Category Archives: Board Effectiveness

The Four Questions Healthcare Boards must Answer

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The Four Questions Healthcare Boards must Answer

In 63 days, Americans will know the composition of the 119th Congress and the new occupants of the White House and 11 Governor’s mansions. We’ll learn results of referenda in 10 states about abortion rights (AZ, CO, FL, MD, MO, MT, NE, NV, NY, SD) and see how insurance coverage for infertility (IVF therapy) fares as Californians vote on SB 729. But what we will not learn is the future of the U.S. health system at a critical time of uncertainty.

In 6 years, every baby boomer will be 65 years of age or older. In the next 20 years, the senior population will be 22% of the population–up from 18% today. That’s over 83 million who’ll hit the health system vis a vis Medicare while it is still digesting the tsunami of obesity, a scarcity of workers and unprecedented discontent:

  • The majority of voters is dissatisfied with the status quo. 69% think the system is fundamentally flawed and in need of major change vs. 7% who think otherwise. 60% believe it puts its profits above patient care vs. 13% who disagree.
  • Employers are fed up: Facing projected cost increases of 9% for employee coverage in 2025, they now reject industry claims of austerity when earnings reports and executive compensation indicate otherwise. They’re poised to push back harder than ever.
  • Congress is increasingly antagonistic: A bipartisan coalition in Congress is pushing populist reforms unwelcome by many industry insiders i.e. price transparency for hospitals, price controls for prescription drugs, limits on private equity ownership, constraint on hospital, insurer and physician consolidation, restrictions on tax exemptions of NFP hospitals, site neutral payment policies and many more.

Fanning these flames, media characterizations of targeted healthcare companies as price gouging villains led by highly-paid CEOs is mounting: last week, it was Acadia Health’s turn courtesy of the New York Times’ investigators.

Navigating uncertainty is tough for industries like healthcare where demand s growing, technologies are disrupting how and where services are provided and by whom, and pricing and affordability are hot button issues.  And it’s too big to hide: at $5.049 trillion, it represents 17.6% of the U.S. GDP today increasing to 19.7% by 2032. Growing concern about national debt puts healthcare in the crosshairs of policymaker attention:

Per the Committee for a Responsible Federal Budget: “In the latest Congressional Budget Office (CBO) baseline, nominal spending is projected to grow from $6.8 trillion in Fiscal Year (FY) 2024 to $10.3 trillion in 2034. About 87% of this increase is due to three parts of the federal budget: Social Security, federal health care programs, and interest payments on the debt.”

In response, Boards in many healthcare organizations are hearing about the imperative for “transformational change” to embrace artificial intelligence, whole person health, digitization and more. They’re also learning about ways to cut their operating costs and squeeze out operating margins. Bold, long-term strategy is talked about, but most default to less risky, short-term strategies compatible with current operating plans and their leaders’ compensation packages. Thus, “transformational change” takes a back seat to survival or pragmatism for most.

For Boards of U.S. healthcare organizations, the imperative for transformational change is urgent: the future of the U.S. system is not a repeat of its past. But most Boards fail to analyze the future and construct future-state scenarios systematically. Lessons from other industries are instructive.

  • Transformational change in mission critical industries occurs over a span of 20-25 years. It starts with discontent with the status quo, then technologies and data that affirm plausible alternatives and private capital that fund scalable alternatives. It’s not overnight.
  • Transformational change is not paralyzed by regulatory hurdles. Transformers seek forgiveness, not permission while working to change the regulatory landscape. Advocacy is a critical function in transformer organizations.
  • Transformation is welcomed by consumers. Recognition of improved value by end-users—individual consumers—is what institutionalizes transformational success. Transformed industries define success in terms of the specific, transparent and understandable results of their work.

Per McKinsey, only one in 8 organizations is successful in fully implementing transformational change completely but the reward is significant: transformers outperform their competition three-to-one on measures of growth and effectiveness.

I am heading to Colorado Springs this weekend for the Governance Institute. There, I will offer Board leaders four basic questions.

  • Is the future of the U.S. health system a repeat of the past or something else?
  • How will its structure, roles and responsibilities change?
  • How will affordability, quality, innovation and value be defined and validated?
  • How will it be funded?

Answers to these require thoughtful discussion. They require independent judgement. They require insight from organizations outside healthcare whose experiences are instructive. They require fresh thinking.

Until and unless healthcare leaders recognize the imperative for transformational change, the system will calcify its victim-mindset and each sector will fend for itself with diminishing results. No sector—hospitals, insurers, drug companies, physicians—has all the answers and every sector faces enormous headwinds. Perhaps it’s time for a cross-sector coalition to step up with transformational change as the goal and the public’s well-being the moral compass.

