When I joined the Harvard Community Health Plan board in1990, the Chairman was a very wise and experienced executive from Federated Department Stores, Maurice Lazarus. “Moogie” as he preferred to be called, projected a throwback image to another day when wise and experienced people went unnoticed as they devoted enormous amounts of their personal time and resources to leading eleemosynary institutions that were trying to provide a social infrastructure that was beyond the scope of what limited government could offer.
If you did not understand that last statement, I encourage you to click on the link. Not many people, including some members of the boards of nonprofit organizations, really understand what nonprofits are, how we got them, and that they are a relatively unique American form of “public-private” partnerships, usually with social missions. There are more than a million and a half nonprofits recognized by the IRS.
We are a nation of skeptics who are often fearful of the government’s actions and in many circumstances nonprofits do for us what governments in other countries do for their citizens. Many nonprofits, like hospitals, are locally controlled and perhaps the public feels more comfortable with them than a hospital owned by the government. Our fear of government control seems so great that in many instances we would prefer to deal with a for profit enterprise than with the government. We seem to trust people who are in pursuit of their own best interest in business more than we trust the officials that we elect to govern us.
More than half of our government’s budget is related to social services and much of those resources are distributed through nonprofits rather than directly by the government. Much of the complexity of healthcare arises from the decision that healthcare be a public/private finance partnership. That stance emerged from a reliance on nonprofit organizations that can often trace their origin to charitable activity from the nineteenth century and then through social legislation, tax law, and the evolution of healthcare as a large and profitable business sector between 1945 and 1980. We usually do not think about the fact that nonprofits in general have evolved out of our culture of individualism and our historical inclination to distrust government that goes back to our pioneer heritage and our fear of any form of tyranny or authoritarian regime. Much of the complexity of healthcare is derivative of this culture of distrust. In our current state, public funds cover more than half the expense of healthcare and tax exemptions provide significant supports that are the equivalent of revenue to nonprofits.
In its relationship with for profit businesses and nonprofits, government has great power to effect the direction that the public/private partnership takes because it pays about half of the bill and uses that leverage to impact the fee schedules. It can use its regulatory power to set the business rules and requirements that protect the public. The power of the executive branch to control healthcare is granted through legislation.
It is fine with most people for government to pay for some or all of their care but they want to get it privately through a nonprofit practice or hospital. Having the delivery system be primarily owned by private individuals, publicly traded corporations and nonprofits is a counter leverage to government and theoretically protects the interests of individuals and gives some control and voice to individuals and communities. Government may make rules, set goals and pay bills, but the performance of healthcare is largely controlled by institutions and individuals who value their independence.
The role of nonprofits in healthcare is huge, as outlined in the summary of Lester Salamon’s book America’s Nonprofits: A Primer:
… much of the institutional care is provided through nonprofit organizations…nonprofits still account for over half of the hospital care, 45 percent of the outpatient clinic care, and nearly 30 percent of the nursing home care…government involvement in the delivery of health services has declined sharply in recent years. By contrast, about half of overall health expenditures are financed with public funds. And in the fields of hospital, clinic, and nursing home care, where nonprofit organizations are most involved, the public sector accounts for an even larger share (more than 60 percent of the expenditures).
…the health field provides an excellent example of the “mixed economy” that lies at the heart of the American social welfare system, with nonprofit, for-profit, and governmental institutions all playing vital roles, often in close collaboration with one another. At the same time, as pressures for cost reductions have intensified, the position of the nonprofit providers in this mixed economy has come under particular stress… What this will mean for the quality, cost, and accessibility of services over the long run, however, remains very much open to debate.
Before my first HCHP board meeting “Moogie” asked me to arrive a few minutes early so that we could chat. When I walked in “Moogie” said, “Gene, I asked you to come by early so I could give you permission to ask any question during the meeting that comes to mind. There are no “stupid questions” at a board meeting. Only stupid people do not ask questions when they are not following the conversation. When you ask a question, I can assure you that some other board member will be saying ‘Thank You’ under their breath”.
I learned a lot on the Board of HCHP, which after a merger in 1995 with Pilgrim Health Care, a large IPA, became Harvard Pilgrim Health Care. I began to realize that most board members brought the mindset and orientation of their “day jobs” to their work on the board. When problems arose, solutions were extracted from whatever the business experience was of the most dominant board members.
