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Trending in Healthcare - March 2017

 

Stand Firm in Environment of Regulatory Change

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The not-for-profit sector has experienced significant change in recent years with the passage and implementation of the Patient Protection and Affordable Care Act (ACA) in 2010 and funding cuts at both the federal and state levels, to name a few. The business model has also changed with the availability of document management systems and enhanced analytical tools to assist management in measuring performance. In this environment of rapid change, the core fiduciary responsibilities of members of the board of directors have essentially remained the same. In this article we discuss the climate for regulatory change in Washington under a new administration, the background of certain regulatory reforms recently enacted, and the implications for non-profit board members.

The Environment for Regulatory Reform

As the Trump Administration starts to develop policy changes for consideration by Congress, it is clear that regulatory reform is high on the agenda. The ACA has been targeted for change since Day 1 of the Administration. On March 6, 2017, House Republicans announced their plan to repeal the Affordable Care Act and replace it with a system of tax credits that will encourage people to purchase insurance on the open market. The Republican bill would also reduce the expansion of Medicaid and reduce federal payments for many new participants.

There has also been significant discussion about dismantling the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) which was implemented in 2010 in order to decrease various risks in the United States financial system after the financial crisis of 2008. The Dodd-Frank Act was a response to fraudulent mortgage activity and the collapse or near collapse of several of the country's largest financial institutions.

President Trump also recently ordered the Department of Labor to review a policy measure of the Obama Administration, the "fiduciary rule," that is scheduled to be implemented in April 2017 to protect retirement savers from high commissions on the sale of retirement products and conflicted advice from investment advisors. The Department of Labor responded by sending a letter to the Office of Management and Budget on February 9, 2017, in which it proposed a delay in implementation of the fiduciary rule, which is expected to be 180 days.

Regulatory reform usually follows a catastrophic financial event. The corporate scandals of the late 1990s, such as Enron, led to the creation of the Sarbanes-Oxley Act of 2002 (the "Act"). Named after its lead sponsors, the Act was passed by Congress to protect investors from the possibility of fraudulent accounting activities by corporations. It also provided reforms to improve financial disclosures by corporations. Although primarily intended to address failings at large banks and publicly traded companies, these landmark pieces of legislation have had a trickle-down effect on not-for-profit-organizations, such as hospitals and healthcare facilities and their related employee benefit plans.

Fiduciary Responsibilities of Non-Profit Board Members

Since passage of Sarbanes-Oxley in 2002, there has been an increased focus on the fiduciary responsibilities of board members, particularly in the not-for-profit sector. Critics at the time often cited boards of directors as nothing more than rubber stamps for management. Admission as a board member was often based on friendships or nepotism rather than credentials. Sarbanes-Oxley set a new standard in the marketplace.

The characteristics of boards have changed since the passage of Sarbanes-Oxley. The gender and diversity of board members is now a component of the election process. Recruiting board members with varied backgrounds in such areas as finance, technology, risk management, human resources, business development, and investing has resulted in more experienced boards that can address complex issues in the marketplace. Equipped with an appropriate mix of qualified individuals, boards can delegate responsibilities to specific committees such as audit/finance, development, or investment and have them report back to the board on a periodic basis. With all these changes, the core fiduciary responsibilities of a board member, the duty of loyalty and the duty of care, remain the same.

The duty of loyalty requires board members to act in the best interests of those it represents, rather than in their own interests. Conflicts of interest should be avoided in all circumstances.

The duty of care requires board members to use their best judgement in making decisions on behalf of those it represents. Regardless of whether there is any softening or elimination of regulations in the near future, not-for-profit organizations should reinforce the importance of board members carrying out their fiduciary responsibilities. Turnover of board members is a constant as terms expire and new board members are elected. An Orientation Program should be in place to educate new board members about the organization and their fiduciary responsibilities to it. Topics covered during such a program should include background information on the organization, its mission and programs, governance structure, financial position, compliance with relevant government laws and regulations, and, fiduciary responsibilities. There should also be an annual refresher program for returning board members that covers the areas mentioned above.

Not-for-profit organizations have made significant progress in the area of governance since the passage of Sarbanes-Oxley. At a time when the pendulum may be swinging toward a decrease in regulation, not-for-profit organizations should stand firm and preserve all that has been gained in improved governance.

 
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