Almost everything that not-for-profit hospital ratings analysts evaluate can be measured, quantified, and databased. Name your agenda item and there’s a metric for that.
Except for one: governance. Despite valiant efforts, we have found no one metric that captures the effectiveness of a not-for-profit hospital board of trustees. The ability to meet budgets, maintain accreditation standards, and provide good customer service start to paint a picture of governance effectiveness, but doesn’t holistically capture the essence of the seemingly elusive quality of high-performing governance.
So, without a metric, how do the rating agencies and other stakeholders evaluate whether a volunteer board is doing its job? With probing questions that every board should be prepared for.
The not-for-profit hospital industry is one of the most complex sectors in the municipal market; astute oversight by a board of trustees is critical. The industry has the dubious role of operating in two very different worlds: the public and private sectors. Public policy and government spending dictate revenue growth, while private market forces drive volume and market share. Not-for-profit hospitals must fund community benefits and justify their tax-exempt status, while also generating enough cash flow to maintain state-of-the-art facilities and build cash reserves. All of this while competing against a barrage of well-funded, fast-moving disruptors.
Add a global health crisis and social injustice into the mix and the role of hospital boards just got a lot tougher, requiring stronger and perhaps different governance more than ever before.
COVID brought new demands on governance, and in many ways, governance rose to the occasion. Two examples are noteworthy.
Agility. The speed in which hospitals acted quickly during the early days of the pandemic was remarkable. Quick lessons were learned from the rapidly spreading cases in Seattle, New York, and New Jersey. Disaster plans that sat on a shelf were activated. Trustees and hospital management used all available resources and connections to secure PPE and ventilators, garner external sources of liquidity, and advocate hard for state and federal relief funds. The resiliency of the industry was very strong, even in the face of many unknowns.
Covenant management. Deft covenant management also became an important measure of governance as many organizations of all ratings faced covenant violations given the shutdown, patient hesitancy, and revenue declines. While a covenant breach is in and of itself a serious matter, ratings analysts will look at the drivers behind it to determine if the cause was bespoke or a fundamental shift in credit quality. Equally important, analysts will evaluate a hospital’s steps to manage the covenants in making their evaluations. With board approval, many hospitals proactively sought amendments during COVID before the covenant violation occurred or received a multi-period waiver thereafter to avoid future covenant defaults. This oversight was well received by the rating agencies.
These are terrific examples of strong governance during great uncertainty. That said, the industry has also witnessed spectacular failures of governance. Allegheny Health Education Resources Foundation (AHERF) remains the poster child of what happens when management goes unchecked by the board. In the case of AHERF, it was a large, star-studded board of industry, academia and healthcare experts. Aggressive and unfettered growth strategies lead to AHERF’s bankruptcy and payment default in 1998. As extreme as AHERF was, there are other instances of payment defaults or near misses by lesser-known, smaller hospitals that stemmed from a board’s unwillingness to change direction or make tough, uncomfortable choices.
Now there will be additional questions asked of governance on workforce and access to care. These are not new issues; COVID simply brought them to the top of the board’s agenda. Workforce questions will now include topics such as diversity, equity and inclusion efforts. Access to care questions will center on strategies that address affordable care, social determinants of health and root causes of health disparities. As we saw with the pandemic, the walls of the hospital stretched beyond clinical care to include affordable housing, behavioral health, and food insecurity. Trustees and management teams will need to determine what their organization’s role will be in providing for their communities and balance those commitments with strong fiscal stewardship.
When the case studies are written about hospitals and COVID, one theme will occur throughout: the importance of strong governance. As with any strategy, good governance should be able to respond articulately to the questions received from rating agencies and the like. Great governance will present the strategies before the questions are asked.
Top 5 Questions for Board Members from Rating Agencies
- What was the biggest challenge your hospital faced and how did it work through it?
- What are the biggest risks now facing your organization and how will you address them?
- How does the board monitor hospital strategy and make mid-course changes?
- What financial targets or ranges has the board set for the organization?
- How does the board remain educated on healthcare policies, particularly reimbursement?
Top 5 Attributes of Great Governance
- A highly centralized governance model
- Systematic board monitoring of capital spending
- Careful, deliberate oversight of organizational growth strategies
- Agility, manageable size, and high functioning committee structure
- Continuous efforts to stay well informed on state, local, and federal healthcare policies and industry developments
