Advising the Health Care Nonprofit Board

JOHN H. FISHER, II, CHC Ruder Ware, LLSC 500 First Street, Suite 8000 P.O. Box 8050 Wausau, WI 54402-8050 715.845.4336

www.ruderware.com

ROBERT M. CHARLES Liebmann, Conway, Olejniczak & Jerry, S.C.

Attorneys and Counselors at Law 231 South Adams Street P.O. Box 23200 Green Bay, WI 54305-3200 www.lcojlaw.com

Health Law/Labor & Employment Law Institute August 23, 2012

Significant Developments

• • • • • • Last 10 Years Has Redefined What It Means To Be A Director Expectation of Board Activism Regulators Taking Duties Beyond Common Law and Model Act Individual vs. Corporate Responsibility Compliance Duties Quality Issues

Main Objectives

• • • • What Defines Board Obligations Developments Affecting Obligations and Structure of Boards Increased Responsibility for Compliance and Quality Our Role As Attorneys In Supporting Boards

A Few General Take-Aways

• • • • Changing Role and Duties Defined By More Than Just Model Rules and Common Law More Eyes On Activities of the Board We Play An Important Role In Advising Board Members

Happy Birthday!!

• • • SOX is 10 Years Old!!

Began Focus On Corporate Governance Significance To Health Care Nonprofits – Increase Accountability/Stronger Governance – Added Credibility to Financial Reports – Creditworthiness

Increased Scrutiny

• • • • • • • Repayment Obligations False Claims Act Enhanced Fraud Remedies Suspension of Payment Exclusions ZPICS, RACS Place organizations and individuals at risk

Brand New HCCA Study

• • • “Auditing the Auditors” Released August 8, 2012 Nonprofit subject to higher rates of audit than for profit health care providers • • 2 Agencies auditing same problem (41%NFP/25%FP) RAC Audits (6 per month NFP/4 per month FP) • CERTS Audits (51% NFP/46% FP) • MAC Requests (41% NFP/27% FP)

IRS Requirements

• • • • 990 Requirements Conflict Disclosure Private Inurment More scrutiny on nature and activity of Boards

What Did I Get Myself Into?

• • • • Community Involvement – I Just Wanted To Help My Community This Is Like Work I Just Have To Show Up For Meetings, Right?

Transition Form the C-Suite Board to the Working Board

Trend Toward Individual Responsibility

• • • United States v. Park – US Supreme Court – Officials responsible even without specific knowledge – Based on position and responsibility to prevent illegal activity Criminal Misdemeanor Exposure OIG Exclusion Authority - Consequences

FDA Using Doctrine Aggressively

• • Letter from FDA Commissioner to Charles Grassley – March 2010 – GAO Report on failures in FDA enforcement – Promised increased use of RCO Doctrine FDA Fulfilled Its Promise – GlaxoSmith Kline Case (Legal Counsel) – Oxycontin Misbranding Case

OIG Use of Park Doctrine

• OIG Guidance for Implementing Permissive Authority (Exclusion) – October 20, 2010 – OIG exercise of exclusion authority over an individual “who has direct or indirect ownership of control interest in a sanctioned entity and who knows or should know of the actions….

– Could this cover a director?

– Director who is an officer?

Wisconsin DOJ

• • • • Wisconsin Health Law Update – January 27, 2012 Thomas Storm – Department of Justice Trend toward looking at individual responsibility Wisconsin recently centralized fraud prevention in an Office of Inspector General

Federal Volunteer Protection Act

– 1997 – To address reductions in volunteers – Preempts less protective state laws – Liability Protections for volunteers serving nonprofit organizations – Does not foreclose suit by the organization against a volunteer – Does not release the organization from liability – Very high standard for punitive damages – 42 USC 14501 et. Seq.

Wis. Stat. 181.0670

• • • Volunteer of non-stock corporation not liable for monetary liabilities arising from act or omission as a volunteer.

