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lthough trustees make decisions that result in the fundamental restructuring of hospitals and health systems, hardly anyone outside their own institutions has taken advantage of their hard-earned experience. Most accounts of conversions, mergers, and major reorganizations in the media and even in the research literature describe them as the work of entrepreneurs, managers, bankers, and lawyers.
We enlisted two colleagues, Carolyn Boone Lewis and Ann F. Monroe, to help us organize a project to make the experience of trustees in restructuring more widely available. Boone Lewis, Immediate Past Chair and Trustee of Greater Southeast Health Care System, Washington, DC, was then a trustee of the American Hospital Association. She is now Chair Elect of the Association. Monroe, who was a senior executive of California Blue Cross during its conversion to WellPoint Health Systems, is now Director of the Quality Initiative of the California Health Care Foundation.
The four of us compiled a list of trustees from around the country who, according to their peers, were particularly reflective and articulate about their experience in the restructuring of hospitals, health systems, and health plans. Twenty hospital/health system trustees were able to join us in a discussion of the experience of restructuring. They came from every region of the country, from institutions of varying sizes, and from urban, suburban and rural areas. We also talked with health plan trustees by conference call and concluded that their experience was sufficiently different from that of members of hospital/health systems boards to merit a separate project.
The trustees discussed their experience under a guideline that everything said was off the record until released by the person who said it. They also agreed that Harry Nelson, a staff writer for the Milbank Memorial Fund who reported for the Los Angeles Times for many years, could attend, ask questions, and take notes.
After the meeting, which Monroe moderated, Nelson and Monroe wrote numerous drafts of this report. Then each of the trustees who attended the meeting reviewed an advanced draft of the report. Each made useful suggestions for its improvement. Nelson completed the drafting of the report.
This is the second collaborative publication of the Health Research Educational Trust and the Milbank Memorial Fund. The first resulted in the report Governing Health Systems: Ten Stories, published in 1997. Both reports are collaborative efforts that challenge––for the better, we hope––the traditional divisions among subjects, authors, editors, funders and publishers. Collaboration is time-consuming but we believe produced a more complete perspective on this issue. This report describes what this group of trustees wants to share about their experience in making decisions about restructuring the healthcare institutions for which they are responsible. We hope that it will be helpful to others facing similar decisions for their organization.
Daniel M. Fox
President
Milbank Memorial FundMary A. Pittman
President
The Health Research and Educational Trust
American Hospital Association
AcknowledgmentsThe following persons participated in a meeting that was the basis for this report and then reviewed it. They are listed in the positions they held at the time of their participation.
John R. Ball, President and Chief Executive Officer, Pennsylvania Hospital, Philadelphia; Paul A. Bennett, President, Broaddus Hospital Board of Trustees, Philippi, West Virginia; Marylee Davis, Immediate Past Board Chair, Sparrow Health System, East Lansing, Michigan, and Chair, Committee on Governance, American Hospital Association; Michael J. Fay, Trustee, Fairview Health System, Hibbing, Minnesota, and Member, Committee on Governance, American Hospital Association; Merrill Gappmayer, Chair, Utah Valley Regional Medical Center and Orem Community Hospital, and Board Member, Intermountain Health Care, Orem, Utah; Frank Godic, Past Chair, Conference of Diocesan Coordinators of Health Affairs, Cleveland, Ohio; G. Alan Griffin, Chair, Board of Trustees, Valdese General Hospital, Morganton, North Carolina; Alice W. Harrison, Chair, Board of Trustees, Chestnut Hill HealthCare, Philadelphia, Pennsylvania; R. Kent Henslee, Trustee, Gadsden Regional Medical Center, Gadsden, Alabama; Geri Herbert, Chairperson, Board of Trustees, Wood River Medical Center, Ketchum, Idaho; Lois LaCivita Nixon, Trustee, Former Chair, Hillsborough County Hospital Authority, Tampa, Florida; M. Jane Oehm, Trustee, Exempla Healthcare, Golden, Colorado, Trustee, Colorado Hospital Association, and Chair, Committee on Governance, American Hospital Association; Joel D. Ohlsen, Past Chairman, Board of Trustees, Medical Director, Radiation Oncology, St. Mary-Corwin Regional Medical Center, Pueblo, Colorado; Thomas A. Ramsey, Past Board Chair and Trustee, Long Beach Community Medical Center, Long Beach, California; Thomas Rathbone, Chief Executive Officer, Health Hill Hospital for Children, Cleveland, Ohio; Sue Reeves, Trustee, Palomar Pomerado Health System, San Diego, California, and Member, Committee on Governance, American Hospital Association; James Roosevelt, Jr., Vice-Chair, Care Group/Mount Auburn Hospital, Boston, Massachussetts; William Weisgerber, Board Director, Ionia County Memorial Hospital, Ionia, Michigan; Patricia West, Chair, Board of Trustees, Memorial Health System-West Volusia, Deland, Florida; Susan Wiltshire, Chair, Northeast Health Systems, Inc., Hamilton, Massachussetts
The following persons, trustees of health plans, participated in a conference call that helped to define this project.
