In a new Governing Health vidcast, McDermott partner Michael Peregrine breaks down why you may need to revamp your conflicts of interest procedures, and how the general counsel and the compliance officer can work together to protect the health system from conflicts-related risks.

Many health systems’ conflict of interest policies and protocols haven’t been updated since the 1990s. While these approaches—based on duty of loyalty and simple concepts of financial interests—may have fit the bill in the past, today’s rapidly shifting environment poses new governance-related challenges that have direct implications for the process by which conflicts of interest are identified, disclosed and addressed. These challenges include:

  • Diversification of health system portfolios, featuring investments in a broadening scope of products, services and enterprises, particularly in the case of innovative technology and delivery of care platforms
  • Growing officer and director interest in investing alongside their health system
  • Swift consolidation of the inpatient health care provider market and increasing ambiguity in identifying competitors
  • Sharpening focus on material bias arising from personal relationships (intra-board or external)
  • Non-traditional market participants, including high-tech market disrupters and powerful new organizations formed by vertical or horizontal combination
  • State regulators’ attention and reaction to media reports regarding high-profile instances of conflicts of interest
  • The presence of constituent directors on corporate and joint venture boards
  • New case law focusing on how personal interests may affect leadership decisions

Continue Reading Addressing Conflicts of Interest: It’s a Whole New Ballgame

At a time when health care organizations are facing greater financial and reputational costs than ever before, more than 150 health care industry leaders, legal and compliance executives, and investors gathered for McDermott’s Health Care Litigation, Compliance & Investigations Forum at the Ritz-Carlton in Chicago to discuss strategies for proactively managing and effectively responding to compliance risks, investigations and litigation.

Sylvia Mathews Burwell, Secretary of Health and Human Services from 2014 to 2017, delivers the keynote presentation.

The event covered a wide range of issues, including fraud and abuse (such as False Claims Act and Stark Law matters), governance, cybersecurity, antitrust, white-collar, intellectual property, products liability and tax-exemption disputes. The event also featured a keynote address by Sylvia Mathews Burwell, Secretary of Health and Human Services from 2014 to 2017, on the foundations of the Affordable Care Act (ACA), the ramifications of the elimination of the individual mandate and the ACA’s prospects going forward.

If your organization needs support in current litigation or wants to ensure best practices to help avoid one, we’re here to help.

Below are key insights from the sessions:

Every Day’s Adventure: How Leading GCs Are Thinking about Compliance and Enforcement

  • Collaboration between the general counsel and the compliance officer provides a proactive and team-oriented approach to substantive legal and policy issues.
  • Keys to effective collaboration include communication, coordination and a culture of sharing, coupled with respect for the independence of the compliance/audit function.
  • Transparency is key; bad news is OK, but surprises are not. Stay closely engaged with the board and internal audit team. Of audience members surveyed, 40 percent brief their board on legal or compliance matters about once a quarter, and 47 percent do so every board meeting.
  • Preventative compliance measures involve a formal enterprise risk management plan and proactive two-way communication with line teams regarding trends and solutions.
Attendees share their thoughts on the biggest practical takeaway that has emerged from Escobar.

Trendspotting: Government Enforcement 2020

  • Cooperation and individual accountability will remain government priorities in enforcement efforts and settlements with companies.
  • Government investment will continue to center on the opioid crisis and Anti-Kickback Statute/False Claims Act enforcement. The Granston and Brand Memoranda are unlikely to curtail the latter.
  • For an in-depth discussion of these issues and other recent developments, see McDermott’s Health Care Enforcement Quarterly Roundup Q3.

Avoiding Dante’s Inferno: Dealing with Physician Disputes

  • During a physician practice management organization acquisition, transparency and education regarding the transaction and integration process help prevent physician disputes down the road. Be clear regarding the goals of, and rationale for, the transaction. Effective integration is the most important factor for success in a transaction with physicians, according to 56 percent of audience respondents.
  • Internal physician champions foster cooperation; seek buy-in by demonstrating how the integration will advance quality of care.
  • Align incentives and economics to keep physician and company goals consistent.

    Attendees share what they consider to be their biggest digital health compliance threat.

