About the Author

Barry S. Bader, president of Bader & Associates, Potomac, Maryland, is a nationally known governance consultant, speaker and retreat facilitator specializing in not-for-profit hospitals and health systems. He is one of a select group of The Governance Institute’s “Governance Advisors.” He is also the publisher of the Great Boards newsletter and website. Find out more about Bader & Associates and its consulting services on the Great Boards website.

Are clinically integrated PHOs a viable platform to align physicians and hospitals?

Last week, I attended a symposium on clinical integration sponsored by Advocate Physician Partners of Chicago. APP is arguably the country’s most successful physician-hospital organization (PHO) at linking hospitals and physicians to contract collectively with health plans, improve clinical outcomes, reduce costs, and share savings with physicians.

In the winter issue of Great Boards, I’ll examine whether clinically integrated PHOs are a viable mechanism to align the financial incentives for hospitals and physicians to manage costs and improve quality. So I came to learn more about APP’s success story, and whether other system’s boards and leadership should pursue this alignment strategy.

And a success it is.

Out of the 5,200 medical staff members practicing in Advocate’s hospitals, APP includes 900 primary care physicians and 2,500 specialists, as well as eight acute care general and two childrens hospitals. APP has signed contracts with 10 health plans for 280,000 capitated lives and 700,000 PPO lives. APP has clearance from the Federal Trade Commission to negotiate contracts for all its members because of its clinical integration program, in which providers agree to follow best practice guidelines designed to improve quality at lower cost.

In 2009, the clinical integration program is engaging physicians in 37 initiatives designed to meet or exceed goals for 107 measures for clinical outcomes, efficiency, medical and technological infrastructure, patient safety and patient satisfaction. For example, the diabetes care initiative focuses physicians on eight measures of how well diabetes patients are managed outside the hospital, to prevent costly hospitalizations, premature deaths, and diabetic complications such as blindness and kidney failure, In 2009, the program preserved an estimated 9,000 years of eyesight and 6,800 years free of kidney disease, and extended lives an estimated 5,700 years.

APP also boasts success with clinical integration programs designed to achieve smoking cessation, screen for and treat depression, improve asthma outcomes, administer childhood immunizations, prescribe generic drugs, and use appropriate drugs to treat coronary artery disease and heart failure. For the details, see a copy of APP’s 2009 Value Report.

As a result, APP’s physicians received more than $28 million in clinical integration incentive payments in 2008. The average payout was about $10,000 per physician, but some high-performing, busy clinicians earned in the neighborhood of $20,000 in incentives.

Some 800 of APP’s physicians are employed by Advocate, but the rest are private practitioners, and about 1800 medical staff members are not part of the PHO, so APP is a good model to examine whether hospital-employed physicians and independent practitioners can collaborate to achieve common quality and economic goals.

Here are a few of my takeaways from the symposium:

• What’s in this for physicians? If a PHO has a genuine clinical integration program, “physicians can align with each other and hospitals to distinguish themselves in the market on the basis of quality; justify higher reimbursement; and conduct collective negotiations with health plans,” said Thomas Babbo, a partner with Hogan Marren, Ltd. and the legal architect of the clinical integration program. “This is about quality and about getting better reimbursement from payers precisely because of this ability to drive better quality. This is value-based, collective bargaining for physicians. It’s not something to apologize for,” so long as it’s genuinely intended to improve quality.

• Should you ask the FTC’s permission? Although the Federal Trade Commission has issued a number of advisory opinions describing the characteristics of a clinical integration program that would justify collective contract negotiation by physicians, Babbo generally advises clients to actively engage the FTC up-front regarding what they’re doing, but not to go through this formal process The process is lengthy, the PHO must delay clinical integration while it’s waiting for the opinion, and there’s a risk the FTC will find some aspect of the program to fault. Instead, he recommends following the existing guidelines laid out by the FTC and U.S. Department of Justice since 1996, and in earlier opinions for other PHOs, such as the Greater Rochester IPA and Tri-State Health Partners.