James J. Barba, Chair, Special Advisory Review Panel, Empire Blue Cross Blue Shield, Albany, New York; Harlan Edmonds, Chairman of the Board, California HealthCare Foundation, Sacramento, California; Donald Hoffman, President, ChoiceCare Foundation, Cincinnati, Ohio; Betty Smith Williams, Professor Emeritus, California State University, and President, BSW & Associates, Los Angeles, California
Converting and Merging Hospitals
Nonprofit hospital trustees today face challenges that extend far beyond traditional concerns with buildings and budgets. The struggle to survive in a health care marketplace is placing great demands on trustees. These demands threaten long-held allegiances to their institutions and to the public. A growing number of hospitals and their trustees must weigh organizational and personal self-interest against quality of care and their organization's obligation to serve the public first. Their options are to merge, sell, convert to for-profit, or remain nonprofit. No single solution fits all situations.
The experiences of trustees who have been through the difficult process of restructuring reveal lessons that may help others who may be faced with the decision whether they, too, should make a change. In December 1997 trustees from 21 hospitals that had restructured met in San Francisco to relate their experiences. This is a report on what they said.
Even after a decision has been made about whether to restructure, the next step is not always swift or easy. Some trustees believed they had found a way to preserve the public interest; some did not. The dynamics of the marketplace and the dedication of the trustees and staff to a careful exploration of all options appeared to be essential elements for arriving at a proper solution.
The trustees' comments have been organized into separate sections that focus on the three phases that organizations generally go through during a restructuring: the pre-restructuring phase, during which discussions focused on whether to reorganize and how that decision was made; the restructuring process itself, in which the dynamics of the negotiations were discussed; and the post-restructuring phase, during which trustees assessed the results.
What Trustees LearnedThe following summary details lessons learned by hospital trustees––lessons they hope will benefit their peers as they undertake the restructuring process:
- Boards that educate themselves about the broader health financing and marketplace issues are more likely to influence their own future.
- Ask questions that are not being asked.
- Be careful in the selection of advisers. Be wary of those with predetermined "solutions" because those solutions will drive the process, perhaps in the wrong direction.
- Don't assume you know how the community feels. Find out early in the process.
- Structure your community survey in ways that give you complete information about the entire community.
- Understand the impact of your decision on the overall health care system for the underserved in your community.
- Work to acquire complete support of the medical staff early in the process.
- Pay attention to how the board makes its decision, not just what the decision is.
- Pay close attention to your feelings.
- Evaluate the structure decided upon and its purpose at every step of the process, from both a legal and operational perspective.
Trustees of health plans face many of the same pressures for consolidation that confront hospital trustees. Despite this similarity, there is some evidence from interviews conducted for this report that the experience of hospital trustees is different from that of health plan trustees. Health plan trustees, for example, appear to be more focused on members of their plan and less focused on the community their plan serves; they may be more concerned about payers' needs and less concerned about community needs than their hospital counterparts; and they may see little or no role for the community in their corporate restructuring. While these differences indicate that health plan trustees display a stronger degree of "ownership" than do hospital trustees, the evidence is hardly conclusive since the matter has not been thoroughly explored.
The Pre-restructuring PhaseWhat Drove Restructuring?