Except – Knowing violation of criminal law – Willful misconduct – Received compensation –

Within scope of duties as director or officer

Nonprofitrisk.org/library/state-liability.shtml

Attorney Roles

• • • • • Outside Counsel In House Counsel Compliance Officer Fellow Director All Positions Create Opportunities To Advise The Board On The Nature of Obligations and Duties

As Outside Counsel

• • • • • • Primarily Work With Management Occasionally In Front of the Board Major Transactions In Service Training Special Presentations (Compliance Duties) When Privilege Is Important

As In-House Counsel

• • • • • Ongoing Interaction With Board Members Regular Board Presentations Ongoing Opportunity For Input Much Greater Opportunity To Advise Board On Nature of Duties Be Careful About Limits to Attorney/Client Privilege

As Compliance Officers

• • • • Health Law Is Great Training To Become CCO CCO Ongoing Duty To Report Directly To The Board Duty To Bring Compliance Risks and Problems To The Attention of the Board Be Careful About Dual-Role Situations and Tension Between Roles

As A Fellow Director

• • • • Duty of Care Framed By Expertise General Attorney On Board Health Care Attorney On Board Compliance Attorney On Board

Nature of Advice

• • • • • • Current Climate Requires Much More Extensive Board Education Board Education Decreases Compliance Risks Periodic Education In The Context of a Major Transaction Or Issues Compliance Process Duties Compliance Risk Area Developments

Board Duties Defined By…

• • • • • • • Model Rules Common Law Regulatory Guidance Regulatory Enforcement State Enforcement Actions SOX Sentencing Guidelines

General Duties of Board

• • • • Trustee Duties vs. General Board Duties Trustees – Liable for Simple Negligence Board – Fiduciary Duty of Good Faith, Loyalty and Obedience Model Rules – Imposes Same Duties In a Nonprofit As In A General Corporation

Some Exceptions

• • • State Attorney Generals Attempts to Impose Trust Rules Attempts to Eliminate Business Judgment Rule For Non Profits – Community Asset Theory – No Market Oversight

Some Examples

• • • • Minnesota 2003 – HealthPoint Maryland Insurance Commissioner 2003 – Report on conversion of a nonprofit to for profit – Business Judgment Rule has “no application” to regulatory approval process Health Midwest v. Kline – upheld Business Judgment Rule Nashville Hospital – upheld Business Judgment Rule over AG Challenge

Model Act

• Director fulfills her duty of care if: – Acts in “good faith” – Care of an “ordinary prudent person” – Under similar circumstances – Reasonable belief action is in the best interests of the organization

Duty Requires

• • • • • Informed and practical judgment Attend meetings Ask questions (reasonable inquiry) Further inquiry of situation warrants Conflict plays a factor – interests of the corporation

Other Factors

• • • • • Size and sophistication of the organization Specialized background of board member Reliance on experts – if reasonable Does not require perfect decision-making

Walt Disney Derivative Litigation

Guidance On Governance

• • • Stevens Institute of Technology (New Jersey) – State regulators challenge to Board practices – Cookbook for a world of trouble Other State AG Cases – Maryland Insurance Commissioner – Minnesota – HealthPoint Conversion Various IRS Guidance

IRS Guidance On Governance

• • IRS Form 990 – Revised substantially in 2008 – Requires much greater disclosure – Encourage “good corporate governance” through transparency IRS Governance Checklist (12/3/2009) – Training IRS Exempt Organizations Unit – Nonprofit Governance Issues – Includes Powerpoint training materials

NFP Governance “Red Flags”

• • • • • Failure to document deliberations Pressure on outside consultants (compensation comparables) Inactive Audit Committee Disengaged Board Regular meetings

NFP Governance Red Flags

• • • • Control by executive committee or small group Failure to correct internal control weaknesses in spite of auditor recommendations Violation of endowment restrictions Borrowing without proper approvals

Sibley Hospital Case

• • • • • • Conflicts led to bad financial decisions Large Board (20 Members) Small group controlled the Board Symbiotic relationship with financial institution Board routinely accepted decision of those in control Board members can be held individually responsible where conflict of interest leads to breach of fiduciary obligations.

