Most hospital and health-system trustees’ motivation to serve is selfless and driven by community-minded altruism. Hospitals today frequently are multi-million-dollar enterprises supported by extremely complex subsidiaries and related structures. The latter are hard to understand and oversee. The result? Conflicts of interest (COI), particularly in smaller communities.
When conflicts occur, most hospitals have COI policies that require their trustees to declare any potential issues. (Here’s a sample conflict-of-interest disclosure form.) By disclosing, affected board members aren’t allowed to vote on matter. This tactic presumes that the oversight of other board members — those who don’t have a conflict — sanitize the issue. Sometimes applicable board members must not even be present during certain discussions, which are held in strict confidence. Yet being so close to such a large cookie jar can be too tempting to resist, especially among self-generating boards with little turnover.
In 2016, a USA Today investigation into self-dealing raised serious concerns about the quality of COI oversight on hospital boards. A review of nonprofit hospitals’ 2014 state tax returns surfaced $54 million dollars in apparent self-dealing. That is, millions of dollars funneled to relatives and companies related to a trustee sitting on a hospital board.
Investigations showed N.Y. hospitals paid substantial fees to companies owned by board members and/or their spouses for services including construction and legal counsel. Fees included those for management, medical, investment management, software maintenance, cablevisions and Internet service, computing, bank, copying, linen service, equipment purchases, and of course, physician clinic or pharmacy.
Hospital CEOs and managers are naturally inclined to keep their board members happy. After all, hospital CEOs report to their boards. Encouraging loyalty and support doesn’t get any more direct than through the strategic distribution of an organization’s largess. Mutual back-scratching at the board level also may lead some boards to dim its oversight intensity on a colleague’s conflict.
The sting of the hook
Lax board member COI oversight can have devastating consequences. For example:
- Trustees can be liable for civil and criminal wrongdoing.
- State and local governments that contribute tax dollars to hospitals and their entities may lay claim to civil compensation from having suspicious arrangements among hospitals and their trustees. This also applies to donors and benefactors.
- The Federal government may weigh in with tax-exemption issues.
- Federal and local bribery statutes can spell criminal liability. Investigations even can lead to further criminal exposure for lying to a grand jury or an FBI agent. (Remember Martha Stewart?)
How does a board minimize the risk of a COI?
- Start with a solid policy detailing how to identify and address potential, actual and apparent COIs and commitment.
- Investigate all conflicts — declared and undeclared — among board members.
- Take care to document good-faith undertakings. Record extraordinary steps your organization took to thoroughly consider alternative options. Or, have a written recommendation of an independent outside consultant as to the reasonableness of your organization’s selection.
Gregorgy R. Piché, J.D., Vice Chairman at Practical Governance Group, offers more than 40 years of experience in healthcare law. In 2010, he founded Singularity Health Law, PLLC, and remains highly active in providing legal counsel and staying involved in state and federal dispute and conflict resolution reform.
For more information, please call Practical Governance Group at 904-606-5744 (main).