Category Archives: Board

The Two Events that Changed U.S. Healthcare for Everyone

Posted on by • Posted in ACA, Affordability, Board, Health Insurance Coverage Adequacy, Health Insurance Denial, Health Insurance Industry, Health Policy, Health System, Healthcare Reform, Hospital, Hospital Industry, Medicaid, Medicare, Price Transparency, Private Equity, Profit, Profit Motive, Skinny Health Plans, Underinsured, Uninsured • Leave a comment
The Two Events that Changed U.S. Healthcare for Everyone

In late 2025, two events reset the U.S. health system’s future at least through 2026 and possibly beyond:

  • November 5, 2024: The Election: Its post-mortem by pollsters and pundits reflects a country divided and unsettled: 22 Red States, 7 Swing States and 21 Blue States. But a solid majority who thought the country was heading in the wrong direction and their financial insecurity driving voters to return the 45th President to the White House. With slim majorities in the House and Senate, and a short-leash before mid-term elections November 3, 2026, the Trump team has thrown out ‘convention’ in their setting policies and priorities for their second term. That includes healthcare.
  • December 4, 2024: The Murder of a Health Executive : The murder of Brian Thompson, United Healthcare CEO, sparked hostility toward health insurers and a widespread backlash against the corporatization of the U.S. health system. While UHG took the most direct hit for its aggressiveness in managing access and coverage disputes, social media and mainstream journalists exposed what pollsters affirmed—the majority of American’s distrust the health system, believing it puts its profits above their needs. And their polls indicate animosity is highest among young adults, in lower income households and among members of its own workforce.

These events provide the backdrop for what to expect this year and next. Four directional shifts seem to underly actions to date and announced plans:

  • From elitism to populism: Key personnel and policy changes will draw less from Ivy League credentials, DC connections and recycled federal health agency notables and more from private sector experience, known disruptors and unconventional thought leaders. Notably, the new Chairs of the 7 Congressional Committees that control healthcare regulation, funding and policy changes in the 119th Congress represent LA, AL, WV, ID, VA, MO & KY constituents—hardly Ivy League territory.
  • From workforce disparities to workforce modernization: The Departments of Health & Human Services, Labor, Commerce and Treasury will attempt to suspend/modify regulatory mandates and entities they deem derived from woke ideology. The Trump team will replace them with policies that enable workforce de-regulation and modernization in the private sector. Hiring quotas, non-compete contracts, DEI et al will get a fresh look in the context of technology-enabled workplaces and supply-demand constraints. The HR function in every organization will become ground zero for Trump Healthcare 2.0 system transformation.
  • From western medicine to whole person wellbeing: HHS Secretary Nominee Robert F. Kennedy Jr. (RFK) Jr.’s “Make America Healthy Again” pledges war on ultra-processed foods. CMS’ designee Mehmet Oz advocates for vitamins, supplements and managed care. FDA nominee Marty Makary, a Hopkins surgeon, is a RFKJ ally in the “Health Freedom” movement promoting suspicion about ‘mainstream medicine’ and raising doubts about vaccination efficacy for children and low-risk adults. NIH nominee Jay Bhattacharya, director of Stanford’s Center for Demography and Economics of Health and Aging, opposed Covid-19 lockdowns and is critical of vaccine policies. Collectively, this four-some will challenge conventional western (allopathic) medicine and add wide-range of non-traditional interventions that are a safe and cost-effective to the treatment arsenal for providers and consumers. The food supply will be a major focus: HHS will work closely with the USDA (nominee Brooke Rollins, currently CEO of the America First Policy Institute, to reduce the food chain’s dependence on ultra-processed foods in public health.
  • From DC dominated health policies to states: The 2022 Supreme Court’ Dobbs decision opened the door for states to play the lead role in setting policies for access to abortion for their female citizens. It follows federalism’s Constitutional preference that Washington DC’s powers over states be enumerated and limited. Thus, state provisions about healthcare services for its citizens will expand beyond their already formidable scope. Likely actions in some states will include revised terms and conditions that facilitate consolidation, allowance for physician owned hospitals and site-neutral payments, approval of “skinny” individual insurance policies that do not conform to the Affordable Care Act’s qualified health plan spec’s, expanded scope of practice for nurse practitioners, drug price controls and many others. At least for the immediate future, state legislatures will be the epicenters for major policy changes impacting healthcare organizations; federal changes outside appropriations activity are unlikely.

Transforming the U.S. health system is a bodacious ambition for the incoming Trump team. Early wins will be key—like expanding price transparency in every healthcare sector, softening restrictions on private equity investments, targeted cuts in Medicaid and Medicare funding and annulment of the Inflation Reduction Act. In tandem, it has promised to cut Federal government spending by $2 trillion and lower prices on everything including housing and healthcare—the two spending categories of highest concern to the working class. Healthcare will figure prominently in Team Trump’s agenda for 2025 and posturing for its 2026 mid-term campaign. And equally important, healthcare costs also figure prominently in quarterly earnings reports for companies that provide employee health benefits forecast to be 8% higher this year following a 7% spike the year prior. Last year’s 23% S&P growth is not expected to repeat this year raising shareholder anxiety and the economy’s long-term resilience and the large roles housing and healthcare play in its performance.

My take:

The 2024 election has been called a change election. That’s unwelcome news to most organizations in healthcare, especially the hospitals, physicians, post-acute providers and others who provide care to patients and operate at the bottom of the healthcare pyramid.

Equipping a healthcare organization to thoughtfully prepare for changes amidst growing uncertainty requires extraordinary time and attention by management teams and their Boards. There are no shortcuts. Before handicapping future state scenario possibilities, contingencies and resource requirements, a helpful starting point is this: On the four most pressing issues facing every U.S. healthcare company/organization today, Boards and Management should discuss…

  • Trust: On what basis can statements about our performance be verified? Is the data upon which our trust is based readily accessible? Does the organization’s workforce have more or less trust than outside stakeholders? What actions are necessary to strengthen/restore trust?
  • Purpose: Which stakeholder group is our organization’s highest priority? What values & behaviors define exceptional leadership in our organization? How are they reflected in their compensation?
  • Affordability: How do we measure and monitor the affordability of our services to the consumers and households we ultimately depend? How directly is our organization’s alignment of reducing cost reduction and pass-through savings to consumers? Is affordability a serious concern in our organization (or just a slogan)?
  • Scale: How large must we be to operate at the highest efficiency? How big must we become to achieve our long-term business goals?

This week, thousands of healthcare’s operators will be in San Francisco (JPM Healthcare Conference), Naples (TGI Leadership Conference) and in Las Vegas (Consumer Electronics Show) as healthcare begins a new year. No one knows for sure what’s ahead or who the winners and losers will be.  What’s for sure is that healthcare will be in the spotlight and its future will not be a cut and paste of its past.

