Nate Kaufman
Welcome to The Healthcare Bridge. I'm Nate Kaufman, and I'll be your host. The Healthcare Bridge is a once a month podcast under Rich Helppie's Common Bridge platform. The goal of The Healthcare Bridge is to provide an insider's guide to the facts about our crazy healthcare system. My thanks to Rich Helppie for taking the risk of allowing me to host. I'm Nate Kaufman and I continue to work with health systems and physicians all over the country. I've worked in the healthcare field for over 48 years. I've spent time as an executive consultant, expert witness and strategic advisor on transactions for many of the largest healthcare organizations in our country. You can also find me ranting frequently on LinkedIn. As I vent my frustrations today, we're talking to Jamie Orlikoff. Now, I selected Jamie as the first guest for The Healthcare Bridge because, well, I asked everybody else and they said no, [laughter] I mean, because everyone else... no, actually, Jamie is a friend, a collaborator and the nation's ex-leading expert on healthcare, leadership and governance. Jamie, why don't you provide a little bit about your background and experience, and as usual, if you want to talk in the third person, that would be fine. [Laughter.]
James Orlikoff
Okay, thanks, Nate. Chapter one, I am bored, alright. [Laughter.] I won't give a book that you give. I'm a consultant. I specialize in healthcare governance and leadership, as you indicated. I've had my own business for 36 years, been in healthcare for 45; so you're older than I am if you've been in healthcare for 48. I specialize in working with boards and leadership groups of hospitals, health systems, large physician groups, provider organizations, trying both to upgrade the quality of governance and also to help them address both internal issues, conflict between the board and CEO or conflict within the board, as well as mediating external issues to make sense out of the crazy healthcare environment, as you described it. So that's a little bit about me. I also have served on boards. I'm currently a member of the St Charles Health System Board in Central Oregon, even though I live in Chicago, which we'll talk about later if you want. And I was a board chair for four years during the pandemic, and that aged me about 35 human years when I did that. I've served on four hospital boards and three health system boards in my career so I get to see it from both sides of the equation. And I'll be very honest with you, it's much, much easier to be a consultant than it is to be a board member these days, the issues are very, very challenging and incredibly complex.
Nate Kaufman
Well, thank you very much for that brief review of your experience. Now, there are numerous complaints about decisions that are being made by health systems today. For example, people say their costs are too high, that they're focused on sick care, not healthcare, and the executive compensation is too high. I just saw recently that one CEO of a not-for-profit health system, his compensation last year was $17 million. Can you briefly explain to folks who are unfamiliar with healthcare governance, about how health systems are governed and how they make decisions?
James Orlikoff
No, I can't. I can't do it. You asked, I answered, what do you want... First, let's start with the basic premise, everybody's angry and that's for a variety of reasons; the post-pandemic change in the culture, everything that's going on in society as we become more polarized. But under girding that is a basic brewing anger that's been boiling for decades about the rising cost of healthcare. Healthcare costs have consistently grown faster than the rate of economic expansion, or faster than the rate of the consumer price index. We knew for years - a phrase you like to use, if something cannot last forever, sooner or later it will stop. We knew for years that that couldn't continue and that sooner or later, it would stop. What we're now experiencing is it's stopping. The question that you ask is full of paradox which signals that this is coming to an end. One of those paradoxes is that healthcare costs become more expensive for consumers and for businesses and for families and for governments, and health systems become more complex and larger in order to try to survive, and their margins become thinner. It's so complicated that to be a CEO of a hospital or a health system is incredibly challenging. I mean, when you and I started in our careers, we did not refer to them as CEOs, we referred to them as administrators. And there was a reason for that, which is all they did was make sure the lights went on and that was about it. Because pre-DRGs, pre the prospective payment system, a monkey could run a hospital because it was a cost plus environment. And ever since then, the reimbursement systems have been changing, the laws have been changing, making it tougher and tougher and tougher for hospitals to operate and do what society expects of them. Now let's take a little detour from what I'm describing for a second, which is, everybody hates hospitals until they need them. Everybody doesn't want hospitals to be so expensive and doesn't care what they cut unless it's a service which they need, and then they go crazy. So therein is the ultimate paradox. When a hospital is saving their life or the life of one of their loved ones, no one is really then too concerned about how the hospital did what it did to stay in business or come to provide the service that it's provided, but when they're not in that acute phase, then they're acutely aware of it as it diminishes their purchasing power. Anyway, enough of the detour, back to the brief answer to your question. We go back to this notion that as healthcare becomes more complex - and bear in mind luminaries no less than Peter Drucker, and he did this 25-30 years ago, said modern day hospitals are the single most complex organizations in human history. And this was before the advent of the multi-state integrated delivery system that was a multitude of hospitals, insurance companies, and nursing homes and sub-acute, long term acute. So it's incredibly complex. It operates on a very, very thin margin. The analogy that I use is, when a nuclear power plant melts down, you can send in a technician to work on it, but they can only