Counsel Should Suggest

• • • • • • Diversify/Decentralize Governance Beware of Concentrated Power Monitor Use of Restricted Funds Be Responsive To Management Letters Great Care Setting Management Compensation – run comparables Beware of Long Terms

Governance Action Items

• • • • • • • Board Review of Form 990 Strong Conflict of Interest Policy Whistleblower Policy (Anti-Retaliation) Document Retention Policy Document Board Meetings Joint Venture Policy Audit Committee With Charter

Exercise of Director Duties

• • • Major Transactions Quality of Care Issues Compliance Oversight

Major Transaction

• • • • • Nashville Hospital Case Regulatory Approval of Sale of NFP to For Profit Lengthy Analysis and Opinion by Attorney General Central Case Defining NFP Board Duties Dissecting Famous Paragraph From Tennessee Attorney General

The members of the board themselves devoted substantial time, effort, and energy to analyzing, pondering, and considering the ramifications of the proposed sale.

They thought about their constituents, about the implications of not selling the hospital’s assets, about a sale to others, about other options such as networking, about continuing to stand alone, and other alternatives….

…and the effects upon the members of the public who utilize the hospital in the community itself. They reflected upon the consequences to the patient, the employees, the businesses in the community which encourage or direct employees to utilize the hospital

The continued availability of primary care and specialized physicians for the community.

Nashville Hospital Takeaway

• • • • Board duties extend past simply looking at the affect on the organization itself Nashville Hospital case spelled out more extensive scope of duties and analysis in NFP AG upheld the Board’s approval of the transaction Gave credence to Board decision, but examined process in detail

Impact On The Community

• • • • • • NFP – Public Assets/Public Trust?

Impact on Patients?

Impact on Community?

Impact on Employees?

Availability of services to the community?

How will it affect physicians?

So What Is The Standard?

• • • • General corporation duty of care?

With an element of public trust?

Impact on the community?

Is there a broader duty to be informed as a director in a nonprofit?

Considering Acquisition

• • • • • Compliance Due Diligence Concerns Latent Compliance Problems Especially In Successor Liability Situations – Merger – Assignment of Provider Agreement – What about asset purchase of physician practice?

Review Compliance Program History Require Pre-Closing Audits?

Duties Over Quality of Care

• • Traditional Roles – 3 Legged Stool Emerging Recognition – Link between compliance, oversight and quality of care – Statements by regulators • HHS Inspector General – Quality is a Compliance Issue • Billing and Quality are linked • Right to reimbursement • Quality reporting initiatives

Core Fiduciary Duty of Director

• • • Duty to make reasonable inquiry regarding how quality of care issues are being addressed Part of duties relating to compliance Ask questions regarding quality issues

Duties Regarding Compliance

• In re Caremark – – Board obligations to assure information and reporting systems are in place – Systems adequate to assure appropriate compliance information is reported to the Board – Systems in place to proactively monitor compliance – This is a duty of the Board of Directors

Reasons for Board to Oversee Compliance

• • • • • • • Individual responsibility (Park Doctrine) Common Law Duties of Care Federal Sentencing Guidelines Increased Fraud Enforcement Increase Revenues?

Compliance Mandatory Suspension of Payment Risks

Nature of Board Duty

• • • • • • • Set tone from the top Effective process in place and operating Adequately funded Issues being addressed Accountable compliance officer Receive regular reports Not required to detect or prevent every risk

Sample Board Presentation

• • What The Board Should Know About Compliance Some Common Issues – Dual Role Compliance Officer – Independent Effectiveness Review – Separating Compliance Budget

Parting Thoughts

• • • • • Board Duties Greatly Expanded Beyond Simple Fiduciary Obligations Requires Proactive Activity Counsel Plays Important Role Does Your Board Review Its Own Performance?

©2012 Ruder Ware, L.L.S.C. Accurate reproduction with acknowledgment granted. All rights reserved. This document provides information of a general nature regarding legislative or other legal developments. None of the information contained herein is intended as legal advice or opinion relative to specific matters, facts, situations, or issues, and additional facts and information or future developments may affect the subjects addressed.

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