PS: The parallels between radical changes facing the health system and other industries is uncanny. College athletics is no exception. As you enjoy the College Football Final Four this weekend, consider its immediate past—since 2021, the impact of Name, Image and Likeness (NIL) monies on college athletics, and its immediate future–pending regulation that will codify permanent revenue sharing arrangements (to be implemented 2026-2030) between college athletes, their institutions and sponsors. What happened to the notion of student athlete and value of higher education? Has the notion of “not-for-profit” healthcare met a similar fate? Or is it all just business?

The Two Events that Changed U.S. Healthcare for Everyone

Posted on by • Posted in ACA, Affordability, Board, Health Insurance Coverage Adequacy, Health Insurance Denial, Health Insurance Industry, Health Policy, Healthcare Reform, Medicaid, Medicare, Price Transparency, Private Equity, Profit, Profit Motive • Leave a comment
The Two Events that Changed U.S. Healthcare for Everyone

In late 2025, two events reset the U.S. health system’s future at least through 2026 and possibly beyond:

  • November 5, 2024: The Election: Its post-mortem by pollsters and pundits reflects a country divided and unsettled: 22 Red States, 7 Swing States and 21 Blue States. But a solid majority who thought the country was heading in the wrong direction and their financial insecurity driving voters to return the 45th President to the White House. With slim majorities in the House and Senate, and a short-leash before mid-term elections November 3, 2026, the Trump team has thrown out ‘convention’ in their setting policies and priorities for their second term. That includes healthcare.
  • December 4, 2024: The Murder of a Health Executive : The murder of Brian Thompson, United Healthcare CEO, sparked hostility toward health insurers and a widespread backlash against the corporatization of the U.S. health system. While UHG took the most direct hit for its aggressiveness in managing access and coverage disputes, social media and mainstream journalists exposed what pollsters affirmed—the majority of American’s distrust the health system, believing it puts its profits above their needs. And their polls indicate animosity is highest among young adults, in lower income households and among members of its own workforce.

These events provide the backdrop for what to expect this year and next. Four directional shifts seem to underly actions to date and announced plans:

  • From elitism to populism: Key personnel and policy changes will draw less from Ivy League credentials, DC connections and recycled federal health agency notables and more from private sector experience, known disruptors and unconventional thought leaders. Notably, the new Chairs of the 7 Congressional Committees that control healthcare regulation, funding and policy changes in the 119th Congress represent LA, AL, WV, ID, VA, MO & KY constituents—hardly Ivy League territory.
  • From workforce disparities to workforce modernization: The Departments of Health & Human Services, Labor, Commerce and Treasury will attempt to suspend/modify regulatory mandates and entities they deem derived from woke ideology. The Trump team will replace them with policies that enable workforce de-regulation and modernization in the private sector. Hiring quotas, non-compete contracts, DEI et al will get a fresh look in the context of technology-enabled workplaces and supply-demand constraints. The HR function in every organization will become ground zero for Trump Healthcare 2.0 system transformation.
  • From western medicine to whole person wellbeing: HHS Secretary Nominee Robert F. Kennedy Jr. (RFK) Jr.’s “Make America Healthy Again” pledges war on ultra-processed foods. CMS’ designee Mehmet Oz advocates for vitamins, supplements and managed care. FDA nominee Marty Makary, a Hopkins surgeon, is a RFKJ ally in the “Health Freedom” movement promoting suspicion about ‘mainstream medicine’ and raising doubts about vaccination efficacy for children and low-risk adults. NIH nominee Jay Bhattacharya, director of Stanford’s Center for Demography and Economics of Health and Aging, opposed Covid-19 lockdowns and is critical of vaccine policies. Collectively, this four-some will challenge conventional western (allopathic) medicine and add wide-range of non-traditional interventions that are a safe and cost-effective to the treatment arsenal for providers and consumers. The food supply will be a major focus: HHS will work closely with the USDA (nominee Brooke Rollins, currently CEO of the America First Policy Institute, to reduce the food chain’s dependence on ultra-processed foods in public health.
  • From DC dominated health policies to states: The 2022 Supreme Court’ Dobbs decision opened the door for states to play the lead role in setting policies for access to abortion for their female citizens. It follows federalism’s Constitutional preference that Washington DC’s powers over states be enumerated and limited. Thus, state provisions about healthcare services for its citizens will expand beyond their already formidable scope. Likely actions in some states will include revised terms and conditions that facilitate consolidation, allowance for physician owned hospitals and site-neutral payments, approval of “skinny” individual insurance policies that do not conform to the Affordable Care Act’s qualified health plan spec’s, expanded scope of practice for nurse practitioners, drug price controls and many others. At least for the immediate future, state legislatures will be the epicenters for major policy changes impacting healthcare organizations; federal changes outside appropriations activity are unlikely.

Transforming the U.S. health system is a bodacious ambition for the incoming Trump team. Early wins will be key—like expanding price transparency in every healthcare sector, softening restrictions on private equity investments, targeted cuts in Medicaid and Medicare funding and annulment of the Inflation Reduction Act. In tandem, it has promised to cut Federal government spending by $2 trillion and lower prices on everything including housing and healthcare—the two spending categories of highest concern to the working class. Healthcare will figure prominently in Team Trump’s agenda for 2025 and posturing for its 2026 mid-term campaign. And equally important, healthcare costs also figure prominently in quarterly earnings reports for companies that provide employee health benefits forecast to be 8% higher this year following a 7% spike the year prior. Last year’s 23% S&P growth is not expected to repeat this year raising shareholder anxiety and the economy’s long-term resilience and the large roles housing and healthcare play in its performance.

My take:

The 2024 election has been called a change election. That’s unwelcome news to most organizations in healthcare, especially the hospitals, physicians, post-acute providers and others who provide care to patients and operate at the bottom of the healthcare pyramid.

Equipping a healthcare organization to thoughtfully prepare for changes amidst growing uncertainty requires extraordinary time and attention by management teams and their Boards. There are no shortcuts. Before handicapping future state scenario possibilities, contingencies and resource requirements, a helpful starting point is this: On the four most pressing issues facing every U.S. healthcare company/organization today, Boards and Management should discuss…

  • Trust: On what basis can statements about our performance be verified? Is the data upon which our trust is based readily accessible? Does the organization’s workforce have more or less trust than outside stakeholders? What actions are necessary to strengthen/restore trust?
  • Purpose: Which stakeholder group is our organization’s highest priority? What values & behaviors define exceptional leadership in our organization? How are they reflected in their compensation?
  • Affordability: How do we measure and monitor the affordability of our services to the consumers and households we ultimately depend? How directly is our organization’s alignment of reducing cost reduction and pass-through savings to consumers? Is affordability a serious concern in our organization (or just a slogan)?
  • Scale: How large must we be to operate at the highest efficiency? How big must we become to achieve our long-term business goals?

