Advising the Nonprofit Board (W0445792.DOC;9)



ADVISING THE NONPROFIT BOARD

JOHN H. FISHER, II, CHC

Ruder Ware, LLSC

500 First Street, Suite 8000

P.O. Box 8050

Wausau, WI 54402-8050

715.845.4336



ROBERT M. CHARLES

Liebmann, Conway, Olejniczak & Jerry, S.C.

Attorneys and Counselors at Law

231 South Adams Street

P.O. Box 23200

Green Bay, WI 54305-3200

I. BACKGROUND AND GOALS

A. Directors and nonprofit organizations generally get involved voluntarily in order to give back to the community and the organization which they serve. Potential directors generally do not give thought to their specific fiduciary obligations or their obligations to oversee compliance with the many complex laws that are applicable in the healthcare industry.

B. It is important for legal counsel to healthcare organizations to be certain that directors and trustees have knowledge of their duties and obligations. Specifically, corporate counsel should advise the board on a regular basis with respect to:

1. The basic fiduciary obligations of oversight, care, loyalty and obedience;

2. The duty of the Board of Directors regarding oversight of corporate compliance programs;

3. The manner that the fiduciary obligations are exercised with respect to major healthcare transactions; and

4. Developments affecting overall Board structure and oversight responsibilities.

C. This presentation will outline the general obligations of members of a nonprofit board of directors. Common law, statutory, case law and regulatory factors defining a director’s duty of care will be outlined. These general obligations will be applied to some common oversight areas and decisions that are being presented to nonprofit boards in today’s fast-moving healthcare environment.

II. SIGNIFICANT TRENDS AFFECTING DIRECTOR RESPONSIBILITIES

D. To apply the same standard as for-profit corporations.

E. Nonprofits are under more scrutiny in the wake of for-profit scandals.

1. Increased focus on the role of governing boards overseeing operations and compliance.

2. State enforcement actions challenging nonprofits.

3. More IRS scrutiny over Board structure and conflicts of interest.

4. More aggressive regulators.

5. Mandatory and more robust compliance program responsibilities.

6. Complex transactions.

7. Responsible Corporate Officer Doctrine (Park Doctrine).

8. Federal and State enforcement preferences directed toward individuals.

9. OIG push toward more assertive exercise of Board of Director oversight.

III. ROLE OF CORPORATE COUNSEL ADVISING THE BOARD ON THE NATURE OF ITS DUTIES

F. Attorneys advise Boards in a variety of settings.

1. Outside Counsel

• Working with management on transactions, regulatory issues, compliance.

1) Duties of the Board may be in the background of this advice.

2) Management is obligated to fulfill the general oversight direction of the Board of Directors.

• Addressing the Board with respect to a major transaction.

• Occasionally directly advising the Board with respect to compliance obligations.

• Sometime asked to provide “in-service” training to new Directors as part of a training program.

2. In-House Counsel

• Has much more ongoing contact with Board of Directors.

• Often present at committee meetings.

• Asked for ongoing input regarding legal issues that arise.

• Often asked to attend Board meetings to give updates on legal/business issues.

• Side note – Attorney/Client privilege issue with respect to in-house counsel. Privilege is not a certain thing and courts have drawn a distinction based on whether in-house counsel is providing strictly legal advice. Business advice is not subject to the attorney/client privilege. Mixed legal and business advice is at risk of possible recovery by private litigants or government investigators.

3. Compliance Officer

• Retain outside counsel when privilege is important.

• Often arises in the context of compliance, self disclosure, investigation.

• Ongoing contact with the Board of Directors regarding compliance issues.

• Must report directly to the Board of Directors.

• Must make regular reports to the Board of Directors regarding compliance program activities. Annually at the very minimum.

• As part of compliance training obligations, must make certain that Board members are appropriately trained regarding their responsibilities over the compliance program, the compliance process, and significant risk areas that affect the organization.

4. Compliance Officer/Legal Counsel Dual Role

• Roles as compliance officer and legal counsel may conflict.

• OIG clearly dislikes dual role compliance officers.

1) Evidence that the compliance program may not be effective.

2) No reliance on attorney-client privilege.

• Duty to advise the Board with respect to the risks.

G. Duty of Legal Counsel

1. Given current health care environment, nonprofit directors need more expansive counseling regarding their duty of care obligations.

2. Proper Board education on the nature and extent of their duties can greatly decrease compliance risk and enhance the quality of decision-making.

3. Advise the Board on the nature of their duties when they are presented with consideration of a major decision.

4. Advise the Board periodically on the general nature of their obligations.

5. Advise incoming Board members on the nature of their duties and obligations.

6. Advise the Board regarding their obligations to oversee the compliance program of their institution.

• General compliance requirements.

• Compliance processes.

• Duties to seek answers.

• Put processes in place.

• Be certain that compliance is being addressed.

• Independence in effectiveness reviews.

IV. GENERAL DUTIES OF NONPROFIT BOARD

H. Regulatory Agencies are Pushing for More Board Engagement

1. Federal Sentencing Guidelines

2. OIG Industry Guidance

3. Daniel Levison Article

• DHH Inspector General

• “Trustee Engagement and Hospital Success”

• Trustee Magazine, July 2010

4. State Attorneys General

5. Sarbanes-Oxley Model

I. Duties and Responsibilities of Board Directors of a Nonprofit Board

1. Revised Model Nonprofit Corporations Act (1987)

• Move toward same duties as directors in for-profit corporations.

• Modern trend away from trust principals.

• Distinction is that trustees can be held responsible for simple negligence as opposed to corporate fiduciary concepts of good faith, reasonable belief.

• But some state Attorney Generals have attempted to apply the trust standard.

1) Community Asset theory

2) No market oversight theory

3) Minnesota AG attempted to force the appointment of two directors in HealthPoint (2003)

2. Director duties arise in several contexts

• Decision-making Function – Involving specific decisions on particular board action:

1) Entering a contract

2) Purchasing a practice

3) Merger or Acquisition

4) Medical Staff Credentialing

• Oversight Function

1) Overseeing day-to-day activities

2) Assure management meets operational obligations

3) Some examples

a) Compliance Program Oversight

b) Quality and Safety Oversight

• Management Function

1) All corporate powers are exercised through delegation from the Board of Directors.

2) The Board is ultimately responsible for the management of the corporation.

