The Crisis in Healthcare Boardrooms

by Robert Gadaleta

Politicians frequently speak of the healthcare crisis in America. Although most discussions focus on the lack of health insurance or proper care for uninsured patients, there is another crisis brewing in the boardrooms of healthcare institutions across America. Increasingly, healthcare organizations and their boards of directors are under intensifying scrutiny from government regulators, politicians, and the plaintiffs’ bar.

At a time when hospitals are closing, merging, or declaring bankruptcy due to financial difficulties, financially sound healthcare organizations have become targets of governmental authorities and the plaintiffs’ bar. Politicians question the not-for-profit status, charity-care policies, and compensation packages of their executives, making it clear that the exposure profiles of these healthcare facilities have increased significantly in recent years.

Historically, the greatest underwriting exposure for not-for-profit hospitals was bankruptcy. Now, two evolving issues are the focus of the government regulators and the plaintiffs’ bar. First, are not-for-profit healthcare organizations accomplishing their charity mission when their financial statements show significant “profits?” Are these organizations taking advantage of the tax benefits of being a not-for-profit while creating significant wealth? Are they truly providing a benefit to needy patients who are uninsured and/or unable to pay for necessary healthcare services?

The second issue, and the topic of much media scrutiny, is executive compensation. Should not-for-profit CEOs have large compensation packages while the organizations they operate benefit from massive tax breaks? Anticipation of increase government charity-care regulation and executive compensation is sure to provoke prolonged discussions in boardrooms across the country.

With recent attention from elected officials, the plaintiffs’ bar recognizes that financially strong healthcare organizations are the newest deep pocket litigation targets. In 2004, the first class-action lawsuits of this kind were filed. Those lawsuits originally challenged the not-for-profit status of healthcare organizations, charging them with not providing enough free care to uninsured patients. In 2006, class-action lawsuits began against financially sound (and primarily non-unionized) healthcare organizations. Those lawsuits alleged that a number of healthcare organizations colluded to keep nurses’ wages artificially low. These two cases will end up potentially costing the healthcare industry and their D&O insurers hundreds of millions of dollars.

What can boards of healthcare organizations do to reduce their exposure to such lawsuits? Be proactive and thoroughly prepared by considering some of the following recommendations:

- Create an independent compensation committee and benchmark your executive compensation packages against financially sound peers, as well as inner-city hospitals that mostly serve uninsured patients.

- Set minimum standards for charity care based on a reasonable percentage of revenues and reexamine what your organization classifies as charity care. The Internal Revenue Service took a stance on this issue in its interim report on tax-exempt hospitals and community benefits project.

- Clearly display your charity care policies in common areas of your organization. Make the process for applying for charity care easy for everyone including those who are illiterate and/or non-native English speakers.

- Avoid aggressive collection tactics including litigation, garnishment, or abusive debt collection from patients who truly need charity care.

Government regulators are never far from important issues like healthcare; however, if you are proactive in addressing emergent liability issues, you may spare your healthcare organization from having to defend itself from one or more of these expensive, time consuming class-action lawsuits.