This week, thousands of healthcare’s operators will be in San Francisco (JPM Healthcare Conference), Naples (TGI Leadership Conference) and in Las Vegas (Consumer Electronics Show) as healthcare begins a new year. No one knows for sure what’s ahead or who the winners and losers will be.  What’s for sure is that healthcare will be in the spotlight and its future will not be a cut and paste of its past.

PS: The parallels between radical changes facing the health system and other industries is uncanny. College athletics is no exception. As you enjoy the College Football Final Four this weekend, consider its immediate past—since 2021, the impact of Name, Image and Likeness (NIL) monies on college athletics, and its immediate future–pending regulation that will codify permanent revenue sharing arrangements (to be implemented 2026-2030) between college athletes, their institutions and sponsors. What happened to the notion of student athlete and value of higher education? Has the notion of “not-for-profit” healthcare met a similar fate? Or is it all just business?

In Healthcare, Near-Sightedness is “Normalcy”

Posted on by • Posted in Board, Consolidation, Integrated Delivery System, Leadership Vision, Medicare Advantage, Strategic Imperative, Strategic Leadership, Strategy and Transformation, Strategy Sustainable Long Term • Leave a comment
In Healthcare, Near-Sightedness is “Normalcy”

Like everyone else, I am thankful the election end is in sight and a degree of “normalcy” might return. By next week, we should know who will sit in the White House, the 119th Congress and 11 new occupants of Governors’ offices. But a return to pre-election normalcy in politics is a mixed blessing.

“Normalcy” in our political system means willful acceptance that our society is hopelessly divided by income, education, ethnic and political views. It’s benign acceptance of a 2-party system, 3-branches of government (Executive, Legislative, Judicial) and federalism that imposes limits on federal power vis a vis the Constitution.

Our political system’ normalcy counts success by tribal warfare and election wins. Normalcy is about issues de jour prioritized by each tribe, not longer-term concern for the greater good in our country. Normalcy in our political system is near-sightedness—winning the next election and controlling public funds.

Comparatively, “normalcy” in U.S. healthcare is also tribal:

while the majority of U.S. adults believe the status quo is not working well but recognize its importance, each tribe has a different take on its future. The majority of the public think price transparency, limits on consolidation, attention to affordability and equitable access are needed but the major tribes—hospitals, insurers, drug companies, insurers, device-makers—disagree on how changes should be made. And each is focused on short-term issues of interest to their members with rare attention to longer-term issues impacting all.

Near-sightedness in healthcare is manifest in how executives are compensated, how partnerships are formed and how Boards are composed.

Organizational success is defined by 1-access to private capital (debt, private equity, strategic investors), 2-sustainnable revenue-growth, 4- scalable costs, 4-opportunities for consolidation (the exit strategy of choice for most) and 5-quarterly earnings. A long-term view of the system’s future is rarely deliberated by boards save attention to AI or the emergence of Big Tech. A vision for an organization’s future based on long-term macro-trends and outside-in methodologies is rare: long-term preparedness is “appreciated” but near-term performance is where attention is vested.

It pays to be near-sighted in healthcare: our complex regulatory processes keep unwelcome change at bay and our archaic workforce rules assure change resistance. …until it doesn’t. Industries like higher education, banking and retailing have experienced transformational changes that take advantage of new technologies and consumer appetite for alternatives that are new and better. The organizations winning in this environment balance near-sightedness with market attentiveness and vision.

Looking ahead, I have no idea who the winners and losers will be in this election cycle. I know, for sure, that…

  • The final result will not be known tomorrow and losers will challenge the results.
  • Short-term threats to the healthcare status quo will be settled quickly. First up: Congress will set aside Medicare pay cuts to physicians (2.8%) scheduled to take effect in January for the 5th consecutive year. And “temporary” solutions to extend marketplace insurance subsidies, facilitate state supervision of medication abortion services and telehealth access will follow quickly.
  • Think tanks will be busy producing white papers on policy changes supported by their funding sponsors.
  • And trade associations will produce their playbooks prioritizing legislative priorities and relationship opportunities with state and federal officials for their lobbyists.

Near-term issues for each tribe will get attention: the same is true in healthcare. Discussion about and preparation for healthcare’s longer-term future is a rarity in most healthcare C suites and Boardrooms. Consider these possibilities:

  • Medicare Advantage will be the primary payer for senior health: federal regulators will tighten coverage, network adequacy, premiums and cost sharing with enrollees to private insurers reducing enrollee choices and insurer profits.
  • To address social determinants of health, equitable access and comprehensive population health needs, regional primary care, preventive and public health programs will be fully integrated.
  • Large, organized groups/networks of physicians will be the preferred “hubs” for health services in most markets.
  • Interoperability will be fully implemented.
  • Physicians will unionize to assert their clinical autonomy and advance their economic interests.
  • The federal government (and some states) will limit tax exemptions for profitable not-for-profit health systems.
  • The prescription drug patent system will be modernized to expedite time-to-market innovations and price-value determinations.
  • The health insurance market will focus on individual (not group) coverage.
  • Congress/states will impose price controls on prescription drugs and hospital services.
  • Employers will significantly alter their employee benefits programs to reduce their costs and shift accountability to their employees. Many will exit altogether.
  • Regional integrated health systems that provide retail, hospital, physician, public health and health insurance services will be the dominant source of services.
  • Alternative-payment models used by Medicare to contract with providers will be completely overhauled.
  • Consumers will own and control their own medical records.
  • Consolidation premised on community benefits, consumer choices and lower costs will be challenged aggressively and reparation pursued in court actions.
  • Voters will pass Medicare for All legislation.

And many others.

A process for defining of the future of the U.S. health system and a bipartisan commitment by hospitals, physicians, drug companies, insurers and employers to its implementation are needed–that’s the point. 

Near-sightedness in our political system and in our health, system is harmful to the greater good of our society and to the voters, citizens, patients, and beneficiaries all pledge to serve.

As respected healthcare marketer David Jarrard wrote in his blog post yesterday “As the aggravated disunity of this political season rises and falls, healthcare can be a unique convener that embraces people across the political divides, real or imagined. Invite good-minded people to the common ground of healthcare to work together for the common good that healthcare must be.”

Thinking and planning for healthcare’s long-term future is not a luxury: it’s an urgent necessity. It’s also not “normal” in our political and healthcare systems.

