New Officer and Director FCA/Stark Exposure
Recent developments may merit a measured briefing to corporate leadership on the potential exposure of health industry officers and directors to financial penalties and other sanctions arising from corporate regulatory violations.
On September 19 and 27, 2016, the Department of Justice announced separate False Claims Act (FCA) settlements that required senior corporate leaders to pay significant financial penalties to resolve allegations that they violated federal law. The September 19 settlement involved allegations that the nursing home operator North American Health Care, Inc. (NAHC) violated the FCA by submitting false claims for medically unnecessary rehabilitation therapy services provided to its skilled nursing home facility residents. NAHC agreed to pay a penalty of $28.5 million, and its board chairman and its senior vice president of reimbursement analysis agreed to pay penalties of $1 million and $500,000, respectively. The September 27 settlement involved the payment of $1 million by the former CEO of Tuomey Healthcare System, to resolve allegations relating to his involvement in what a jury concluded was the health system’s FCA and Stark Law violations. The settlement also included a four year Medicare participation exclusion. In addition, the former CEO waived any rights to indemnification he may have had against the health system.
It is important not to overreact to the impact of these two settlements. However, it is worthwhile to note that they are consistent with the Yates memorandum theme on individual accountability and the application of Yates to civil, as well as criminal matters. The DOJ’s announcements of these settlements leave little doubt that efforts to assert individual accountability will extend to officers and executives who “lead or participate” in what are perceived to be illegal conduct. This perspective was echoed in a September 26 speech by a senior Department of Justice official. Certainly these are not the only FCA-related settlements involving corporate employees. However, they are noteworthy to the extent that they involve very senior leaders and apply significant penalties. Given the continued emphasis on Yates and individual accountability, it is possible that these represent a new wave of FCA settlements that will incorporate material penalties against senior corporate leadership. These are messages that the board and senior executive should hear, in a presentation that balances the likelihood of risk, the significance of the potential penalties and the importance of continued leadership over legal compliance.
The Quality Committee and "Worthless Services"
The board’s Quality of Care Committee should be made aware of a September 7 Department of Justice complaint against a nursing home system and its director of operations that alleges False Claims Act violations for the provision of services “that were either non-existent or grossly substandard.”
The government has long made known its willingness to pursue enforcement actions under the FCA against health care providers for quality of care-based violations of Medicare and Medicaid law. One government theory of liability under the FCA involves submitting reimbursement claims for the provision of care that is so deficient that it effectively amounts to no care at all (often dubbed “worthless services” liability). Because the FCA is a fraud statute and is not designed to regulate medical standard of care issues, judicial decisions apply a high burden for pleading and proving worthless services claims under the FCA: “[i]t is not enough to offer evidence that the defendant provided services that are worth some amount less than the services paid for.” In other words, these courts hold that even if the care is substandard, that is not enough to support an FCA claim. In any event, the September 7 complaint is a reminder to health system boards and their quality committees that the Department of Justice remains willing to pursue enforcement actions based on significant standard of care violations.
In the Vanguard complaint, the government alleges a litany of non-existent or grossly substandard services, including chronic staffing and critical medical supplies shortages, failure to provide standard infection control, failure to administer medication to residents as prescribed by their physicians, failure to provide wound care as ordered by physicians, failure to adequately manage residents’ pain and providing unnecessary and excessive psychotropic medications to residents and using unnecessary physical restraints on residents. In a Yates connection (see above), the company’s Director of Operations was included in the complaint on the grounds that he was aware of these alleged quality of care failures, yet failed to take any corrective action.
Many governance experts believe that health care board of directors have a fiduciary obligation with respect to the provision of care to patients and/or residents. This perceived obligation is grounded in both duty of care (e.g., operational oversight) and duty of loyalty (corporate mission to provide health care services) principles. For many health care boards, its Quality of Care Committee is responsible for implementing these responsibilities. The Vanguard complaint—including the allegations involving the Director of Operations—underscores for that Committee the important nexus between quality of care and corporate compliance. The Committee may wish to work in consultation with the General Counsel, the Chief Compliance Officer, the Chief Medical Officer and the Compliance Committee to help reduce exposure to “worthless services” complaints that can be so devastating to the corporate reputation. This oversight can focus, in part, on matters of staffing and on the use of an effective quality of care “dashboard” to help the board monitor quality metrics.
New Compliance Oversight of Incentive Compensation Arrangements
The board, and several of its key committees, may wish to re-evaluate the extent to which organizational culture is being properly reflected in the incentive targets provided under certain executive and (especially) physician/physician group employment agreements.
