The Future of Corporate Governance in Health Care
- by Jeff Voigt
As the industry evolves, the boards of health care companies must become more engaged.
On December 5, I hosted a segment on corporate governance in health care on SIRIUS XM channel 111’s “The Business of Health Care.” My guests were Michael Peregrine, partner at McDermott Will and Emery (and an expert on the laws surrounding health care governance); Jonathan Kalodimos, assistant professor of finance at Oregon State University; and Thomas Tsai, M.D., surgeon and health policy researcher at Harvard.
The health care field is evolving rapidly and becoming increasingly complex. With such change comes a need for boards of directors at health care companies to become more engaged. The evolving issues they face relate to the following factors: Antitrust caused by increasing consolidation (e.g. CVS’s acquisition of Aetna); quality of care and associated reimbursement; disruptive technologies (e.g. Amazon’s foray into pharma distribution); information technology and the increasing use of data in making decisions; sexual harassment; increased risk-taking by health care providers (sharing in financial risk of care); focusing on value; and data security. In other words, there is a lot of information that requires processing, monitoring (via audit and compliance committees), and thought by boards.
Each of the panelists discussed these issues from a different perspective. Michael Peregrine stated that now more than ever, directors need to be engaged—simply put, they need to do their job in providing the appropriate monitoring and advice to the organizations they are responsible for overseeing. Thomas Tsai, on the other hand, recently co-authored a Health Affairs study on board practices and their relation to hospital performance on quality. The researchers found that organizations that pay attention to quality (with a board that views this as a priority) perform better on quality metrics that are used by payers in determining payment. Jonathan Kalodimos also reiterated Tsai’s conclusions on quality, stating that effective board monitoring is crucial to the provision of high quality care. In a recent study published by the Journal of Corporate Finance, he found that a board’s focus on quality corresponds to an increased probability of a patient surviving a heart attack.
One of the issues that we discussed at length was the concept of board independence and how this affects board-functioning. The major impetus to focus on independence resulted from the 2002 Sarbanes-Oxley Act. This law specifically requires independence in the finance, audit, and compliance committees at the board-level. However, a study published in a 2010 issue of the Journal of Financial Economics, co-authored by University of Washington professor Ran Duchin, found that as the complexity of the environment a board is operating in increases, the greater the need is for board directors who know the business (i.e. are less independent) to maximize the organization’s performance. Conversely, the study also found that in less complex environments, board independence can improve the performance of an organization. The finding that “outsider” independent board directors are less effective when it is difficult and costly to understand the firm’s business (due to the high costs of their acquiring information) has important implications for board member selection. In essence, boards also need to understand the business and engage with management regarding where the company should be headed.
The final issue that we discussed was the pending tax reform legislation before Congress. Embedded in this law is a provision for not-for-profit CEOs to be taxed at a rate of 20 percent on income above $1 million. This has implications for CEOs’ salaries in this sector, and the possible movement of not-for-profits towards becoming for-profit entities. This is another issue boards may have to deal with in the increasingly complex world of health care.