• Since Advocate has a successful medical group of employed physicians, why does it need a PHO? The PHO recognizes that “9 out of 10 Americans get their medical care from a solo or small group practice,” explains Lee B. Sacks, M.D., president of APP. Among APP’s approximately 600 primary care physicians in private practice (not employed by Advocate), 300 (50%) are in solo practice, almost 200 are in two or three person practices, and less than 250 are in practices of 20 or fewer physicians. These physicians are not interested in larger groups or hospital employment. “APP is a bridge between Advocate’s employed and independent physicians.”

• Will payers play? “You have to have payers in the market who are willing to pay you” an incentive for quality, says Sacks. Since the PHO seeks higher fees from health plans, it has to demonstrate its value proposition, i.e., better outcomes and more efficient healthcare at a lower overall price. Even then, health plans will be reluctant to pay higher fee schedules on the promise of lower overall costs. Babbo recommends going to local employers and making the case for the value proposition of clinical integration directly to them, such as smoking cessation programs that decrease absenteeism and lower healthcare costs. The employers can then become an ally of the PHO when seeking contracts with health plans. Sacks, adds, “Health systems are usually among the largest local employers, so working with the benefits team of the partnered system is an opportunity to demonstrate value to other employers.” In our winter issue, I’ll describe APP in further detail, including its membership criteria, infrastructure, financial incentives, and governance structure, which is physician driven and physician led. I’ll also describe the startup efforts by Tri-State Health Partners in Hagerstown, Maryland, the most recent PHO to get a favorable advisory opinion from the Federal Trade Commission.

Clinically integrated PHOs are one of a number of possible mechanisms for hospital physician alignment and integration. You can read about others, including case studies, on the Great Boards website.

Is your board in a self-evaluation rut?

Has your board’s periodic self-evaluation process become a mundane exercise that generates little interest or results? If so, the board could be in a self-evaluation rut. Typical indicators include:

1. A nationally recognized self evaluation survey yields high scores every year.
2. The board spends hardly any time discussing survey results.
3. Some of the survey questions don’t apply or seem marginally important.
4. The board stopped doing regular self assessments because they weren’t productive.

Regular board self-assessment is like a regular physical exam by a physician. The test results might be fine, but missing scheduled check-ups could result in delayed detection of serious illness. A good physician doesn’t just check vital signs and lab values – she asks the all important questions: “Is anything bothering you? Has anything changed since the last time I saw you? Would you like to talk about ways to be even healthier?”

A good board self assessment process works the same way. A board needs an opportunity, every year or two, to step back and reflect on its work, makeup, structures and practices. I have rarely seen a board didn’t come away from a well-designed self-evaluation process with a number of ideas to improve itself. Great governance is a continuous journey, not a destination.

Here are six alternatives to “self evaluation as usual.” Some work better with a governance facilitator and some don’t, and all can enable a board to break free of the self evaluation rut.

1. Change the questions. National best practice questionnaires (I use the The Governance Institute’s very good survey most often) are invaluable, especially if scores are so-so, but what is the board learning if all the scores are high every year? Instead, in some years, why not develop a customized set of several open-ended questions about various elements of governance, such as “Is the board’s role clear?”, “Are we spending enough meeting time on forwarding looking, critical issues?”, and “What critical competencies will our board need in the future?” Compile the results into a discussion document for a self evaluation retreat or discussion. Challenge the board’s thinking in advance with articles on leading edge governance practices.

2. Establish the board’s work priorities and education agenda for the coming year. Most CEOs do a good job keeping their boards educated and informed. They’ll hit the mark even better if the board has the opportunity annually to discuss the major issues on which it wants to focus time for discussion and education. This discussion can often be coupled with discussion of either standardized questionnaire results or a customized survey.

3. Rigorously evaluate your committees. If your board relies on an active, working committee structure, ask each committee to conduct a rigorous self assessment and summarize the results for discussion at a self evaluation retreat or special session. Don’t re-invent the wheel- we published sample committee self assessment questions in the Summer 2008 issue of Great Boards.

4. Pick a focus. Who says self assessment must cover the waterfront every time? Why not pick just one or two big topics or questions to discuss, such as:

• How can we develop of culture of commitment and active engagement?
• How should the board carry out its responsibilities for quality oversight?
• As our organization and the environment change, what are the competencies we should seek in our “board of the future”?
• Should we evaluate individual trustees, and if so, how we can do it in a helpful, non threatening manner?
• What will the Form 990 mean for the way the board approaches its definition of independence, conflict of interest policy, and oversight of executive compensation, community benefit, corporate compliance, and financial integrity?

