more important—an organization essential to improving health for the local population—boards must also adapt.
Whether the health system is large or small, board oversight is critical to ensuring that local healthcare isn’t lost in the effort to transform, or that the organization doesn’t financially implode as a result of the wrong strategic decision. As financial incentives morph into a framework more oriented toward improving and maintaining health rather than just treating the acutely ill, it’s the board’s responsibility to help the organization get back to the basics of the mission to improve the health of its home.
North Shore-LIJ Health System, headquartered in Great Neck, New York, and covering the New York metro area, is typical of a large health system that’s worked hard on growth and transformation of the business in recent years. A relatively sleepy hospital system as recently as the 1990s, North Shore-LIJ has moved into the insurance business and has grown through mergers or acquisition into a 19-hospital system with a robust variety of joint ventures to help cover care outside the hospital’s walls. The effort, broadly, reflects the vision of leadership and the board that scale and vertical integration would be essential to compete in a healthcare environment where value is king.
New business, new experts
That vision requires expertise that the health system’s board didn’t always have, says Mark Claster, the chairman of the board at North Shore-LIJ, which will officially change its name to Northwell Health beginning in 2016.
“Boards clearly are lagging behind because they might not have the necessary expertise that’s now needed with some of these new ventures,” he says.
Claster, president of Carl Marks & Co., and a partner with the New York City company’s consulting and investment banking arm, Carl Marks Advisors, says the need for new skills became apparent to North Shore-LIJ as the board and some of its committees began to evaluate and execute on some business opportunities, from smaller joint ventures with physician practices and federally qualified health centers to a huge strategic move to enter the health insurance business in 2014. Before that particular evolution could happen, says Claster, the board needed what he calls very specific expertise in a complicated business to help understand the risks and potential rewards, as well as what the board didn’t know.
“We have a lot of intellectual property also,” he says. “These aren’t typical things community boards of hospitals are used to looking at. As health systems evolve and wellness becomes more of a concept in moving from fee-for-service to value-based reimbursement, people are going to be required who can gauge and evaluate the progress of those ventures.”
He says at least in North Shore-LIJ’s experience, governing through what amounts to a 135-member board—a legacy of hospital acquisitions or mergers throughout previous years—is a luxury, especially in a global talent center like New York, because of the diversity of experience such a large board brings. But that size can also be a disadvantage in terms of ability to act, which is why he says North Shore-LIJ is really governed at the committee level.
“We’re run by committees,” he says.
The finance, quality, due diligence, and audit and compliance committees—just to name a few—have their own meeting schedules and report to the 30-member executive committee, which meets monthly and in certain situations has the ability to act on behalf of the full board, which meets only quarterly.
“Clearly, things are changing so quickly; you need to be nimble and decisive, there’s no question about that,” Claster says. “Opportunities present themselves and you need to act. That’s why we have that due diligence committee. When you do enough deals or ventures—call them whatever you want—management understands what the board needs in order to make a decision.”
Where’s the fit?
Whereas North Shore’s board wrestles with how to move the organization successfully toward new lines of business, other organizations, such as Pekin (Illinois) Hospital, a 107-bed facility near Peoria, are trying to figure out whether to continue on as independent organizations, or whether they will move toward affiliation with or even acquisition by a bigger parent. None of those questions will be answered tomorrow, says Ronald H. Miller, board chairman of the hospital and a retired CEO of ethanol producer Aventine Renewable Energy who now runs his own consulting firm, Prisma Advisors LLC.
First recruited to the board in 2003, Miller served nine years before rotating off, thinking he’d done his community duty. But he was recruited back as chairman in 2014 and holds the position today.
“We’ve been fortunate throughout history to maintain a fairly strong balance sheet, so that’s a luxury to manage the business, but we’ve had periods of time on the operating side that were up and down,” he says.
One such period, in particular, stands out to Miller.
Dire financial straits that resulted from a poorly considered foray into a renovation of a former mall for ambulatory services and physician offices around the turn of the century led to the replacement of the CEO and an association with Quorum Health Resources to recruit a new CEO and CFO, as well as what Miller calls a “deep dive” more recently on ways to improve the hospital’s business. Since then, with the board’s oversight, the hospital has been managed at the CEO and CFO level by QHR (a national consulting and management services business headquartered in Brentwood, Tennessee), and several of those top leaders have cycled through.
To some degree, says Miller, the association with Quorum, which is ongoing, brings broad expertise on a number of possible strategic options for the hospital, many of which are constantly being evaluated. With help from a professor at Peoria’s Bradley University who specializes in strategic planning, the board also went through an assessment of skills it likely needs as healthcare moves toward value-based reimbursement and greater IT capability, among other areas of expertise needed to exist in such a reimbursement system.
Remembering how much the decision on the mall renovation cost the hospital in both opportunity cost and capital is a touchstone for Miller and the rest of the board as they seek the added value of outside expertise. Miller says the attitude is that the board wants to be supremely careful with strategic decision-making and doesn’t want to squander the laborious rebuilding of its credit profile following the losses from the failed mall experiment.
Of the 11-member board, three are always physicians—including the president and president-elect of the medical staff. The other eight, like Miller, tend to come from the community either as leaders or experts in their field.
One area that was lacking in recent times was IT.
“We struggle a little bit in that area, so we were able to bring in a lady from Caterpillar who is involved in their IT applications group, and she has been very helpful already,” says Miller, referring to the international heavy equipment company headquartered in Peoria.
On the service side, Pekin tends to try to stay conservative, focusing on areas where it knows it has a strategic local advantage. For example, that means no open-heart surgery program or any plan to build one. Pekin’s location in the Peoria area means it’s constantly under threat of encroachment by bigger neighbors. As a result, Pekin has successfully focused on services including gastrointestinal, orthopedics, some general surgery, and of course, primary care.
As part of that commitment to primary care, Pekin is using part of its carefully rebuilt credit position to construct a new $12 million medical office building on the east side of town, where the growth is, says Miller. Up to 30 providers will eventually locate there from scattered places around the area.
Despite these recent decisions, which Miller says should help shore up the hospital’s immediate financial future as well as serve as a physician alignment tool, that doesn’t mean the threat from being small and specialized has abated.
“There’s constant debate on our strategic direction,” Miller says. “Should we affiliate? Should we be acquired? We’re going to have to spend, here in the next five years, a significant amount of dollars to upgrade the hospital, but we’ve got a balance sheet to carry it through should we stay independent.”
That underlying strength puts the organization in a good place. For Pekin Hospital, affiliations could be attractive, but it will be a careful evaluator. Until recently it was affiliated with OSF St. Francis Medical Center in Peoria, but that business agreement ended this past summer.
“Whether we do something like that again or we do something stronger, I don’t really know, but we do have local autonomy on how we decide to move forward. It is a double-edged sword,” Miller says. “We have to do it better, we have to know what service lines we’re in and what we will look like 20 years from now. This community needs good healthcare. Who owns it is not important to me, as long as it stays here.”
Regardless of the size of the organization they represent, boards must navigate a fine line between governing and managing, North Shore-LIJ’s Claster says.
“The board is supposed to set strategic direction. They may get a lot of input from management, but if a board has to do management’s job for them, then you have the wrong management,” he says. “Especially in healthcare, you rely on management to educate you to some degree on why they want to go the direction they want to go in, and the board has to independently evaluate. That’s what a board’s role is: to govern.”