Identify the various committees of a HCO (Health Care Organization) board and evaluate the function of each committee. Please first read Physicians on Hospital Boards: Time for New Ap

Corporate Responsibility and Health Care Quality: A Resource for Health Care Boards of Directors

United States Department of Health and Human Services Office of Inspector General

American Health Lawyers Association

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Corporate Responsibility and Health Care Quality: A Resource for Health Care Boards of Directors

Arianne N. Callender Douglas A. Hastings Michael C. Hemsley Lewis Morris Michael W. Peregrine

I. Introduction This educational resource is the third in a series of co-sponsored documents by the Office of Inspector General (OIG) of the U.S. Department of Health and Human Services and the American Health Lawyers Association (AHLA), the leading health law educational organization.1 It seeks to assist direc- tors of health care organizations in carrying out their important oversight responsibilities in the current challeng- ing health care environment. Improving the knowledge base and effectiveness of those serving on health care organi- zation boards will help to achieve the important goal of continuously improv- ing the U.S. health care system.

The prior publications in this series addressed the unique fiduciary respon- sibilities of directors of health care organizations in the corporate compli- ance context. With a new era of focus on quality and patient safety rapidly emerging, oversight of quality also is

becoming more clearly recognized as a core fiduciary responsibility of health care organization directors. Health care organization boards have distinct responsibilities in this area because promoting quality of care and preserv- ing patient safety are at the core of the health care industry and the reputation of each health care organization. The heightened attention being given to health care quality measurement and reporting obligations also increasingly impacts the responsibilities of corpo- rate directors. Indeed, quality is also emerging as an enforcement priority for health care regulators.

The fiduciary duties of directors reflect the expectations of corporate stake- holders regarding oversight of corpo- rate affairs. The basic fiduciary duty of care principle, which requires a direc- tor to act in good faith with the care an ordinarily prudent person would exercise under similar circumstances, is being tested in the current corporate

climate. Embedded within the duty of care is the concept of reasonable inquiry. In other words, directors are expected to make inquiries to manage- ment to obtain the information neces- sary to satisfy their duty of care.

This educational resource is designed to help health care organization direc- tors ask knowledgeable and appropriate questions related to health care quality requirements, measurement tools, and reporting requirements. The ques- tions raised in this document are not intended to set forth any specific stan- dard of care, nor to foreclose arguments for a change in judicial interpretation of the law or resolution of any conflicts in interpretation among various courts. Rather, this resource will help corporate directors establish, and affirmatively demonstrate, that they have followed a reasonable quality oversight process.

Of course, the circumstances of each organization differ and application of the duty of care and consequent

1 The other two co-sponsored documents in the series are Corporate Responsibility and Corporate Compliance: A Resource for Health Care Boards of Directors, The Office of Inspector General of the U.S. Department of Health and Human Services and The American Health Lawyers Association, 2003; and An Integrated Approach to Corporate Compliance: A Resource for Health Care Organization Boards of Directors, The Office of Inspector General of the U.S. Department of Health and Human Services and The American Health Lawyers Association, 2004.

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reasonable inquiry by boards will need to be tailored to each specific set of facts and circumstances. How- ever, compliance with standards and regulations applicable to the quality of services delivered by health care organizations is essential for the lawful behavior and corporate success of such organizations. While these evolving requirements can be complex, effective compliance in the quality arena is an asset for both the organization and the health care delivery system. It is hoped that this educational resource is useful to health care organization directors in exercising their oversight responsibili- ties and supports their ongoing efforts to promote effective corporate compli- ance as it relates to health care quality.

II. Board Fiduciary Duty and Quality in the Health Care Setting

Governing boards of health care organizations increasingly are called to respond to important new devel- opments—clinical, operational and regulatory—associated with quality of care. Important new policy issues are arising with respect to how quality of care affects matters of reimbursement and payment, efficiency, cost controls, collaboration between organizational providers and individual and group practitioners. These new issues are so critical to the operation of health care organizations that they require attention and oversight, as a matter of fiduciary obligation, by the governing board.

This oversight obligation is based upon the application of the fiduciary duty of care board members owe the organiza- tion and, for non-profit organizations, the duty of obedience to charitable mis- sion. It is additive to the traditional duty of board members in the hospital setting

to be responsible for granting, restricting and revoking privileges of membership in the organized medical staff.

Duty of Care The traditional and well-recognized duty of care refers to the obligation of corporate directors to exercise the proper amount of care in their deci- sion-making process. State corpora- tion laws, as well as the common law, typically interpret the duty of care in an almost identical manner, whether the organization is non-profit or for-profit.