5. Ask a governance expert to “kick the tires.” Great leaders regularly invite outside experts to take an objective look their organizations, compare what they see to effective practices elsewhere, provide education and facilitate a discussion of opportunities for improvement. Hospitals often call in experts in such areas as revenue cycle improvement, physician practice management, clinical product lines and long-term strategic planning. A governance expert can do the same for the board.

6. Engage in a comprehensive governance assessment and redesign process. A comprehensive assessment usually involves not just kicking the tires but examining all aspects of a governance structure that has multiple, overlapping or large boards, redundant committees and meetings, and little turnover. Boards often want a top-to-bottom assessment a year or so after a major organizational change as a merger or major acquisition. Bringing on a new CEO is an ideal for either a “kick the tires” or comprehensive assessment.

Board self assessment can be a re-energizing and productive process. If it isn’t, don’t abandon the practice – improve it!

NEW ISSUE OF GREAT BOARDS NEWSLETTER IS AVAILABLE

The fall issue of Great Boards includes articles on public transparency and problem prevention techniques.

First, we look at how charitable organizations are responding to outside pressures for greater transparency by providing more and more information to the public on their executive pay, community benefits, quality, prices and governance practices. More important we asked hospitals and health system leaders if all the exposure made any difference? Surprisingly, it does. We heard stories of better media relations, increased trust from business and government leaders, and increased public use of hospital websites. As Joel Wernick, President and CEO of Phoebe Putney Health System in Albany, Georgia, said: “You can put a lot of criticism to rest pretty darn quickly if you just make information easily available.”

Next, I interview Michael A. Roberto, author of a fascinating and practical new book called, “Know What You Don’t Know: How Great Leaders Prevent Problems Before They Happen.” Roberto applies his seven techniques to governance and suggests some ways boards can work creatively and proactively to support management.

Read both stories on the Great Boards website at http://www.greatboards.org/.

WEBINAR ON HOSPITAL-PHYSICIAN ALIGNMENT

The Governance Institute is launching a new webinar series. I will be presenting at the first one, along with John Harris, a principal at DGA Partners in Philadelphia, on “Physician–Hospital Alignment: Successful Strategies and Board Leadership.” The webinar will be held Monday, October 12, at 2 p.m. Eastern time. For further information go to, GovernanceInstitute.com/webinars.

Here’s brief overview:

Webinar title: “Physician–Hospital Alignment: Successful Strategies and Board Leadership”

Monday, October 12, from 2 pm – 3 pm eastern time

Program Overview: Aligning with physicians is now a top priority for hospitals. Rapid strategic change is being driven by dynamic shifts in financial incentives, the competitive marketplace, quality measurements, proposed health reforms in Washington, physicians’ lifestyle concerns, and a changing social compact between hospitals and physicians.

Many hospitals see that their relationships with physicians have reached a tipping point. As a result, new models — clinically integrated PHOs, hospital-affiliated medical groups, and so on — are emerging to successfully align interests. Hospital boards and senior management must have a solid understanding of the challenges and opportunities presented by this evolving strategic issue.

Webinar objectives: This Webinar will:

* Explore the dynamics that make physician–hospital alignment imperative
* Identify the most successful models for physician–hospital alignment—and ways to assess which model(s) is/are most likely to win your physicians’ support and succeed
* Explain the board’s role in development of an alignment strategy, including 12 questions boards should ask about their hospital’s physician alignment strategy
* Describe practical approaches for building communications, trust, and engagement in leadership with and by aligned physicians

Part II: Mergers and Alliances: How soon and how much to engage the board?

Executives face the challenge of determining how soon and how much to engage the board in discussions before a final deal is consummated and ready for formal approval.

It’s tempting to keep information about a potential merger or strategic alliance in a small, management-driven circle, but surprising the whole board with a done deal is a never a good idea. Pre-cooked mergers and alliances that trample on some stakeholders’ turf can trigger a backlash from powerful directors, physicians and other stakeholders – and could scuttle a sensible strategic partnership. It also deprives the executive team of the insights and M&A experience that directors may have.