UnitedHealth CEO Sold $5.6 Million in Shares the Same Day as Ransomware Attack

Posted on by • Posted in Backdated Documents, Board, Board Chairman, C-Suite, CEO, CFO, Corporate Negligence, Finance Committee, Financial Reporting, Financial Reporting Fraud, Financial Reporting Transparency, Financial Stewardship, Financial Transparency, Internal Audit, Internal Control, Investigation, Leadership Crisis, Leadership Culture, Leadership Ethics, Leadership Intent, Leadership Transparency, Leadership Values, Malfeasance, Negligence, Ransomware Attack, Securities and Exchange Commission (SEC), Untrustworthy • Leave a comment
https://healthcareuncovered.substack.com/p/unitedhealth-ceo-sold-56-million?utm_source=post-email-title&publication_id=255152&post_id=145375065&utm_campaign=email-post-title&isFreemail=true&r=59t65&triedRedirect=true&utm_medium=email

Other senior executives also cashed out as the company faced a $1.6 billion threat that wreaked havoc throughout the health care system.

On February 21, the same day that a ransomware attack began to wreak havoc throughout UnitedHealth Group and the U.S. health care system, five of UnitedHealth’s C-suite executives, including CEO Andrew Witty and the company’s chief legal officer, sold $17.7 million worth of their stock in the company. Witty alone accounted for $5.6 million of those sales.

The company’s stock has not recovered since the ransomware attack and has underperformed the S&P 500 index of major stocks by 8% during that time. In the two weeks following the ransomware attack, the company’s stock slid by 10.4%, wiping out more than $46 billion in market cap and greatly reducing the value of shares held by non-insiders. The slide continued for several weeks. On the day Witty and the other executives sold their shares, the stock price closed at $521.97. By April 12, it had fallen to $439.20.

The ransomware attack is estimated to have cost the insurance giant as much as $1.6 billion in total. Witty would later confirm, during his appearance before the Senate Finance Committee on May 1, that the company paid $22 million in ransom to the hackers. 

“He (Witty) sold the shares on the same day that he learned of the ransomware attack,” said Richard Painter, a professor at the University of Minnesota School of Law who is also the vice chair of Citizens for Responsibility and Ethics in Washington. “That’s not good. For the SEC to prove a civil case of insider trading they just have to prove that it’s more probable than not that executives acted on inside information. CEOs have got to be a heck of a lot more careful.

You’re the CEO of a company, you should not be buying or selling the stock right in the middle of a material event like a ransomware attack. You’re asking for trouble. You’re going to end up with an SEC investigation. If that goes badly you could end up with a DOJ investigation.” 

How much UnitedHealth’s C-suite executives sold in company stock on February 21, 2024:

Brian Thompson, the CEO of UHG’s insurance arm, sold $1.5 million on the same day. John Rex, then the CFO and now the CFO and president, sold $4.4 million, as did Dirk McMahon, now the former president. Chief Legal Officer Rupert Bondy, who would likely have to have signed off on the sales, sold $750,000. 

HEALTH CARE un-covered is the first media outlet to report these disclosures. 

The ransomware attack was caused at least in part by negligence on UnitedHealth’s part, Witty admitted at the Finance Committee hearing. He acknowledged that the company had failed to use multi-factor authentication — requiring more than just a password to access information — to secure its data. The cyberattack exposed the personal health information of as much as a third of Americans’ health information. 

“This incident and the harm that it caused was, like so many other security breaches, completely preventable and the direct result of corporate negligence,”

Sen. Ron Wyden (D-Ore.) wrote to federal regulators on May 30. “UHG has publicly confirmed that the hackers gained their initial foothold by logging into a remote access server that was not protected with multi-factor authentication (MFA). MFA is an industry-standard cyber defense that protects against hackers who have guessed or stolen a valid username and password for a system.”

UnitedHealth exploited the crisis created by its own negligence to further entrench its position as the largest employer of doctors in the country, acquiring medical practices that were unable to pay their bills due at least in part to the chaos created by the ransomware attack. The American Medical Association is considering legal action against the company for the attack, with a proposal for its House of Delegates conference beginning June 8 stating that “Optum is the largest employer of physicians and has acquired practices when the ransomware disruption made those practices unable to survive without acquisition… Even the practices that survive will have ongoing damages including but not limited to denials related to giving therapy when it was impossible to obtain prior authorization, from using lines of credit and having to pay interest, from having billing departments and others work overtime to submit claims, to losing key employees from inability to make payroll.”

Other well-timed insider stock transactions

In April, Bloomberg reported that in the lead up to the disclosure of an FTC investigation into UnitedHealth’s monopolistic practices, other UnitedHealth insiders, including Chairman Stephen Hemsley, had sold $102 million worth of their shares.

News of that investigation and the stock sales led Sen. Elizabeth Warren (D-Mass.) and other lawmakers to call for an SEC investigation into the trading.

The disclosures revealed here, however, are potentially more incriminating: the executives sold the stock the same day the company became aware of the devastating ransomware attack. When Witty was supposed to be all hands on deck strategizing how to protect health care providers and millions of patients, he spent at least part of his day taking action to preserve his net worth.

EDITOR’S NOTE: 

This is not the first time UnitedHealth executives have engaged in questionable or illegal stock transactions. In 2007, former CEO William McGuire agreed to a record $468 million settlement with the SEC after it was learned that for more than a decade he had engaged in a scheme to inflate the value of his holdings in the company and, consequently, his net worth.

An SEC investigation that year found that over a 12-year period, “McGuire repeatedly caused the company to grant undisclosed, in-the-money stock options to himself and other UnitedHealth officers and employees without recording in the company’s books and disclosing to shareholders material amounts of compensation expenses as required by applicable accounting rules.” In other words, he was back-dating his stock options.

As the SEC explained: 

[F]rom at least 1994 through 2005, McGuire looked back over a window of time and picked grant dates for UnitedHealth options that coincided with dates of historically low quarterly closing prices for the company’s common stock, resulting in grants of in-the-money options.

According to the complaint, McGuire signed and approved backdated documents falsely indicating that the options had actually been granted on these earlier dates when UnitedHealth’s stock price was at or near these low points.

These inaccurate documents caused the company to understate compensation expenses for stock options, and were routinely provided to the company’s external auditors in connection with their audits and reviews of UnitedHealth’s financial statements.

Financial Literacy: A Leadership Prerequisite

Posted on by • Posted in Accessible Liquidity, Board, Board Purpose, Debt Levels, Debt Service, Debt Service Coverage Ratio, Financial Literacy, Financial Vital Signs, Leadership, Leadership Continuity, Leadership Learning, Operating Expenses, Operating Income, Operating Margin, Operating Margin Drivers, Operating Metrics, Operating Revenue, Revenue Diversification, Revenue Growth, Unrestricted Cash • Leave a comment

https://www.kaufmanhall.com/insights/blog/financial-literacy-leadership-prerequisite

In last month’s blog, we discussed the importance of financial planning, both for internal audiences—including the leadership team and the board of trustees—and for external audiences—including prospective students and their families, rating agencies, alumni and other stakeholders. This month, in the first of a series of blogs focused on key finance-related issues, we’re turning our attention to a broader and deeper internal audience, asking the question, “What is your institution’s financial literacy?”

