United States: Corporate Law & Governance Update - July 2016

The Board and "MACRA"

It is exceedingly important for the health system board—and its key committees—to be briefed on the strategic implications of CMS' recently released proposal to implement the physician payment reforms required under "MACRA." Given the legal and compliance components of MACRA, the system general counsel is well-positioned to provide this briefing.

As most general counsel know, MACRA will impact how CMS pays physicians for services provided to Medicare beneficiaries by substantially linking such payments to performance metrics and incentivizing physicians to reduce hospital utilization and to participate in alternative payment models that bear substantial financial risk. MACRA will create powerful incentives that will accelerate the reshaping of the physician services market.

MACRA will likely encourage physicians to consolidate into larger groups, enter into arrangements with physician specialty management companies, or, most likely, become employed by or otherwise contractually aligned with health systems in order to have access to the IT and other care management infrastructure that they will need to achieve the MACRA metrics. Accordingly, MACRA presents a significant opportunity for health systems to create greater clinical and financial alignment with their physicians (and to manage the hospital utilization incentives described above) —as well as a greater risk of losing this opportunity to their competitors. MACRA will create futher impetus for the creation of hospital and physician systems that are fully integrated, clinically, operationally and financially.

The need for board awareness lies in the profound change these reforms are expected to have on health systems, their physician relationships, strategic planning and legal compliance. MACRA will affect the roles and responsibilites of key board committees such as Strategic Planning; Audit & Compliance; Physician Compensation and Finance, to say the least. The general counsel can be a highly effective advisor to governance in all MACRA-related briefings.

Audit/Compliance Committee Briefing

Several important developments in June merit the attention of the system's Audit & Finance Committee. These include new DOJ rules that would nearly double penalties under the False Claim Act, and the latest public comments on application of "Yates Memorandum" principles from senior DOJ officials.

DOJ's interim final rules (issued on June 29) substantially increase both the minimum and maximum per claim penalties. They are set to go into effect on August 1, 2016 and will apply to claims after November 2, 2015. McDermott's "white collar" attorneys expect that, among other factors, the new rules will likely not result in increases in the actual amounts paid by entities settling cases, because DOJ typically settles for a multiplier on single damages only (2-3 times absent a financial inability to pay), and foregoes penalties altogether.

However—and this is key for the Audit & Compliance Committee—the expectation is that the new rules will increase the pressure on entities, whether for-profit and not-for-profit, to settle cases because of the enormous potential exposure. Bond and other financing could be jeopardized, which may affect settlement decisions in marginal cases. Thus, the "business risk" implications of FCA penalties become potentially far more significant, which is a serious board/committee oversight consideration.

Committee members may also benefit from reading the June 9 speech of Acting Associate Attorney General Bill Baer. In his comments, Mr. Baer discussed the rationale for the government's commitment to individual accountability, and the core elements of corporate cooperation, in the context of a larger discussion on FCA enforcement.

Level of Director Engagement

The June 8 comments of United Airlines CEO Oscar Munoz draw meaningful attention to the critical fiduciary responsibility of "engagement" and the risks that can arise when a governing board becomes isolated from corporate operations. 

While not capable of precise measurement, "engagement" generally refers to the broad level of commitment of the director to his/her fiduciary duties given the circumstances at hand. It extends beyond the mere calculation of hours spent by board members in the performance of governance responsibilities, to subjective factors such as attentiveness, diligence, exercise of constructive skepticism, awareness of operational results, sensitivity to trends and developments, and commitment to service (i.e., no over-boarding).

In his comments, Mr. Munoz was critical of the United board's level of engagement. Indeed, he attributed much of the operational decline of the airline in recent years to the board's isolation—reflected in part by the infrequency of its meeting schedule. This, according to Mr. Munoz, resulted in lack of operational insight and the board's inability to respond more quickly to problems, such as the company's challenging reservations system.

When scrutinizing board conduct, regulators and third-party interest groups increasingly focus on evidence reflecting the level of board engagement generally, and on particular board agenda items in particular. As health systems agendas become increasingly more complex, important third parties will likely expect a level of engagement by board members that is commensurate with that complexity. As Mr. Munoz suggested, infrequent board meetings may manifest to some a lack of necessary engagement.

Tax Exemption Enforcement

The long term future of the Exempt Organizations (EO) Division of the Internal Revenue Service in terms of regulating the tax-exempt organizations sector is the subject of a June 8 report of the IRS' "Advisory Committee on Tax Exempt and Government Entities" (ACT). As such, it is worthy of notice by the Board's Mission, and Audit & Compliance committees.

ACT is an organized public forum for discussion of relevant exempt organizations; tax-exempt bonds and other tax issues. It enables the IRS to receive regular input on the development and implementation of IRS policy concerning the EO community. ACT members are selected by the IRS Commissioner and appointed by the Department of the Treasury.