In the end Harvard Pilgrim went into receivership (long after Moogie’s time as chair was over) because it did not pay attention to issues that were not a part of the business experience of any board member. Harvard Pilgrim hit a financial wall because the board and management forgot the importance of managing the “medical/loss” ratio. In the pursuit of growth and market share it lost sight of sound actuarial principles. The experience convinced me that you cannot sell a dollar’s worth of healthcare for ninety cents and make it up on volume.
I learned more about the complexities of governance when I became Chair of the Harvard Vanguard Board of Trustees. After a long debate we decided to become a 501c3 nonprofit. Along the way I learned that many people seemed to conceptualize a nonprofit as a “real cool way” to avoid taxes and acquire other economic benefits. In particular some of the board members had a very difficult time recognizing that as a nonprofit organization the “owner” was the public, and that as a board we held the organization “in trust” for the benefit of the community. A board must continually remind itself of its accountability to mission. A board should be vigilant in its effort to avoid decisions and behaviors that to the outside observer may seem more consistent with enurement than with mission.
Many nonprofit board members come from a culture of “maximizing shareholder value”. They can forget that the shareholders are the public and not the management or the organization’s well compensated professionals. In the future the worthiness of tax exemption will be a constant concern for boards. The benefits that are available to a nonprofit can be the equivalent of substantial amounts of revenue and multiples of their usual margin.
Looking into the future for all boards and management teams I can predict that we can count on for sure what I facetiously label as the Quadruple Challenge Plus One:
- There will be continuing downward pressure on revenues.
- Increasing regulatory complexity and persistent audits for compliance and the detection of fraud.
- Continuing demands from all payers, the government and patients for efficiency and value. These demands may force some boards to consider mergers and affiliations.
- Operational costs will continue to rise disproportionate to revenue.
- The “plus one” is the evolving professional workforce shortages and growing professional stresses relative to current work flows and the workforce shortages. This negative workforce reality will occur on top of the growing problem of “burnout”. We are moving toward the day when there will be less than one primary care physician for every 10,000 American adults. There will be more elderly patients and more patients with complex medical problems. The boards of nonprofits may discover that this is a bigger issues than the pressure on revenue.
Boards are usually comprised of people who have known success in their business and professional lives and I would predict that many will catch up to the rapid pace of change. Many boards are now responsibly reconsidering the value of their autonomy because they do not have the resources to maintain acceptable levels of quality, safety and service. There are many good reasons for the boards of practices and smaller hospitals to consider affiliations.
Never before has there been more need for the boards of nonprofit organizations to focus on their “duty of care”. Meeting the “Quadruple Challenge Plus One” requires boards to do much more than “hold management accountable”. The members of boards of successful organizations will need to move well beyond the body of knowledge that they bring from their “day jobs”. An advantage of nonprofits is that they are not publicly or privately owned and need not be caught in the trap of a focus on short term financial thinking that can be so antithetical to the support of innovation.
I worry that too often the voluntary boards of nonprofit healthcare are overwhelmed by its complexity and do not realize that healthcare institutions rarely “cut” their way to success. Waste needs to be engineered out of our processes and can not be eliminated just but cutting personnel and programs of care. John Toussaint has succinctly articulated the Lean philosophy of “management by process” in “Catalyst” a publication of the New England Journal of Medicine.
Dr. Toussaint’s article is a “must read” description of Lean philosophy and management in contrast to the status quo thinking that is supported and fostered by most boards of nonprofit healthcare enterprises. I am sure that Dr. Toussaint would agree that even the best management team motivated to implement a Lean philosophy will have a steeper hill to climb without the understanding, support and patience of an engaged board. Some exceptional boards have not only been supportive of Lean, but have been actively involved in the process of Lean transformation.
A little over ten years ago the “quality movement” was adopted and fostered by the most forward looking nonprofit healthcare boards. Now, I believe that enlightened boards will recognize the benefits to the community of the shifting from “volume to value”. Forward looking boards will see that they must work with their management teams to shift their focus to new payment models and new management strategies, and away from their failing efforts to oversee the generation of more revenue to perpetuate their current system of care that is manifestly failing to achieve the mission to which they also have both a “duty of care, a duty of loyalty” and a “duty of obedience”.
In the future successful nonprofit healthcare enterprises will be governed by exceptional boards that will effectively partner with both private partners and government. Nonprofit boards that function well can get closer to their communities and the needs of their communities than can government which begins its work without the trust of many of the governed. Nonprofit healthcare should be able to be a bridge to a better functioning partnership across all providers. In truth, patient centricity and the health of the community are at the core of the reason for the existence of every nonprofit healthcare enterprise, a fact that their boards must not forget.