The terms described in this blog will be very familiar to members of college and university finance teams and to many institutional leaders as well.

The point is that these terms should be familiar to as many individuals as possible throughout the institution: they form the foundation of a basic financial literacy that every college and university should foster across its faculty and staff.

What is financial literacy?

Financial literacy is the ability to understand where an institution stands at any given time with respect to key elements of its balance sheet and income statement. To state it simply, financial literacy means an understanding of the vital signs that describe the financial health of the institution. In medicine, the basic vital signs are body temperature, pulse rate, respiration rate, and blood pressure. In finance, the vital signs include measures of unrestricted cash, revenue, expenses, debt, and risk.

In medicine, there are professionals whose job is to dig deeper if any of the body’s vital signs are deteriorating. Similarly in finance, it is the job of the CFO and finance team to monitor the vital signs of the institution’s financial health and to seek causes and solutions of current troubles or to use changes in the vital signs to address potential future issues. For most of us—in medicine or finance—the goal should be a basic understanding of what the vital signs measure and whether they point to good health.

There are some key considerations for each financial vital sign:

  • Unrestricted Cash. The critical question related to unrestricted cash (also termed liquidity) is whether the institution has enough accessible liquidity to meet its daily expenses if its cash flow was unexpectedly interrupted. Days cash on hand is a balance sheet metric that is typically used to assess this issue: days cash on hand literally measures how long unrestricted cash reserves could cover the institution’s operating costs if its cash flow suddenly stopped. 

    The emphasis on “accessible liquidity” is an important element of this financial vital sign: it speaks to the ability to distinguish between institutional wealth versus liquidity. In higher education, an endowment can be an important source of the institution’s wealth, but many of the funds within an endowment cannot be easily accessed—they are, by and large, not liquid funds or are highly restricted as to their use. Readily available, unrestricted cash reserves are what an institution must rely on to meet its day-to-day expenses should cash flow be interrupted or reduced.
     
  • Revenue. Because an institution needs to maintain or grow its cash reserves and allocate them sparingly, the amount of revenue coming in—from tuition and fees and from other sources of additional income (see below)—is also an important vital sign. An institution should obviously be taking in enough revenue to cover its expenses without drawing on its cash reserves. 

    Additionally, however, given continued growth in expenses, revenue growth (through enrollment growth, student mix, and/or program mix) is a significant measure of ongoing vitality.

    Financial health is also enhanced if an institution does not rely too heavily on a single revenue source. For schools with an endowment, for example, the amount of income the endowment can generate to support operations is an important source of additional income. More generally, additional income can come from such auxiliary revenue sources as residential fees, fundraising, special events, concessions, and a host of other sources. These additional revenue sources, while potentially small on an individual basis, can be material on a cumulative basis.
     
  • Expenses. How much does it cost to produce the education that a college or university provides to its students? If that cost is approaching—or worse, surpassing—the net tuition revenue and additional income that the institution brings in, what is being done—or could be done—to reduce those costs? Expenses are perhaps most similar to body temperature in medical vital signs; if they get too high, they must be brought down before the health of the institution begins to decline. And the measure of expenses should be viewed overall for the institution as well as on a per student basis to communicate the “value” of different student types to the organization.
     
  • Debt. Debt is an essential component of the funding of significant capital projects that colleges and universities must undertake to maintain updated and competitive facilities. Just as most people need to take out a mortgage to afford a home purchase—spreading the cost of the home over a multiyear payment period—so too do institutions often need debt to finance large capital expenditures. But the amount of debt (also termed “leverage”) can also be an indicator of the institution’s financial health. That health begins to decline if the amount of debt relative to an institution’s assets or annual income grows too large, or if the amount required to pay for the debt (i.e., to meet the scheduled principal and interest payments—the debt service) puts too much of a burden on the cash flow generated from the institution’s day-to-day operations. If the debt service becomes too high relative to cash flow, the institution may face onerous legal requirements, or even default, which may severely constrain its ability to provide the range of programs desired and expected by its student population.
     
  • Risk. Risk is an indicator that identifies potential weaknesses in any of the preceding indicators that could jeopardize the institution’s financial health. For basic financial literacy, only the most significant risks need to be identified: over-reliance on tuition revenue in a market with declining enrollments, for example, or over-reliance on endowment income in the event of market instability. Once an institution consistently measures its risks, it can begin to determine what level of risk is appropriate and address strategies to manage that risk.

Why does financial literacy matter?

Promoting financial literacy throughout an institution cultivates a common understanding of financial health that provides context for leadership’s decisions and a common language to address issues. If tuition revenue is declining, for example, financially literate faculty members should better understand the need to prioritize academic programs that not only meet the academic needs of their students, but also can draw more students or produce healthier margins. If cost-cutting measures are required to reduce expenses, financially literate staff should understand the genesis of the need for reductions and why the institution cannot simply draw on its endowment to close the gap. Furthermore, acknowledging and describing the most significant risks an institution faces using a common language makes clear the need for action if one or more of those risks begins to materialize.

Financial literacy is also an important tool for cultivating the next generation of faculty leaders. When faculty members rise to leadership positions, it is essential that they understand that academic growth and strategic initiatives cannot succeed without sufficient resources to support them, or if they cannot generate the revenue needed to cover—or exceed—their costs.

By promoting financial literacy across the institution, the institution can help ensure that future leaders are acquiring the foundation needed for them to grow into informed decision-makers who understand the need to maintain the institution’s financial health.

Hospitals at a Crossroad: Reactive Navigation or Proactive Orchestration?

Posted on by • Posted in 2024 Election Issues, American Hospital Association (AHA), Bankruptcy, Board, Financial Stewardship, Financial Viability, Financially Distressed, Health System, Healthcare Reform, Hospital, Hospital Industry, Leadership, Leadership Investment, Leadership Problem Solving, Leadership Transformation, Leadership Vision, Medicaid, Medicare, Public Opinion, Public Perception, Utilization Trends • Leave a comment
Hospitals at a Crossroad: Reactive Navigation or Proactive Orchestration?

This is National Hospital week. It comes at a critical time for hospitals:

The U.S. economy is strong but growing numbers in the population face financial insecurity and economic despair. Increased out-of-pocket costs for food, fuel and housing (especially rent) have squeezed household budgets and contributed to increased medical debt—a problem in 41% of U.S. households today. Hospital bills are a factor.