Hospitals are facing a multitude of pressures in today's competitive health care environment. Six major areas dominate their concerns:
- Financial distress characterized by high levels of uninsured or high costs that were not addressed
- Market changes: physician relationships splinter; neighborhoods deteriorate or grow prosperous; competitors merge or affiliate
- Strategic planning and market analysis
- Managed care moves in or grows stronger and picks its partners
- Investor-owned companies like Columbia/HCA expand and become the feared or fought agitators
- Aging physical plants or infrastructure require capital
The pre-restructuring phase is often a time of doubts, dismay, and mental confusion. A variety of internal and community circumstances drove hospital trustees to consider restructuring. Board members often had widely different opinions about the necessity to make changes.
The trustees reported that it was a shocking experience to be suddenly faced with the possibility that the hospital would not survive unless changes were made and that denial was a common reaction. A trustee of a midwestern county hospital expressed his community hospital board's initial reaction, saying, "As it became clearer that we would have to close our doors, we went through a stage of denial and told ourselves we would study the issue––a way of putting off a decision."
The fears and feelings of the hospital's physicians often played a major role in stirring a board to action. This example came from a hospital trustee seeking a safe harbor from the early invasion of managed care: "Fear and frenzy by doctors and the state of the market in our city incited the decision for the board to meet. There was a lack of continuity among board members. We formed a steering committee that included physicians and management."
For another hard-pressed community hospital in the same highly competitive region, the board's reaction to the revolution in health care delivery was equally stark: "We woke up and realized the big issue was survival."
Sometimes the hospital's ownership presented special problems for the trustees. For example, a trustee of one public hospital said, "In 1993 hospitals in the state were going for-profit, but we were a public body and restricted in what we could do. We could not compete effectively with the for-profits because of the open meeting and open records law. We were restricted by law from partnering with for-profits, plus they were not interested in opening their books to the public. We knew we had to do things differently in order to survive or we could remain a stand-alone facility. Then we began educating ourselves through the AHA [American Hospital Association] and Price Waterhouse."
Deciding How and When to RestructureFor some trustees, the decision about how and when to restructure was thrust upon them by forces long in the making but ineffectively dealt with until crises arose. Several examples were offered by board members of church-sponsored hospitals. A trustee of a hospital that is part of a Catholic chain and a board member of another religious hospital system outlined the problems they faced. Sometimes their decisions were influenced strongly by for-profit or nonprofit systems that were simultaneously wooing and threatening to compete with them. The early and mid-1990s was a time of acute hysteria triggered by the enormous expansion by Columbia/ HCA, which, for many hospitals, presented a threat that demanded immediate decision making about their future. "The number of sisters present in the hospital had been reduced. The hospital sought an alliance with other Catholic hospitals, but it was agreed our hospital would close. A for-profit chain approached the sisters, and the hospital was sold."
Another trustee had a different problem with for-profit interest. He wondered whether his hospital system could continue its mission under a for-profit system: "Ours is a 24-hospital system that is mission driven. Its problems have been maintaining the mission set by our church. When Columbia/ HCA arrived, the question arose whether we were a nonprofit or for-profit organization."
In other cases, hospitals took a more proactive approach, looking at what was happening to hospitals in other communities and taking the initiative to shape a future most appropriate for their situation. Trustees of one small hospital in a large overbedded eastern city looked at their situation in an organized manner and arrived at a key decision: "Our CEO tried to keep the board educated about what was happening elsewhere. When we saw the entry of managed care and looked at our mission, we asked whether we could stand alone and the answer was no. We understood the need to become part of a larger system or network that included tertiary care and a strong medical education component."
In some cases, hospital decision making was driven by managed care. The trustee of a rural western hospital said, "Our hospital was strong financially but managed care contracts dictated that we needed to continue cutting costs and serve a wider geographic area. Our ultimate partner was a similar, though Catholic, hospital across town."
Another rural hospital trustee said that his hospital's goal was to get managed care contracts. The rural hospital was financially sound but too small to compete with a larger hospital only seven miles away, with which it eventually merged.
A trustee of an inner-city hospital commented, "The fact that we were financially healthy [at the time of the merger] didn't change the situation. We had to look three to five years down the road. Despite all the difficulties in implementing the merger, we were still convinced that managed care would be killing us if we weren't in this alliance."
Sometimes solutions were found with relatively little stress and confusion. Strong, well-informed leadership was important. Two community hospitals in a midsize western city were an example: "The city had two hospitals. The area was high poverty, low insurance. There was a lack of access to capital. One of the administrators invited a consulting company to review the situation. It decided on a merger, and that action was taken."
In the final analysis, whatever triggered the need to restructure, the outcome depended heavily on the hospital board's sense of being in control of its future. When that dynamic was present, alternatives were more rigorously evaluated and the best interest of the community took a higher priority.
Seeking Advice from ConsultantsMost trustees used consultants, although not always with satisfaction. Their experiences indicated that while selecting the right consultant can be well worth the cost, caution should be exercised in determining the consultant's qualifications to handle the issue at hand. Before hiring a consultant, it may be advisable to speak with trustees of other institutions that have undergone a similar restructuring with that consultant. Some trustees decided that they should not have used a consultant at all.
A regional hospital trustee in a rural state said that his hospital used consultants who were very valuable, but he advised others to check credentials carefully. "You need to get multiple RFPs, interview the finalists, and make sure it's not a junior member who will do the work. Make sure the firm has had experience with your kind of problem."
Consultants can provide good advice on how to assess the community's feelings about the hospital and its services. A regional hospital trustee in the South said, "The local government was telling us it wanted us to get all the help we could to make the right decision. It was impressed by the way we took a consultant's advice and made our decision based on what was best for the community."
Several trustees reported problems that arose when consultants were not chosen carefully or were inappropriate for the job. The trustee of a rural area hospital reported his hospital's mixed experiences with consultants: "In our first process, which was to join a city and a county hospital, we had a good consultant. In the second process, we came up with a plan that was not clear enough to our attorney and he insisted on a renegotiation."
Another trustee commented, "In our first process, which was to join two public hospitals, we had a good consultant. In the second process, we did not use a consultant and two of the five attorneys involved began to renegotiate points after and outside of our board negotiations."
Consultants may not be the only source of help. The trustee of a western regional hospital suggested one alternative: "When you're going broke, how can you afford consultants and retreats? Go visit with your peers. Consultants aren't the only answer."
The trustee of a moderate-sized eastern metropolitan hospital besieged by large teaching institutions tried a novel use of consultants, which in this case failed to produce the desired results. "When we decided to form the system, we felt if we used consultants with opposing views we would get results. We fired the first one and the second one gave us problems." This caution came from another trustee: "Many consultants are looking for a problem to match their solution. Be sure consultants deal with your unique problem. One size doesn't fit all." And this from a past board chair of a midwestern system: "Having a very experienced consultant can be overwhelming for the board. The board knows the community best. We made mistakes because we didn't act on what we know about the community."
Several trustees emphasized the importance of achieving consensus among board members on the principles and issues the board must consider before deciding on consultants; mistakes were made in the absence of such agreement. A trustee of a rural southern hospital gave an example of an unprepared board: "We told the consultant to tell us what we needed, and was that a mistake!"
A number of trustees indicated that the level of education among board members about the complex and sometimes arcane issues they were about to consider was low. This led one trustee to declare, "There are 85,000 trustees in the country. Many hospital associations have ignored trustees. Many trustees don't even know they have the opportunity for education. This is a major issue."
Several trustees revealed how they went about educating their board members. "For the education process, we put together ten leaders, using consultants to frame the principles we wanted to guide us. Then we considered what was happening in the marketplace and whether to affiliate with another organization."
Local AdviceThe trustees relied heavily on their management teams to guide the process. In addition to management, they also relied on their attorneys and their accounting firms, and they often employed new attorneys who specialize in restructuring. A poll of the attendees revealed that in a majority of cases, the decision whether to hire a consultant was made jointly by the board and the CEO, not by the CEO alone.
Although some of the 21 trustees at the meeting were attorneys, several spoke cautiously about an attorney's role. One regional medical center trustee, himself an attorney, said, "It's not a good idea for a lawyer to be a board member." Speaking of outside attorneys, another lawyer-trustee declared, "Lawyers must understand the chemistry of the deal. When you look for lawyers, you may find they are knowledgeable, but look out for the power struggles."
In only a few cases did trustees seek advice from other hospital trustees who had gone through a restructuring. Most of those consulted were involved in AHA governance activities, where there is a forum for trustees to talk. Likewise, few boards sought help from representatives of hospital systems not actively interested in the management of the hospital under consideration.