Conversely, fishbowl negotiations are a prescription for disaster. Getting a lot of directors enmeshed in the details of deal making or letting news leak out prematurely to stakeholders, especially medical staffs, also will kill a deal and embarrass the other partner.

The answer is finding the right balance, consistent with a board’s unique culture — some boards are accustomed to having a lot of involvement, while others vest great discretion in their CEOs and board leaders. The CEO and board leaders should clearly think through the right process for engagement of directors so the final decision has broad stakeholder support and benefits from the insights and experience of directors.

Whether an organization is joining a larger system, engaging in a merger or alliance of equals, or adding a new member to its existing system, the board’s involvement in the negotiation process usually involves these steps:

1. Get general consent from the full board to look at strategic alliances. This is best done as part of the ongoing strategic planning process. Directors may ask, “Why do we need to engage in a merger or alliance – can’t we do well just as we are?” A five-year, strategic financial projection can help answer that question. The full board should buy into the rationale for why the organization needs to grow and what it hopes to achieve through a merger or strategic alliance – e.g., access to capital, critical economic mass, market strength, improved quality. The strategic planning process may involve directors in broadly analyzing a number of potential strategic partners to determine who would be the ideal fit. The amount of detail the full board gets into at this early, pre-negotiation stage, will vary and requires careful judgment by the CEO and board leaders.

2. Choose a small group of the board’s leaders to be more closely informed about merger and alliance discussions. This could the board’s executive committee, strategic planning, or an “ad hoc strategic partnerships task force.” The group should draw from the board’s most influential leaders, including the chair and the board’s best strategic thinkers in terms of mission, strategy, business, finance, culture, and quality. Although merger and alliance talks occur mostly between the parties’ CEOs and senior executives, this committee or task force is the CEO’s “Governance A-team” for the board’s engagement in merger and alliance discussions.

3. Form a steering committee of leaders from both or all parties. The steering committee will include some of each board’s “A-teams.” The steering team should be small, probably 3-4 directors from each party plus the CEOs. Each member must sign a confidentiality agreement. It’s this group that addresses the key questions common to all partnership discussions, such as who will be the CEO and who’s on the board. It will identify and then answer questions specific to each deal, such as, will all parties be part of an obligated financial group, what will happen to existing foundation assets, and will a specific amount of capital be invested in particular facilities? Mergers with Catholic organizations must address the impact of the Ethical and Religious Directives of the Catholic Church and the values of religious sponsors.

4. Prepare the committee to address the key questions. The steering committee should be briefed on the range of structural options for joining organizations, and the pro’s and con’s of each option. It should also examine the case for a merger or alliance, including a strategic and financial analysis projecting what a combined organization might look like. And of course, the parties should learn about each other’s mission, values, culture, facilities, programs and people. If a partnership is the right thing to do, trust and a sense of cultural compatibility should build during the course of the steering team’s learning process.

5. Candidly explore the key questions (deal points) and options. This is the steering committee’s major work, to explore options and reach agreement on a vision and the key “deal points,” including the most appropriate type of corporate structure to achieve the strategic and financial aims, governance structure and authority, board composition and selection method, management succession plan, and other key issues.

6. Go back to each board at appropriate “plateaus” in the process. The leaders on the steering committee can’t get so far ahead that other board members feel they have no voice – but again, everyone can’t be involved in the negotiations. So, at one or more key places in the negotiation process, the board chairs should update their boards, seek feedback if appropriate, and ensure the board is still behind the partnership efforts.

7. Reach agreement on the key questions. The steering committee should reach agreement on the key deal points. All the key issues must be addressed. Such potentially controversial issues as the governance structure and the management succession process should be settled here, not left to due diligence.

8. Sign an MOU. The deal points form the basis of a Memorandum of Understanding, which generally states that the parties have agreed to merge or align, and will enter a period of due diligence to iron out final financial and legal aspects of the deal. Since MOUs are often made public, the steering committee should ensure that a communications plan to key stakeholders and the public is ready to go. The plan should stress the vision and benefits of the proposed arrangement.

9. Review the results of the due diligence. Each board, through its committee structure, should thoroughly review the results of the due diligence process and the proposed affiliation agreement.

10. Grant final approval. Each board votes final approval of the combination.

Outside experts in three areas – law, finance, and governance — generally make valuable contributions to a merger or alliance process. The governance consultant often also serves as a facilitator for the process.

If the negotiation process strikes the right balance of governance input but not meddling, it will build trust and a positive culture for successful governance and operation of the emergent organization.

First of two parts: Board’s Role in Mergers and Alliances — The 7 questions boards always ask

First of two parts
Board’s Role in Mergers and Alliances: The 7 questions boards always ask

Just as in the early 1990s, hospitals and health systems are seeking advantages of size and scale to prepare for the uncertain but undoubtedly difficult aftermath of healthcare reform. Last week, Modern Healthcare reported that Central Connecticut Health Alliance, a 330-bed hospital with two campuses, has signed a memorandum of understanding with Hartford (Conn.) Healthcare to become the system’s fourth hospital. Earlier, two major Dakota health systems — Sioux Falls, S.D.-based Sanford Health and Fargo, N.D.-based MeritCare Health System – announced plans to merge. Modern Healthcare says 28 deals were announced in the first half of 2009, according to Irving Levin Associates, Norwalk, Conn.—but “a spate of announcements” has come since July 1, signaling heightened interest.

Sometimes alliances rather than mergers are the best match to achieve strategic goals. In May, 19-hospital Banner Health, the largest not-for-profit system in Arizona, announced a partnership with the prestigious University of Texas M.D. Anderson Cancer Center in Houston, to build a $90 million outpatient clinic and cancer hospital at one of Banner’s suburban hospitals.

Approval of a merger or major alliance is clearly a governance responsibility. I’ve had several clients ask about the best approaches to facilitating the board’s involvement in a partnering process. I advise them that there are seven questions that boards always ask, and which require their engagement to reach the best answers:

1. Why are we doing this? The rationale must have a strong fit with the mission and the strategic vision. It must fill critical gaps – e.g., capital, geographic scope, clinical integration, administrative efficiencies. The financial and market share benefits should be quantified, not just rhetorical. In addition, why is this partner the right one? Have we looked at all the options?

2. What’s the best corporate structure? A range of structures, from full asset mergers to joint ventures to clinical affiliations and more –can be used to gain the benefits of combining organizations. Boards should be educated in the range of options and weigh in on the one that’s best suited to achieve the strategic intent of a deal.

3. How will the authority of our board be affected? Hospital boards often don’t want to sacrifice autonomy but consolidations often fail when the governance structure impedes a tough but necessary strategic or final decision (case in point – the recent breakup of Health Alliance in Cincinnati). Failure to choose a sustainable governance model can doom a new system from the start.

4. How will board members be chosen? Current board members may want to preserve their seats but the most successful systems minimize representational governance in favor of competency-based board composition. Getting the “right people on the bus” can make or break eventual success.

5. Who will be CEO? Boards understandably want to protect their CEO, but co-CEO models rarely work. The management succession process should be clearly laid out in advance. Current executives should be treated fairly, and the resulting organization should have strong leadership to get the job done.

6. What will happen to our most treasured facilities or programs? Sometimes specific protections are appropriate to include in an affiliation agreement, sometimes not, and sometimes it’s agreed super majorities will be necessary to close facilities, integrate clinical product lines, or divest assets. It all depends and requires candid discussion.

7. Is it legal? FTC is displaying renewed interest in the anti-trust potential of hospital mergers. Boards will want to know in advance if there’s a good case to be made to federal and state regulators.

Of course, there will be other many other issues specific to each deal. Mergers and alliances with Catholic systems pose particular challenges. But these seven questions must always be addressed up front.

In Part II next week, I’ll discuss how soon and how much to engage the board, including the most common steps for board involvement.

How Boards Can Avoid “Surprises”

Surprising bad news is the bane of a director’s existence. Operating losses appear without warning. The medical staff votes “no confidence” in the CEO. Medicare investigates an unexpected death during surgery and finds rampant quality deficiencies. A competitor beats you by announcing plans to build in a hot growth suburb. A labor union announces a campaign to organize the nursing staff. When boards think things are going fine and hear such news, trust fades quickly in management, justified or not.

