Objectives

1. Guiding Your Hospital into the Future: What Trustees Should be Doing NowIllinois Hospital AssociationIHA Leadership SummitSeptember 20, 2011Lombard, ILRex KillianKillian & Associates, LLC314-504-2213rkillian@killianadvisory.com

2. Identify and discuss healthcare governance trends, challenges and pressures facing boards Share and discuss governance best practices Discuss fiduciary responsibilities of board members Identify practical implications to responsibilities of hospital and health system boards Discuss a practical approach to improving the effectiveness and efficiency of the board Re-examine board processes Objectives 2 2 2 2

3. Governance Imperative “The range and depth of challenges facing health care organizations signal an industry in crisis. Governing boards must raise the bar on their performance and accountability to fulfill their most fundamental responsibility: to earn and maintain the public’s trust in and commitment to the health care organizations they govern.” Report of the Blue Ribbon Panel on Healthcare Governance, 2007, Health Research and Educational Trust (HRET) 3 3 3 3

4. Governance Challenges - Summary Health care governance is on radar of several regulatory and private bodies and is creating a sense of urgency to address governance practices • SOX [Link to Stewardship of Assets] - Independent directors, audit function and governance committee (2002) • Independent Sector – Principles of good governance (2004) • IRS [Link to Tax Exempt Status] - Governance guidelines and Form 990 (2008), IRS agent training materials (2009), IRS Governance Check Sheet (2009) and new Sec 501(r) compliance requirements (2010) – majority of independent directors, review form 990, review policies on Executive Compensation, COI, and Whistleblower Claims • HHS & OIG [Link to quality] – HHS/OIG resource guide ties oversight of quality to duty of care (reasonable inquiry) and duty of obedience (to mission) (2007) 4 4 4 4

5. Challenges - Summary • Bond Rating Agencies [Link to credit profile] - mission, board composition and SOX similar financial reviews (2005) • Accreditation Bodies [Link to licensure and certification] - competency based boards, written board responsibilities, ultimate accountability for quality (2010) • Trustee certification – NJ and 12 hospital associations • Blue Ribbon Panels – HRET, NACD & Independent Sector (2005-2007) • Health Reform – transformational changes to health care delivery and payment initiatives, reimbursement, preventive care and community health with goal to improve quality and reduce costs (2010) • Dodd-Frank Act – requires more accountability to shareholders in public companies – analogy to Health Reform’s requirement that hospitals be more accountable to the community (2010) 5 5 5 5

6. Health Reform – Compliance Tax-Exempt Hospitals under 501(c)(3) must meet requirements of 501(r): • Conduct community health needs assessment once every 3 yrs, develop action plan to address needs and widely publicize to public (tax yrs after 3/2012) • Adopt and publicize written financial assistance policy for patients who require financial assistance (tax yrs after 3/2010) • Refrain from extraordinary collection actions if have not made reasonable efforts to determine eligibility for financial assistance (tax yrs after 3/2010) 6

7. Compliance cont’d • Limitation on ER charges (tax yrs after 3/2010) • Secretary of Treasury shall review at least once every 3 yrs community benefit activities of each hospital organization • Excise tax of $50,000 for noncompliance with Sec 501 (r) • 2/24/11 - IRS released revised Schedule H of Form 990 designed to monitor and enforce Sec 501(r) 7

8. Health Reform – Charity Care Reporting Secretary of Treasury annual report to Congress on four levels of community benefit of all hospitals (nonprofit, for-profit and government) to create uniformity of reporting [and possibly to develop a uniform community benefit requirement] • Charity care • Bad debt expense • Unreimbursed costs • Costs of community benefit activities • [Note: Senator Grassley’s 5th “5% charity care” requirement was deleted] 8

9. Governance Trends In light of the challenges, there is a growing trend toward the adoption of governance best practices • Boards are becoming more accountable as bodies and as individuals • Boards are moving to collaborative relationships between directors and CEOs • Boards are becoming more competency/skill set based rather than representational • Boards are seeking ways to become more efficient and effective, i.e. board meetings, board organization, committees, culture, education and staffing 9 9

10. Governance Best Practices Blue Ribbon Panel (HRET) – sample practices for exceptional boards • Use consent agenda for routine matters • Spend majority of time on strategy • Include one “deep dive” item each meeting • Add expert in quality to board and develop quality literacy for all board members • Create board culture that is engaged, interactive, embraces constructive challenge, respectful dissent • Develop board composition profile (matrix of skill sets) • Assess efficiency and effectiveness of board performance (Board evaluation) 10 10 10 10

