Fiduciary Standards for Board Members of Financially Distressed Hospitals
By Richard S. Cooper, Esq.Member
McDonald Hopkins LLC
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Original Publish Date: August 9, 2016
Increasingly, hospitals are facing material financial challenges which, for some hospitals, create a financial distress scenario that requires prompt and decisive action to remain viable. Hospital boards of directors/trustees need to be particularly sensitive to their fiduciary duties and obligations in such situations. What follows below is a primer on the early warning signs of financial distress and board and hospital responsibilities which apply.
Early Warning Signs of Financial Distress
- Days cash on hand
- What is the industry standard?
- What is the actual amount on hand?
- Is there a discernible trend?
- Accounts payable
- Generally paying within terms?
- If not within terms, how far outside of terms, on average?
- What change, if any, has there been in the “days to pay” over the prior year?
- Has the hospital received any demand letters or had legal action been taken against it in the past 12 months?
- Has the hospital breached any loan covenants?
- Accounts receivable
- Days to collect
- What is the industry standard?
- What is the actual number?
- Is there a trend?
- Have there been any reimbursement rate changes?
- Have there been payor mix changes?
- Personnel matters
- Have any individual providers departed within the past 12 months? If so, how many?
- Have any department managers or directors left within the past 12 months? If so, how many?
- Has there been a change in management within the past 12 months?
- Has there been any change in accounting personnel within the past 12 months?
- With respect to changes in personnel, have such changes been voluntary, through lay-offs, consolidation, or through a combination of each?
- Have there been any practice areas or departments discontinued in the past 12 months?
- Physical condition
- What is the general condition of the facility?
- What is the general condition of the equipment?
- Capital expenditures
- Were there any capital expenditures within the past 24 months?
- Are there any scheduled capital expenditures within the next 12 months?
- Have budgeted capital expenditures from prior years actually been used on the budget items or were they used in other areas?
Fiduciary Standards for Board Members
- Members of boards of directors/trustees have the following fiduciary duties:
- Duty of Care
- Requires the board to be informed about any proposals, alternatives, the condition of the hospital, and the impact on the hospital – both short term and long term – of any particular decision.
- Duty of Loyalty
- Requires that board members advise other board members of relevant conflicts of interest and set aside conflicting loyalties when making a decision. Board members must evaluate options and make decisions as truly independent board members or may have to abstain from certain votes.
- Duty of Obedience to the mission (non-profits only)
- Normally, the board of a non-profit owes its primary obligation to the fulfillment of the mission.
- If the organization experiences financial difficulty, the board may need to subordinate fulfillment of mission to other interests, including those of the organization’s creditors.
Board Role – Bottom Line
- Board members should be:
- Proactive
- Fully informed
- Conflict-free
- Must do/“no-brainers”
- Active participation in meetings and careful review of documents and agreements under consideration
- Challenge management – don’t just act as a “rubber stamp”
- Supplement management when necessary with outside advisors
- Stay informed on legal obligations
- Disclosure of conflicting interests
Corporate Governance Best Practices
- Recruit board members with experience in not-for-profit settings
- Review, on a regular basis, the fiduciary duties of board members
- Review, on a regular basis, the organization’s mission
- Require annual policy and practices acknowledgement, including conflict of interest disclosure
- Maintain meeting minutes and other corporate records
Mr. Cooper provides legal representation to a broad range of hospitals, other healthcare facilities and physician groups across the United States. He has been listed in The Best Lawyers in America for health law for twenty-three consecutive years and selected for inclusion in Ohio Super Lawyers (2005-2015).
Visit the McDonald Hopkins LLC web site at www.mcdonaldhopkins.com.