Following the end of the discussion on consultants and board education, the moderator summed up the session:
"Everybody attending the meeting used consultants. Consultants are not always the best option. Sometimes it is better to speak with one's peers. Use consultants to do a broader reach using a third-party's view to get community input by phone surveys, for example. Sometimes use consultants to create a neutral ground for the two sides to craft an agreement. Consultant opinion does not relieve the board's responsibilities. Be sure to have the issues and principles outlined before the consultants come in. Remember that there are two kinds of consultants: processing and restructuring. The board needs to know the difference."
Engaging the CommunityThe issue of hospital benefit versus community benefit is central to any hospital restructuring. Despite the hospital's obligation to the public, which arises from a nonprofit hospital's tax-exempt status, community benefit has not always been foremost in the minds of the trustees, who must also consider fiduciary responsibilities. Some trustees were more aware than others of their public obligation; sometimes awareness took time.
One trustee declared, "For us the most important thing was to divorce ourselves from our own personal interest in the hospital. In the first meeting all we heard from board members was 'my hospital' and 'my board.' It took some doing, but we finally decided our purpose was to serve the community."
A trustee of one large system said her board initially failed to use its knowledge of the community. She said, "The board knows the community best. We made mistakes because we didn't act on what we knew about the community."
The trustee at one small urban hospital spoke of her board's reliance on physician and trustee input for an awareness of community needs. She said, "We have a 30-member board plus 24 emeritus members. We trusted them to bring in the community needs. We focused on the primary care needs of the community. We also used a community health assessment to guide us. . . ."
Hospitals that had not kept close contact with their community often took elaborate steps to gain insight into community sentiment. A county hospital trustee said, "We took zip code records and looked at areas we wanted to compete in. We asked the chamber of commerce and school and student councils and organized labor for their views. We intend to continue with follow-ups because we don't believe in 'you all' come and tell us what bothers you."
Small hospitals in rural areas also found innovative ways to study the community. One such trustee said, "We went to all the civic groups, senior citizens, employees, pessimistic groups, and government and told them the situation. We hired a consultant to study the community and design questions. The board approved questions and then we did a survey."
When and whom to inform in the community about a hospital's possible restructuring––one that may affect residents in significant ways––were always troubling questions. A board's inability to be direct and reassuring to the community often helped to lay the groundwork of suspicion and distrust that developed following the announcement that a restructuring decision had been made. Seldom could management and trustees keep secret their discussions with a potential partner. Many trustees feel it is important that the community be kept informed about the progress of negotiations, even when the specific details can't be exposed. As one trustee declared, "It becomes a disaster if the decision is a surprise to the community."
This appeared to be true regardless of the size of the hospital or the community. It happened in rural areas. One rural area trustee confided, "When we made our decision, it was a surprise to the community. It was a mistake that we lost communication with the community." And it happened in big cities. One struggling hospital lost sight of its community obligation when it came time to make a change. Advocates for the community then emerged to remind the hospital of its obligations. One urban hospital trustee said, "Our hospital prided itself for being close to the community, but when we changed from nonprofit to for-profit, we did not talk much with the community. Then we had to have public hearings. The community now wonders about the transaction, and we have some explaining to do."
The experience gained from restructuring can sometimes strengthen a facility's relations with the community, as one rural western hospital learned. One trustee said, "After our first merger we saw a major shift in our vision toward dealing with the community health needs and the need to work with the community. Things have blossomed since our relations with the police, juvenile justice system, and parent groups have improved. Before that, the hospital alone tried to deal with drug problems. Now we are just one of the partners." In another example, a southern regional hospital lamented, "The community came to us threatening lawsuits. We began an education process to understand things about the community we needed to know. It paid off. We learned workers at one company had objected to our sale to a for-profit because they thought they would lose benefits. We showed them that this was not so."
Perhaps a majority of trustees were aware of the need to keep the community informed and contented. At one midsize urban hospital, a trustee said, "We had a continuing assessment of the community long before the merger took place. We assessed the patients, doctors, the government, paramedics, the public, and the special ethnic population in our community." A large regional hospital system reported that "Our restructuring was driven by community needs that became apparent long before we considered making a change. A new CEO gave direction for the community focus."
Nearly all trustees who delayed involving the community early in the process expressed regret at having done so. However, all were recounting experiences that occurred in the days before states began passing laws that mandate disclosure at certain points in time during the deliberations and outline the rules of the game.