11. Best Practices cont’d Panel on Nonprofit Sector (2007), Independent Sector • Board responsibilities – mission, strategic direction, budget, key financial transactions and governance practices • Board composition – diverse skill sets • Independent directors – substantial majority • Board education, development and orientation • Board and Board member evaluation • Terms and term limits – advantages and disadvantages [Note: Panel created in 2004 at urging of U.S. Senate Finance Committee. Issued reports in 2005, 2006 and 2007 with 33 “principles of good governance” and has largely informed the work of the IRS. New Workbook to facilitate compliance with the Principles for Good Governance.] 11 11 11 11

12. Board Member’s Fiduciary Duties What is Impact of Trends and Challenges on a Board Member's Fiduciary Duties? • Duty of Care – Members must be knowledgeable of all reasonably available information and act with due care – typically fulfilled by: • Preparing for and attending board meetings • Making reasonable inquiry and actively participating • Challenging board members and senior leaders • Acting in best interest of organization • Adhering to organization’s Mission • Monitoring performance against goals and strategies 12 12 12 12

13. Fiduciary Duties – cont’d • Duty of Loyalty – Trustees must disclose conflicts, maintain confidentiality and act in the best interests of the organization – typically fulfilled by: • Pursuing best interest of organization and not the personal interests of board members • Complying with Conflicts of Interest Policy • Complying with Corporate Compliance Policy and Code of Conduct/Ethics • Abiding by policy of strict confidentiality 13

14. Fiduciary Duties cont’d • Duty of Obedience – Members must ensure that the organization is obedient to its charitable purpose and mission – typically fulfilled by: • Regularly reviewing the Mission • Making sure that board’s decisions support the charitable mission and community • Conducting community health needs assessment every 3 yrs and action plan to address needs • Reviewing policies on Exec Comp, COI, Document Retention and Whistleblower Claims • Reviewing organization’s Form 990 14

15. Board Responsibilities What is impact of trends and challenges on the key responsibilities of hospital and health system boards? • Mission and Community Benefit • Strategy • Quality/Patient Safety • Financial/Stewardship of Resources • Executive Management • Board Education and Development [Note: Board responsibilities drive the work of the Board, the competencies/skill sets needed on the Board and the Board’s evaluation. Board “responsibilities” are different than the “powers and duties” set forth in the Bylaws] 15 15 15 15

16. Implications for Hospital and Health System Boards Mission and Community Benefit • Regularly review the mission (IRS) • Ensure that hospital conducts community health needs assessment every 3 yrs, develops implementation plan, monitors performance, ensures public transparency and reports on Form 990 (Health Reform) • Review and update as necessary community benefit/charity care reporting policy and practices (Health Reform) • Balance mission/margin, monitor performance metrics (Bond Rating Agencies) • Consider community-based care networks, school-based clinics and community health activities (Health Reform) • Consider new model of community benefit aligned with Health Reform goals designed to improve health of community (i.e. a community collaborative effort) 16 16

17. Board Implications cont’d Vision and Strategy • Review current strategic direction/plan and develop action plan to address health reform initiatives • Emphasis on integrated and coordinated care models, coupled with Value Based Purchasing (VBP) and bundled payments, dictates re-examination of hospital integration and physician alignment strategies (Health Reform) • Consider Accountable Care Organization (ACO) planning (Health Reform) • Consider new opportunities in preventive care (Health Reform) • Spend majority of board time on strategy discussions and set strategic direction (Blue Ribbon Panel and TGI Surveys) • Explore potential collaborative arrangements for long term viability 17 17

18. Board Implications cont’d Quality of Care • Approve strategic initiatives for quality improvement and patient outcomes - ultimate accountability for quality and patient safety (Health Reform and Accreditation Bodies) • Develop quality measures that are consistent with HHS’ new National Quality Strategy and approve, as appropriate, modifications to hospital’s measures & monitor performance • Include a quality expert on board, where available, and full board educated on quality and patient safety (Health Reform) • Focus on improving patient safety, reducing preventable errors, reducing avoidable readmissions and patient satisfaction (Health Reform) • Embrace public reporting on quality (Health Reform) 18 18

19. Board Implications cont'd Finance/Stewardship of Assets • Review Form 990 and IRS Governance Check Sheet – transparency (IRS) • Review policies on executive comp, conflicts of interest, document retention and whistleblower claims – use of assets (IRS) • Conduct financial reviews similar to SOX (Bond rating agencies) • Board composition – competency based with diverse skills (clinical, quality, finance, investment, legal …) (Bond rating agencies and Accreditation Bodies) • Review and adopt policies that address eligibility criteria for financial assistance and collection practices (Health Reform) • Assess financial impact of Health Reform and develop action plan to address (Health Reform) 19 19