3. General Duties

• Common law

1) Historically, there has been very little precedence on which to advise nonprofit hospital boards on the nature of their duties. It was unclear whether corporate or trust principles were applicable.

2) Recent cases and model rules tend toward the application of general corporate standards of care.

3) State Attorney General actions and governmental regulators are providing some additional definition of the duty of nonprofit hospital boards.

• Primary Duties Adopted in Model Act

1) Duty of care – requires a director to use the care of an ordinary prudent person under similar circumstances.

2) Duty of loyalty – required a director to act in the interest of the organization and not in the personal interests of the director or in the interests of another entity.

3) Duty of obedience – requires nonprofit directors to further the purposes of the organization as defined in articles, bylaws, mission statement.

• The Model Act provides that a director fulfills his duty of care if he acts in good faith, with the care of an ordinary prudent person under similar circumstances, and reasonably believes his actions are in the best interest of the organization.

1) Ordinary prudent person

a) Informed, practical judgment and common sense;

b) Does not require excessive caution; and

c) Does not require special skills (ordinary).

• Generally requires making informed decisions based on a reasonable inquiry.

1) Attend meetings, review information, request additional information when warranted.

2) Further inquiry if circumstances seem suspicious or information seems incomplete.

• Good faith with a “reasonable belief”

1) Fact-based inquiry into the state of mind of the director when making an important corporate decision.

2) Did actions of the director reflect honesty and good faith?

3) Allegiance to the interests of the organization.

4) Conflict plays a factor (Sibley Hospital Case).

5) Was there a subjective belief that the action was in the best interest of the organization?

• In a “like position” and under “similar circumstances”

1) Evaluated given the unique nature of the organization.

2) Similar size and level of sophistication

• Concept of duty of care recognizes differences in the background and experience of directors

1) Directors who are also in operational control.

2) Directors retained for their expertise in a certain area.

• Business Judgment Rule – a director will normally not be held liable if the director make a decision in good faith, is disinterested, is reasonably informed, and rationally believes the decision is being made in the best interests of the organization. A finding of gross negligence or recklessness will overcome the presumption of the business judgment rule.

1) The Business Judgment Rule has been uniformly applied in the “for-profit” arena; even when there have been obvious flaws and imperfections in the board’s decision-making process.

2) Exercise of good faith and due care has been sufficient to sustain the presumptions of the Business Judgment Rule.

a) See for example, In re Walt Disney Derivative Litigation, Case No. 411, 2005 (Del. June 8, 2006)

3) “Best practices” are not necessary in order to sustain a finding that a director’s actions were taken in “good faith.”

4) Open question – will state charity enforcers or a court reviewing the decision of a nonprofit Board apply the same analysis?

a) Are there distinctions with nonprofit organizations?

b) They are supposed to serve the public benefits.

c) There is not the same element of “market remedy” in the nonprofit sector.

5) Examples:

a) Maryland Insurance Commissioner issued a lengthy report on the conversion of a nonprofit to for-profit status (2003). Asserted that the Business Judgment Rule “has no application” to a regulatory approval proceeding.

b) Health Midwest v. Kline involved a challenge to the sale of Health Midwest to HCA. The court upheld the application of the Business Judgment Rule and declined to apply charitable trust law.

c) Tennessee ex. rel. Adventist Health Care System/Sunbelt Health Care v. Nashville Hospital – The court noted the Attorney General’s approval of a sale to a lower priced suitor.

6) Counsel should assure that Boards are making “good faith” decisions based on adequate information when taking major actions.

• Reliance on experts – Directors are permitted to rely on expert advice as a long as it is reasonable for them to do so. A director is generally permitted to rely on information, opinions, reports or statements, including financial statements and other financial data, if prepared and presented by: (1) one or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented; (2) legal counsel, public accountants or other persons as to matters the director reasonably believes are within the person’s professional or expert competence; and (3) a committee of the board of which the director is not a member, as to matters within its jurisdiction if the director reasonably believes the committee merits confidence.

4. General board responsibilities

• Serve as trustee, advisor, benefactor.

1) Preserve and protect the organization’s assets.

2) Ensure organization’s continued activities in pursuit of its charitable purposes.

3) Ensure that the organization acts in prudent and effective manner.

4) Have duty of loyalty; care; obedience; to act in good faith with diligence, care and skill.

5) Act as advisers to the organization’s employees and members with respect to the organization’s “business.”

• Establish goals and policies

1) Establish long-term goals and operating policies.

2) Ensure that goals and policies are clearly articulated, observed in the course of day-to-day operations, and modified when their modification is in the best interests of the organization.

• Ensure continuity

5. Specific responsibilities

• Mission statement

1) Use as a guide in determining the propriety of proposed activities.

2) Assists the Board and staff in focusing and clarifying the organization’s basic goals.

• Strategic goals

1) Long-term goals used for advance-planning purposes.

• Operational goals and objectives

1) Blueprint for achieving the strategic goals and fulfilling the mission statement.

2) Developed by executive staff and approved by the board after consideration.

3) Include discrete, quantifiable tasks and deadlines for their accomplishment.

4) Serve as a basis for budget development and evaluating staff and board performance.

• Operation Issues

1) Exercising authority to approve or disapprove new projects, capital expenditures and other activities.

2) “Rubber stamping” of staff requests may constitute a violation of the directors’ duty of care.

3) Directors should ask for whatever information is reasonably necessary to make proper decisions.

4) Solicit staff opinions.

• Budget and Finance

1) Review and approve (or disapprove) budgets prepared by staff.

2) Monitor financial performance by reviewing interim financial statements prepared by staff.

3) Engage independent CPA’s to review (or audit) annual financial statements and report to the board.

4) Take reasonable steps to ensure the security of the organization’s funds and other assets.

5) Maintain the organization’s exempt status and consult with attorneys or accountants regarding avoidance of tax penalties for improper activities or unrelated business income.

6) Consult with qualified insurance brokers and obtain appropriate types and amounts of insurance.

7) Direct appropriate and secure investment of the organization’s assets as required by the Internal Revenue Code and by the Uniform Fiduciaries Act.