Recent developments in the broader commercial sector provide a cautionary note on the compliance risks that can arise when performance incentives are misconstrued by employees to justify behavior that is inconsistent with the company’s commitment to legal compliance. When properly constructed, performance incentives can be an important component of legally appropriate employment agreements. They can help motivate executive and physician employees to achieve meritorious corporate and mission goals. Yet the recent commercial developments raise the possibility that, in certain situations, some employees may misinterpret the incentives as promoting conduct that is, in fact, completely contrary to the organization’s ethics and risk culture. These developments suggest that such misinterpretation may occur in spite of significant and explicit compliance education about the proper goals of the incentives.
The board, principally through its compliance, and physician and executive compensation committees, may choose to exercise increased oversight over incentive compensation arrangements, the terms of which are subject to legal standards (e.g., tax and anti-fraud and abuse). The primary focus of this oversight would be threefold: first, to determine whether significant performance incentives are consistent—in both design and application—with the organization’s compliance program and code of ethics; second, whether there is appropriate management and compliance oversight of their application; and third, whether existing compliance education mechanisms are appropriately effective in instilling a culture of compliance throughout the organization.
Board "Right Sizing"
The most effective size of the health system governing board (parent or subsidiary) is an increasingly important governance issue given continued industry evolution. This point is emphasized by a new article in HealthLeaders magazine. Since matters of board size implicate corporate law, tax and fiduciary duty concerns, the general counsel should be consulted on all “right sizing” initiatives.
It is a generally recognized nonprofit governance principle that boards should periodically review the size of the board to assure continuing efficiency. Yet (despite what some voices may say), applicable law does not mandate a particular board size (other than to establish statutory minimums). Neither is there any accepted best practice on the subject. Recent, prominent statements of governance principles confirm that there is no one-size-fits-all standard. From the law’s perspective, the proper size of an individual governing board is best determined by balancing two different, but not necessarily competing, factors.
On the one hand, the board should be large enough to allow for the effective management of board affairs and to incorporate desired diversity in viewpoints and perspectives. On the other hand, the board should be small enough to accommodate effective board discourse and decision making, and to avoid frequent barriers to achieving meeting quorum. For health systems, the particular challenge is how best to address these two factors given increasingly complex board agendas. The extent of regulatory scrutiny of board actions, it may be best to emphasize (or “lead” with) the “effective management” factor. The health system board must be large enough to allow for the appropriate allocation of duties and responsibilities, to meet with sufficient frequency without prompting concerns with director fatigue, and to properly staff board committees without excessive overlap that might strain focus and attention. These are all issues that support director satisfaction with the elements of the duty of care. The temptation to keep boards as small as possible, simply primarily in order to reduce burdens associated with necessary executive/board interaction (a valid, but not exclusive concern), should be resisted.
Structuring a “right sizing” initiative to focus on the number of directors necessary to properly address board responsibilities—as opposed to (legitimate) matters of streamlining—places appropriate attention on the nature and scope of board duties, particularly as they arise in the context of large, operationally sophisticated health systems operating in a highly regulated environment.
Separate Indemnification Agreements
Legitimate concerns with individual liability, and the sufficiency and enforceability of bylaw-based indemnification agreements, are causing some officers and directors to seek separate, individual agreements from their health system. Interest in such agreements spiked after the issuance of the Yates Memorandum, and will likely be exacerbated by concerns arising from recent health industry FCA settlements that include penalties against board officers and executives.
The organic corporate documents of most health systems provide language committing to provide protection to officers and directors who are targeted for claims by governmental and private parties arising from their corporate conduct. In highly regulated industry sectors and in connection with complex and controversial transactions, particular concerns may arise as to whether the bylaw provisions address all of the relevant issues, and provide for sufficient protection should disputes arise over the scope of indemnification or advancement. This is particularly the case where the health system’s overall “D&O” coverage may be less than comprehensive.
A typical focus on separate indemnification agreements is to provide for mandatory indemnification, when the applicable bylaw provision provides for permissive indemnification as the board may determine. A separate written agreement can incorporate a level of detail on terms and conditions that may be out of place in a bylaw provision. Separate agreements are also attractive to the extent that they are contractually enforceable obligations of the health system and require the officer or director’s consent before being amended or terminated. An additional goal of separate agreements is to assure that indemnification extends to claims that may arise after the officer or director may have left the company/board service. Some agreements also include provisions intended to protect against (allegedly) wrongful attempts to withhold indemnity or advancement.
Separate indemnification agreements require careful drafting and must be structured in a manner consistent with applicable corporate and tax law—especially (but not solely) as such law may relate to excess compensation and benefits, and to the provision of coverage, even where the individual has been determined to have violated law or breached fiduciary duties. Nevertheless, the increasing regulatory focus on individual accountability suggests that the board may want to evaluate the feasibility of providing such individual agreements and, if so, on what terms.