The capital market for hospitals is tightening: interest rates for debt are increasing, private investments in healthcare services have slowed and valuations for key sectors—hospitals, home care, physician practices, et al—have dropped. It’s a buyer’s market for investors who hold record assets under management (AUM) but concerns about the harsh regulatory and competitive environment facing hospitals persist. Betting capital on hospitals is a tough call when other sectors appear less risky.

Utilization levels for hospital services have recovered from pandemic disruption and operating margins are above breakeven for more than half but medical inflation, insurer reimbursement, wage increases and Medicare payment cuts guarantee operating deficits for all. Complicating matters, regulators are keen to limit consolidation and force not-for-profits to justify their tax exemptions. Not a pretty picture.

And, despite all this, the public’s view of hospitals remains positive though tarnished by headlines like these about Steward Health’s bankruptcy filing last Monday:

The public is inclined to hold hospitals in high regard, at least for the time being. When asked how much trust and confidence they have in key institutions to “to develop a plan for the U.S. health system that maximizes what it has done well and corrects its major flaws,” consumers prefer for solutions physicians and hospitals over others but over half still have reservations:

A Great DealSomeNot Much/None
Health Insurers18%43%39%
Hospitals27%52%21%
Physicians32%53%15%
Federal Government14%42%44%
Retail Health Org’s21%51%28%

The American Hospital Association (AHA) is rightfully concerned that hospitals get fair treatment from regulators, adequate reimbursement from Medicare and Medicaid and protection against competitors that cherry-pick profits from the health system.

It can rightfully assert that declining operating margins in hospitals are symptoms of larger problems in the health system: flawed incentives, inadequate funding for preventive and primary care, the growing intensity of chronic diseases, medical inflation for wages, drugs, supplies and technologies, the dominance of ‘Big Insurance’ whose revenues have grown 12.1% annually since the pandemic and more. And it can correctly prove that annual hospital spending has slowed since the pandemic from 6.2% (2019) to 2.2% (2022) in stark contrast to prescription drugs (up from 4% to 8.4% and insurance costs (from -5.4% to +8.5%). Nonetheless, hospital costs, prices and spending are concerns to economists, regulators and elected officials.

National health spending data illustrate the conundrum for hospitals: relative to the overall CPI, healthcare prices and spending—especially outpatient hospital services– are increasing faster than prices and spending in other sectors and it’s getting attention: that’s problematic for hospitals at a time when 5 committees in Congress and 3 Cabinet level departments have their sights set on regulatory changes that are unwelcome to most hospitals.

My take:

The U.S. market for healthcare spending is growing—exceeding 5% per year through the next decade. With annual inflation targeted to 2.0% by the Fed and the GDP expected to grow 3.5-4.0% annually in the same period, something’s gotta’ give. Hospitals represent 30.4% of overall spending today (virtually unchanged for the past 5 years) and above 50% of total spending when their employed physicians and outside activities are included, so it’s obvious they’ll draw attention.

Today, however, most are consumed by near-term concerns– reimbursement issues with insurers, workforce adequacy and discontent, government mandates– and few have the luxury to look 10-20 years ahead.

I believe hospitals should play a vital role in orchestrating the health system’s future and the role they’ll play in it. Some will be specialty hubs. Some will operate without beds. Some will be regional. Some will close. And all will face increased demands from regulators, community leaders and consumers for affordable, convenient and effective whole-person care.

For most hospitals, a decision to invest and behave as if the future is a repeat of the past is a calculated risk. Others with less stake in community health and wellbeing and greater access to capital will seize this opportunity and, in the process, disable hospitals might play in the process.

Near-term reactive navigation vs. long-term proactive orchestration–that’s the crossroad in front of hospitals today. Hopefully, during National Hospital Week, it will get the attention it needs in every hospital board room and C suite.

PS: Last week, I wrote about the inclination of the 18 million college kids to protest against the healthcare status quo (“Is the Health System the Next Target for Campus Unrest?” The Keckley Report May 6, 2024 www.paulkeckley.com). This new survey caught my attention:

According to the Generation Lab’s survey of 1250 college students released last week, healthcare reform is a concern. When asked to choose 3 “issues most important to you” from its list of 13 issues, healthcare reform topped the list. The top 5:

  1. Health Reform (40%)
  2. Education Funding and access (38%)
  3. Economic fairness and opportunity (37%)
  4. Social justice and civil rights (36%)
  5. Climate change (35%)

If college kids today are tomorrow’s healthcare workforce and influencers to their peers, addressing the future of health system with their input seems shortsighted. Most hospital boards are comprised of older adults—community leaders, physicians, et al.

And most of the mechanisms hospitals use to assess their long-term sustainability is tethered to assumptions about an aging population and Medicare. 

College kids today are sending powerful messages about the society in which they aspire to be a part. They’re tech savvy, independent politically and increasingly spiritual but not religious. And the health system is on their radar.

The Four Conflicts that Hospitals must Resolve in 2024

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The Four Conflicts that Hospitals must Resolve in 2024

If you’re a U.S. health industry watcher, it would appear the $4.5 trillion system is under fire at every corner.

Pressures to lower costs, increase accessibility and affordability to all populations, disclose prices and demonstrate value are hitting every sector. Complicating matters, state and federal legislators are challenging ‘business as usual’ seeking ways to spend tax dollars more wisely with surprisingly strong bipartisan support on many issues. No sector faces these challenges more intensely than hospitals.

In 2022 (the latest year for NHE data from CMS), hospitals accounted for 30.4% of total spending ($1.35 trillion. While total healthcare spending increased 4.1% that year, hospital spending was up 2.2%–less than physician services (+2.7%), prescription drugs (+8.4%), private insurance (+5.9%) and the overall inflation rate (+6.5%) and only slightly less than the overall economy (GDP +1.9%). Operating margins were negative (-.3%) because operating costs increased more than revenues (+7.7% vs. 6.5%) creating deficits for most. Hardest hit: the safety net, rural hospitals and those that operate in markets with challenging economic conditions.

In 2023, the hospital outlook improved. Pre-Covid utilization levels were restored. Workforce tensions eased somewhat. And many not-for-profits and investor-owned operators who had invested their cash flows in equities saw their non-operating income hit record levels as the S&P 500 gained 26.29% for the year.

In 2024, the S&P is up 5.15% YTD but most hospital operators are uncertain about the future, even some that appear to have weathered the pandemic storm better than others. A sense of frustration and despair is felt widely across the sector, especially in critical access, rural, safety net, public and small community hospitals where long-term survival is in question. 

The cynicism felt by hospitals is rooted in four conflicts in which many believe hospitals are losing ground:

Hospitals vs. Insurers:

Insurers believe hospitals are inefficient and wasteful, and their business models afford them the role of deciding how much they’ll pay hospitals and when based on data they keep private. They change their rules annually to meet their financial needs. Longer-term contracts are out of the question. They have the upper hand on hospitals.

Hospitals take financial risks for facilities, technologies, workforce and therapies necessary to care. Their direct costs are driven by inflationary pressures in their wage and supply chains outside their control and indirect costs from regulatory compliance and administrative overhead, Demand is soaring. Hospital balance sheets are eroding while insurers are doubling down on hospital reimbursement cuts to offset shortfalls they anticipate from Medicare Advantage. Their finances and long-term sustainability are primarily controlled by insurers. They have minimal latitude to modify workforces, technology and clinical practices annually in response to insurer requirements.

Hospitals vs. the Drug Procurement Establishment: 

Drug manufacturers enjoy patent protections and regulatory apparatus that discourage competition and enable near-total price elasticity. They operate thru a labyrinth of manufacturers, wholesalers, distributors and dispensers in which their therapies gain market access through monopolies created to fend-off competition. They protect themselves in the U.S. market through well-funded advocacy and tight relationships with middlemen (GPOs, PBMs) and it’s understandable: the global market for prescription drugs is worth $1.6 trillion, the US represents 27% but only 4% of the world population.

And ownership of the 3 major PBMs that control 80% of drug benefits by insurers assures the drug establishment will be protected.

Prescription drugs are the third biggest expense in hospitals after payroll and med/surg supplies. They’re a major source of unexpected out-of-pocket cost to patients and unanticipated costs to hospitals, especially cancer therapies. And hospitals (other than academic hospitals that do applied research) are relegated to customers though every patient uses their products.

Prescription drug cost escalation is a threat to the solvency and affordability of hospital care in every community.

Hospitals vs. the FTC, DOJ and State Officials: 

Hospital consolidation has been a staple in hospital sustainability and growth strategies. It’s a major focus of regulator attention. Horizontal consolidation has enabled hospitals to share operating costs thru shared services and concentrate clinical programs for better outcomes. Vertical consolidation has enabled hospitals to diversify as a hedge against declining inpatient demand: today, 200+ sponsor health insurance plans, 60% employ physicians directly and the majority offer long-term, senior care and/or post-acute services. But regulators like the FTC think hospital consolidation has been harmful to consumers and third-party data has shown promised cost-savings to consumers are not realized.

Federal regulators are also scrutinizing the tax exemptions afforded not-for-profit hospitals, their investment strategies, the roles of private equity in hospital prices and quality and executive compensation among other concerns. And in many states, elected officials are building their statewide campaigns around reining in “out of control” hospitals and so on.

Bottom line: Hospitals are prime targets for regulators.

Hospitals vs. Congress: 

Influential members in key House and Senate Committees are now investigating regulatory changes that could protect rural and safety net hospitals while cutting payments to the rest. In key Committees (Senate HELP and Finance, House Energy and Commerce, Budget), hospitals are a target. Example: The Lower Cost, More Transparency Act passed in the the House December 11, 2023. It includes price transparency requirements for hospitals and PBMs, site-neutral payments, additional funding for rural and community health among more. The American Hospital Association objected noting “The AHA supports the elimination of the Medicaid disproportionate share hospital (DSH) reductions for two years. However, hospitals and health systems strongly oppose efforts to include permanent site-neutral payment cuts in this bill. In addition, the AHA has concerns about the added regulatory burdens on hospitals and health systems from the sections to codify the Hospital Price Transparency Rule and to establish unique identifiers for off-campus hospital outpatient departments (HOPDs).” Nonetheless, hospitals appear to be fighting an uphill battle in Congress.

Hospitals have other problems:

Threats from retail health mega-companies are disruptive. The public’s trust in hospitals has been fractured. Lenders are becoming more cautious in their term sheets.  And the hospital workforce—especially its doctors and nurses—is disgruntled. But the four conflicts above seem most important to the future for hospitals.

However, conflict resolution on these is problematic because opinions about hospitals inside and outside the sector are strongly held and remedy proposals vary widely across hospital tribes—not-for profits, investor-owned, public, safety nets, rural, specialty and others.

Nonetheless, conflict resolution on these issues must be pursued if hospitals are to be effective, affordable and accessible contributors and/or hubs for community health systems in the future. The risks of inaction for society, the communities served and the 5.48 million (NAICS Bureau of Labor 622) employed in the sector cannot be overstated. The likelihood they can be resolved without the addition of new voices and fresh solutions is unlikely.

PS: In the sections that follow, citations illustrate the gist of today’s major message: hospitals are under attack—some deserved, some not. It’s a tough business climate for all of them requiring fresh ideas from a broad set of stakeholders.

PS If you’ve been following the travails of Mission Hospital, Asheville NC—its sale to HCA Healthcare in 2019 under a cloud of suspicion and now its “immediate jeopardy” warning from CMS alleging safety and quality concerns—accountability falls squarely on its Board of Directors. I read the asset purchase agreement between HCA and Mission: it sets forth the principles of operating post-acquisition but does not specify measurable ways patient safety, outcomes, staffing levels and program quality will be defined. It does not appear HCA is in violation with the terms of the APA, but irreparable damage has been done and the community has lost confidence in the new Mission to operate in its best interest. Sadly, evidence shows the process was flawed, disclosures by key parties were incomplete and the hospital’s Board is sworn to secrecy preventing a full investigation.

The lessons are 2 for every hospital:

Boards must be prepared vis a vis education, objective data and independent counsel to carry out their fiduciary responsibility to their communities and key stakeholders. And the business of running hospitals is complex, easily prone to over-simplification and misinformation but highly important and visible in communities where they operate.

Business relationships, price transparency, board performance, executive compensation et al can no longer to treated as private arrangements.

Three Must-Haves for Every Rating Presentation

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Creating a great rating agency presentation is imperative to telling your story. I’ve probably seen a thousand presentations across the past three decades and I can say without a doubt that a great presentation will find its way into the rating committee. Show me a crisp, detailed, well-organized presentation, and I’ll show you a ratings analyst who walks away with high confidence that the management team can navigate the industry challenges ahead.

During the pandemic, Kaufman Hall recommended that hospitals move financial performance to the top of the presentation agenda. Better presentations chronicled the immediate, “line item by line item” steps management was taking to stop the financial bleeding and access liquidity. We still recommend this level of detail in your presentations, but as many hospitals relocate their bottom line, management teams are now returning to discussing longer-term strategy and financial performance in their presentations.

