De­tailed rules, trans­parency should de­fine health sys­tem CEOs’ out­side di­rec­tor­ships

Modern Healthcare - - News - By Tara Ban­now

WHEN EVOLENT HEALTH was just a fledg­ling tech­nol­ogy firm, MedS­tar Health swooped in to be its first cus­tomer. Even to­day, the not-for-profit health sys­tem re­lies on Evolent’s pop­u­la­tion health man­age­ment sys­tem and health plan man­age­ment ser­vices.

Mean­while, MedS­tar’s CEO, Ken­neth Samet, has served as a direc­tor for Evolent since 2015. Last year, the gig paid him to­tal com­pen­sa­tion worth $177,500. He also owns more than 12,000 shares in the com­pany.

The CEOs of not-for-profit health sys­tems rou­tinely serve as di­rec­tors for out­side com­pa­nies, in­clud­ing pub­licly traded ones, and their lat­est Se­cu­ri­ties and Ex­change Com­mis­sion proxy fil­ings show they're well com­pen­sated for do­ing so. It’s also not un­com­mon for those health sys­tems to si­mul­ta­ne­ously do busi­ness with those com­pa­nies. Opin­ions on the prac­tice run the gamut, but gov­er­nance ex­perts say such re­la­tion­ships can be man­aged by hav­ing de­tailed poli­cies on con­flicts of in­ter­est that are reg­u­larly re­viewed.

“It’s not that there are not con­flicts of in­ter­est,” said David McMil­lan, man­ag­ing prin­ci­pal of strat­egy and in­te­gra­tion with the health­care con­sult­ing firm PYA. “It’s that we man­age the con­flicts of in­ter­est.”

But not ev­ery­one thinks that’s pos­si­ble. North­well Health has a goal of not do­ing busi­ness with com­pa­nies it has re­la­tion­ships with, said Greg Radin­sky, North­well’s chief com­pli­ance of­fi­cer. The SEC fil­ings show North­well CEO Michael Dowl­ing was com­pen­sated $134,410 serv­ing as a direc­tor for BankUnited. He also owns 5,000 shares of the com­pany’s stock.

North­well does not do busi­ness with BankUnited.

“There’s lots of shades of gray to look at, and we tend to take a con­ser­va­tive ap­proach over­all,” Radin­sky said.

Some take that even fur­ther. Jef­frey Ro­moff, CEO of UPMC, has had a long-stand­ing prac­tice of not serv­ing on out­side boards to avoid even the ap­pear­ance of con­flicts of in­ter­est, a spokesman wrote in an

email. Ro­moff did not com­ment for this ar­ti­cle.

Drug gi­ant Merck & Co. ef­fec­tively paid Mayo Clinic $234,167 for CEO Dr. John Nose­wor­thy’s work serv­ing on its board. Even though Mayo buys Merck’s prod­ucts and re­ceives re­search fund­ing from the com­pany, Mayo’s chief le­gal of­fi­cer shrugged off any no­tion that the re­la­tion­ship in­flu­ences pur­chas­ing or re­search de­ci­sions.

“The re­al­ity at Mayo Clinic is our re­searchers, phar­ma­cists, physi­cians and busi­ness­peo­ple are mak­ing de­ci­sions based on what they think is best for our pa­tients and for Mayo Clinic,” said Josh Mur­phy, “and what re­la­tion­ships our CEO has with other ex­ter­nal en­ti­ties is not fac­tor­ing into that anal­y­sis.”

Health sys­tem ex­ec­u­tives’ out­side roles have taken the spot­light since Septem­ber, when Me­mo­rial Sloan Ket­ter­ing Can­cer Cen­ter’s chief med­i­cal of­fi­cer re­signed fol­low­ing re­ports that he failed to dis­close sev­eral mil­lions of dol­lars in pay­ments he re­ceived from drug and health­care com­pa­nies in dozens of his re­search ar­ti­cles. In early Oc­to­ber, Sloan Ket­ter­ing’s CEO re­signed from the boards of Merck and Charles River Lab­o­ra­to­ries, from which he re­ceived roughly $600,000 in cash and stock com­pen­sa­tion last year. The re­search in­sti­tute also launched a new con­flict-of-in­ter­est task force.