• Compliance with laws and regulations

• Supervision and oversight of quality and patient safety

J. Liability of Board Members Under Wisconsin Statute

1. Limited liability

• Self dealing - A contract or transaction between a corporation and one or more of its officers is not void or voidable under Wisconsin law if any of the following occurs:

1) The director’s interest in the transaction is disclosed to the board that authorizes, approves, or ratifies the contract or transaction by a vote of consent sufficient for the purpose without counting the votes or consents of the interested directors;

2) The director’s interest is disclosed or known to the members entitled to vote and they authorize, approve, or ratify such contract or transaction by vote or written consent; and

3) The contract or transaction is fair and reasonable to the corporation.

• Criminal conduct - Officers may be held personally liable for violations of criminal law unless they had reasonable cause to believe their conduct was lawful or no reasonable cause to believe their conduct was unlawful.

• Responsible Corporate Officer Doctrine (Park Doctrine)

1) Wisconsin Health Law Update presentation January 27, 2012

a) Thomas Storm, Wisconsin Department of Justice.

b) Current trend is to look toward both high and low level individuals.

c) Tendency away from excluding the hospital because of impact on the community.

d) Focus on individuals.

e) Wisconsin DHS recently (2011) created an Office of Inspector General and centralized many of the state’s fraud prevention activities.

• Willful misconduct - Officers may be held personally liable for willful misconduct; however, the statute does not define what constitutes willful misconduct.

• Exceptions from limited liability - personal immunity provided to non-stock corporate officers and directors does not apply to any of the following:

1) A civil or criminal proceeding brought by or on behalf of any governmental unit, authority, or agency (unless brought in its capacity as a private party or contractor).

2) A proceeding brought by any person for a violation of state or federal law where the proceeding is brought pursuant to an express private right of action created by state or federal statute.

3) The liability of a director under section 181.29 of the Wisconsin Statutes (making loans to officers).

• Reliance on other sources - Directors are permitted by statute to rely upon information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by any of the following:

1) An officer or employee of the corporation whom the officer believes in good faith to be reliable and competent in the matters presented.

2) Legal counsel, public accountants, or other persons as to matters the officer believes in good faith are within the person’s professional or expert competence.

3) In the case of reliance by a director, a committee of the board of which the director is not a member, if the director believes in good faith that the committee merits confidence.

K. 2009 – Wisconsin Adopts Uniform Prudent Management of Institutional Funds Act

1. Replaced the Uniform Management of Financial Institutions Act & eliminated the historic dollar value rule for endowment spending

2. Amended provisions governing the release and modification of restrictions on charitable funds

3. Main purpose – Provides uniform and fundamental rules for the investment of funds held by charitable institutions and expenditure of funds donated as endowments to institutions.

1) To ensure that assets are invested prudently in diversified investments that sought growth as well as income

2) To ensure that appreciation of assets could prudently be spent for the purposes of any endowment funds held by charitable institution.

4. Standard of care – requires investment “in good faith and with care an ordinarily prudent person in a like position would exercise under similar circumstances and that investments costs are appropriate and reasonable.”

5. Permits prudent expenditure of both appreciation and income.

6. Institutions, “may appropriate for expenditure of accumulate so much of an endowment fund as the institution determines to be prudent for the uses, benefits, purposes and duration for which the endowment fund is established.”

7. State may adopt rebuttable presumption of imprudence if institution expends an amount greater than 7% of its fair market value of a fund over three years.

8. Donor intent is more broadly protected

9. Practical Impact/Guidance for Boards

• A nonprofit Board may want to establish a separate committee responsible for ensuring compliance with UPMIFA.

• Specifically the Committee would be required to do the following:

1) Consider the charitable purposes of the institution and the purposes of the institutional fund;

2) Manage and invest the fund in good faith and with the care that an ordinarily prudent person in a like position would exercise under similar circumstances;

3) Incur only costs that are appropriate and reasonable in relation to the assets, the purposes of the institution, and the skills available to the institution;

4) Make a reasonable effort to verify facts relevant to the management and investment of the fund; and

5) Generally consider general economic conditions; the possible effect of inflation or deflation; the expected tax consequences, if any, of investment decisions or strategies; the role that each investment or course of action plays within the overall investment portfolio of the fund; the expected total return from income and the appreciation of investments; other resources of the institution; the needs of the institution and the fund to make distributions and to preserve capital; and an asset's special relationship or special value, if any, to the charitable purposes of the institution.

V. IMPACT OF SARBANES-OXLEY AND RATING AGENCY ON NONPROFIT HOSPITAL/HEALTHCARE SYSTEM

L. Many Nonprofit Hospitals are embracing concepts contained in Sarbanes-Oxley

1. Adoption of Section 404 and other requirements.

• Strengthen governance.

• Increase accountability.

• Added creditability to financial reports.

• Where there are investors, bond holders, bond insurance, credit enhancement mechanisms.

2. Compliance permits creditors to better assess creditworthiness; gives more creditability to reports; positive influence on ability to access capital.

M. Sarbanes-Oxley and the nonprofit hospital

|Requirement |Significance |

|201: Prohibits Non-Audit Services by Auditors |Limits the perception of conflict of interest when an auditor also |

| |performs consulting services |

|203: Rotate lead auditor every 5 years |Provides continuing fresh assessment of audited statements |

|204: Audit Communications with Audit Committee |Audit Committee provides a clear link to the audit process by the |

| |board; enhances board knowledge of audit issues |

|301: Standards of the Audit Committee |Makes for a more centralized audit function by permitting the board to|

| |focus energies on process and outcomes |

|302: Certification of financial statements |Strengthens the creditability of financial statements |

|304: Forfeiture of certain bonuses and profits |Puts performance compensation at risk due to restatement; results in |

| |more accurate original |

|404: Adoption of Code of Ethics Policy |Very important; also required for health care compliance; evaluates |

| |internal controls and systems to enhance financial statement integrity|

|406: Adoption of a Code of Ethics |Provides greater accountability to the board for compliance issues |

|407: Financial expert on the Audit Committee |Enhances understanding of the audit process by the Board |

VI. DUTIES OF NONPROFIT BOARD CONCERNING MAJOR TRANSACTIONS

N. Financing and Direction of Corporate Assets

1. Sibley Hospital Case – Stern v. Lucy Webb Hayes National Training School for Deaconesses and Missionaries.

2. Key issue - Did the Hospital Board breach its duties in the management of hospital funds?

3. Board controlled by two powerful directors

1) Large Board – 20 members.

2) Power vested in a small number of powerful directors.

3) Remainder of the Board routinely accepted the decision of the small group.

