Advising the Health Care
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
www.ruderware.com
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
www.lcojlaw.com
Health Law/Labor & Employment Law Institute
August 23, 2012
Significant Developments
• Last 10 Years Has Redefined What It Means To
Be A Director
• Expectation of Board Activism
• Regulators Taking Duties Beyond Common
Law and Model Act
• Individual vs. Corporate Responsibility
• Compliance Duties
• Quality Issues
Main Objectives
• What Defines Board Obligations
• Developments Affecting Obligations and
Structure of Boards
• Increased Responsibility for Compliance and
Quality
• Our Role As Attorneys In Supporting Boards
A Few General Take-Aways
• Changing Role and Duties
• Defined By More Than Just Model Rules and
Common Law
• More Eyes On Activities of the Board
• We Play An Important Role In Advising Board
Members
Happy Birthday!!
• SOX is 10 Years Old!!
• Began Focus On Corporate Governance
• Significance To Health Care Nonprofits
– Increase Accountability/Stronger Governance
– Added Credibility to Financial Reports
– Creditworthiness
Increased Scrutiny
•
•
•
•
•
•
•
Repayment Obligations
False Claims Act
Enhanced Fraud Remedies
Suspension of Payment
Exclusions
ZPICS, RACS
Place organizations and individuals at risk
Brand New HCCA Study
• “Auditing the Auditors”
• Released August 8, 2012
• Nonprofit subject to higher rates of audit than
for profit health care providers
•
•
•
•
2 Agencies auditing same problem (41%NFP/25%FP)
RAC Audits (6 per month NFP/4 per month FP)
CERTS Audits (51% NFP/46% FP)
MAC Requests (41% NFP/27% FP)
IRS Requirements
•
•
•
•
990 Requirements
Conflict Disclosure
Private Inurment
More scrutiny on nature and activity of Boards
What Did I Get Myself Into?
• Community Involvement – I Just Wanted To
Help My Community
• This Is Like Work
• I Just Have To Show Up For Meetings, Right?
• Transition Form the C-Suite Board to the
Working Board
Trend Toward Individual Responsibility
• United States v. Park – US Supreme Court
– Officials responsible even without specific
knowledge
– Based on position and responsibility to prevent
illegal activity
• Criminal Misdemeanor Exposure
• OIG Exclusion Authority - Consequences
FDA Using Doctrine Aggressively
• Letter from FDA Commissioner to Charles
Grassley – March 2010
– GAO Report on failures in FDA enforcement
– Promised increased use of RCO Doctrine
• FDA Fulfilled Its Promise
– GlaxoSmith Kline Case (Legal Counsel)
– Oxycontin Misbranding Case
OIG Use of Park Doctrine
• OIG Guidance for Implementing Permissive
Authority (Exclusion) – October 20, 2010
– OIG exercise of exclusion authority over an
individual “who has direct or indirect ownership
of control interest in a sanctioned entity and who
knows or should know of the actions….
– Could this cover a director?
– Director who is an officer?
Wisconsin DOJ
• Wisconsin Health Law Update – January 27,
2012
• Thomas Storm – Department of Justice
• Trend toward looking at individual
responsibility
• Wisconsin recently centralized fraud
prevention in an Office of Inspector General
Federal Volunteer Protection Act
– 1997 – To address reductions in volunteers
– Preempts less protective state laws
– Liability Protections for volunteers serving
nonprofit organizations
– Does not foreclose suit by the organization against
a volunteer
– Does not release the organization from liability
– Very high standard for punitive damages
– 42 USC 14501 et. Seq.
Wis. Stat. 181.0670
• Volunteer of non-stock corporation not liable
for monetary liabilities arising from act or
omission as a volunteer.