Managing Compliance and Data Privacy in 2018: From Human Error to Artificial Intelligence

  • Creating a culture of compliance is critical for managing risk, but doing so is increasingly challenging for organizations seeking to innovate within health care and apply expertise and ideas from other fields.
  • Compliance and legal, while serving separate purposes, are inextricably intertwined. Align these functions thoughtfully to ensure optimal performance and clarify the relationship between the compliance officer and the general counsel.
  • Artificial intelligence (AI) offers powerful tools not only for health care delivery but also for managing an organization’s compliance risks. Currently, 20 percent of audience respondents use AI to identify or investigate compliance issues. Like any tool, AI must be thoughtfully leveraged. Establish rigorous processes to prevent human error and ensure data security.

Expecting the Unexpected in a Government Investigation: From Ambush Interviews to Unbudgeted Legal Fees

  • In responding to investigations and promoting business concerns, care must be taken to avoid even the appearance of obstructing the investigation. Be accurate and observe ethical boundaries.
  • Early credibility and candor with the government can promote collaboration on narrowing the scope and burden of response, especially regarding digital data.
  • Discourage employee speculation about the identity of the whistleblower in order to reduce the risk of retaliation claims.
Attendees share their highest communication priorities during a crisis.

Crisis Management: Weathering the Storm and Protecting Your Reputation

  • When mapping out a crisis management strategy, think “when,” not “if.” Twelve percent of audience respondents reported that their organization has no crisis response plan in place and 33 percent were unsure.
  • Even if a crisis event does not reflect on an organization’s performance, the organization’s response to the crisis often shapes public perception of its standards and quality.
  • Tone is key, as is demonstrating core values such as integrity, competence, transparency and empathy. An effective crisis response shows care for victims, promises a thorough investigation and implements speedy corrective actions.

McDermott lawyers who presented at this event included David S. Rosenbloom, Laura McLane, Stephen W. Bernstein, Monica Wallace, Tony Maida, Amy Hooper Kearbey, Amandeep S. Sidhu, and Paul M. Thompson.

The latest episode of the Governing Health podcast gets back to basics: the board’s responsibility for monitoring the impact of key economic trends and indicators. McDermott partner Michael Peregrine welcomes special guest John Challenger, CEO of executive outplacement firm Challenger, Gray & Christmas, who recently appeared on the Today Show and is one of the foremost thought leaders on the US economy and workforce. Together, John and Michael delve into today’s top economic issues and their significance for health system board governance.

Today’s “million dollar question:” How long is the economy expected to grow, and when should the finance committee look for signs of a recession?

Like canaries in a coal mine, the early warning signs of a slow-down are already present—if you know where to look. The current job creation statistics and record low unemployment numbers signal a tight job market for skilled workers. Companies may start to put expansion plans on hold for fear of being unable to recruit enough skilled workers to staff new plants or operations. “You can’t get to this full of an employment situation without the risks of a recession starting to grow,” John said. “Two years from now, it seems inevitable we’re going to be in some kind of recession.”

What are the governance ramifications of the most recent unemployment and job creation statistics?

Despite low unemployment and competition for skilled workers, wages are not going up. The board should engage with HR executives and recruiters to analyze how best to allocate capital toward growth-oriented plans. Retention of high-performing and high-skilled employees should be at the top of the board’s agenda. “Look at your talent inside your organization and understand who your key leaders are—the people you need most to stay at the organization and not be recruited away,” John said. “Fighting to keep them and making sure there are plans in place to hold them is really critical, because replacing them means you have to find new people with those same skills.” Even if you can find the right skillset in this tight job market, the new hires will not have the corporate memory or know-how that makes your current employees so valuable, he said.

Recent employment statistics also indicate that ambulatory jobs are at the forefront of job creation in the health sector. “This suggests that we’re beginning to see direct manifestations of health systems moving their focus to ambulatory care and away from the inpatient facility,” Michael said.

Does John Flannery’s departure from GE after just over a year as CEO indicate a new phase of “short termism” in board oversight of the CEO?

More than 150 CEOs were discharged in September 2018, a sharp uptick from the previous month. “That may be an anomalous situation, but it’s interesting that it happened at the same time that John Flannery left GE,” John said. “Usually when you see CEOs leave within less than a year, or just over a year in this case, there are communication problems inside the board and the C-suite. There was a sense from the news reports that the board expected much quicker decisive action on the new CEO’s part that wasn’t being taken.”