The ACT report mirrors the perspective of many tax-exempt organizations that the EO enforcement and technical educations functions of the IRS have significantly declined over the past several years. As a result, the ACT report expresses concern that the IRS may be unable to regulate the EO community "consistently and effectively." Accordingly, the ACT makes a series of recommendations intended to assist the IRS in reclaiming its role "as a regulator of tax-exempt organizations" instead of what ACT described as "its nearly exclusive focus on tax administration."

The ACT report can serve as a reminder to health system boards and their legal risk evaluation function that compliance with exempt organization tax laws remains important, and that there are credible public voices calling for the IRS to return to more active oversight of the exempt organization sector.

Conflicts of Interest

The controversy surrounding the board of the Hershey Trust continues to offer a duty of loyalty tutorial of sorts for the health system board. This is particularly the case with respect to the regulatory and reputational risks that can arise from the perception (not just the reality) of conflict of interest.

As mentioned in our June Newsletter, the current controversy arose earlier this year when the Pennsylvania Attorney General expressed concern that the Hershey board had violated certain provisions of a 2013 conflicts of interest settlement. Hershey is one of the largest U.S. charitable entities, with approximately $12 billion in assets. The June issue arose from a series of published reports that in 2015, the then-Chairman of the board worked through the Trust's CEO to obtain a summer internship for the Chairman's son with one of the Trust's money management funds.

According to the media reports, it was the effort to obtain the internship (in the context of the conflicts guidelines set forth in the 2013 settlement) that prompted the Attorney General to seek the removal of three trustees (including the Chairman) and to direct the Trustees to personally reimburse the trust for the reported $650,000 cost of an internal review of the internship issue conducted by outside counsel.

[The media reports provide that while the Chairman did ultimately disclose the internship (through an email to the Vice Chairman), that disclosure occurred well after the internship was arranged, and did not make reference to the role of the Trust's CEO in helping to arrange for the internship.] While the outside counsel review concluded that the Chairman's conduct complied with the Trust's governance policies, the Trust and its board were subsequently subjected to substantial public criticism for the arrangement.

This controversy—which has yet to be brought to conclusion—helps to underscore the need for board members to try to avoid even the appearance of conflict of interest in their corporation-related relationships and arrangements. In many instances, the "perception" of conflict can be as damaging to a corporation's reputation as can be an actual conflict; and, when a corporation is already under regulatory scrutiny, "perception" can serve to "lengthen the ethical shadow" over the organization and its board. 

Strategic Planning Committee & Antitrust

The Department of Justice's recent antitrust initiatives in health care—outside of the "M&A" arena—continue to provide noteworthy "fodder" for Strategic Planning Committee attention. The newest initiative was its June 9 antitrust suit against Carolinas Healthcare System, alleging that CHS imposed "steering restrictions" into its commercial payor contracts, in violation of Section 1 of the Sherman Act.

The complaint alleges that the CHS steering restrictions in its payor contracts are anticompetitive, because they (1) prevent payors from offering consumers tiered-network and narrow-network health plan options that lower costs, while preserving patients' access to "comparable or higher quality alternative healthcare providers" to CHS, and (2) weaken the competitiveness of CHS's rival hospitals. As to the latter, DOJ alleges that because inclusion in a top tier or narrow network can lead to higher patient volume, smaller hospitals, to qualify for selection into these types of plans, are incentivized to improve quality and efficiency. According to the complaint, as a result of CHS's ability to block payors from offering such plans, those incentives – and therefore the procompetitive effects they engender – do not materialize.

This complaint is the latest DOJ antitrust effort focusing on payor-provider contracting. [In the last half-dozen years, DOJ also issued a consent decree resolving charges that alleged monopolist United Regional Health Care System imposed anti-competitive terms in payor contracts that excluded rivals from payor networks, and sued Blue Cross Blue Shield of Michigan over most favored nations clauses in its contracts with hospitals.]

Health systems (and payors) with sizable market shares need to keep DOJ's enforcement history regarding provider-payor contracts in mind when considering negotiations over exclusivity or other restrictive provisions. This is noteworthy for board committees (e,g., Strategic Planning and Compliance) with oversight for system payor contracting practices. Rigorous internal antitrust compliance should extend beyond the "dealmakers" contemplating mergers and strategic transactions, to include Payor Contracting, HR, Finance, Marketing, and all departments where potentially anticompetitive conduct – such as price (or wage) fixing, conspiracies not to compete or anticompetitive exclusionary practices – could materialize. 

Competency-Based Governance

Efforts to increase the level of industry-specific competency at the health system board and committee levels receive a "boost" from the results of a new survey conducted by a global consulting firm. The survey results demonstrate the significant value attributed to aligning board member skills with long term corporate strategy.

The survey, "Building a Great Board" (from KPMG), addresses a variety of issues associated with board composition and refinement. While the benefit of competency-based boards is stressed, other key trends cited by the survey include (a) barriers that exist to adding directors with specific expertise needed by the company; (b) the benefit arising from identifying the board's future talent needs; and (c) the recognition that a board succession plan may be a worthwhile governance mechanism. The survey also notes that an active board approach to refining board composition is supported by individual director evaluations and "director refreshment" protocols.