4) Executive and finance committees did not meet during the period in question.

5) Powerful directors refused input or inquiry from other directors.

4. Suit alleged that there was a symbiotic relationship with certain financial institutions and that decisions were made that were not in the best interest of the organization.

5. Established the rule that hospital board members can be held individually liable where conflicts of interest lead to a breach of fiduciary obligations.

O. Sale of a Nonprofit to a For-profit Healthcare System – Nashville Memorial Hospital

1. This case from the state of Tennessee involved the sale of Nashville Memorial Hospital to HealthTrust. The Atty. Gen. Of Tennessee was charged with reviewing the transaction as a result of a required notification from Tennessee Memorial Hospital of the prospective sale to HealthTrust.

2. The Tennessee Atty. Gen. conducted an in-depth analysis of possible self-dealing, good-faith considerations of other purchase offers, and the fiduciary duties of the directors in relationship to the control of charitable assets. The Atty. Gen. filed a very detailed analysis covering the general duties of a Board of Directors when converting a nonprofit corporation to a for-profit corporation and selling the assets to a for-profit corporation.

3. The Atty. Gen. ultimately concluded that the proposed sale and transaction were in the public interest. The detailed memorandum that was filed by the Tennessee Atty. Gen. covered the general care standard for directors of nonprofit corporations. It also went into the specific duties of a nonprofit board to be informed prior to making a decision respecting the conversion of nonprofit assets to for-profit assets.

4. The Tennessee Atty. Gen. noted a special duty that directors of charitable corporations have to protect charitable assets by ensuring a realistic market price is realized in the sales transaction. The Atty. Gen. scrutinized the transaction and found favorably in favor of the transaction.

5. The Atty. Gen. also analyzed the directors duty to be informed with respect to such a proposed transaction. A quote from that case has become the standard for determining when the director has fulfilled his or her obligation to be informed. The Tennessee Atty. Gen. stated as follows:

6. “The members of the boards themselves devoted substantial time, effort, and energy to analyzing, pondering, and considering the ramifications of the proposed sale. They thought about their constituents, about the implications of not selling the hospital’s assets, about a sale to others, about other options such as networking, about continuing to stand alone, and other alternatives, and the effects upon the members of the public will utilize the hospital in the community itself. They reflected upon the consequences to the patient, the employees, the businesses in the community which encourage or direct employees to utilize the hospital, into the continued availability of primary care in specialized physicians for the community.”

7. Tennessee ex. rel. Adventist Health Care System/Sunbelt Health Care v. Nashville Memorial Hospital, 914 S.W.2d 903 (Tenn. Ct. App. 1995)

P. Involvement In a Physician/Hospital Organization

1. Board must resolve it is in furtherance of the nonprofit mission.

2. Private inurnment issues.

3. Decisions regarding governance of the PHO.

4. Conflict in exercising duties in governance of the PHO.

• Hospital interests vs. PHO interests.

VII. DUTY OF HOSPITAL BOARD OVER QUALITY OF CARE AND SAFETY ISSUES

Q. Traditional view of quality responsibility in the Hospital (Institutional) setting

1. The “3-legged stool” concept

• Leg 1 – The Medical Staff

• Leg 2 – Management

• Leg 3 – Board of Directors

2. Traditionally, the medical staff deferred to on quality issues. Concept of the “independent, self-governing medical staff.”

3. Traditionally, Management:

• Operations

• Institutional support staff

• Facility issues

• Technology

• Accounting

• Facility changes and billing

4. Traditionally, the Board takes a 50,000 foot view of quality issues.

• Deals with finance, policy, strategic direction.

• A great deal of reliance on the medical staff over quality issues.

• Traditionally removed from direct role in quality definition, measurement, improvement, enforcement.

5. Summary of the traditional model of quality in a hospital setting

“A hospital owes a duty to its patients to exercise reasonable care in the selection of its medical staff and in granting specialize privileges. The final appointing authority resides in the hospital’s governing body, although it must rely on the medical staff and in particular that credentials committee (or committee of the whole) to investigate and evaluate an applicant’s qualifications for the requested privileges. However, this delegation of the responsibility to investigate and evaluate the professional competence of applicants for clinical privileges does not relieve the governing body of its duty to appoint only qualified physicians and surgeons to its medical staff and periodically monitor and review their competency.”

R. Forces Moving Quality Toward the Board – Counsel has opportunities to engage the Board on the connection between Board oversight, compliance and quality of care.

1. Integration – employment of physician and in particular, the primary care base.

2. Statements by Regulators

• Daniel Levinson, HHS Inspector General

• Suggests quality is a compliance issue

• Subject to Board oversight

• Material linkage between billing and quality of patient care

• Quality concerns effect right to reimbursement and imposition of penalties

• Lack of medical background is no excuse to defer to the medical staff on quality of care indicators

3. Health care reform

4. Joint commission standards

• “The hospital has an organized, self-governing medical staff that provides oversight care, treatment, and services provided by practitioners with privileges, providers for uniform quality of patient care, treatment, and services, and reports to and is accountable to the governing body.

5. Quality of Care Liability Cases

• Wisconsin case clearly makes the Board responsible for credentialing.

1) Johnson v. Misericordia Community Hospital, 301 N.W. 2d 156, 163 (Wis. 1981) Wisconsin Supreme Court.

2) Does the hospital owe a duty of care to its patients to use due care in the selection of its medical staff and the granting of specialized surgical (orthopedic) privileges?

3) Hospital sued for corporate negligence after the surgeon damaged the patient’s femoral artery during surgery.

4) The Physician had made several misrepresentations on his application for privileges that would have been discovered if a proper investigation had been conducted.

5) Wisconsin Supreme Court clearly held that the ultimate duty lies with the governing body, stating:

6) “Physicians accept, though sometimes grudgingly, that they are part of a larger system of medical care when using the hospital and are willing to participate in the medical staff activities excepting the need to abide by the adopted professional standards of the institution. In their office practice they view themselves as instant individual entrepreneurs solely responsible to themselves for the diagnosis and treatment of patients. They believe the same degree of skill should be applied in either setting. Thus, when seeing patients in the hospital they believe they should be left alone to do as they see fit, so long as their own personal standards of performance exceed those required by the institution. They view the hospital as providing resources on a demand basis that are needed by them for treating patients. They do not see the hospital as a control system that decides for them their hours, work schedule, income or professional direction. Any steps taken by the hospital that physicians interpret as being even remotely control mechanisms are usually met with rather sharp reminders about physician independence.”

S. The board’s oversight responsibilities on quality issues is becoming recognized as one of the “core fiduciary responsibilities of a member of a healthcare organization Board of Directors”. Promoting and assuring quality of patient care and patient safety are at the core of the mission of any healthcare organization.

1. Governmental and third-party payers are focusing more attention on the level of quality measurements and reporting obligations. These quality measurement and reporting obligations become part of the central oversight responsibility of the nonprofit board.

2. A central component of the healthcare directors duty of care includes the obligation to make a reasonable inquiry into matters of importance.

3. Nonprofit Directors are required to affirmatively demonstrate that they have followed a reasonable oversight process as it relates to the assessment of quality in the organization.

T. Quality of care issues generally arise in the context of the board exercising its oversight function

1. Governance obligation to support patient safety and quality of care is an ongoing task.

2. Board members are expected to assist leadership in assessing emerging quality of care concepts and arrangements as they implicate patient safety issues, appropriate levels of care, cost-reduction, reimbursement, and collaboration among providers.

U. The duty to oversee quality of care often fits hand-in-hand with the duty to oversee the corporate compliance program.

1. Many new mechanisms and financial relationships that are being adopted to address quality of care issues are also closely scrutinized and heavily regulated by federal and state government.

2. Some of these efforts include pay-for-performance programs, outcomes management arrangements, gainsharing, service line joint ventures, the physician affiliation models, creation of clinical integration and other actions being taken in the healthcare community.

V. Medical staff relations often provide a link to the directors duty of obedience to corporate purposes. Responsibilities of the board include:

1. The conduct of the hospital as an institution.

2. Ensuring that the medical staff is accountable to the governing board for the quality of care provided to patients and see the maintenance of standards of professional care within the facility and requiring the medical staff function competently.

W. Specific responsibilities of governing board members as related to quality of care and patient safety:

1. Being sensitive to the emergence of quality of care issues, challenges and opportunities close.

2. Being sensitive and attentive to the development of specific quality of care measurement and reporting requirements.

3. Periodically inquiring of management and executive staff regarding the hospital’s periodic reporting requirements.

4. Asking for periodic updates from the management and executive staff on organizational quality of care initiatives and how the organization intends to address legal issues associated with these initiatives.

X. Some practical questions for healthcare governing body members to ask as related to quality of care and patient safety issues. See attachment.

VIII. FOCUS ON DUTY TO ASSURE COMPLIANCE WITH LAWS AND REGULATIONS

Y. Sources of Duty of Board Over Compliance

1. General Corporate duties

2. Federal sentencing guidelines

3. OIG Industry Guidance

4. Statements by Regulators

5. Park Doctrine

Z. Health care is extremely regulated

AA. Health Care Fraud Liability

1. Criminal statutes

2. False Claim Act

3. Civil Monetary Penalties

4. Exclusion

5. Payment Suspension

AB. Governmental Enforcement Activity

1. Return on investment mentality

2. PPACA’s new anti-fraud toolbox

• 60-day repayment rules regulation

• Mandatory compliance programs

• Suspension of payment

3. Trend toward holding responsible individuals liable for compliance failures:

• OIG has the statutory authority to exclude individuals from participation in federal healthcare programs (42 U.S.C. Section 1320A-7)

• Park Doctrine - United States v. Park, 421 U.S. 658 (1975)

1) An official of a corporation can be convicted of a crime without a showing actual participation in the crime or knowledge of the crime.

2) Conviction is possible based simply upon being in a position of responsibility to prevent or correct the legal violation and failing to do so.

3) United States v. Iverson, 162 F.3d 1015 (9th Cir. 1998) – applied the responsible corporate officer doctrine to a chemical products company president for violations of the federal Clean Water Act.

4) United States v. Dotterweich, 320 U.S. 277 (1943) – decided by US Supreme Court before the Park decision. Upheld the conviction of the head of a drug company based solely on the “authority and responsibility” as president and general manager. This was a misdemeanor conviction.

5) All of these cases have been misdemeanor prosecutions.

• FDA is aggressively using the Park Doctrine

1) FCA Commissioner Letter to Senator Charles Grassley

a) March 4, 2010

b) Discussed a Report from the Government Accountability Office which raised concerns about deficiencies in the FDA’s Office of Criminal Investigations.

c) Letter stated that the OCI would increase the use of misdemeanor prosecutions against individuals and noted that individual prosecutions were a valuable “enforcement tool.”

d) “When considering whether to recommend a misdemeanor prosecutions against a corporate official, consider the individual’s position in the company and relationship to the violation, and whether the official had the authority to correct or prevent the violation. Knowledge of the actual participation in the violation are not a prerequisite to a misdemeanor prosecution but are factors that may be relevant when deciding whether to recommend charging a misdemeanor violation.” (Amendments to FDA Regulatory Procedures Manual).

2) United States v. Stevens (D.Md. Nov. 2010)

a) FDA sought charges against legal counsel for GlaxoSmith Kline.

b) Alleged obstruction of official proceedings, concealing information, and making false statements to the FDA.

c) The attorney apparently was involved in gathering documents and wrote letters to the FDA in which she asserted that there had been no “off-label” promotion of the product and asserted that all documents had been provided.

d) Specifically stated that she did not have promotional slides that the FDA has sought.

e) She responded that she had not done anything wrong and had relied on the advice of a nationally prominent law firm retained by her employer.

f) The trial court affirmed the defense and found that charges should never have been brought against Ms. Stevens.

g) Even though the ruling was against the government, it is not likely to deter attempts to charge attorneys if it appears that any attorney’s advice is obstructing an investigation.

3) The Oxycontin Misbranding Case

a) Plea agreement with corporate executives.

b) Agreement acknowledged that the executives has no knowledge of the criminal activity.

c) Agreement acknowledged only that they were “responsible corporate officers.”

d) Executives were subsequently excluded from participation in Federal health care programs.

e) Executives challenged their convictions in court and lost.

f) Set the stage for further use of the Park Doctrine in the health care arena.

4) Established new guidelines for asserting Park Doctrine exclusions.

5) Issued additional sanctions against pharmaceutical industry executives.

• The United States Sentencing Commission issued notice that it plans to provide for stricter penalties to individuals sentenced under the Park Doctrine.

4. Office of Inspector General Use of RCO Doctrine

• Trustee Engagement and Hospital success, Trustee Magazine, July 7, 2010.

1) Strongly encourages greater degrees of Board engagement.

2) Best Boards are actively, questioning and exercise constructive skepticism.

• OIG Guidance for Implementing Permissive Exclusion Authority Under Section 1128(b) of the Social Security Act, October 20, 2010.

1) Discussed OIG exclusion authority over an individual “who has direct or indirect ownership or control interest in a sanctioned entity and who knows or should know of the action constituting the basis for [a sanction]; or who is an officer or managing employee.

2) Does a director have a “direct or indirect ownership or control interest?”

3) Directors who are also officers clearly have exposure.

4) “Common” directors – less clear.

5) Legislative activity that would extend the OIG’s exclusion authority by extending possible exclusion to any individual who is currently or formerly “affiliated with” a sanctioned entity.

• Recent OIG exercise of RCO doctrine

1) Wellcare Health Plans

a) Seeking mandatory exclusion of certain executives.

b) Criminal indictments for health care fraud (March 2011)

c) Florida health plan accused of fraud in connection with the Florida Medicaid program.

• How To Avoid RCO Liability

1) Who is exposed?

a) Management

b) Owners

c) In-House Counsel

d) Compliance Officer

e) Potential Board Members?

2) Impossible to be personally attentive to every risk area.

3) Make sure your compliance program is active and effective.

4) Be actively involved in the compliance program.

5) Have compliance program assessed for effectiveness.

6) Review process for identification of risk areas.

7) Make certain audits are conducted.

8) Comprehensive corrective action program based on results of effectiveness review and audits.

9) Self-reporting process in place and used when errors are found.

10) Repayment of overpayments process in place and actively used.

11) Establish system for addressing inevitable compliance breakdowns.

5. Suspension of Payment based on any “credible allegation” of fraud.

6. All of these factors push providers toward development and of compliance programs and proactively assuring that the compliance program is proactive and effective.

AC. Compliance Program Development

1. Responsibility of Board of Directors

• Common Law and Statutory Duties

• OIG Compliance Guidelines

• Federal Sentencing Guidelines

• Court decisions

1) In re Caremark International, Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).

2) Established Board obligation to assure information and reporting systems are in place.

3) Reporting systems are adequate to assure that appropriate compliance information will come to the attention of the Board.

4) Judicial proclamation that the board has an affirmative obligation to assure that systems are in place to proactively monitor compliance.

2. Reasons to formalize compliance program

• Federal sentencing guidelines

• Over $5 Million Medicaid

• Repayment liability – False Claims Act

• Increase Revenues

• Decrease inadvertent fraud risk

• Mandatory compliance programs (condition of participation)

• Suspension of payment risks

• Whistleblowers

• Payment Suspension

3. Financial Realities of Compliance

• Benefits outweigh the costs

1) Difficulty communicating to Board and management

2) Political/Budget issues

• The costs are evident and quantifiable

• The benefits are more difficult to put a price tag on (HCCA Article regarding costs)

• Simple risk analysis

1) Probability of consequences

2) Cost of consequences

3) Percentage of revenues

4) Categories of risk/risk baskets

5) Criminal liability – cannot assign a dollar amount

4. Compliance Program Elements – 7/8 Primary Elements of an Effective Compliance

• Standards and Procedures

• Oversight

• Education and Training

• Monitoring and Auditing

• Reporting

• Enforcement and Discipline

• Response and Prevention

• Risk Assessment

5. General Knowledge of Specific Risk Areas.

6. Assure that there is an effective compliance process in place.

• First level of compliance is process.

1) Is the process effective to proactively develop compliance as an institutional value?

a) Tone from the top.

b) Proactive, inquisitive Board

c) Compliance as an institutional value

2) Is the process scaled to the size and complexity of the organization? Appropriate scale is the key.

3) Is there a mission statement and is it communicated through all levels of the organization?

4) Is there a high ranking member of management responsible for compliance?

a) Beware of dual role

5) Is compliance adequately budgeted?

6) Is there a training program in place?

7) Is there a structure for ongoing identification of risk areas?

8) Is there a reporting mechanism for compliance concerns?

9) Is there an anti-retaliation policy and is it enforced?

• Outcomes - second level of compliance

1) Are risks being successfully identified?

2) Are resources being properly focused?

3) Is the process successful in identifying problem areas before they become problems?

7. What the Board of Directors needs to know about compliance.

• Attached PowerPoint format for fictional board.

• Includes some common issues

1) Dual Role Compliance Officer

2) Independent Effectiveness Review

3) Separate Compliance Budget

IX. RECENT LEGAL DEVELOPMENTS GUIDING NONPROFIT BOARD STRUCTURE AND FUNCTION

AD. Conditions of Participation – Recent CMS Final Rule – May 16, 2012

1. Effective July 16, 2012.

2. Final Rule requires a hospital’s governing body to include at least one member of the hospital’s medical staff.

3. This requirement was not included in the proposed rule.

4. Comments to final rule states that the provision was added at the urging of several sources that provided comments to the proposed rule.

5. CMS states the reason is to promote open lines of communication between the hospital and the medical staff.

6. The American Hospital Association submitted a letter objecting to the change by CMS.

• The proposition was not included within the proposed rule.

• Hospitals and other stakeholders did not have notice and opportunity to make comments.

• Amounted to a “substantive policy change that violated the Administrative Procedure Act.

• Urges CMS to immediately rescind the requirement that a hospital board include at least one member of the medical staff.

7. Side Note – the Final Regulations also requires each hospital to have its own medical staff. Multi-hospital systems cannot have a single organized medical staff. This was also a change that was not included in the proposed rule.

8. Look for further developments in these two areas. There is a possibility of litigation if CMS does not relent on the provision.

9. What do you do in the meantime?

10. As of June 15, 2012 – CMS release to State Survey Agency Directors that they should not attempt to assess compliance or assess deficiencies with the “physician director” requirement until CMS has “addressed the issue completely.” (CMS Ref: S&C: 12-36-HOSPITAL)

AE. New 990 as of January 11, 2012

1. New 990 requires more disclosure of potential conflicts of interest, compensation of board members and staff, waste, and other details having to do with financial accountability and avoidance of fraud.

2. Independent voting member (“IVM”) on 990 and disinterested director. To be considered an IVM, 4 criteria must be met at all times during the year per instructions on Form 990.

• Member must not be compensated as an officer or other employee of organization or related organization.

• Member did not receive total compensation or other payments exceeding $10,000 during the taxable year from the organization as an independent contractor. But this does not include reasonable compensation /expense reimbursements for services provided in the capacity as a member of the governing body.

• Neither member, nor any family member of a member, was involved in a transaction with the organization (whether directly or indirectly) that is required to be reported on Schedule L.

• Neither member, nor any family member of member, was involved in a transaction with a related tax-exempt organization (whether directly or indirectly) that is required to be reported on Schedule L.

3. Not considered to lack independence merely because donate money to nonprofit.

4. IVM is not necessarily consistent with the definition of a “disinterested director.”

• This is established under state law, nonprofit sector governance practices, and/or existing protocols of exempt org.

• The Wisconsin Legislature has not provided a specific definition of “disinterested director, but Wis. Stat. §181.0831 does provide guidance on when a director has a conflict of interest.

5. IRS standard of review

• As set in Form 990 – whether the 990 filer made a “reasonable effort” to draft and implement policy.

• All 990 filers must adopt and follow procedure/policy to determine what members of organization’s governing body are independent and what persons have business or familial relationships.

6. Primarily a transparency issue. Directors who are not IVM must be disclosed on the 990.

• Policy may not permit IVM on Audit and certain other committees.

• Independent Sector – Panel on the Nonprofit Sector

1) Principles for Good Governance and Ethical Practice

2)

AF. Stevens Institute Settlement – New Jersey

1. Civil Complaint filed against Stevens Institute of Technology, its president and board of directors.

• Alleged mismanagement of nonprofit finances

• Excessive compensation of president

2. Lessons for healthcare boards

• Willingness of state regulators to challenge board action they perceive may place charitable assets at risk.

• Some specific practices that may lead to inquiry by regulators.

• Actions that may be taken by state regulatory officials to correct problematic practices by charitable institutions.

3. Stevens involved a nonprofit, tax exempt “501(c)(3)” organization

• Although not a healthcare organization, the lessons are equally applicable to health care organizations.

• Involved New Jersey Nonprofit Corporation Act and the Uniform Management of Institution Funds Act (“UMIFA”).

4. Specifics of NJ Attorney General case – Alleged breach of multiple fiduciary duties and UMIFA duties by the President and “insider” board members

• Regular misstatement of financial reports.

• Failing to correct internal control weakness in spite of repeated warnings from auditors.

• “Gross negligent” in internal controls and accounting practices.

• Violation of board approved endowment spending rates.

• Borrowing without required corporate approval.

• Invasion of restricted assets and collateralized endowments.

• Approving excess compensation to the university president.

• Violating restrictions that had been imposed by donors.

• Improper use of gifts and bequests to satisfy operating expenses.

5. Specific Problems Cited by New Jersey Attorney General

• Allegation that a small group consisting of the president, board chair and vice chairs dominated the board and committees.

• Allegation that committees acted far beyond their authority, did not keep minutes and did not report to the board.

• Allegation that statements in auditors management letters were not provided to the board and that the board was misinformed about the reason for auditing firm’s resignation.

• Allegation that there were misrepresentations to the board regarding compensation comparability analysis for the president which had not in fact been undertaken.

• Allegations that the president had pressured outside consultants to change compensation comparables to make the results more favorable.

6. Settlement Terms – Settlement with the New Jersey Attorney General required Stevens to accept a series of sweeping governance changes that affected the composition and structure of its Board of Directors and its committee practices.

• Changes to executive committee. Reconstituted as an advisory committee; stripped of the power to act on behalf of the Board.

• Extension of full Board of Director Power. Power vested back into the full board of directors:

1) Compliance oversight

2) Financial oversight

3) Operational matters

• Audit Committee:

1) Charter revised to provide committee with more complete oversight of nonprofit financial affairs.

2) Responsibility to review Form 990.

3) Conducting annual audit of expenses of the President and five most highly compensated employees.

4) Committee required to have a chairman with financial expertise.

5) Full board required to meet with auditor, review auditor’s management letter and review Form 990.

• Roles of Executive Committee and Chair

1) President may not be a voting member of the Board.

2) Executive Committee members may not serve as chair of any other committee.

3) Chair, Vice Chair of the Board may not serve as chairman of a committee.

• Term Units:

1) 15 year maximum for the Chair and Vice Chair of the Board.

2) Trustees serving 12 years and having reached age 72 can no longer serve as a voting member of the board.

3) Four year term limits for committee members and committee chairs.

4) Two-year stand-down provisions between terms.

• Retain Special Counsel

1) Former New Jersey Supreme Court Justice must be retained for a two-year oversight period.

• Committee Governance

1) Charter revisions to clarify responsibilities of committees.

2) New Chairs required for various operating committees.

a) Audit

b) Human Resources

c) Investment

d) Nominating Committee

• Executive Compensation. Required focus on outside consultants to HR and Compensation Committee; specifically as it relates to compensation to the president.

• Posting Financial Information. Increased transparency of financial information by posting on website.

• Officer Loan. President’s mortgage to the company required to be satisfied. Discontinue extending loans to officers.

• Restricted Donations. Require a Donor’s Bill of Rights and audit of restricted assets.

X. IRS GOVERNANCE CHECK SHEET

AG. IRS Agent training materials

1. Materials released that are used by the IRS to train its exempt organization agents in governance issues.

2. Materials include outlines and PowerPoint presentations for agent training.

AH. Guidelines for agents highlight practices that are likely to raise IRS suspicion.

1. Guidelines will be applied to future examination of public charities.

AI. Guide sheet used by agents on governance portion of the examination of a tax exempt organization.

1. Lists examples of problematic practices.

AJ. Usefulness of IRS Materials

1. Educate directors and officers that the IRS is focusing on these issues.

2. Useful guidance on the issues that the IRS will examine.

3. Clearer indicating of governance practices that the IRS considers problematic.

AK. List of Practices The IRS May Find to be Problematic Based on IRS Guide Sheet:

1. 1. Written mission statement stating 501(c)(3) purposes.