Relationships Among Board MembersIn times of stress and change, both the positives and negatives of board dynamics were exaggerated and magnified. Experiences cited by trustees indicated that if the board had been functioning well, with mutual respect and commonality of purpose, it weathered the stresses of restructuring, perhaps with tensions but without disruptions and dysfunction. However, they warned that if board members are poorly prepared to meet the challenges and differences of opinion are allowed to simmer just below a level of superficial politeness and professionalism, the process will be unnecessarily delayed and stressful. The experience of the board of one metropolitan hospital is an example of such disharmony. One trustee described his situation: "The market was overbedded and the situation was dangerous. Our board believed that if you work hard doing the same thing, you will succeed. We found the businesspeople and the lawyers on the board didn't share the same values. But we found that bringing the board together caused members to share values."
Sometimes the CEO is the source of disharmony. The board chair of one hospital system told this story: "We had a CEO who kept his vision to himself and concentrated on medical affairs. The doctors on the staff were angry about this and began to court administrators whom they believed would be favorable to their views if they became CEO. So we got another CEO who was community oriented and allowed us to manage our mission."
On the other hand, CEOs can also save the day, as one trustee learned: "Our CEO was involved on a regional policy board of the AHA, and his visionary thinking helped to move the board along with him. One of the things he helped to accomplish was to have us listen to the doctors on the staff."
In certain situations, boards were advised by their attorneys to appoint a "special committee" or subset of the board to act on the organization's behalf. As a result, some members of the board were more "in the know" than others. Even the CEO, upon whom the board had relied consistently for its policy and operational direction, may have been looked upon as an outsider. In these circumstances, special attention was paid to keeping those members not on the special committee as informed as possible in order to minimize a potential split of the board and to maintain a dialogue between board members.
Advice for increasing the chances of a successful restructuring included establishing a reasonable time in which to complete the transaction. Anything over two years may be so long that top-notch employees are lost and the stability and morale of employees dwindle.
The Post-restructuring PhaseEvery hospital that entered into a restructuring process did so because the board believed––or at least hoped––that the hospital itself and the larger community would benefit from its decision. As might be expected, the experiences of the trustees fell into several categories. For some, the resulting situation exceeded their hopes. For others, the initial restructuring led to more restructuring, with peace and stability still out of sight. And for a few, the new reality brought a whole new set of problems.
A Small Metropolitan Hospital Amidst Large Academic Centers
This hospital went through two processes 18 months apart and arrived at opposite outcomes as a result of each. In the first planning process, the trustees decided that the hospital should be independent but have a strong connection with other hospitals, so it joined with a large local hospital to form a new system. Internally and financially, the hospital was healthy and had a strong, educated board and good relations with the doctors. But about this time, managed care plans and outside clinics began recruiting the hospital's physicians and Columbia/HCA came into the area. The hospital decided it could not remain independent because it would soon be ground down by managed care or find itself pressured by a system that would cause it to change the nature of its care business––from an independent acute-care facility to a long-term care or rehab facility. Surrounded by major teaching hospitals with worldwide goals––but not necessarily community goals––the trustees made their second major decision. "We reviewed a Columbia offer and found it seductive. We formalized a partnership with Columbia, and we ended up able to direct the hospital's future and able to make health choices for the nine communities in its area."A Regional Hospital in a Rural Area
This hospital ended up with a bitter experience involving a government agency. It began with a merger that was supported by the community but opposed by two large payers, one a physician-owned HMO and the other a locally owned physician organization. The merger was completed in one and one-half years at a cost of $2 million. Antitrust considerations placed the agreement before the Federal Trade Commission. It ruled against the agreement 5 to 0 on the grounds of restraint of trade because there had been two providers and ended up with only one. One trustee said, "The hospitals and the community saw the decision as having been disrupted by an agency that had no knowledge of the community's health care needs."A Church-owned Hospital System
Polls showed that the people liked their hospital but disliked the hospital system. When a large for-profit moved into the area, problems arose involving property taxes and community benefits. To meet these problems, the hospital system realized that it had to begin decentralizing board control of its hospitals. According to a board member, "The system is now trying to document community service better than it did in the past. A couple of years ago we put a single board over three hospitals in one area. Local control is the way to stay in touch with the community. We still get efficiency."A Public Hospital System in a Highly Competitive State
This public hospital made a lease management arrangement with a nonprofit hospital system. A new nonprofit community-based board was formed, but the tax-based hospital board still exists and owns the assets of the hospital. The new board and management have more flexibility than the public board. There is confusion within the community about the roles of the two boards. The public board's role is to administer the taxes it receives. The lease was designed so that at the end of five years the tax burden would be reduced from approximately $10 million to $1.5 million. However, the taxing board has not yet been able to make the suggested reduction, due to existing lawsuits and a desire to fund additional health-related projects outside of the hospital. When the lease/management agreement was made, the new community-based board did not hold a public meeting or grant access to records because Florida's Sunshine Law does not apply to private nonprofit organizations, only to public bodies. The local newspaper believed that because the public board transferred the management to another hospital, public meetings should be held and records should be made available to the public. The newspaper has filed suit in Florida Supreme Court. A bill passed during the 1998 legislative session clarified the state's hospital conversion process. Currently, the Florida Supreme Court wants to have additional briefs on the legislation. If the court rules against the hospital, 17 other hospitals with similar contracts will be affected.An Academic Medical Center
The hospital was faced with making sure the underserved were served, and it needed to set up an arrangement that required the attorney general's and the court's approval. The attorney general and the court were against setting up separate foundations to serve the underserved, so the hospital continues to be nonprofit.
Effects on CommunitiesCommunities may receive some benefits when a hospital merges or converts from nonprofit to for-profit status, although in many cases the full potential is not realized. In most states the benefit comes from the establishment of a new nonprofit foundation dedicated to carrying on the hospital's charitable obligations to the community after the restructuring. The extent of the community benefits depends strongly on state laws and regulations and on the determination of trustees to represent the community's interest.
A Church-owned Urban Hospital that Survived Restructuring
When the sisters sold the hospital to a for-profit chain, they set up an association that sponsored a nonprofit housing complex so that the sisters could maintain a presence in the community. The housing complex became a true community resource. As part of a new chain, the hospital, now under a new name, has become deeply involved in community services. A board of community leaders now advises the hospital on health and education services it can provide through business, youth, and social organizations and through churches of various denominations. The trustee says, "The hospital policy has been to respect the culture of the community."A Small Hospital in a Heavily Bedded Urban Area
While this hospital had a difficult time with its restructuring and had to give up obstetrics and a psychological service, it has been able to save other services and is continuing to improve. It now has a large behavioral health program and joint ventures with competent organizations. A trustee says, "The community understands that this is a continuing process. We got the community involved in figuring out how to replace some services. The community has been important in getting things going for us again."A Public Hospital in a Large City
Ten years ago this hospital, which was linked with a university, had two bids to change from public to private, but this did not happen. Now an even stronger relationship exists with the university, across many clinical departments, and with the entire community. A trustee said, "The catalysts were a new CEO and the university president. The university led the way to get an indigent care tax, which benefited all hospitals and the community through broader access."
ConclusionEmphasizing What Trustees Have Learned
In San Francisco the trustees spoke candidly and thus shared information that will be useful to others. Discussions of each phase of restructuring yielded key findings:
- Denying a problem exists is deadly. From the beginning, consult with physicians, staff, and the community.
- Make sure the board is well informed and prepared to deal with each matter under consideration.
- Seek advice from other trustees who have gone through restructuring. Perhaps trustees from different hospitals should talk with one another about their performance.
- Decide whether consultants are needed, and then select them with care.
- Remember that you represent the community as well as your organization.
Trustees mentioned other materials that proved helpful to them during periods of uncertainty. The guideline booklet prepared by the American Hospital Association was helpful in stimulating their thinking. Other tools assisted them in obtaining community input and keeping up with the financial status of the hospital. Trustees underscored the importance of being knowledgeable about available tools.
They stressed that boards and CEOs should regularly discuss important issues that trustees sometimes neglect. One such issue is the hospital's status in its market. Another is informing trustees about the community benefits provided by their organization. Likewise, ongoing physician involvement in board considerations is necessary to prevent a crisis from taking place.
As trustees look to the future, the governance structure of the merged and collaborative institutions is the central issue. The interests and relative power of collaborating institutions cannot be ignored or postponed during the restructuring negotiations. Take nothing on faith, one trustee advises. Be specific about everything.
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