20. Board Implications cont’d Executive Management • Consider development of a Health Reform goal for senior executives' incentive compensation program • Expect regular Executive Mgt reports to Board on status of Health Reform developments • Consider multi-disciplinary committee to evaluate Health Reform impact and proposed action steps • Develop CEO and senior leadership succession plans 20

21. Board Implications cont'd Board Education and Development • Ensure that Board receives proper education on Health Reform and develop action plan and timeline • Educate full board on quality and patient safety measures • Evaluate board organization and committee structure (i.e. board committee to focus on hospital/physician integration strategies?) • Develop Board education and development plan • Conduct periodic Board [and Board member] evaluations, develop action plan and monitor performance • Develop Board and Board leadership succession plans • Evaluate Board meeting processes to improve effectiveness 21

22. Effective and Efficient Boards – Practical Approach • Right People – Competency based (not representational) with skill sets needed as driven by board’s responsibilities and goals; recruitment should target needed competencies as identified by board profile and gap analysis • Right Organization – Establish best governance model and structure to fulfill the mission and accomplish the board’s responsibilities (Form follows function). Includes governance model, fiduciary v. operating board, committee structure, staff support, terms and term limits 22 22 22 22

23. Effective Boards cont’d • Right Issues – work of board driven by responsibilities around mission, strategy, quality, finance, executive management and education and annual board goals; clarify Member, board and mgt responsibilities • Right Processes – Board agenda utilizes Consent Agenda, allocates majority of time to Board dialogue on strategy, quality or other focus items; board materials; committee and mgt reports; more interactive dialogue and good culture • Right Follow Through – set Board goals; develop work plan to monitor progress; conduct board, board chair and board member evaluations coupled with action plans; board and board leadership succession planning 23 23 23 23 23

24. Board Processes - Premise “Meetings that focus the board’s time on critical organizational issues and facilitate thoughtful deliberation and effective decision-making are far more valuable than meetings filled with reviews of committee minutes and long reports…” Report of Blue Ribbon Panel (2007) “Many board members ask, ‘why am I here? what difference do I make? and what is my purpose?’ Chait, “Governance as Leadership”, Board Source (2005)

25. Restructuring Meetings to be More Effective • Meetings – frequency and time allotted • Re-examine both frequency of meetings and time allotted • Focus on board’s work is more important than frequency • Be sensitive to increased time commitment of board members • Materials – streamline board materials • Consider 1-page agenda item summary with background, issue, dialogue Q and action requested • Brief and concise – limit size • Consider paperless, board portal etc • Distribute at least 7 days in advance for adequate preparation • Board members read in advance and come prepared to discuss

26. Board Meetings cont’d • Agenda Planning – Be thoughtful and intentional • Consider 2-yr planning calendar • Agenda items driven by Board goals, items requiring board action, executive leadership and board member input • Challenge staff – why does it have to be on the board agenda? What are you asking of the Board? Input? Action? • Draft agenda prepared by governance staff and/or CEO and reviewed by Chair • Try to avoid new agenda items and materials after agenda is distributed

27. Board Meetings cont’d • Agenda - Consider a new format with following features: • Maximize use of Consent Agenda for all routine matters (examples include approval of minutes, reports, appointments, minor projects or capital expenditures). Board members can always ask that an item be removed from Consent Agenda. • Focus Items – structure a timed agenda to allow more time for Board discussion on strategy, quality or other focus items as opposed to listening to reports • Place focus items and action items up front to ensure sufficient time and energy

28. Board Meetings cont’d • Agenda cont’d • Board Committee reports – read in advance, take questions only or if board input is needed on an issue • Management reports – same • Board Education – set aside time for board education and development (driven by annual Board Education Plan) • Executive Session • Meeting Assessment – spend a few minutes assessing the meeting. How did the board’s actions support the hospital’s mission, vision and strategy? Use Board members’ time wisely, gain their insights and the work will be more meaningful

29. Conclusions • Not a time to “wait and see” outcome of legislative and litigation efforts on Health Reform or future IRS efforts based on collection of governance information from revised Form 990. • Because of greatly increased external scrutiny and substantially increased demands on board member’s time, there is a need for improvements in governance practices and processes – it is time to re-examine old customs and adopt new governance approaches • Adoption of effective governance practices will take strong leadership of board chair and CEO and commitment and support of board members 29 29 29