The general counsel is well-suited to present these issues to the board (and, in particular, to its governance committee). "Competency-based governance" is certainly relevant to assuring the long-term sustainability of the corporation. From a legal perspective, however, increasing the number of board members with specific, identified areas of expertise and perspective are particularly necessary to assuring effective board oversight of operations and senior management. 

General Counsel Ethical Challenges

Two developments involving the roles and responsibilities of in-house counsel are useful reminders to the board on the ethical limitations imposed on such counsel. One such development involved the challenges arising from internecine controversy, while the other involved the suspension of counsel for allegedly critical remarks about board conduct.

For example, an ongoing controversy involving control of a media company highlights how in-house counsel can be buffeted  by conflict between various different corporate constituents—shareholders, management and the governing board. This is not an improbable circumstance in the nonprofit health care sector, where the potential for controversy between similar constituents (substituting "sponsors" or "members" for shareholders) always exists. In such situations, the in-house counsel is guided by Rule of Professional Conduct 1.13(a)—"the organization as the client," and provide advice consistent with the best interest of the company.

The other controversy involved the decision of the Hershey Trust (there they go again) to place its deputy general counsel/compliance officer on administrative leave for authoring internal letters and memoranda that reportedly expressed concerns about board mysfunction and the expense and distraction caused by responding to internal investigations. This controversy serves as a reminder to both the board and the general counsel of the "reporting up" (and sometimes "reporting out") obligations arising under Rule of Professional Conduct 1.13(b). [Note: the exact wording of 1.13(b) may well differ from state to state.]

CLICK HERE TO ACCESS THE LEGAL ETHICS PRESENTATION OF MICHAEL PEREGRINE AND ANNE MURPHY AT AHLA'S IN-HOUSE COUNSEL PROGRAM ON JUNE 29, 2016.

Director Protest Resignations

The recent resignations by nearly half of the board of a prominent energy company provide a reminder of the circumstances and impact of "protest" resignations by board members. In this case, the directors resigned following their failure to remove the company's CEO, whom they felt was not well-suited to lead the company's new business strategy.

"Protest resignations" are not wholly uncommon in the nonprofit world and, particularly, in the health care sector. Resignation is a right usually provided in state corporation law and in the bylaws. Catalysts for "protest resignations" typically include disagreements with the board or senior leadership team; perceived change in organizational mission or strategy; concerns with corporate risk profile; discomfort with board composition; and similar matters.

Recent court decisions suggest, however, that there may be particular risks associated with a director's choice to resign  during a period of corporate controversy or distress. The act of resignation itself does not carry with it some inherent breach of duty risk. Yet, a director may not be able to avoid liability exposure for actions arising from board service merely by resigning, no matter what prompted the resignation. For that reason, media coverage of "protest resignations" can serve as a useful opportunity for corporate counsel to discuss with directors the broader topic of boardroom "exit strategies."

Charitable Mission Oversight

The board's "mission oversight" is of growing importance, with increasing legislative, regulatory and media concerns as to whether the operation of large, financially complex health care systems can be accommodated in the nonprofit, tax-exempt entity model. For that reason, a June 9 letter from Sen. Charles Grassley to the IRS Commissioner is relevant.

Sen. Grassley has historically retained close interest in the debt collection practices of tax-exempt health systems and their compliance with the provisions of IRC Sec. 501(r). This interest has most recently been manifested in his scrutiny of Mosaic Life Care, a Missouri nonprofit hospital system that ultimately agreed to restructure what Sen. Grassley described as its "aggressive collection practices" and to forgive almost $17 million in patient debt.

What is particularly noteworthy of his letter to Commissioner Koskinen is perspective that continued, close congressional oversight of the tax-exempt hospital sector is necessary to assure that low income patients are treated fairly. Accordingly, he calls for greater IRS investigation of problematic hospital debt collection abuses and enforcement of Section 501(r) and its provisions. He also asks for an update on efforts of the IRS and HHS to collect information on how hospitals are complying with Section 501(r).

Continued board oversight is necessary to help demonstrate that both the structure of the health system and the totality of its operations support a nonprofit, charitable purpose. Because, in certain circumstances, and to certain constituencies, the operation of, and services provided by, those systems may appear imperceptible from their tax-paying for-profit counterparts.

The board may want to take two related steps: First, confirm that the general counsel has the authority and resources necessary to monitor Sec. 501(r) compliance. Second, more formally incorporate into both the strategic planning effort, and the board decision-making process, consideration of how specific strategic initiatives and particular board decisions are consistent with the charitable mission of the health system.

Corporate Law & Governance Update - July 2016

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
McDermott Will & Emery
McDermott Will & Emery
McDermott Will & Emery
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
McDermott Will & Emery
McDermott Will & Emery
McDermott Will & Emery
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions