Nonprofit Hospital Boards on the Firing Line

We need only look at recent national headlines to be aware of Congress’s and the public’s plummeting confidence in leadership and governing boards of even the most revered academic institutions. But why should doctors be interested in healthcare governance?

While not as sensationalized in the press, investigative journalists have been questioning the ethics of the country’s leading nonprofit hospitals. Reporters raise some pretty serious issues: harassing patients who are unable to pay medical bills while offering enhanced services to patients with deep pockets and boosting revenue/profits by reducing staff-patient ratios (thereby compromising patient safety).

My colleague Amol Navathe, MD, PhD, is a practicing physician, a senior fellow at the Leonard Davis Institute of Health Economics, and a co-director of the Healthcare Transformation Institute at the University of Pennsylvania. His guest essay for the New York Times (“Why are Nonprofit Hospitals Focused More on Dollars than Patients?”) is spot on!

He begins with the misnomer “nonprofit.” A nonprofit hospital is actually allowed to make money. Because it isn’t owned by investors, it is considered a charitable organization by the Internal Revenue Service, but the tax-exempt designation comes with the expectations that the dollars it saves on taxes will be invested in the community the nonprofit hospital serves (e.g., reduced costs and/or free care for the poor). Today, more than half of the nation’s hospitals are nonprofit, and too many have been doing far too little public good in exchange for their collective $28 billion (as of 2020) in tax exemptions.

What is driving nonprofit hospitals’ focus on revenues rather than patient care? Navathe posits several possibilities:

• The ongoing implementation of value-based care that inevitably results in reduced requirements for inpatient facility care.
• The continuing financial fallout from the pandemic (e.g., inflation, skilled worker shortage) that has forced nonprofit hospitals to prioritize finances in order to survive (i.e., less charity for patients who can’t afford their emergent and urgent care).
• The trend toward hospital acquisition and creation of increasingly large systems that tends to increase prices.

He contends that the solution begins at the top, with governing boards recommitting to act in accordance with their organization’s mission. Too often, financial expertise and/or large donor status have been the sole requirements for board membership.

Shifting the board’s focus toward mission will require changing its composition; i.e., adding clinical expertise and community connectedness. A mission-focused board can move the needle by tying executive compensation to metrics that reflect the organization’s mission rather than solely on its financial performance (e.g., tying meaningful percentages of executive compensation to reducing patient care disparities).

Policymakers can also play a vital role by:

• Providing clear standards for measuring the community benefits on which nonprofit boards base executive incentives.
• Holding boards more accountable; e.g., the IRS and state and local governments looking into whether or not nonprofit hospitals reward their executives for delivering community benefits.
• Imposing limits on profits for nonprofit organizations (nonprofit hospital profits are currently unlimited).

I have had the privilege of serving as a hospital trustee for more than 20 years in two different systems and markets. And I’ve seen nonprofit hospital boards struggling to fulfill their fiduciary responsibilities in this crazy marketplace. I heartily agree with Navathe that our best chance to help these hospitals may be in “activating their boards for the common good.”