Monitoring Board Expenses
In the current corporate responsibility environment, board members should be particularly sensitive to the propriety (both actual and perceived) of their individual and collective spending and reimbursement practices. This is important, in particular, following the high profile action by South Carolina Governor Nikki Haley to request the trustees of the Medical University of South Carolina to repay funds previously reimbursed by the University for hotel, dining and similar meeting-related expenses. While the South Carolina focus was on state-owned facilities, the same concept could easily be applied by state charity officials to nonprofit health systems.
The Governor’s action followed the investigative report by a Charleston newspaper that, over the last several years, the board had incurred over $560,000 in food, beverages and hotel expenses. The Medical University’s board chair ordered an investigation of the board’s spending practices and the state inspector general has reportedly commenced an investigation of the spending practices of other state university boards. As one might expect, the newspaper story referred to “pricey meals, expensive bottles of wine and luxury hotel rooms.”
Historically, state and federal charity officials have become involved in the board meeting expenditure practices of nonprofit board members and executives, only where there were clear suggestions of financial excess and abuse (e.g., extraordinarily high expenses, failure to properly allocate between spousal and non-business related expenses, submitting reimbursement claims for hotel expenses outside the meeting period or for outrageous or inappropriate expenses). In addition, virtually all recent statements of governance principles acknowledge the need for an appropriate frequency and duration of board meetings and for appropriate levels of director education programming (all of which can be enhanced, from time to time, by going “offsite”). Concerns about such expenses are often (but not always) lower when board members are serving without compensation.
Yet, appearances can create the most unfortunate impressions—particularly when the subject of media scrutiny. In the current environment, such appearances can prompt embarrassing inquiry from charity officials (most often, the state attorney general). Health systems should take notice of the Medical University situation and, with the direction and advice of their general counsel, adopt a board spending and reimbursement protocol that is appropriate and reasonable given the size of the organization, the complexity of the board agenda, and the typical costs of meals and lodging in the headquarters locale (i.e., different thresholds if the board office is in a major urban area or a smaller regional community). Those who review and approve reimbursement requests under the protocol should receive some form of enhanced job protection against retaliation for their activity.
"Onboarding" Key Leaders
Much has been written about the importance of providing comprehensive orientation programming (i.e., “onboarding”) to new board members, in order that they may be capable of assuming their board duties and responsibilities on an accelerated basis. Following recent media coverage, attention is now spreading to onboarding activities involving an incoming CEO and new board chairs.
For example, a recent article in Forbes spoke to the value of more direct board involvement in what the article described as the “acquiring, assimilating, and accelerating” of new CEOs. The goal of such an exercise is to respond to the daunting statistic indicating that 40 percent of new CEOs fail in their first 18 months of service. The Forbes article focuses on several factors critical to the onboarding process: the need for the board to assure alignment on expectations for the recruitment process and the desired CEO characteristics; assembling a broad list of qualified candidates in order to provide options for the board; developing a relationship with the new CEO by discussing with him or her the nature of the job, its deliverables, stakeholders, announcement themes, pre-start and “day one” plans; and adopting a comprehensive assimilation plan that accommodates conversations between the CEO and key stakeholders, as well as with members of the CEO’s likely formal and informal networks.
Along the same lines, a recent survey conducted by the Alliance for Nonprofit Management suggested that more than 50 percent of 635 surveyed nonprofit board chairs reported that they neither received, nor pursued special training or other orientation before they assumed that position. A related result was that a slightly larger percentage had only three years or less experience on the board before assuming the chair’s role. As might be expected, the survey recommended more focused mentoring and related onboarding activity aimed at training individuals for the chair’s role. Some progressive health systems have adopted formal training programs for incoming board leaders (e.g., board and committee chairs). These programs focus on (i) basic fiduciary duties and principles of nonprofit and exempt organization tax law; (ii) the expected relationship of governance to management; (iii) the specific roles and authorities provided under state law and system governing documents and the various rights, powers and authorities vested in the board and committee leadership; (iv) committee structure, composition and practice; and (v) managing conflicts, independence and related issues. These are, of course, all issues on which the general counsel is particularly familiar.
Corporate Cooperation and Compliance Effectiveness
One of the principal responsibilities of the governing board in the context of a federal regulatory investigation is whether, and if so to what extent, it should cooperate with the government in order to demonstrate organizational good faith and reduce the prospects of defending a criminal or civil complaint. While these issues were most formally introduced in September, 2015 with the release of the Yates Memorandum, three separate September public presentations by senior Department of Justice officials shed additional light on this important governance topic.