Leaders are usually great problem solvers, but a new book — Know What You Don’t Know: How Great Leaders Prevent Problems Before They Happen – argues that “leaders at all levels must hone skills as problem finders,” and by so doing, “they can preempt threats that could lead to disaster for their organizations.”

Organizational breakdowns and collapses, says author Michael Roberto, do not occur “in a flash; they evolve over time.” Great leaders, says Roberto need to learn seven sets of skills and capabilities that enable them to find problems and institute improvements before catastrophe occurs.

I recently interviewed Roberto, professor of management at Bryant University in Smithfield, Rhode Island, and formerly on the faculty member at Harvard Business School, to ask whether his advice for top management could be applied by governing boards. “Absolutely,” he said, but boards face some unique challenges.

The full interview will appear in the fall issue of Great Boards, but here are a few excerpts:

• “Filtering of information is always happening in organizations as information moves up the hierarchy. Perhaps the biggest filter of all takes place between management and the board.”
• Board meetings should be “about the dialogue not the documents. Board members are inundated with too many documents. My dean likes to call it ‘death by PowerPoint.’ The focus of the board meeting should be on creating a robust dialogue, not on plowing through a million documents.”

When recruiting new board members, ask “about how they run their management meetings. How do they interact with their own board, and what are those board meetings like? Get a real feel for the kind of a decision-making process this person tends to structure and lead. How connected are they to the front lines of what is happening in their organization?”

Until then, see these articles in past issues of Great Boards:

• Ten Ways  to Improve Board Meetings
• “Generative governance,” an interview with Richard P. Chait, co-author of Governance as Leadership.

Case Studies of System Integration

Clinical integration to manage quality and costs is taking center stage as health care reform legislation moves through Congress. Expanding access will unquestionably require controlling spending. When Washington is done, whatever the result, providers will have to pick up the pieces and redesign delivery systems to do more with less.

To help, The Commonwealth Fund is releasing 15 case studies to illustrate how diverse types of organized health care delivery systems promote higher performance through information continuity, patient engagement, care coordination, team-oriented care delivery, continuous innovation and learning, and convenient access to care. The first group includes Geisinger Health System and Hill Physicians, a California IPA. In December, Great Boards released five case studies of hospital-physician alignment, including Summa Health System in Akron, Ohio, and Aurora Healthcare in Milwaukee. All make good resources for board reading and discussion.

The New Yorker article Obama made famous

This is the article that galvanized President Obama (he circulated it widely) and has everyone in health care talking as Washington debates how to control health care costs, improve quality and expand access all at once. In the June 1 issue of The New Yorker, physician-writer Atul Gawande tells how he went to McAllen, Texas to find out why it’s the most expensive city in the country for health care. He writes: “The primary cause of McAllen’s extreme costs was, very simply, the across-the-board overuse of medicine.” Not quality, not demographics, not fraud or malpractice, although all are issues. The culprit is excessive use, and unless health reform reform changes that, it will fail.

Every health care trustee, physician and executive should read this piece both for its insights and because of its impact on healthcare reform.

IRS Official Links Good Governance and Tax Exemption

IRS is actively promoting “good governance” to an unprecedented degree.
“Somewhat controversially – at least to some – we have advanced the notion that there is a link between good governance and tax compliance,” Sarah Hall Ingram, IRS Commissioner, Tax Exempt and Government Entities, told a meeting at Georgetown University Law Center last week. Her speech is available online.

“I’m not interested in trying to usurp the business judgment of an organization’s officers or board of directors or trustees. Nor am I a micro-economist concerned with whether an organization is maximally efficient in the way it provides its charitable services to the public. I do think, however, that a tax-exempt charity should actually provide charity; it should provide some meaningful and measurable benefit or service to the public.”

Ingram said good governance includes at least three things: a clear and well-communicated mission; transparency about its governance and charitable works; and “an engaged, informed and independent” board that has “real responsibility and authority. It must, for example, be able to implement, in the life of the organization, the rules against inurement and self-dealing.” The board should also have principles regarding proper use and safeguarding of assets, supported by policies and practices that address executive compensation, protect against conflicts of interest, and support independent financial reviews, she said.

For an in-depth look at the new IRS Form 990, see the summer issue of the Great Boards newsletter, available June 29.