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Boards are Valuable!

Posted on February 6, 2017 by James A. Rice, Ph.D., FACHE

What is the economic value of good hospital board work?

After a recent Gallagher Integrated study, it has been concluded that effective Hospital Boards create significant value to the organizational vitality of hospitals and health systems, with both qualitative and economic dimensions.

The board value proposition can be defined in four interrelated spheres of impact:

  1. Enabler of tax-exemption that pays dividends in both operational and capital financing benefits;
  2. Champion for quality outcomes and patient safety benefits;
  3. Facilitator to optimize payer contracting;
  4. Enhancer of CEO performance

Assessing the scope of these positive contributions varies by study, and the degree of optimism of industry analysts, from 2-11% of an institution’s annual operating budget. Here are the numbers:

1. The Board as Enabler of Tax-exemption: The enduring social compact with society and our state and federal governments.

A variety of studies suggest that the tax exempt status of US community hospitals has substantial value. In 1994, the aggregate value of the capital tax exemptions for NFP hospitals in 1994 was $4.6 billion from income taxes and $1.7 billion from property taxes."There are essentially three kinds of tax breaks for NFP hospitals: exemption from capital taxes on income and property; tax exemption in bond financing (which has the added benefit of freeing up NFP hospitals' endowments to earn tax-free income); and deductibility of charitable contributions.2 This benefit had grown to $12.6 billion in 2002 and $24.6 billion in 2011.3 This yields an estimate for 2014 of about $25.2 billion. The benefits are a function of the government allowing such benefits if the hospital assets are governed in trust for the public welfare by independent and wise boards of directors or trustees or governors.

As indicated below, in 2014 community hospitals generated $809 billion in revenues. The tax exemption value in 2014 is estimated to be 25.2 billion/809 billion or a 3.1% benefit.4 Under our current laws and tax structures, if we did not have boards, we are unlikely to be allowed to have the tax benefits.

2. The Board as Quality Champion role empowers accreditation to participate in government and commercial insurance payments.

Community hospitals must meet the Medicare Conditions of Participation in order to be allowed to participate in Medicare and Medicaid.5 Hospitals that are accredited by an agency recognized by the Federal government, such as the Joint Commission on Accreditation of Healthcare Organizations, are “deemed” to meet those conditions. Alternatively, the hospital may elect to be surveyed by the state health department to assess their compliance with the conditions. Most private insurers also require the hospitals they contract with to be accredited.6

“Achieving such recognition adds luster to an institution’s image and may be a point of professional pride for employees. Accreditation may bring distinction in the form of dollars as well as favorable opinion.7

Both the Medicare Conditions of Participation and Joint Commission accreditation standards require that the hospital have a well organized and functioning board. 8

“Accredited hospitals offer higher quality of care to their patients. Accreditation also provides a competitive advantage in the health care industry and strengthens community confidence in the quality and safety of care, treatment, and services. Overall it improves risk management and risk reduction and helps organize and strengthen patient safety efforts and creates a culture of patient safety. Not only does it enhance recruitment and staff education and development, it also assesses all aspects of management and provides education on good practices to improve business operations.”9

Boards are essential components of a community hospital’s capacity to participate in Medicare which represents on average over 26% of a community hospitals revenue.10 Medicare and Medicaid combine to be almost 59% of hospital revenues.10 Effective board work arguably contributes to 10% of the organization’s ability to earn accreditation, which can account for over 50% of the hospitals revenues. This line of reasoning suggests a value from good board work of at least 10*50 or 5% of economic value.11

This does not account for the loss of donations from philanthropy due to reputational risk that could result from bad press over quality or billing problems. It also does not account for a loss of market share from commercial customers due to reputational risk from poor image due to weak quality scores or related bad press.

3.     The Board Oversight minimizes regulatory fines and penalties.

Sloppy board decision making processes, with weak evidence based judgements on contracting for physician services, or improper billing to government and commercial insurance payers can have two large negative impacts on a hospital’s financial vitality: (1) large penalties from the Department of Justice or the Office of Inspector General of the Medicare and Medicaid programs, and (2) loss of tax exemption. With the proliferation of RAC Audits by Recovery Audit Companies, 12 Whistleblowers,13 reputational and financial risk from cyber breaches,14 and OIG audits,15 a hospital’s board oversight has become a very important element in a hospital risk management imperatives. Good board oversight yields a culture of accountability and integrity to a hospital’s compliance with governmental payer requirements that could contribute 10-20% of the regulatory risk for penalties, (or 10% to 20% of an estimated risk of 11.8% of overpayments cited below; i.e. 1.1 to 2.2% value) .