PS: Last week, I caught up with Drs. Steve and Pat Gabbe in Columbus, Ohio. Having served alongside them at Vanderbilt and now as an observer of their work at Ohio State, I am reminded of the goodness and integrity of those in healthcare who devote their lives to meaningful, worthwhile work. Steve “burns with a clear blue flame” as a clinician, mentor and educator. Pat is the curator of a program, Moms2B, that seeks to alleviate Black-White disparities in infant mortality and maternal child health in Ohio. They’re great people who see purpose in their calling; they’re what make this industry worth fixing!

Three Things Board Members Should Know When Attending Rating Agency Meetings

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https://www.kaufmanhall.com/insights/blog/three-things-board-members-should-know-when-attending-rating-agency-meetings

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.

Healthcare 2024: The 10 Themes that will Dominate Discussion

Posted on by • Posted in Accountable Care Organization (ACO), Antitrust, Board, Board Effectiveness, C-Suite, Distrust, Health Policy, Health System, Hospital, Hospital Industry, Market Consolidation, Market Trends, Market Uncertainty, Non-Profit Healthcare Industry, Physician Independence, Public Health, Workforce Issues, Workforce Strategy • Leave a comment
Healthcare 2024: The 10 Themes that will Dominate Discussion

The U.S. health system has experienced three major shifts since the pandemic that set the stage for its future:

  • From trust to distrust: Every poll has chronicled the decline in trust and confidence in government: Congress, the Presidency, the FDA and CDC and even the Supreme Court are at all-time lows. Thus, lawmaking about healthcare is met with unusual hostility.
  • From big to bigger: The market has consistently rewarded large cap operators, giving advantage to national and global operators in health insurance, information technology and retail health. In response, horizontal consolidation via mergers and acquisitions has enabled hospitals, medical practices, law firms and consultancies to get bigger, attracting increased attention from regulators. Access to private capital and investor confidence is a major differentiator for major players in each sector.
  • From regulatory tailwinds to headwinds: in the last 3 years, regulators have forced insurers, hospitals and drug companies to disclose prices and change business practices deemed harmful to fair competition and consumer choice. Incumbent-unfriendly scrutiny has increased at both the state and federal levels including notable bipartisan support for industry-opposed legislation. It will continue as healthcare favor appears to have run its course.

Some consider these adverse; others opportunistic; all consider them profound. All concede the long-term destination of the U.S. health system is unknown. Against this backdrop, 2024 is about safe bets.

These 10 themes will be on the agenda for every organization operating in the $4.5 trillion U.S. healthcare market:

  1. Not for profit health: “Not-for-profit” designation is significant in healthcare and increasingly a magnet for unwelcome attention. Not-for-profit hospitals, especially large, diversified multi-hospital systems, will face increased requirements to justify their tax exemptions. Special attention will be directed at non-operating income activities involving partnerships with private equity and incentives used in compensating leaders. Justification for profits will take center stage in 2024 with growing antipathy toward organizations deemed to put profit above all else.
  2. Insurer coverage and business practices: State and federal regulators will impose regulatory constraints on insurer business practices that lend to consumer and small-business affordability issues.
  3. Workforce wellbeing: The pandemic hangover, sustained impact of inflation on consumer prices, increased visibility of executive compensation and heightened public support for the rank-and-file workers and means wellbeing issues must be significant in 2024.
  4. Board effectiveness: The composition, preparedness, compensation and independent judgement of Boards will attract media scrutiny; not-for-profit boards will get special attention in light of 2023 revelations in higher education.
  5. Employer-sponsored health benefits: The cost-effectiveness of employee health benefits coverage will prompt some industries and large, self-insured companies to pursue alternative strategies for attracting and maintaining a productive workforce. Direct contracting, on-site and virtual care will be key elements.
  6. Physician independence: With 20% of physicians in private equity-backed groups, and 50% in hospital employed settings, ‘corporatization’ will encounter stiff resistance from physicians increasingly motivated to activism believing their voices are unheard.
  7. Data driven healthcare: The health industry’s drive toward interoperability and transparency will will force policy changes around data (codes) and platform ownership, intellectual property boundaries, liability et al. Experience-based healthcare will be forcibly constrained by data-driven changes to processes and insights.
  8. Consolidation: The DOJ and FTC will expand their activism against vertical and horizontal consolidation that result in higher costs for consumers. Retrospective analyses of prior deals to square promises and actual results will be necessary.
  9. Public health: State and federal funding for public health programs that integrate with community-based health providers will be prioritized. The inadequacy of public health funding versus the relative adequacy of healthcare’s more lucrative services will be the centerpiece for health reforms.
  10. ACO 2.0: In Campaign 2024, abortion and the Affordable Care Act will be vote-getters for candidates favoring/opposing current policies. Calls to “Fix and Repair” the Affordable Care Act will take center stage as voters’ seek affordability and access remedies.

Every Board and C suite in U.S. healthcare will face these issues in 2024.