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:
- Enabler of tax-exemption that pays dividends in both operational and capital financing benefits;
- Champion for quality outcomes and patient safety benefits;
- Facilitator to optimize payer contracting;
- 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."1 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?