In most jurisdictions, the duty of care requires directors to act (1) in “good faith,” (2) with the care an ordinarily prudent person would exercise in like circumstances, and (3) in a manner that they reasonably believe to be in the best interests of the corporation.2 In analyz- ing compliance with the duty of care, courts typically address each of these elements individually. In addition, in recent years, the duty of care has taken on a richer meaning, requiring direc- tors to actively inquire into aspects of corporate operations where appropriate – the “reasonable inquiry” standard.

Thus, the “good faith” analysis nor- mally focuses upon whether the matter or transaction at hand involves any improper financial benefit to an indi- vidual and/or whether any intent exists to take advantage of the corporation. The “prudent person” analysis focuses upon whether directors conducted the appropriate level of due diligence to allow them to render an informed decision. In other words, directors are expected to be aware of what is going on around them in the corporate busi- ness and must in appropriate circum- stances make such reasonable inquiry as would an ordinarily prudent person under similar circumstances. The final criterion focuses on whether directors act in a manner that they reasonably

believe to be in the best interests of the corporation. In this regard, courts typically evaluate the board member’s state of mind with respect to the issues at hand.

When evaluating the fiduciary obliga- tions of board members, it is important to recognize that “perfection” is not the required standard of care. Directors are not required to know everything about a topic they are asked to consider. They may, where justified, rely on the advice of executive leadership and outside advisors.

In addition, many courts apply the “business judgment rule” to determine whether a director’s duty of care has been met with respect to corporate de- cisions. The rule provides, in essence, that a director will not be held liable for a decision made in good faith, where the director is disinterested, reasonably informed under the circumstances, and rationally believes the decision to be in the best interests of the corporation. In other words, courts will not “second guess” the board members’ decision when these criteria are met.

Director obligations with respect to quality of care may arise in two distinct contexts:

• The Decision-Making Function: The application of duty of care principles as to a specific decision or a particu- lar board action, and

• The Oversight Function: The applica- tion of duty of care principles with respect to the general activity of the board in overseeing the operations of the corporation (i.e., acting in good faith to assure that a reasonable infor- mation and reporting system exists).3

Board members’ obligations with respect to supervising medical staff credentialing decisions arise within the context of the decision-making

2 American Bar Association, Section of Business Law, Revised Model Nonprofit Corporation Act, Section 8.30 (1987).

3 In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).

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function. These are discrete decisions periodically made by the board and relate to specific recommendations and a particular process.

The emerging quality of care issues discussed in this resource arise in the context of the oversight function—the obligation of the director to “keep a finger on the pulse” of the activities of the organization.

The basic governance obligation to guide and support executive leadership in the maintenance of quality of care and patient safety is an ongoing task. Board members are increasingly expect- ed to assess organizational performance on emerging quality of care concepts and arrangements as they implicate is- sues of patient safety, appropriate levels of care, cost reduction, reimbursement, and collaboration among providers and practitioners. These are all components of the oversight function.

This duty of care with respect to qual- ity of care also is implicated by the related duty to oversee the compli- ance program.4 Many new financial relationships address quality of care issues, including pay-for-performance programs, gainsharing, and outcomes management arrangements, among others. State and federal law closely regulate many of these arrangements. Given that directors have an obligation to assure that the organization has an “effective” compliance program in place to detect and deter legal violations, they may fairly be regarded as having a concomitant duty to make reasonable inquiry regarding the emerging legal and compliance issues associated with quality of care initiatives, and to direct executive leadership to address those issues. The board may direct executive

staff to provide periodic briefings to the board with respect to quality of care developments so that the directors may establish a proper “tone at the top” in terms of related legal compliance. In other words, it is the role of the execu- tive staff to brief the board concerning new developments in the law and re- lated legal implications, and it should be the ongoing obligation of the board to reasonably inquire whether the organi- zation’s compliance program and other legal control mechanisms are in place to monitor the associated legal risks.

Duty of Obedience to Corporate Purpose and Mission Oversight obligations with respect to quality of care initiatives also arise—for non-profit boards—in the context of what is generally referred to as the fiduciary duty of obedience to the cor- porate purpose and mission5 of health care organizations. Non-profit corpora- tions are formed to achieve a specific goal or objective (e.g., the promotion of health), as recognized under state non-profit corporation laws. This is in contrast to the typical business corpo- ration, which often is formed to pursue a general corporate purpose. It is often said of non-profits that “the means and the mission are inseparable.”6

The fundamental nature of the duty of obedience to corporate purpose is that the non-profit director is charged with the obligation to further the purposes of the organization as set forth in its articles of incorporation or bylaws.7 For example, the articles of incorporation of a non-profit health care provider might describe its principal purpose as “the promotion of health through the provision of inpatient and outpatient hospital and health care services to

residents in the community.”