A recent letter to the AHA observes…

“The Department’s 2014 Agency Financial Report estimated improper payments in the Medicare fee-for-service program of $42.7 billion, which represents an 11.8-percent improper payment rate.” 16

“Recent years have seen a significant increase in the number of whistleblowers filing qui tam actions under the FCA. Indeed, whistleblowers filed 700 new FCA cases in fiscal year 2014, and according to a November 2014 Department of Justice press release, “[t]he number of qui tam suits rose from 30 in 1987, to 300 to 400 a year from 2000 to 2009, to more than 700 for each of the last two fiscal years.” 17

4.Enhancer of CEO performance

High-performance hospital boards create the conditions with their decision making and CEO support that enhance the likelihood that the executive team is able to accomplish their strategic plans. How much does a Board’s encouragement for CEO peak performance translate into better financial performance; higher levels of service quality; and important gains in market share? Some industry observers could estimate that the combination of these gains could be worth at least 1-2% of the annual operating budget.

The combined impact of Board Value:

Integrating all of these factors illustrates the substantial role and value that good board work can play for hospitals every year:

Enabler for tax-exempt benefits                         3%

Enabler to participate in government payers     5%

Enabler to moderate regulatory penalties         2%

Enabler ot Executive performance                    1%

Aggregated value of good board work     11%

Applying these positive benefits from good board work can represent millions of dollars to each hospital in the US, and billions of dollars of value to the health system as a whole, as illustrated below.

Current hospital spending in US

In the most recent government reports, the US spent $9,523 (2014) for every person in the country, for total national health expenditures of $3.0 trillion, and total national health expenditures as a percent of Gross Domestic Product: 17.5%. 18 Of these enormous amounts, hospitals account for $978 billion19 or 32% in 2014. These hospital costs have been rising about 3.5% per year. 20

How many hospitals account for these expenditures, and how can their boards impact the cost effectiveness of these investments in the people’s health care?

A recent study by the American Hospital Association identifies that about 5,600 hospitals accounted for $892.7 billion of the national expenditures which paid for about 34.9 million admissions. 21 However, the community hospitals, which are governed by boards as we know them, account for 4,926 hospitals with expenditures of $809 billion. There are 37.7% rural and 62.3% urban hospitals. Community hospitals provide 33 million admissions in 2014.22 On average, therefore, an average community hospital would generate $809 billion/4,926 hospitals or $164.2 million. (Of course, many larger hospitals will have much larger budgets, and small critical access hospital would have much smaller budgets).

To explore the combined impact of good board work on these expenditure patterns, we can make a series of assumptions within certain scenarios.

  • Scenario 1: Boards have a small impact on generating revenues and reducing costs (only 2% on average). This benefit would be: $162* 2% or $3.2 million for an average hospital or $809*2% or $16.2 billion for all hospitals
  • Scenario 2: Boards have a modest impact (a 5% impact). This level of benefit would be $8.1 million per hospital, or $40 billion respectively.
  • Scenario 3: Boards have a large impact on generating revenues and reducing costs (a 11% impact). This benefit would be $162*11% or $17.8 million on average for an average hospital or $88.9 billion in aggregate.

This analysis suggest a contribution from good board work of $16.2 to $88 billion annually to our nation’s health system, or $3.2 to $17.8 million for an average hospital.

How do you value the positive impact of your Board’s time and talents?

1) The Tax Benefits of Not-For-Profit Hospitals (NBER Working Paper No. 6435) co-authors William Gentry and John Penrod, in The National Bureau of Economic Research:

2) Ibid.

7) See: National Health Policy Forum, Hospital Oversight in Medicare: Accreditation and Deeming Authority Lisa Sprague

16) Department of Health and Human Services, January 15, 2015, see:

20) Ibid.

22) Ibid 

Seven Executive Actions to Develop Younger Board Members

Posted on February 6, 2017 by James A. Rice, Ph.D., FACHE

Work with our colleague Larry Walker enables hospital and health system executives to access new resources for great board work, the Gallagher GovernWell Resource Suite.* One of the many resources in this suite describes a series of considerations for C-Suite leaders to become more active and successful attracting younger community leaders into the work of their governing boards. Wise CEOs will explore the following seven actions with board leadership to establish and follow a roadmap to stronger governance by lowering the average age of the board.

Action 1: Commit to Recruit Younger Board Members.

The keys to a successful and sustainable organization are rooted in a mission-driven focus, a sense of vitality and the ability to look ahead and plan for continued success into the future. Who better to contribute energy, new perspectives and a vested interest in the future than the next generation of leaders? Yet nearly 60 percent of not-for-profit board members are over the age of 50; add in board members over age 40 and the percentage jumps to 86 percent.1 If your board is missing the diversity of age, you may also be missing the commitment, passion for service, and fresh thinking of your community’s next generation of leaders. In addition to the benefits younger leaders can offer to your board, you may also be missing an opportunity to offer your community a valuable leadership development experience for these future leaders.