Gov­er­nance ex­perts in­ter­viewed for this ar­ti­cle agreed there aren’t hard and fast rules around health sys­tem CEOs serv­ing as di­rec­tors for out­side com­pa­nies—nor should there be. What’s more im­por­tant is that such re­la­tion­ships are en­tered into with clear ex­pec­ta­tions, the or­ga­ni­za­tion has writ­ten con­flicts poli­cies that are re­vis­ited reg­u­larly and there is trans­parency through­out.

Pam Knecht, CEO of Chicago-based gov­er­nance con­sult­ing firm Ac­cord

Lim­ited, said of­ten­times the con­flict dis­clo­sure forms board mem­bers must fill out are too gen­eral and don’t call out the need to re­port all types of re­la­tion­ships that could pose po­ten­tial con­flicts.

“One an­swer to do­ing the right thing here is to make sure the con­flict-of-in­ter­est poli­cies and dis­clo­sure forms are de­tailed, and they ask spe­cific ques­tions,” she said. “Do you have an own­er­ship in­ter­est in any com­pa­nies with which the health sys­tem does busi­ness? What is your per­cent­age own­er­ship in­ter­est?”

Sev­eral CEOs of health sys­tems who use and hold own­er­ship stakes in the group pur­chas­ing or­ga­ni­za­tion Premier

“One an­swer to do­ing the right thing here is to make sure the con­flict-of-in­ter­est poli­cies and dis­clo­sure forms are de­tailed, and they ask spe­cific ques­tions.” Pam Knecht CEO Ac­cord Lim­ited

also sit on its board of di­rec­tors. That in­cludes the heads of Ad­ven­tist Health, Ad­ven­tist Health Sys­tem, Ban­ner Health, McLaren Health, Rochester Re­gional Health Sys­tem and Texas Health Re­sources. And the GPO pays well for the work. Ban­ner’s Peter Fine, for ex­am­ple, was com­pen­sated a to­tal of $221,000. Ad­ven­tist Health’s Scott Reiner re­ceived to­tal com­pen­sa­tion of $191,750 serv­ing on the board.

Serv­ing on a ven­dor’s board puts health sys­tem CEOs in the chal­leng­ing po­si­tion of hav­ing to bal­ance their re­spon­si­bil­ity to their own or­ga­ni­za­tion, for whom sup­ply costs might be the sec­ond- or third-largest ex­pense, with their fidu­ciary re­spon­si­bil­ity as a board mem­ber for the GPO, said PYA’s McMil­lan.

“That’s where the con­flict be­comes a lit­tle bit dif­fi­cult and boards have to pay par­tic­u­lar at­ten­tion to it, be­cause what’s good for Premier may or may not be good for me and the health sys­tem,” he said.

But Blair Childs, a Premier spokesman, said Premier is unique from other com­pa­nies in that its hos­pi­tal di­rec­tors rep­re­sent its own­ers. Premier is ma­jor­ity owned by about 200 health sys­tems, and the CEOs who serve as di­rec­tors do so at their health sys­tems’ be­hest, he said.

“We have a very dif­fer­ent busi­ness model,” Childs added. “This is an align­ment of in­ter­ests, not a con­flict of in­ter­ests. That is re­ally the key.”

CEOs in other in­dus­tries have long served on out­side boards that are part of their eco­nomic food chain, McMil­lan said. Health­care, by con­trast, is en­ter­ing its first phase of man­ag­ing those con­flicts of in­ter­est as op­posed to pro­hibit­ing them out­right. Ban­ning such re­la­tion­ships is no longer an op­tion, con­sid­er­ing the ver­ti­cal in­te­gra­tion that’s caused sec­tors that were once siloed to do busi­ness with one an­other.

One ex­am­ple of that evo­lu­tion would be a health sys­tem part­ner­ing with a third-party in­sur­ance com­pany, McMil­lan said. Say that health sys­tem also owns a phar­macy, and their in­sur­ance com­pany part­ner also buys a phar­macy with op­er­a­tions in the health sys­tem’s ser­vice area. Now there is a po­ten­tial con­flict be­tween the health sys­tem’s phar­macy and the payer’s phar­macy. That can be mag­ni­fied if the payer-owned phar­macy has sig­nif­i­cant mar­ket share in the ser­vice area.

“This ver­ti­cal in­te­gra­tion you’re see­ing in the in­dus­try is cre­at­ing a brand new dy­namic,” McMil­lan said. “You have roles that were tra­di­tion­ally very seg­re­gated that are now over­lap­ping. That has to be man­aged from a fidu­ciary stand­point. There’s a lot more of these types of sit­u­a­tions that are go­ing to come up.”

Health sys­tems can also ben­e­fit from the ex­per­tise their CEOs gain from serv­ing on boards of out­side com­pa­nies, sev­eral ex­perts said. While they of course can’t di­vulge pro­pri­etary in­for­ma­tion shared by phar­ma­ceu­ti­cal com­pa­nies, in­sur­ers, tech com­pa­nies or oth­ers, they do bring back an un­der­stand­ing of how other in­dus­tries do busi­ness.

“Wouldn’t you love to have your CEO on the board of an or­ga­ni­za­tion that’s been ef­fec­tive in busi­ness dis­rup­tion? You would. But the re­spon­si­bil­ity is on the board to rec­og­nize and iden­tify the lim­i­ta­tions on that,” said Michael Pere­grine, a part­ner at the law firm Mc­Der­mott Will & Emery.

In Mayo’s case, the re­la­tion­ship is mu­tu­ally ben­e­fi­cial, Mur­phy said. CEO Nose­wor­thy has brought back in­sight into how Merck ap­proaches key top­ics like tal­ent devel­op­ment, brand po­si­tion­ing and cap­i­tal plan­ning.

Nose­wor­thy has also got­ten an in­sider’s view into how Merck ap­proaches the chal­lenge of ap­ply­ing sci­en­tific re­search to pa­tient care, Mur­phy said.

In re­turn, Nose­wor­thy has shared with Merck what his physi­cians be­lieve are their pa­tients’ great­est un­met needs.

“That’s an im­por­tant per­spec­tive that comes from our pa­tients and physi­cians to this health­care ecosys­tem,” said Mur­phy, who also noted that although Nose­wor­thy keeps his com­pen­sa­tion from Merck, Mayo ad­justs his salary to sub­tract for that amount.

Knecht, of Ac­cord Lim­ited, said there are other ways for boards to get spe­cific ex­per­tise with­out us­ing peo­ple who have con­flicts of in­ter­est. If they want a physi­cian’s per­spec­tive, per­haps they could look for a re­tired physi­cian who lives in a dif­fer­ent com­mu­nity.

“Think more cre­atively about this,” she said. “If what you’re re­ally try­ing to do is get the per­spec­tive and ex­per­tise, then try to do so with­out bring­ing onto your board some­one who has po­ten­tial con­flicts of in­ter­est or even a real con­flict of in­ter­est.”

Knecht also cau­tioned against com­pa­nies build­ing their boards based on the or­ga­ni­za­tions they want to form re­la­tion­ships with. The pri­mary con­cern should be adding peo­ple who have the right ex­per­tise and can abide by their fidu­ciary du­ties.

In some cases, health sys­tem CEOs serve on the boards of fast-food chains. Sharp Health­Care’s Michael Mur­phy, for ex­am­ple, was com­pen­sated nearly $264,000 serv­ing as a direc­tor for Jack In The Box. Sharp de­clined to com­ment for this ar­ti­cle. Dig­nity Health’s Lloyd Dean earned com­pen­sa­tion of $280,800 serv­ing on the board of McDon­ald’s Corp. A Dig­nity spokes­woman re­ferred Mod­ern Health­care to McDon­ald’s for com­ment. McDon­ald’s did not re­spond.

It might look bad if health sys­tem CEOs serve on the boards of com­pa­nies gen­er­ally deemed to con­trib­ute to poor health, McMil­lan said. On the other hand, health sys­tems might ar­gue their CEO is ed­u­cat­ing that com­pany about health­ier food op­tions, he said. If they’re go­ing to do that, though, they’d bet­ter have ev­i­dence, such as if the fast­food com­pany were to of­fer a smaller por­tion size as a di­rect re­sult of ev­i­dence that direc­tor pre­sented.

“Now you’ve cre­ated a pos­i­tive com­ment to the mar­ket about your abil­ity to reach across in­dus­tries and af­fect

● health­care,” he said.

“You have roles that were tra­di­tion­ally very seg­re­gated that are now over­lap­ping. That has to be man­aged from a fidu­ciary stand­point. There’s a lot more of these types of sit­u­a­tions that are go­ing to come up.” David McMil­lan

Man­ag­ing prin­ci­pal of strat­egy and in­te­gra­tion PYA

Sources: Mod­ern Health­care re­search; lat­est Se­cu­ri­ties and Ex­change Com­mis­sion proxy state­ments

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