Today’s boards are quick to act in response to perceived CEO performance issues. If an organization’s share price is dropping, it often means that the CEO’s days are numbered, John said. To combat potential communication problems, a close relationship between the board and the CEO in his or her first year—and particularly the first 100 days—is helpful. “Alignment in terms of what’s expected and what the objectives are is crucial,” John said. “It shouldn’t be the kind of situation where the CEO is acting on his or her own with a board that’s not engaged in the strategic decisions being made.”

How much longer will the current trend of “older CEOs keeping their jobs longer” continue?

Recent statistics suggest that boards are more willing to retain senior CEOs longer than they did previously. This is likely due to the economy, John said. Because so many companies are posting excellent results, there is no immediate impetus to move a long-tenured CEO out.

What are the broader implications of recent “organizational justice” developments, such as Amazon’s decision to raise wages?

“It’s always the most successful companies that can make these kinds of decisions,” John said. “Sometimes they lead the way and others follow.” Because Amazon is a market leader, the real question is whether less successful competitors will be able to follow suit. That will determine whether Amazon’s minimum wage increase is the beginning of a broader trend.

In a similar development, Harvard University (John’s alma mater) recently increased its employee wages as a means of corporate social responsibility. In John’s view, the move was an ethical rather than a business decision. At the same time, the economic implications of large-scale wage increases is a significant matter that boards should monitor. “We’ve seen minimum wage laws in places like Seattle and other cities get enacted that would move wages up for people in the low-skilled or semi-skilled area of the workforce,” he said. “There’s always the question, if that were instituted on a wider basis, whether that would depress job creation, as companies could afford fewer workers. It’s an open issue and it’s going to become even more important.”

Click here to listen to the full episode.

McDermott recently launched the second episode of its special edition podcast providing an in-depth discussion of the interplay between State Attorneys General enforcement authority and nonprofit Board of Directors responsibility in the governance and operation of health systems. This special edition of the Governing Health podcast series welcomed four prominent State Attorneys General (AGs) to discuss the transformation of the nonprofit health care sector.

In episode two, our panelists discussed how the evolution of nonprofit health care affects business activities, including M&A, Board of Directors obligations, and state nonprofit law across the health care landscape. Here are four key takeaways:

  • Beware the dangers of “mission drift.” Mission drift occurs when a change in corporate purpose conflicts with donor intent. As large health care organizations increasingly take on all aspects of health care, they often acquire nonprofit facilities endowed with gift assets. Health systems must consider how the original donor intended for those assets to be used in the community, said Karen Gano, President of the National Association of State Charity Officials and Assistant Attorney General of Connecticut, Special Litigation Unit.
  • Keep beneficiary interests front-and-center when considering a sale or a conversion to a for-profit business model. In New York, there is a statutory requirement that any sale of charitable assets must be for fair consideration and in the best interests of charitable beneficiaries, said Jim Sheehan, Chief of the New York Attorney General’s Charities Bureau. Even if a transaction makes good business sense for the organization, Boards must ask themselves, what provisions are we making for the community served, and how does this transaction serve the nonprofit’s underlying mission? “We don’t have the authority to substitute our judgment for that of the Board, but we are obliged to ensure that the board has exercised its fiduciary duties of both loyalty and care in arriving at the decision to sell or convert,” said Mark Pacella, Chief Deputy Attorney General of Pennsylvania, Charitable Trusts and Organizations Section.
  • Retain control when engaging in a joint venture with a for-profit entity. The state AG office will examine joint ventures—whether they involve new programs or services, or the construction of a new facility—to ensure there is actual control with an emphasis on care and no excess benefits to any individual or to the for-profit partner, said Bob Carlson, Assistant Attorney General of Missouri.
  • Ensure that investment in innovative activities is objective. If the investor is the entity itself or its executives, the investment process can become politicized. “One the expectations we have is that there be a very rigorous process for assessing both initial investments and whether additional money is put in the same way [as it would be in] any other investment,” Jim said.

Click here to listen to the full podcast.

Coming Soon: Episode Three

In the final episode of this special three-part podcast series, our guests will discuss how operating activities, fiduciary duties and the class of beneficiaries are affected by the transformation of nonprofit health care.

Infographic: How Do State Attorneys General Track Nonprofit Health Care?