Four generations are now represented in the work force, but not necessarily around the board table. If nearly sixty percent of not-for-profit board members are over age 50, and 86 percent are over age 40, there’s a good chance that generations X and Y (those born between 1965 and 2000) are probably not represented on your hospital’s board. And it’s not because they aren’t interested. Talented and educated young leaders are committed to not-for-profit work because of “its promise of meaningful work leading to social change.” In a national study in which two-thirds of respondents were under the age of 40, nearly half the respondents indicated that their ideal next job would be in the nonprofit sector.2 Instead, the skepticism of current board members often keeps the next generation from serving as trustees.3

Action 2: Remove Obstacles to Board Service.

The Heckscher Foundation for Children recently released a board development grant request for proposals “to address the need for younger (next generation) board members for its grantees and other non-profits serving New York youth.” In their release, the Foundation observed that boards are reluctant to bring on next generation leaders because:4

  • Next generation leaders lack financial resources, professional status and the connections the board would like from its members;
  • Next generation leaders require significant training;
  • Attracting and retaining next generation trustees is difficult when most board members are older.
  • NextGen trustees will complain about disorganized agenda, a lack of digital tools to inform and support board decision-making, such as web-based portals and performance monitoring dashboards.

Echoing the same reasons listed above, board members from other organizations often report an admitted bias from C-suite executives for board candidates from the Baby Boomer generation when seeking to fill vacancies on their boards.3 Yet the next generation is committed to contributing value to their community by giving their time, money, skills, and abilities. Despite skepticism and reluctance, ensuring a vital board now and into the future requires making a place for the next generation at the board table today, and acknowledging that young leaders are also donors, volunteers and active members of the hospital’s community with a desire to contribute. 

Action 3: Map Board Member Passions to Health System Priorities

C-Suite leaders can ignite board strategic thinking and strategy development by unleashing the interests and engagement of old and young board memebrs.

Based on interviews with 50 not-for-profit executives, BoardSource reported four primary benefits derived from engaging Generations X and Y on not-for-profit boards.3 The first is the passion that individuals from Generations X and Y have for the mission of not-for-profit organizations. Second, younger board members want to connect their passion with results. In his book Y-Size Your Business, Jason Dorsey also addresses the driving need Generation Y individuals have for understanding objectives and achieving tangible outcomes.5 Third, Gen X and Y want to contribute in meaningful ways. They are willing to invest their time, energy, and knowledge of technology, the Web and social media to raise the organization’s visibility and build new channels and networks of community support. Finally, younger trustees will have new ideas, perspectives and approaches to offer. Not afraid to ask questions, their new ways of thinking should be embraced as an opportunity to add vibrancy and depth to board deliberations. 

The health care landscape is one of rapid change and evolution. Hospital boards need a diverse mix of trustees who can bring together new ideas, concepts, and thinking that will help to propel their organizations forward.

Action 4: Develop a Board Continuity Strategy

Securing and retaining trustees of any age should begin with an investment in succession planning rather than trustee recruitment or appointment. By assessing the board’s leadership strengths, weaknesses and using the hospital’s strategic plan to define critical leadership requirements, the board can identify the skills, knowledge and expertise it needs from new trustees. Beyond that, young trustee candidates should demonstrate a readiness to be active board participants and have the maturity and sense of accountability for the responsibilities they will assume as a trustee. They should possess enough confidence to speak up and engage collaboratively and constructively with other trustees in board discussions. The ability to analyze issues, formulate an opinion and clearly articulate a position without defensiveness are characteristics that all trustees, young and old, should possess.

Action 5: Recruit From New Sources.

The most common means used by boards to recruit new board members is to simply ask for recommendations from current board members.The result is a gravitation to the familiar, recruiting friends and acquaintances that mirror one’s self instead of drawing in younger individuals with leadership talent. But investing now in the effort it may take to recruit young talent to the board will define the hospital’s leadership succession and success for years to come.

Hospital boards can start by looking at organizations that employ and/or interact with the talent pool of young leaders. Ask the administrators of agencies and organizations that serve younger populations to recommend responsible, confident and talented young individuals. Organizations to approach might include the Chambers of Commerce for Asian and African Americans, leaders of local college faculty and alumni associations, regional youth advisory councils, Rotary, AmeriCorps, faith-based organizations, and young professional associations.6, 3

Action 6: Invest in a “Governance Academy” for Ongoing Education

Consider funding a local community governance academy that shares the costs of developing needed board talent for local non-profits, school boards, small businesses, and economic development organizations. Case studies, educational materials and inter-industry speakers can enrich board member development and inter-organizational collaboration.

Investing in governance succession planning is a critical component to creating a pipeline of well-prepared young leaders. Consider sponsoring or co-sponsoring a board training program for your community to ensure that not only the hospital’s board, but also the community’s other not-for-profit organizations have a growing pool of trained board candidates ready for service. Share with participants the benefits of board service, educate them about the responsibilities of board members and highlight the need for their leadership skills.

Your board can also take orientation to the next level by linking experienced board members as mentors with new trustees. As a mentor, an experienced board member could offer a new trustee support, background information and insights, recap critical issues and identify subtle nuances. Mentors that successfully engage new trustees can also help prevent potential feelings of isolation that new and particularly younger board members might experience.

 Nurture and evaluate the “board readiness” of emerging young leaders by inviting them to serve on task forces or committees, and continue building their board readiness with a strong orientation program. Many new trustees, not just the young, arrive on the board with little or no prior board or health care expertise. A strong orientation program and warm welcome is critical to their successful service on the board.

Action 7: Commit to Continuous Improvement

Generational differences, perspectives, and experience all have the potential to create challenges for effective board operations. Rejuvenate your ongoing work to conduct an annual board self-assessment process that leads to at least one new action for each committee, for each board member, and for the board as a whole.

The first step to avoiding or preventing problems is to ensure that diversifying the age of board members is a sincere and not token effort. Early identification of opportunities for new trustees’ engagement and participation in the work of the board is important. An attentive board chair can create opportunities for young trustees to voice their opinions without putting them “on the spot” by asking all board members to express their thoughts and viewpoints on key issues in “round robin” discussions. 

No one, young or tenured, should discount the value of fresh perspectives and new ideas that younger trustees can offer. For their part, younger trustees must also give credence to the concerns and experience of more seasoned trustees. All trustees will need to recognize, respect, and account for the fact that each age cohort may have a different communication style and varying comfort levels with the use of technology. As with any endeavor, positive communication, attentive listening and mutual respect among trustees are foundational to success. 


Is Your Board Age Diverse?

With only 14 percent of not-for-profit board members under the age of forty, hospitals may be missing young leaders’ passion for service, their energy and ambition, and their fresh ideas and perspectives of the future. If the board is not engaging these young leaders as trustees, hospitals are also missing the chance to contribute to the growth and experience of the next generation of leaders. If there are lingering doubts about the next generation’s leadership ability, experience and resources, consider CNNMoney’s 2011 list of “Fortune’s 40 Under 40, Business’s Hottest Rising Stars.”7 The nation’s top businesses are benefiting from the leadership of these young C-suite executives. And so is health care, as demonstrated by Modern Healthcare’s annual “Up & Comers” recognition of health care management executives under age 40. Businesses both inside and outside of health care are recognizing the contribution of young executives and leaders to their success, but boards continue to lag in this area. With an eye on the future, consider these questions:

  • How many generations are represented on the board? Are there three or even four generations?
  • Are any of the current trustees from Generations X or Y?
  • Does the board have a trustee succession plan? Does it include actions for building a pipeline of young trustee talent?
  • What’s keeping the board from seeking out and including younger members of the community as trustees? Are these barriers valid? What can the board do to overcome them and invest in the next generation of leaders?


Defining the Generations

World War II

Born 1922—1945

Baby Boomers

Born 1946—1964

Generation X

Born 1965—1980

Generation Y

Born 1981– 2000


Sources and More Information

1.     BoardSource Nonprofit Governance Index 2010. 

2.     Cornelius, Marla; Corvington, Patrick; Ruesga, Albert. Ready to Lead? Next Generation Leaders Speak Out. A National Study Produced in Partnership by CompassPoint Nonprofit Services, The Annie E. Casey Foundation, the Meyer Foundation and 2008. 

3.     Terry, Alexis S. Next Generation and Governance, Report on Findings. BoardSource.  2009. 

4.     The Heckscher Foundation Board Development Grant Program Request for Proposals.  Accessed May 15, 2012.

5.     Dorsey, Jason Ryan. Y-Size Your Business: How Gen Y Employees Can Save You Money and Grow Your Business. Hoboken, New Jersey: Wiley, 2010. 

6.     Leadership Lessons: Mining the Next Generation of Board Leaders. Board Member.  November/December 2009. 

7.     Fortune’s 40 Under 40, Business’s Hottest Rising Stars. CNNMoney. 2011. 

8.     Up & Comers. Modern Healthcare. Accessed June 1, 2012.

9.     Whitehome, Samantha. Make Room for Gen Y. Associations Now. ASAE, The Center for Association Leadership. Accessed May 15, 2012.

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