How Health Systems are Right-Sizing Their Boards

Prudent healthcare executives and boards are busily rethinking the size, composition, and focus of their governing bodies.

This article first appeared in the September 2016 issue of HealthLeaders magazine.

Upheaval characterizes the business of healthcare over the past few years. Roughly since the passage of the Patient Protection and Affordable Care Act in 2010, executives and boards have slowly recognized the reality that healthcare spending will not remain an ever-growing pie where the size of your slice depends on the volume of procedures and admissions you can generate. The timing of when and how extensively that change comes varies by market, but just as executives have to change focus and dive into areas that are unfamiliar, so also do boards have to adapt to sweeping change.

Because of consolidation in the healthcare industry, many organizations have found it necessary to reduce the size of their board or eliminate some legacy boards altogether. Some committees are also fair game for elimination or reorganization due to shifts in priorities. At the same time, boards are being pushed to take a more active role in corporate affairs. As the need grows to streamline corporate structure, so it also grows to streamline board structures to ensure the organization's processes are as efficient as possible. This requires not only eliminating duplicative committees, but also redefining the expertise boards need, and perhaps even reducing some seats.

The reality for prudent health system boards is that they have to change as the incentives and the healthcare business landscape does. Those changes include a greater focus on value and quality in healthcare, but they don't stop there. Board members want to change size, composition, and focus to help the institution they love and represent adjust, but they're not always sure where to start.

Effectiveness
Chris Lowney's time as the chair of Catholic Health Initiatives' Board of Stewardship Trustees roughly mirrors the age of the PPACA. During six years on the board of Catholic Health Initiatives, a 103-hospital health system with operations in 18 states, the former J.P. Morgan managing director says the health system has had to do a lot of restructuring to try to streamline governance. Some of that work would be necessary regardless of the changes in the way healthcare services are evaluated and paid for because they're in response to acquisitions or new partnerships, but generally, Lowney says he started his term as board chair in 2013 with an agenda aimed at making governance throughout the system more effective.

"Not long after I took over the board, we commissioned work to help generate some suggestions on how we might be more effective," he says. "We made changes based on that."

Part of the revamp came from a desire to focus discussion time on issues, challenges, and strategic problems in a more open way. Previously much of board time was expended on the presentation and reaction to various reports from management and committees.

"We used to have reports from every committee at every board meeting. Now we no longer do that," Lowney says. "It was uncomfortable to make that change for some of us, because that's the way we were used to working, but it chews up so much time, there was not a lot left for the more open strategic discussion we wanted."

Now such reports are assigned to the consent agenda. Board members are expected to read and process them prior to meetings. Another concrete change from the assessment was that the board disbanded the strategy committee.

"It did a good job for us, but not long after I took over as chair we disbanded it because we felt like so much of the full board's discussion already revolved around strategic issues that we weren't served by having a separate committee," he says.

Recalibration takes time
CHI's board, though it is responsible for a system with operating revenues of $15.2 billion reported in fiscal year 2015, faces challenges similar to those with which almost all hospital and health system boards are having to come to grips.

"An increasing number of boards are asking the question: 'Are we structured in competency, number, and culture to lead a nine- or 10-figure business going forward?' The time it takes to recalibrate can be fairly significant."

Michael Peregrine, a partner with McDermott Will & Emery in the law firm's Chicago office, and an expert in corporate governance, says smart boards are spending considerable time and effort in self-evaluation, and in determining from a size and composition perspective whether it is well situated to lead the institution in the challenges ahead. Peregrine says he was not involved in CHI's work.

"An increasing number of boards are asking the question: 'Are we structured in competency, number, and culture to lead a nine- or 10-figure business going forward?' The time it takes to recalibrate can be fairly significant," he says.

Much of the upheaval can be attributed to the mushrooming competencies required to effectively run the business, especially as many aspects of the care continuum that hospitals and health systems once cheerfully ignored are increasingly important strategically as the clinical and financial incentives for outcomes-based reimbursement align. That drives the need for innovative acquisitions and partnerships, and sows the seeds for board overlap and confusion.

"All of a sudden the competencies required to run this business are really diverse—there are lots of structures and partnerships," says Peregrine.

Boards have to evaluate how to effectively provide oversight. Does it have the right people, expertise, and perspective, and are they engaged? Do some committees and legacy boards need to be merged or disbanded?

"Many are struggling with 'overboarding' right now," he says.

"You've got to get beyond shared governance after a while and move toward unified governance. The right time is when you have a sense the board is struggling to keep up with the agenda and provide oversight."

Another problem that can face boards in what's already a time of uncertainty is the difficulty of merging two boards when the organizations they govern merge. Sometimes, that's put off well beyond an ideal time frame. But Peregrine says those situations mark a great opportunity for health systems to make their boards self-perpetuating versus constituency-based, or political. That's tough to get beyond, because political forces can be brutal, but Peregrine says "clever boards" are getting beyond this problem quickly out of necessity.

While both parties often pick half the board in such situations, Peregrine says "bold CEOs" know they need their boards to get beyond "us versus them." A joint board, conversely, focuses on the shared mission of the combined system.

"You've got to get beyond shared governance after a while and move toward unified governance," he says. "The right time is when you have a sense the board is struggling to keep up with the agenda and provide oversight."

Sometimes that happens after self-evaluation; sometimes management sees that some board members can't keep up due to a variety of circumstances. This is particularly true of community systems that evolve into regional systems, Peregrine says. "Those board members sometimes struggle with a regional focus and with finding expertise in more diversified areas like insurance and technology."

Size vs. expertise
Adding that expertise can sometimes work at cross-purposes with reforms that seek to manage down the size of boards into something more manageable. It's not unheard of for even small health systems with three or four hospitals in one small region to have as many as 30 people on the board thanks to legacy commitments that came with mergers, acquisitions, or close partnerships. That need for expanded expertise is something CHI has struggled with, says Lowney, but it has also made progress.

Meanwhile, managing down board size has been a challenge for Aspirus Inc., parent company of an eight-hospital health system in Wisconsin and Michigan, says its president and CEO, Matthew Heywood. Aspirus's forward-thinking board solved that problem before he arrived in 2013, and he's grateful they did.

Prior to his arrival, the system had become what Heywood calls a confederation rather than a true health system with a cohesive strategic focus.

"Our board focused at the time on being more a board for the hospital in Wausau, our 250-staffed-bed, 14-county tertiary center, as opposed to being a board for the entire organization," says Heywood.

The corporate organization has only grown more complex. Aspirus now includes a health plan, among other businesses outside the acute care space. Certainly integration of those capabilities would have been more difficult, and managing them today would be as well without the exercise that created both a corporate board and separate board for the hospitals and clinics from the previous 20-person board.

"What happened was the previous board got sucked into the tactical day-to-day management of the hospitals and the clinics. It wasn't really functioning and as successful as it could be, so they decided to create a corporate board of 10–12 people and a separate board for the hospitals and clinics. That allowed the corporate board to pull itself out of the day-to-day management and make itself more strategic," Heywood says.

The separate nature of the boards allows Heywood and the corporate board chair to focus on making sure it has the right people, and that the board is on the lookout a year ahead of time to replace those whose tenure is ending to help maintain the skills the board needs.

"I'm on the governance committee, and as a person is rolling off we start a year in advance looking for that new board member," Heywood says.

CHI's Lowney agrees that finding the broad expertise most health systems now need is proving challenging even for big systems.

"We've keenly felt we need more and other kinds of expertise on the board, and it's not like there's expertise we used to need that we no longer need," he says. "We feel we also need people who know insurance, who are consumer engagement experts, and who have expertise in big data."

That presents a conundrum for organizations that want to keep the group at a discussion-optimal size, but, on the other hand, might need to add different skills and experience. Board members at CHI are limited to a maximum of three, three-year terms. That might sound like a long time, but people frequently have to step off early for other reasons, he says. And while the current board can help find expertise in their own areas, that's not true for areas that are not already represented.

"Our current talent knows their own peers to nominate, but that network doesn't necessarily suffice when we need, for example, a Silicon Valley person who is at the cutting edge of data," Lowney says. "We're grappling with that."

Further, an organization like CHI not only has its corporate board, but many regional boards "because we believe there's real value added by our local and regional boards," says Lowney. "The business end is pretty disrupted, and there's lots of change in the business dynamics of healthcare."

That has immediate implications for relative accountability and job responsibilities at the local and national level. Over the past year, CHI boards have gone through exercises aimed at getting sharper about what metrics for which those local boards should be accountable.

About a third such metrics relate somehow to quality and safety, Lowney says. One is bottom line finance-related. One is the level of charity care.

It's important to balance your own biases, he admits.

"I've been on the board six years, and as an investment banker, my gut instinct is that everything in the world revolves around money. Our journey as a board has taught me that what we have to talk about first is quality in a broad sense—outcomes, patient satisfaction, how engaged and satisfied our physicians are."

CHI's board doesn't have committee reports at every board meeting now—in fact, the only committee that does give a report at the board meeting is the quality committee. Local and regional boards act similarly, he says.

"The most important thing to us as a system is quality, and so the most important thing they can do is ensure we get great outcomes," he says. "When I first joined the board, we'd come to quality and people would start using acronyms on very technical medical stuff, and I'd follow it but half assume the docs on the board would carry the water on the discussion. But we can't operate that way. I say this to board colleagues: If there's a number there and you can't understand it and management can't explain it to you, that's their fault."

Quicker action
Peregrine says much of the problems with boards today extend from one issue: slow decision-making.

But he says what clients often miss with that assessment is that there is a conflict that must be balanced between streamlining decision-making and reducing the size of boards.

"Streamlining is valuable, but downsizing boards, meetings, or contact between the board and management does not necessarily work at the same time the organization is diversifying," he says. "Management wants to limit their load, but at the same time, the law expects more time as the business gets more sophisticated."

For example, audit, finance, and compliance are all in one committee for some organizations, but Peregrine says be careful where you streamline.

"Are you really able to give justice to all those responsibilities in that structure? As boards become bigger and more diversified, the demands on board members are increasing, and much more is expected. You're a director of a nine- to 10-figure business. Expectations are much higher. It's not like the old days where you are a member of the board but the CEO did all the heavy lifting."

For his part, Lowney says all the changes surrounding governance in healthcare can seem overwhelming.

"But that's one of the ironies. The things that make it very challenging and sometimes frustrating to be on this kind of a board is what also makes it exciting and rewarding," he says. "There's so much change around us, and nobody can just read a blueprint to make it succeed."