McDermott recently launched a special edition podcast providing an in-depth discussion of the interplay between State Attorneys General enforcement authority and nonprofit Board of Directors responsibility in the governance and operation of health systems. This special edition of the Governing Health podcast series welcomed four prominent State Attorneys General (AG) to discuss the transformation of the nonprofit health care sector.

Episode one focuses on the jurisdiction of the State Attorneys General, the types of data commonly flagged for review, and the importance of an actively engaged Board of Directors. Here are five key takeaways:

  • An actively engaged board is critical to avoid pitfalls. The board of directors must provide strategic oversight and organizational direction to help a nonprofit avoid pitfalls. When a board becomes complacent or overly deferential to executive management, problems almost always arise, said Mark Pacella, Chief Deputy Attorney General of Pennsylvania, Charitable Trusts and Organizations Section. Given the sheer size of the nonprofit sector, state AGs cannot monitor every entity for early warning signs, such as diversions of assets or conflicts of interest. Therefore, “[directors] have to be actively engaged, they have to put themselves in a position to be aware of a nonprofit’s activities, to be aware of the risks,” said Bob Carlson, Assistant Attorney General of Missouri.
  • The AG has broad jurisdiction over nonprofit health care matters. In Pennsylvania, for example, court rules of procedure require that the AG’s office be notified of Orphan’s Court proceedings and civil matters that implicate a charitable interest, giving the AG the opportunity to intervene. Investigators also follow up on developments published in the news media, and complaints from whistleblowers or competitors.
  • Red flags in a Form 990 can lead to an investigation. State AGs are moving from a complaint-driven enforcement system to a system driven by data and analytics. With the automation of the 990 process, for example, the New York AG office can proactively identify warning signs in a nonprofit health care entity’s financial activities, including negative net worth, loans to officers (which are illegal in New York), and indicators of asset or cash flow problems. This data-driven system allows investigators to make more sophisticated decisions not just about enforcement, but about outreach. “The goal is not to make [these organizations] miserable,” said Jim Sheehan, Chief of the New York Attorney General Charities Bureau. “The goal is to say, ‘OK, looks like you have a difficulty, let’s talk with the agency that pays you and with the charities about what you can do to address it.”
  • In an investigation, the AG can and will subpoena directors and officers.The AG’s formal investigation tools include subpoena power and civil investigation demands, which often involve interviewing insiders such as board members, Carlson said.
  • State registration for charities that solicit public funds is about to get much easier. The National Association of State Charity Officials (NASCO) is developing a single-registration portal, said Karen Gano, President of NASCO and Assistant Attorney General of Connecticut, Special Litigation Unit. Currently, 40 states require registration of charities that solicit funds from the public. The NASCO portal will eliminate duplication and onerous data entry by allowing organizations to register online once, rather than filing registrations under 40 different state regimes, Gano said. The portal will be introduced in phases starting in fall 2018.

Our guests include:

  • Bob Carlson, Assistant Attorney General of Missouri
  • Karen Gano, President of the National Association of State Charity Officials and Assistant Attorney General of Connecticut, Special Litigation Unit
  • Mark Pacella, Chief Deputy Attorney General of Pennsylvania, Charitable Trusts and Organizations Section
  • Jim Sheehan, Chief of the New York Attorney General’s Charities Bureau

Click here to listen to the full episode, and stay tuned for episodes two and three of this special series, which will cover topics such as the consequences of “mission drift,” considerations in M&A transactions, collaboration between state and federal regulators, guidance for operating across state lines, and much more.

Since the announcement in late January that Amazon, Berkshire Hathaway and JPMorgan were teaming up to “disrupt health care,” the intersection of health and business has been top of mind for many. As we wait with bated breath to see just how (or if) they revolutionize the industry, the conversation continues about other potential disruptors and trends on the health care horizon.

Earlier this month, McDermott Will & Emery hosted the 2018 Health Care Services Private Equity Symposium, where participants explored the various business and legal perspectives impacting the health care field. I had the pleasure of moderating a panel discussion at the event entitled “Hot or Not? A Health Care Sector Analysis,” where I joined a handful of experienced investment minds to explore key trends in health care private equity in 2018. Continue Reading Where Health and Investment Collide: Health Care Private Equity Trends to Watch in 2018