be in there for seven minutes, and then they get their maximum dose of radiation, and you've got to change them up. It used to be that a good CEO could be the CEO of a system for 30-40 years. They could stay there for a lifetime. And now one of the things that we're confronting - and I'm sure the CEOs listening to this won't like me saying it - is that those days may be over, that maybe you can't expect someone to do this for more than ten years or longer. So that's one side of the equation. The other side of the equation is you can make the similar argument for boards which is, prior to the prospective payment systems, boards of hospitals were like boards of the Girl Scouts or United Way. They were philanthropic. It was a feather in their cap. It was an honor to be on the board and the board didn't have to do anything, so they picked people who didn't know anything about healthcare and they'd smile and come to a meeting once a month and have a nice dinner and go to a really cool resort once a year for a three day edu-tainment session and it was really great. Well, all that stuff that I described that happened to hospitals and health systems and CEOs is now also happening to boards. Boards are being held to higher standards. They're being held accountable by society in the form of the Internal Revenue Service, states attorneys general, physicians. Boards are getting sued with much greater frequency. Boards are being held to a higher degree of scrutiny and transparency. For example, university governance used to be somewhat similar to healthcare governance. Look at what's happening to Harvard. The Trump administration is not only going after Harvard as an institution, but it's naming and shaming the board of Harvard and saying we want different people sitting in those seats, and we want to control who's on the board, and threatening to take away Harvard's tax exempt status. Those forces are also happening in the healthcare space. It's getting much, much more challenging to be board members. So as boards make decisions, to your question, we're finding that the quality of governance that was sufficient to get every hospital and every health system in the country today where it is, is insufficient to get it where it needs to be. It used to be boards were comprised of mostly lay people who knew nothing about healthcare. Now we're seeing the professionalization of governance where at least 30%, probably more like 50%, of the board need to be healthcare professionals, need to be people who are retired or who are active healthcare professionals who don't work in the market that the hospital or health system serves so they can bring a knowledge, which is so challenging in this complex environment. All of this factors into how do they make decisions now.
Nate Kaufman
Which was, by the way, my original question.
James Orlikoff
Someone makes a motion, and if it's seconded, they vote.
Nate Kaufman
What is the difference between a healthcare board and the CEO, with respect to the direction of a health system and the key decisions that are made?
James Orlikoff
Well, that's an interesting question, because what you're really asking is, what's the difference between governance and management? And so if you think about, say, three concepts which interrelate: mission, strategy and tactics, how do you define those? The elevator speech definition is [that] the mission is why an organization exists. The strategy is what it does in the context of the current and projected market to survive and to accomplish the mission. Tactics is how the organization expresses the strategy. So why, what, how. There is no question - and this is a matter of law - the board is in charge of the mission. Any mission related issues; do we do something which changes not just what we do, but who we are, that's a board decision and that is under the fiduciary duty of obedience to parable purpose. That's one of the fiduciary duties of a board, and that's the mission. That's why the IRS says to be a not-for-profit tax exempt organization you have to have a board where at least 51% of the board members are independent, meet the IRS definition of independence, so that they can be loyal to the mission, not loyal to the institution. A CEO or any executive, even though they may be very mission focused, inherently is institutionally loyal, because they make their living from the institution. That's the first distinction. Mission is exclusively the domain of the board. Tactics, on the other hand, is exclusively the domain of management, how an organization expresses its strategy, that is purely the job of management, and if a board gets involved in tactics, it's micromanaging. And the only time that that's even in the ballpark of acceptable is if the organization is in some type of a crisis, an existential crisis. So we've clarified; those are the boundaries. Now to your question. Strategy, whose job is it to do strategy? And the answer is, it's a much more ambiguous answer. The answer is, it depends. For example, in the for-profit world, in the publicly traded world, the consensus is, it's the CEOs job to develop strategy and the board simply rubber stamps it. There are others who argue -especially in the not-for-profit world - no, strategy is a shared function, which must be negotiated out. Increasingly, boards need to take more of a role in the development of strategy, specifically at the beginning point when you're establishing strategic direction - should we go this way, or should we go that way - that rather than have a CEO and an executive team develop this full blown strategic plan and then simply bring it to the board for approval, that the board needs to have its fingerprints on it so that it can have a sense of ownership over it. And the more complex the environment becomes some - and I'm one of those - argue that the more important it is for the board to be more involved in strategy than in the past. But there is no data on that. There is data on the mission and the tactics, and everyone agrees on that. The issue of who is in charge of strategy is a matter of debate. So what that really means is it should be negotiated explicitly in every single hospital and health system so that if you ask that question to a board or a CEO, they could say, well, here's how we do it in our organization.
Nate Kaufman
I think that was closer, which was nice. So there are boards that are really good at governing and practice good governance, and then there are boards that are not so good at governing and not so good governance practices, like you mentioned, micromanaging or not getting involved in strategy or not having expertise from outsiders. In your experience, what percent of the boards would you say are really practicing good governance and what are they doing? What are the big mistakes that the not so good governors are doing?
James Orlikoff
Good question. Let me, of course, reframe it and make it a better way. All right, let's come up with... imagine a four rung ladder of governance. I want to give you like four stops on the governance ladder. The first stop is illegal governance. These are boards who don't meet the IRS regulations or who are breaking the law and this happens very frequently. There are still many boards where there is self-dealing on the board, where the board is doing things which, once it comes to light, can generate sanctions or liability, so you clearly don't want to be there. The second rung of the ladder is barely legal governance. And what that means is it dots the I's and crosses the T's, but it doesn't pass the smell test. There have been many, many cases where board members were given big contracts by their health system, and they followed the rules. They weren't a member of the committee that made the decision. They were excused and not in the room when the board discussed it and voted on it, and still, the attorneys general said, no, I don't care about that, you can't award a big contract like this to the chair of your board. That just makes no sense, and were still sued and found liable. There's this notion of are you meeting the letter of the law, and are you meeting the spirit of the law, and would it pass the smell test. That's the second rung. We now go to the third rung, and that's good governance, that's your use of language, and that's where boards are doing all the stuff they should be doing, but they're not embracing best governance practices. That's the fourth rung, best governance practices. The good rung, I would say that's where normative governance - I wouldn't say good - that's where 60% of boards are. The best boards are the ones where only 5% of boards are. That's where all boards need to be pushing, because the environment is changing so quickly that if you're just staying at the good rung, good will become the second rung, it'll become failing the smell test very quickly. Boards, much more than ever before, need to have a great degree of alacrity in prosecuting continuous governance improvement. Now I've reframed your question delicately and I think rather succinctly so now let us go to the question, shall we, what are - because I think that's what you meant - the best practices.
Nate Kaufman
Before I start cutting myself, yes, let's get to the answer.
James Orlikoff
Best governance practices, what does this mean? Number one, it means that boards create a culture of performance and accountability. What does this mean? It means that renewal of terms is not automatic, that individual board member performance is assessed. It means that in order to do this assessment, there is a job description for the individual board member which has performance criteria which goes beyond simply needing attendance, but how they engage, how much time they're supposed to spend. And boards then are willing to say, we're not reappointing you. More importantly, they're also willing to remove board members midterm for cause. They have a mechanism to remove a board member. They have criteria for doing so, and more importantly, they have a culture that is willing to do this. Because certainly in the past and in the vast majority of organizations today, removing a board member from a board midterm is avoided like the plague. I actually had this conversation about five, six years ago, where we were talking about a client of mine [who] had a problem board member. When the board chair said, yeah, Nate is a terrible board member, horrible board member, thank goodness he only has seven years left on his term. In other words, they were willing to tolerate seven years of dysfunctional performance rather than having one difficult conversation, making one difficult decision. That's good governance, that's the norm of governance; don't rock the boat, don't upset anybody. And that leads to the next issue. Where did this come from? It came from the fact that boards used to be all volunteers, and if someone's willing to volunteer their time, heaven forfend, you would hold them accountable. Heaven forfend, you would fire them, you can't fire a volunteer. And if they all come from the community, it would have a very negative impact on them in terms of their reputation in the community. So all of those implicit assumptions about the past model of governance factor into best practices governance. You call those out and you change them. And so what are we seeing are more boards putting members on their board who do not live or work in the community that is served by the health system. I am an example. I live in Chicago. I'm on the board of a health system in Oregon. About 30% of our board does not live or work in that health system area. And so what does that mean? It means we can recruit expertise which may not be available in our service area. More importantly, it means that these board members can call out the awkward things, point out the naked pink elephants dancing on the boardroom table that no one who lives there wants to talk about because of the community relationships. So what used to make governance work was the political, social economic relationships. Now what's stopping it from working in the old model are those very social, political, economic relationships. Because I live and work in that community, and my kids are there and my spouse is there, I may not be willing to take on a physician who has a quality problem because the physician is well loved, or a medical group, or terminate - back to your original question - a CEO who isn't performing well but is well loved in the community because I'm worried - I'm not worried about the mission - I'm worried about the impact a necessary decision will have on me in the community in which I live. We're becoming more like Fortune 500 companies, they don't care where you live when they put you on the board. They don't have a criteria that says every board member has to live within 50 square miles of the headquarters of the corporation. And hospitals and health systems are now beginning to move in that direction. The data shows that the vast majority of health systems have at least one or two outside board members, which brings us to the next issue, compensation. It's taking so much more time to be a board member, and we're asking board members to make such difficult decisions, and because of what's called director distraction rules, where it used to be, I could serve on 8-10 boards and no one would care. Now, if I'm on a publicly traded board, they don't want me serving on any other board. In fact, the Wall Street Journal just did a story in May about the best board members in the publicly traded space. They were mimicking what modern healthcare does when modern healthcare does their annual Trustee of the Year Award, which is a really interesting problem, because good governance is a team sport. They should be doing the best boards, not the best board members, not the best trustee, anyway. We can come back to that if you want. But in the Wall Street Journal they identified 250 top directors of publicly traded corporations, and they said about half of those directors sit on just one board, so the days of serving on 5, 6, 7, boards are gone. Institutional services will not invest, investor services will not invest, in a company if their directors serve on more than two or three boards; it's taking so much time. So the pool of board members is diminishing, and in fact, seven of the directors that the Wall Street Journal identified as top ten only serve on one board. Hospitals and health systems are now saying we have to compete in that pool, and the pool is diminishing. We're having great trouble attracting Gen-X, Gen-Y, millennials to be on boards, because there are generational differences. Increasingly, health systems are now compensating their board members. The majority of health systems in this country, according to the most recent AHA data, pay their board members. Oh, heaven forfend, isn't that illegal? People still think that, wait a minute, you're a not- for-profit, tax exempt organization, it's illegal to pay the board members. No, it's not. It's not illegal at the federal level, and not illegal at any state level, but there's this notion that it's got to be volunteer. So we're breaking that mentality. We're breaking the compensation mentality. We're breaking the, you've got to live in this community to really understand the community mentality, and we're paying board members, which then helps us - if we're professionalizing that side of the equation - professionalize the accountability side of the equation. We're paying you... (Nate Kaufman: Jamie...) Hang on. Do I interrupt you?
Nate Kaufman
For this we're not paying you, so I get to interrupt you. [Laughter.]
James Orlikoff
Yes, we pay directors. We can then be willing to fire them for lack of performance.
Nate Kaufman
I feel a lot better now. So as we make our closing comments, our brief and succinct closing comments, [laughter] do you have any advice for patients or health systems that you would like to share?
James Orlikoff
Any advice for patients? For patients, I would say the quality varies tremendously, and it doesn't it vary from hospital to hospital or health system to health system, but it varies within, so you want to be an informed consumer. Medically related patient injury is still the third leading cause of death in the United States, and the more we look, the more problems that we find. With all of this economic pressure that hospitals are under, and with hospitals cutting services and operating on thin staffing ratios, quality and safety are a very big concern. So any advice I would give to a patient would be centered in caveat emptor; do research and check it out for health systems. I think the advice would be somewhat dependent upon the markets in which they're functioning, but it would be number one, you've got to make certain that your management is operating at such a high degree of operational efficiency that they likely don't have the bandwidth to engage in meaningful strategic planning, and that this then, is the argument for why a board needs to get more involved. Let management keep the doors open, let them run the organization, but the board's job now should encompass scenario based planning, contingency based planning. If A happens, what do we do? If B happens, what do we do? Right now, if the budget bill passes in its current form in the Senate forum -which freaked everybody out because everyone thought they'd moderate the Medicaid cuts, but they exacerbated the Medicaid cuts - what would we do? What would the impact be on us and what would we do? Because I don't think any one group can do both of those things. You need to have one group with its heads down focusing on just relentless operational efficiency, relentless in your space, negotiation with the payers to make sure that the rates are sufficient to make margin. But you also have to be looking to the future and recognizing that unthinkable things can and will happen, and that you don't want to be stuck like a deer in the headlights when they do. You want to have contingency plans. So that would be my advice in a brief, succinct way.
Nate Kaufman
That was excellent, Jamie. I guess my advice is to focus on results, not process, and facts, not opinions. And so with that, as an insider, my advice to patients is that all healthcare is not the same, except for cost. Select your doctors and hospitals as if your life depends on it, because it may. And if you're not sure who to choose, ask an insider. This is Nate Kaufman, signing off for The Healthcare Bridge. Thank you very much.
James Orlikoff
Thank you.
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