Health Care Governance Challenges Towards (and Beyond) Re-Opening

• May 29, 2020

• Michael W. Peregrine , McDermott Will & Emery LLP

Expectations regarding the health care board’s fiduciary responsibilities, and the extent of its engagement with the management team, are likely to increase as the company proceeds through the stages of organized response to the COVID-19 pandemic. The general counsel can be a valuable guide to leadership in this process.

These expectations are grounded in the basic fiduciary principle that directors should exercise a greater degree of diligence with respect to their duties in times of crisis or controversy. This principal extends to closer engagement of board members in monitoring both corporate affairs and the portfolio of the executive team. The extent of the additional engagement is dictated by the significance of the controversy and the clarity of a response plan.

But how best to apply this principle is understandably unclear when confronted with truly unpredictable or improbable circumstances, in which businesses lack an established, well defined path forward to recovery. Those situations can present a challenge to general counsel advising the board and management on specific expectations of their conduct. 

That’s why Microsoft CEO Satya Nadella’s recent observations on the stages of pandemic corporate response offer a welcomed framework for providing such advice. In an interview with The New York Times,[1] Mr. Nadella described the world (and commerce) as proceeding through three distinct organizational phases during the pandemic—the first two of which will be familiar to health industry leaders, but the last of which may be daunting, if not also motivating.

The first Nadella phase “is simply responding to the immediate impact through office closures, cost cuts and the like.” In other words, it’s the application of traditional crisis management methods that many health care companies have already implemented (or are in the process of implementing)—the most obvious manifestations being the suspension of elective surgery, the implementation of telemedicine and other remote physician access mechanisms, and the postponement of certain strategic initiatives.

Given the extraordinary patient safety and public health implications of this “responding” phase, many boards have been particularly deferential to the recommendations of executive management and of medical staff leadership. They have focused on monitoring financial performance and basic legal compliance, and on maintaining basic governance formalities through such measures as virtual meetings and essential elements of information flow. While such a detached approach is certainly understandable given the extraordinary circumstances of the first several months of the pandemic, it is unlikely to be an acceptable fiduciary model moving forward.

The second Nadella phase is “recovery, which is already under way in many places, and will be more like a ‘dial’ than a ‘switch’; suggesting that there will be lots of movement of the dial, back and forth.” In other words, it’s the implementation of specific business resiliency plans, which are subject to board review and which, by their nature, must be flexible and adaptive. For health care, again most obvious manifestations are the gradual return of elective surgery and of more traditional, in-person access to physician offices.

In this “recovery” phase, the board is expected to become more active and to re-engage with management from a monitoring perspective. The general counsel will want to remind the board of its unique oversight obligation for business resilience, which involves the periodic review of management’s plans for the company to recover from the shocks and stresses of the disruptive experience and to “get the company back on its feet.” 

This specific board obligation can be manifested in at least four ways: First, by recognizing the technical complexity and organizational interdependency of resiliency plans. Second, by supporting management’s efforts to develop the capacity for both cultural and business resilience from the current pandemic environment. Third, by confirming that resiliency goals are aligned across the enterprise. And fourth, by making sure that management’s resiliency strategies are supported, incentivized, and sustained/refreshed on a frequent basis.

While oversight of business resilience and recovery is by nature a seldom applied governance responsibility, it implicates certain traditional concepts of oversight and constructive skepticism with which most board members, with adequate education from the general counsel, will be comfortable.

But the third Nadella phase is both unique and notable. It calls for “reimagining;” a period in which “innovations born of necessity during the previous two phases will emerge, like remote control of manufacturing processes, A.I. bots helping diagnose patients and more effective distance-learning technologies.” It would be the pandemic version of “lessons learned”; i.e., the opportunity to incorporate within company operations the efficiencies, shortcuts, ideas, and designs developed out of necessity during the first two phases. It could potentially result in a drastic reorientation of the company’s business model.

For health care, this might involve a more fulsome commitment to telemedicine and other forms of virtual care, accelerated investment in innovation such as A.I., and increased emphasis on talent management. The respected health industry advisor Ken Kaufman[2] projects that the “reimagining” phase will involve a comprehensive, strategic approach to health care delivery redesign, particularly as it relates to (i) segmentation of sites of care; (ii) rationalization for quality and efficiency; (iii) the development of new care models; and (iv) the organization’s ambulatory footprint.

Regardless of the specific direction it may take, the “reimagining” phase anticipates a subtle shift in the board/management dynamic, away from the board’s traditional “review and concur” approach to strategic planning. Rather, the expectation is that the board will exercise a much closer, more informed relationship with management. This is particularly the case given the potential that “reimagining” will generate proposals that could result in significant organizational change. It should also be noted that re-imagination might require fundamental changes to board structure and composition in order to be truly successful.

Yet no matter which phase a health care company finds itself in, the board will be expected to be attentive to several pandemic-related oversight responsibilities. These include, but are not limited to the following: 

• maintaining appropriate basic board and committee meeting frequency (virtual or otherwise), information flow from management, and other governance formalities;
• protection of the health, safety, and morale of the workforce as the company begins to reopen;
• receiving regular updates on financial solvency (at least for companies that have experienced liquidity concerns); 
• expanded corporate compliance focus on compliance with the provisions with emergency state and federal grants and loans;
• an awareness of the limitations of state-specific hospital/health care tort immunity laws; 
• working with management to assure that appropriate short-term contingency plans are in place should renewed waves of COVID-19 interrupt recovery initiatives; 
• maintenance of supply chain relationships and options, particularly as they relate to personal protective equipment; 
• enhancements to risk management and technology/information system operations to reflect “lessons learned”; 
• greater organization-wide board collaboration with management on quality of care/patient safety matters; and
• the adequacy of board size and composition as reflected within pandemic-related performance circumstances.

Viewed collectively, Satya Nadella’s vision of “respond, recover, reimagine” is a thoughtful shorthand for an effective health care board response to the pandemic. It reflects the escalating level of board involvement in crisis level engagement with management, from acceptable deference (during the response); to meaningful monitoring (during the recovery) to significant partnership (during re-imagination). The general counsel is particularly well suited to advise both the board and management on the degree of appropriate involvement.

ARTICLE TAGS

• Coronavirus Pandemic Hub
• Governance