It is well understood that the Yates Memorandum provides clear incentives for the corporation under investigation to provide the government with “all relevant facts relating to the individuals responsible for the (alleged) misconduct.” In recent comments DOJ Fraud Division Chief Andrew Weissmann warned that the government is increasingly attentive to potential self-reporting misconduct; i.e., situations where companies might make “scapegoats” of lower level employees by providing the government with evidence regarding their culpability in order to shield higher level executives from investigation. In a September 8 presentation, Principal Deputy Assistant Attorney General David Bitkower commented on the DOJ’s health care fraud enforcement activity, including its focus on corporate health care fraud, through a careful analysis of FCA lawsuits instituted by qui tam relators. Mr. Bitkower also referenced the use of benchmarking and other metrics to analyze the effectiveness of corporate compliance programs and conduct interviews of compliance personnel and other witnesses.
In addition, in a September 27 presentation, Principal Deputy Associate Attorney General Bill Baer commented on corporate cooperation in civil enforcement matters. He identified several factors that, when present, would contribute to a company meeting the threshold for cooperation credit. These include being proactive in terms providing material assistance to the government across a broad spectrum of elements; being timely in the provision of such assistance; enabling the government to pursue conduct it might not otherwise have been able to address; and an acknowledgment of responsibility, or efforts to help victims of the relevant company conduct.
Decisions relating to corporate cooperation and the form, structure and operation of the compliance plan are ultimately those of the governing board. They are decisions that should be made with the advice and recommendations of the general counsel and qualified outside white collar and compliance program legal counsel. These three new DOJ speeches are relevant to the board’s (and compliance committee’s) awareness of cooperation and compliance effectiveness issues.
Fiduciary Duties of Overlapping Directors
A recent settlement involving Clayton Act enforcement highlighted antitrust concerns arising from situations in which directors and officers of one corporation serve in similar capacities on the board of a competitor. This settlement also indirectly heightened attention to a more frequent scenario in nonprofit health systems—board and officer overlap between parent and affiliate companies, and their related fiduciary obligations.
As health systems grow and mature, corporate law and governance issues regarding the relationships between parent and subsidiary organizations are becoming more complex, and increasingly more ripe for substantial disagreement or dispute between those organizations and their officers and directors. An increasingly prominent example of this is confusion on the duty of loyalty owed by subsidiary corporation officers and directors—especially those who may simultaneously serve as officers and directors of the parent organization.
There is not, of course, any fundamental legal concern with overlapping officer or directorships between affiliated companies in a nonprofit health system. However, confusion may arise as to the potential for conflict when subsidiary board members are called upon to vote on matters where there is a theoretical or actual potential for conflict between the interests of the subsidiary corporation and the parent. To which organization is their duty of loyalty owed? This potential for conflict can arise regardless of whether the subsidiary directors or officers are simultaneously serving as fiduciaries of the parent, are appointed or elected by the parent, or the parent otherwise exercises substantial reserved powers over the subsidiary.
The conflicts risks arising from these situations can be substantially mitigated by the incorporation in the corporate purposes clause of all of the nonprofit subsidiary corporations, a statement that says, in essence, that their primary organizational mission includes the support of the charitable mission of the parent organization. Such a “common purposes clause” serves to clarify that the ultimate duty of the subsidiary director is to serve the interests of the parent organization.
Major Nonprofit Leadership Controversy
A recently resolved controversy involving a nationally renowned charity provides a colorful example for nonprofit health systems of the potential risks of concentrating governance and operational authority in a single, charismatic individual, and of the attorney general’s willingness to investigate what it perceives to be potentially problematic expenditures by a charity.
The controversy had its roots in the long time commitment of a highly prominent philanthropist to the charity, her interest in continuing to serve in a combined chair/president (i.e., operations leader) role, and the aggressive manner in which she dealt with other board members opposed to some of her positions. The controversy was fueled by the charity’s settlement with a former CFO, who claimed the philanthropist had fired him for raising allegations that she had unilaterally authorized (i.e., no board approval) a $450,000 payment to a former staff member who had experienced illness. The state attorney general investigated the payment. According to media reports on a recent meeting, the charity’s board addressed these concerns through bylaw amendments and other actions that changed the philanthropist’s title and role, named a new chief executive officer and appointed an expanded board leadership group. The board is also reportedly considering implementing three year renewable terms for board service to replace what it referred to as an “open-ended service” arrangement.
These are themes that are not unusual for many health systems, large or small. The exercise of concentrated authority by dominant officers or directors—no matter the extent of their devotion to mission or best intentions—can create undesirable operational and governance controversy. They can disable the effectiveness of the board, cause rifts in the governance/management relationship and, in certain circumstances, prompt whistleblower activity and attract the attention of charity officials. Most health systems separate the board chair and CEO positions. Yet, it is not out of the realm of experience that some system boards suffer from other forms of individual officer and director dominance, e.g. a major donor, an influential business leader, a prominent physician, or a “legacy” board member. In these situations, as with the charity in question, it can be helpful to have in place such protections as bylaw provisions that require separation of the Chair/CEO positions; spending authorization protocols; individual board evaluation procedures and fitness to serve/disruptive director policies.