• Except
– Knowing violation of criminal law
– Willful misconduct
– Received compensation
– Within scope of duties as director or officer
• Nonprofitrisk.org/library/state-liability.shtml
Attorney Roles
•
•
•
•
•
Outside Counsel
In House Counsel
Compliance Officer
Fellow Director
All Positions Create Opportunities To Advise
The Board On The Nature of Obligations and
Duties
As Outside Counsel
•
•
•
•
•
•
Primarily Work With Management
Occasionally In Front of the Board
Major Transactions
In Service Training
Special Presentations (Compliance Duties)
When Privilege Is Important
As In-House Counsel
•
•
•
•
Ongoing Interaction With Board Members
Regular Board Presentations
Ongoing Opportunity For Input
Much Greater Opportunity To Advise Board
On Nature of Duties
• Be Careful About Limits to Attorney/Client
Privilege
As Compliance Officers
• Health Law Is Great Training To Become CCO
• CCO Ongoing Duty To Report Directly To The
Board
• Duty To Bring Compliance Risks and Problems
To The Attention of the Board
• Be Careful About Dual-Role Situations and
Tension Between Roles
As A Fellow Director
•
•
•
•
Duty of Care Framed By Expertise
General Attorney On Board
Health Care Attorney On Board
Compliance Attorney On Board
Nature of Advice
• Current Climate Requires Much More
Extensive Board Education
• Board Education Decreases Compliance Risks
• Periodic Education
• In The Context of a Major Transaction Or
Issues
• Compliance Process Duties
• Compliance Risk Area Developments
Board Duties Defined By…
•
•
•
•
•
•
•
Model Rules
Common Law
Regulatory Guidance
Regulatory Enforcement
State Enforcement Actions
SOX
Sentencing Guidelines
General Duties of Board
• Trustee Duties vs. General Board Duties
• Trustees – Liable for Simple Negligence
• Board – Fiduciary Duty of Good Faith, Loyalty
and Obedience
• Model Rules – Imposes Same Duties In a
Nonprofit As In A General Corporation
Some Exceptions
• State Attorney Generals
• Attempts to Impose Trust Rules
• Attempts to Eliminate Business Judgment Rule
For Non Profits
– Community Asset Theory
– No Market Oversight
Some Examples
• Minnesota 2003 – HealthPoint
• Maryland Insurance Commissioner 2003
– Report on conversion of a nonprofit to for profit
– Business Judgment Rule has “no application” to
regulatory approval process
• Health Midwest v. Kline – upheld Business
Judgment Rule
• Nashville Hospital – upheld Business
Judgment Rule over AG Challenge
Model Act
• Director fulfills her duty of care if:
– Acts in “good faith”
– Care of an “ordinary prudent person”
– Under similar circumstances
– Reasonable belief action is in the best interests of
the organization
Duty Requires
•
•
•
•
•
Informed and practical judgment
Attend meetings
Ask questions (reasonable inquiry)
Further inquiry of situation warrants
Conflict plays a factor – interests of the
corporation
Other Factors
•
•
•
•
•
Size and sophistication of the organization
Specialized background of board member
Reliance on experts – if reasonable
Does not require perfect decision-making
Walt Disney Derivative Litigation
Guidance On Governance
• Stevens Institute of Technology (New Jersey)
– State regulators challenge to Board practices
– Cookbook for a world of trouble
• Other State AG Cases
– Maryland Insurance Commissioner
– Minnesota – HealthPoint Conversion
• Various IRS Guidance
IRS Guidance On Governance
• IRS Form 990
– Revised substantially in 2008
– Requires much greater disclosure
– Encourage “good corporate governance” through
transparency
• IRS Governance Checklist (12/3/2009)
– Training IRS Exempt Organizations Unit
– Nonprofit Governance Issues
– Includes Powerpoint training materials
NFP Governance “Red Flags”
• Failure to document deliberations
• Pressure on outside consultants
(compensation comparables)
• Inactive Audit Committee
• Disengaged Board
• Regular meetings
NFP Governance Red Flags
• Control by executive committee or small
group
• Failure to correct internal control weaknesses
in spite of auditor recommendations
• Violation of endowment restrictions
• Borrowing without proper approvals
Sibley Hospital Case
•
•
•
•
•
Conflicts led to bad financial decisions
Large Board (20 Members)
Small group controlled the Board
Symbiotic relationship with financial institution
Board routinely accepted decision of those in
control
• Board members can be held individually
responsible where conflict of interest leads to
breach of fiduciary obligations.
Counsel Should Suggest
•
•
•
•
•
Diversify/Decentralize Governance
Beware of Concentrated Power
Monitor Use of Restricted Funds
Be Responsive To Management Letters
Great Care Setting Management
Compensation – run comparables
• Beware of Long Terms
Governance Action Items
•
•
•
•
•
•
•
Board Review of Form 990
Strong Conflict of Interest Policy
Whistleblower Policy (Anti-Retaliation)
Document Retention Policy
Document Board Meetings
Joint Venture Policy
Audit Committee With Charter
Exercise of Director Duties
• Major Transactions
• Quality of Care Issues
• Compliance Oversight
Major Transaction
• Nashville Hospital Case
• Regulatory Approval of Sale of NFP to For
Profit
• Lengthy Analysis and Opinion by Attorney
General
• Central Case Defining NFP Board Duties
• Dissecting Famous Paragraph From Tennessee
Attorney General
The members of the board 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
who 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
The continued availability of primary care
and specialized physicians for the
community.
Nashville Hospital Takeaway
• Board duties extend past simply looking at the
affect on the organization itself
• Nashville Hospital case spelled out more
extensive scope of duties and analysis in NFP
• AG upheld the Board’s approval of the
transaction
• Gave credence to Board decision, but
examined process in detail
Impact On The Community
•
•
•
•
•
•
NFP – Public Assets/Public Trust?
Impact on Patients?
Impact on Community?
Impact on Employees?
Availability of services to the community?
How will it affect physicians?
So What Is The Standard?
•
•
•
•
General corporation duty of care?
With an element of public trust?
Impact on the community?
Is there a broader duty to be informed as a
director in a nonprofit?
Considering Acquisition
• Compliance Due Diligence Concerns
• Latent Compliance Problems
• Especially In Successor Liability Situations
– Merger
– Assignment of Provider Agreement
– What about asset purchase of physician practice?
• Review Compliance Program History
• Require Pre-Closing Audits?
Duties Over Quality of Care
• Traditional Roles – 3 Legged Stool
• Emerging Recognition
– Link between compliance, oversight and quality of
care
– Statements by regulators
•
•
•
•
HHS Inspector General – Quality is a Compliance Issue
Billing and Quality are linked
Right to reimbursement
Quality reporting initiatives
Core Fiduciary Duty of Director
• Duty to make reasonable inquiry regarding
how quality of care issues are being addressed
• Part of duties relating to compliance
• Ask questions regarding quality issues
Duties Regarding Compliance
• In re Caremark –
– Board obligations to assure information and
reporting systems are in place
– Systems adequate to assure appropriate
compliance information is reported to the Board
– Systems in place to proactively monitor
compliance
– This is a duty of the Board of Directors
Reasons for Board to Oversee
Compliance
•
•
•
•
•
•
•
Individual responsibility (Park Doctrine)
Common Law Duties of Care
Federal Sentencing Guidelines
Increased Fraud Enforcement
Increase Revenues?
Compliance Mandatory
Suspension of Payment Risks
Nature of Board Duty
•
•
•
•
•
•
•
Set tone from the top
Effective process in place and operating
Adequately funded
Issues being addressed
Accountable compliance officer
Receive regular reports
Not required to detect or prevent every risk
Sample Board Presentation
• What The Board Should Know About
Compliance
• Some Common Issues
– Dual Role Compliance Officer
– Independent Effectiveness Review
– Separating Compliance Budget
Parting Thoughts
•
•
•
•
•
Board Duties Greatly Expanded
Beyond Simple Fiduciary Obligations
Requires Proactive Activity
Counsel Plays Important Role
Does Your Board Review Its Own
Performance?
©2012 Ruder Ware, L.L.S.C. Accurate reproduction with
acknowledgment granted. All rights reserved.
This document provides information of a general nature
regarding legislative or other legal developments. None of
the information contained herein is intended as legal advice
or opinion relative to specific matters, facts, situations, or
issues, and additional facts and information or future
developments may affect the subjects addressed.
53