Beyond the facts and figures, many hospitals ask me what the rating analysts REALLY want to know. Over those one thousand presentations I’ve seen, the presentations that stood out the most addressed the three themes below:

  1. What makes your organization essential? Hospitals maintain limited price elasticity as Medicare and Medicaid typically comprise at least half of patient service revenue, leaving only a small commercial slice to subsidize operations. The ability to negotiate meaningful rate increases with payers will largely rest on the ability to prove why the hospital is a “must-have” in the network. In other words, a health plan that can’t sell a product without a hospital in its network is the definition of essential. This conversation now also includes Medicare Advantage plans as penetration rates increase rapidly across the country. Essentiality may be demonstrated by distinct services, strong clinical outcomes and robust medical staff, multiple access points across a certain geography, or data that show the hospital is a low-cost alternative compared to other providers. Volume trends, revenue growth, and market share show that essentiality. A discussion on essentiality is particularly needed for independent providers who operate in crowded markets.
  2. What makes your financial performance durable? Many hospitals are showing a return to better performance in recent quarters. Showing how your organization will sustain better financial results is important. Analysts will want to know what the new “run rate” is and why it is durable. What are the undergirding factors that make the better margins sustainable? Drivers may include negotiated rate increases from commercial payers and revenue cycle improvements. On the expense side, a well-chronicled plan to achieve operating efficiencies should receive material airtime in the presentation, particularly regarding labor. It is universally understood that high labor costs are a permanent, structural challenge for hospitals, so any effort to bend the labor cost curve will be well received. Management should also isolate non-recurring revenue or expenses that may drive results, such as FEMA funds or 340B settlements. To that end, many states have established new direct-to-provider payment programs which may be meaningful for hospitals. Expect questions on whether these funds are subject to annual approval by the state or CMS. The analysts will take a sharpened pencil to a growing reliance on these funds. 

    The durability of financial performance should be represented with highly detailed multi-year projections complete with computed margin, debt, and liquidity ratios. Know that analysts will create their own conservative projections if these are not provided, which effectively limits your voice in the rating committee. 

    We also recommend that hospitals include a catalogue of MTI and bank covenants in the presentation. Complying with covenants are part of the agreement that hospitals make with their lenders, and it is the organization’s responsibility to report how it’s performing against these covenants. General philosophy on headroom to covenants also provides insight to management’s operating philosophy. For example, is it the organization’s goal to have narrow, adequate, or ample headroom to the covenants and why? As the rating agencies will tell you, ratings are not solely based on covenant performance, but all rating factors influence your ability to comply with the covenants.
  3. What makes your capital plan affordable? Every rating committee will ask what the hospital’s future capital needs are and how those capital needs will be supported by cash flow, also known as “capital capacity.” To answer that question, a hospital must understand what it can afford, based on financial projections. Funding sources may require debt, which requires a debt capacity analysis with goals on debt burden, coverage, and liquidity targets. Over the years, better presentations explain the organization’s capital model, outline the funding sources, and discuss management’s tolerance for leverage.

There is always a lot to cover when meeting with the rating agencies and a near endless array of metrics and indicators to provide. As I’ve written before, how you tell the story is as important as the story itself. If you can weave these three themes throughout the presentation, then you will have a greater shot at having your best voice heard in rating committee.

Three Things Board Members Should Know When Attending Rating Agency Meetings

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I am often asked how board members can play a helpful role in rating agency meetings if they are invited to attend.

Below are three ways in which board members can add value to the rating presentation:

1) Acknowledge the organization’s challenges. Too many times the key issues that need to be addressed upfront are left to the end, when time is short. Examples may include a covenant violation, unfavorable variance to budget, downturn in liquidity, or an unexpected change in management. A rating should be able to endure the ups and downs of a business cycle but large swings in performance or covenant violations challenge the bandwidth of tolerance and need to be addressed early. Better meetings acknowledge these issues upfront before the analysts ask about them (said another way: the best defense is a good offense). If the analysts leave the meeting with the sense that management is on top of the issues, then that same confidence is brought forward to the rating committee.

Covenant violations have been on the rise since 2022 and board members should be well versed in the ramifications when there is a breach. In its simplest form, a bond is a promise to pay. To ensure full and timely repayment of that bond, hospitals agree to maintain certain financial covenants that serve as financial guardrails. Covenants are typically measured on an annual basis but may be measured more frequently per the terms of the agreements. The penalties for violating a covenant can range from a consultant call-in to an event of default with acceleration provisions. In any circumstance, covenant violations require an inordinate amount of time and resources to address and should be understood, even if at a basic level, by the board.

To that end, board members should maintain a basic understanding of hospital reimbursement and the ongoing challenges hospitals face, namely: inadequate reimbursement levels, labor shortages, perennial scrutiny over tax-exempt status, and the need to improve access and equity in healthcare. An informed trustee is a great trustee. One of the most impressive board members I met in my years as a ratings analyst was a business executive who was chair of a 25-bed critical access hospital and well-versed on the complexities of reimbursement. (You read that correctly: a 25-bed hospital, not a 500-bed hospital, academic medical center, regional or national system). Despite large-scale challenges as a small facility, that hospital continued to show good financial performance. Knowledgeable governance, working in tandem with management, had something to do with that.

2) Address how the organization will absorb additional debt if adding leverage. Ratings express the ability of a hospital to repay its debt; when debt increases, the ability to repay that debt can weaken. A board member or senior management should explain how they got comfortable adding leverage to the organization and what the benefits are of using debt to fund the projects, rather than, say, cash. Detailed, multi-year financial projections should show how the hospital will rebuild the balance sheet and absorb higher debt service. Projections are especially important when the size of the construction project or acquisition funded with the debt is material. This is also an opportunity for boards to demonstrate how the various skills and expertise they bring to the organization can be helpful. For example, individuals with real estate or construction experience can bring their experience to large projects. Individuals with experience in highly regulated or highly unionized industries can also bring their know-how to senior leadership.

3) Share the organization’s succession plan. Succession planning is one of the most important responsibilities of the board. Sam Altman’s wild ride (he’s in/he’s out/he’s in, again) as CEO of OpenAI and the mutiny his departure would have caused is a timely example of why succession planning is essential. From a ratings perspective, curating the very best leadership is viewed as a best practice of high-performing organizations. A good example of strong succession planning is Texas Children’s Hospital, the largest pediatric provider in the U.S. Earlier this year, the board and the CEO created the separate role of President (this title was previously combined with the CEO’s title) and launched a search that was completed in September. The new President will report to the CEO, who will continue in his role. The Chair of the Texas Children’s Board of Trustees notes that the new structure is intended to prepare the organization for its “next evolution in leadership.” The opportunity for the new President to work with Texas Children’s long-serving CEO should ultimately provide for a smooth leadership transition.

If we’ve learned anything from the past four years, it is the importance of strong governance and management. Undoubtedly, board members will be called upon for their guidance and expertise as turbulent times continue for the industry. Maintaining a basic understanding of the hospital’s financial challenges, supporting management, and building a succession playbook will be integral to the organization’s long-term success.