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The Keckley Report

Are Ethical Risks Taken Seriously by Boards of Healthcare Organizations?

By June 4, 2018March 1st, 2023No Comments

The biggest risk facing most healthcare organizations is not their financial sustainability nor uncertainty about the competitive environment: it’s inadequate attention to their ethical risks.

It’s a costly oversight. Left unattended, it impacts an organization’s value and reputation. But two recent studies suggest it’s not getting the attention it needs by their boards of directors.

According to the National Association of Corporate Directors, boards of publicly-traded companies pay closest attention to the financial performance and think they need to spend more time in strategic planning. But oversight of ethics issues is a lesser concern unless there’s a high-profile lapse. 2017-2018 Public Company Governance Survey conducted by the National Association of Corporate Directors

And LRN’s interviews with Chief Ethics and Compliance Officers found that most boards have inadequate metrics in place for measuring ethics and compliance effectiveness and are hesitant to hold senior executives accountable for misconduct. Their report concluded “Sexual harassment and abuse, retaliatory firings against those who speak out, unrealistic financial targets and unreasonable pressure to meet them, toxic workplace cultures – each scandal raises questions about the behavior of those at the top and the cultures that enable such behavior” What’s the Tone at the Very Top? The Role of Boards in Overseeing Corporate Ethics and Compliance.”

In April, 2017, Jerome Powell, the new Chairman of the Federal Reserve, said, “Across a range of responsibilities, we simply expect much more of boards of directors than ever before. There is no reason to expect that to change.” In early 2018, the Fed encouraged Wells Fargo to “refresh its board” and directors of several high profile private organizations like The Weinstein Company, USA Gymnastics and Michigan State University others have been criticized or forced out over their failures to be aware of and address apparent misconduct in their organizations.

Like every organization, whether public or private, Increased board attention to ethics is the new normal in healthcare. Corporate counsel is dutiful about compliance risks alerting directors to the rules and regulations associated with their fiduciary responsibilities. But ethical risks are another matter. What might be legal may not be ethical. And boards vary in the degree to which they are comfortable delving into an organization’s unwritten rules, values and culture though no less significant than compliance risks.

Healthcare is a spotlight industry. We employ more than any other industry. We touch every household. We are a sixth of the economy and the CEOs of our publicly-traded companies are the highest paid of any industry. Thus, the ethical standards that guide the decisions made by our boards are subject to scrutiny and second guessing.

Our biggest companies are publicly traded and operate under the scrutiny of the SEC, DOJ and a myriad of regulatory agencies. But the majority of the organization in healthcare are smaller, not for profit, privately-owned. Most operate under the oversight of self-perpetuating or elected boards and many are voluntary and unpaid roles. Attention to compliance risk gets attention and having Directors and Officers (D&O) insurance protection for trustees/directors protects the individuals who serve as directors/trustees against personal liability. But insurance coverage does not protect organizations against loss of reputation and enterprise value when an ethical breech is discovered.

In this era of social media and GlassDoor, organizational dirty linen can’t be hidden. Financial results are no longer an excuse for leadership misdeeds or a toxic culture. These are board issues. Given healthcare’s high profile, the pressure is on our Boards to be more assertive in oversight of ethicality in the ways our organizations perform. The NACD and LRN studies both point out that boards invest inadequate time and attention to these matters.

And in healthcare specifically, Boards must be more assertive in addressing three areas where the spotlight shines brightly on our ethicality:

Pricing: Drug price increases that appear opportunistic have been the recent focus of persistent negative media attention and a likely target of regulatory action. Insurance premiums and hospital prices have garnered similar attention, especially where underlying costs do not clearly justify price hikes. Boards are responsible for approving budgets and therefore directly culpable for price hikes in healthcare. To date, the managers in these organizations have taken the heat where boards should share responsibility.

Conflicts of Interest: Board members, like executives who run their companies, bring business interests and personal agenda to their roles. It is incumbent on Boards to aggressively weed out conflicts that influence directly or indirectly decisions made by their organizations. As the healthcare industry transitions from mom and pop operations to mega-deals, the business arrangements among all parties involved must be transparent. The impetus behind regulator attention to Group Purchasing Organizations, Pharmacy Benefits Managers and other middle-men is suspicion that deals are not always above board. Full disclosure of all potential conflicts of interest by organizational executives and directors, and recusal by same when decisions are made when they are conflicted are not given adequate attention by most boards, especially privately-owned/operated organizations with voluntary boards.

Evidence: In healthcare, we make claims about the quality and safety of the goods and services we provide. Some are closely monitored, like the FDA’s scrutiny of off-label promotion of drugs and stiffer requirements for scientific evidence from medical device manufacturers, or the FTC’s oversight of advertising that’s false or misleading. But there are two areas where Boards must be more watchful: assertions that the care delivered by organizations is evidence-based and claims that treatment recommendations are not influenced by financial incentives. Studies show adherence to evidence-based practice is highly variable (RAND, IHI, Dartmouth, et al) and financial considerations influence clinician treatment recommendations. Overstating the efficacy and effectiveness of a drug, procedure or treatment approach is pervasive in healthcare: boards that approve these practices without appropriate disclosures and safeguards are complicit in fraud.   

In every organization, the Board is accountable for the culture of their organization that defines acceptable and unacceptable behavior. The Board sets the performance standards by which leaders are recruited, rewarded or dismissed. The Board owns the mission, vision and values and approves the business strategies appropriate to their pursuit. It’s true in every healthcare organization, whether among the 14 that are part of the Fortune 100 or a community hospital. And in healthcare, Board attention to our pricing, conflicts of interest and application of evidence to practice is uniquely sensitive to public scrutiny and potential risk.

Whether paid or voluntary, local or global, inattention to ethical risks by healthcare boards is an issue that deserves more attention.


P.S. Last week, the Congressional Budget Office and Joint Committee on Taxation offered their analysis of the President’s FY19 federal budget for 2019-2028. Healthcare figures prominently: the budget includes cuts of $1.3 trillion in mandatory healthcare spending largely thru elimination of ACA health insurance exchange subsidies and Medicaid expansion obligations to states and lower Medicare payments to providers.

It presumes states will play a bigger role and have more latitude to innovate in the delivery and financing of healthcare. State Medicaid agencies could create their own drug formularies and negotiate directly with manufacturers (five states would be given this authority on a trial basis). And block grants for Medicaid would essentially hand-over control of Medicaid to the states.

Last week, actions in several states underscore their growing influence in our national health policy:

The Virginia legislature passed Medicaid expansion, becoming the 33rd state to expand (Maine’s legislature previously passed similar legislation but its Governor has refused to sign the law). In addition, three states-UT, NE and ID—are considering expansion.

New Jersey Gov. Phil Murphy signed into law a measure requiring that residents carry health insurance or pay a penalty. The legislation comes in response to congressional Republicans’ repeal of the mandate contained in the Affordable Care Act in last year’s tax bill. NJ becomes the second state requiring coverage

Texas’ Medicaid announced plans to cut reimbursement at least 10% for ear, nose, and throat specialists, radiation oncology, dentists, and ambulance providers effective October 1.

Ohio Governor John Kasich and Colorado Governor John Hickenlooper announced their bipartisan plan to replace the Affordable Care Act focused on stabilizing insurance markets, maintaining the employer mandate, and giving states flexibility to implement additional reforms.

More to come no doubt!