2. Are the governing body’s composition duties and qualifications clearly set forth in governing documents?

3. Have directors been provided with current copies of articles of incorporation and bylaws?

4. Are the frequency of board meetings commensurate with the business of the organization?

5. Does the board meet as specified in the bylaws?

6. Do persons with conflicts of interest participate in conflict of interest decisions? Is there a written conflict of interest policy that addresses recusals and disclosures? Is there an annual conflict questionnaire? Has the conflict of interest policy been adhered to?

7. Does the Board rely on comparability data when making compensation decisions? Is the basics for compensation contemporarily documented and recorded in the corporate minutes?

8. Do board members have family relationships with officers, other board members, or key employees?

9. Is organizational control rested with a single or select few individuals?

10. Are there organizational systems and procedures to assure that assets are properly used consistent with the organizational mission?

11. Is the Board informed of and attentive to organizational financial affairs?

• Are written financial reports provided to Board members?

• Are there frequent discussions regarding financial issues at board meetings?

12. Was there full board and/or committee review of the Form 990 filed by the organization?

13. Was an independent accountant’s report prepared, reviewed and discussed?

14. Was a management letter prepared and reviewed by the board?

15. Is there an adequate document retention and disposal policy?

XI. GOVERNANCE “RED FLAGS”

AL. Diversify governance. Do not concentrate governance on a small group of individuals.

AM. Be aware of putting too much power in an executive committee. This could limit the proper authority of the Board.

AN. Monitor compliance with state laws regarding management of nonprofit funds.

AO. Carefully consider executive compensation. Document reliance on external independent consultants and comparability data.

AP. Be responsive to management letters issued by auditors.

AQ. Be sensitive to accumulation of power through lengthy terms. Balance knowledge and experience against need for fresh perspective and consolidation of power.

AR. Look for additional state oversight of nonprofit activities.

Tips To Assist Boards In Making Informed, Good Faith Decisions

Nonprofit organizations and their legal counsel should take all steps that are reasonably necessary including affective education documentation to position themselves to render informed decisions in good faith. Nonprofits should not rely upon the application of the business judgment rule. Although most states will still apply the business judgment rule, action should be taken to independently:

1. Confirm the applicability of the business judgment rule in your jurisdiction.

2. Adopt and maintain recognize governance “best practices.”

3. Make certain that the board has access to information and advisers that are necessary to make informed decisions.

4. Engage in ongoing review of board agenda and meeting minutes to insure that and I can't record of deliberations is being made and to assure that board decision-making has been appropriate.

5. Review your conflict of interest disclosure process to ensure that it is effective.

6. Review all conflict of interest disclosures to be certain that proper processes been followed and that the system is functioning appropriately.

7. Make sure that the business transaction that is before the board for approval is assessed with reference to the overall mission of the organization.

8. Scrutinize each decisions to be certain that conflict of interest decisions were made very conservatively.

9. Confirm that any responsibilities that are delegated to committees of the board are appropriate.

Some Suggested Questions That Board Members Should Ask About Quality of Care Issues

1. What are the goals of the hospitals quality improvement program?

1. What metrics and benchmarks are used to measure progress towards meeting the performance goals?

2. How does your organization measure and improve the quality of patient present care?

3. Who are the key management and clinical leaders responsible for quality and safety programs?

4. How were the organizations’ quality assessment and improvement process integrated into overall corporate policies and operations?

5. Are clinically quality standards supported by operational policies?

6. How does management implement, oversee, and enforce policies?

7. What internal controls exist to monitor and report on quality matrix?

8. Does the board have a formal orientation and continuing education process that helps members appreciate external quality and patient safety requirements?

9. Does the board include members with expertise in patient safety and quality improvement issues?

10. What information is essential to the board’s ability to understand and evaluate the organization’s quality assessment and performance improvement programs?

11. How frequently does the board review reports about the quality improvement efforts?

12. How do the organizations quality assessment and improvement processes coordinate with its corporate compliance program?

13. How is quality of care and patient safety issues addressed in the organization’s risk assessment corrective action plans?

14. What processes are in place to promote the reporting of quality concerns and medical errors and to protect those who ask questions and report problems?

15. What guidelines exist for reporting quality and patient safety concerns to the board?

16. Are human and other resources adequate to support patient safety and clinical quality?

17. How are proposed changes in resource allocation evaluated from the perspective of clinical quality and patient care?

18. How are adverse patient events and other medical errors identified, analyzed, reported, and incorporated into the organization’s performance improvement activities?

19. Do management and the board address quality deficiencies without unnecessarily increasing the organizations liability exposure?

APPENDIX A

EXTERNAL SOURCES FOR BOARD EDUCATION ON COMPLIANCE DUTIES

Collaborative efforts between the American Health Lawyers Association (AHLA) and the Office of Inspector General of the Department of Health and Human Services (OIG)

• April 2003 – Corporate Responsibility and Corporate Compliance

• July 2004 – An Integrated Approach to Corporate Compliance

• September 2007 – Corporate Responsibility and Health Care Quality: A Resource for Boards of Directors

• 2010 – The Health Care Compliance Director’s Compliance Duties: A Continued Focus of Attention and Enforcement



h1Resources/PI/Pages/HealthCareDirector’sComplianceDuties.aspx

OIG Documents

• OIG Website -

• OIG Compliance 101 Education Materials – Videos, Webcasts, Downloads - pliance/101/index.asp

• March 2009 – OIG Guidance: Driving for Quality in Acute Care: A Board of Directors Dashboard” Government Industry Roundtable - oig.fraud/docs/complianceguidance/RoundtableAcuteCare.pdf

• July/Aug. 2010 – OIG Inspector General, Daniel Levinson, Trustee Engagement and Hospital Success -

trusteemag_app/jsp/articledisplay.jsp?dpath=TRUSTEEMAG/Article/data/07JUL2010/1007TRU_viewpoint

IRS Documents

• IRS Position Paper, Governance and Related Topics for 501(c)(3) - Feb. 2008 pub/irs-tege/governance_practices.pdf

• IRS Governance Checksheet and Guide - Dec. 2009 -





HCCA

• May 2010 – Interview Jim Sheehan, Former NYS Medicaid Inspector General (Trustee Governance) -

Content/NavigationMenu/ComplianceResources/ComplianceNews/JSheehanInterview.pdf

OIG/HCCA

• Compliance Oversight for Healthcare Leaders (Video) -

Content/NavigationMenu/ComplianceResources/ComplianceOversightforHealthCareLeaders/default.htm

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