Legal and Fiduciary Responsibilities of Hospital Board
Members
Part I
A Trustee's Legal Role
State and federal laws hold the hospital Board of Directors
legally responsible for the control and operation of the hospital. The
Trustees are accountable for everything from the quality of patient
care to the financial health of the organization. The Board may delegate,
such as delegating the management of corporate affairs to the hospital
chief executive officer, but as the policy maker and guardian of the
hospital mission, the Board remains ultimately responsible. The Trustee's
legal role is also defined by accreditation entities and the corporate
governance documents, such as the articles of incorporation and bylaws.
Maine law requires that:
- The activities of a corporation must be managed by a board of directors;
- The corporate directors shall exercise their powers and discharge
their duties in good faith with a view to the interests of the corporation,
and with that degree of diligence, care and skill which ordinarily
prudent people would exercise under similar circumstances in like
positions;
- Boards of directors shall ensure that no employee of a corporation
may be terminated for contacting a director; and
- No loans shall be made by a corporation to its directors or officers.
Medicare requires that a governing body be legally responsible
for hospital conduct, including:
- Being responsible for all services provided, whether or not furnished
under contracts;
- Appointing the CEO and members of the medical staff;
- Approving the medical staff bylaws and rules;
- Ensuring that the medical staff is accountable for the quality of
care;
- Ensuring that every Medicare patient is under the care of a doctor;
- Ensuring that the hospital budgeting plan includes certain specified
elements; and
- Ensuring that the hospital meets the emergency needs of patients.
State hospital licensing regulations require that a
governing board be responsible for the organization, management, control
and operation of the hospital. The Board must:
- Have written bylaws, meet at regular intervals, and appoint appropriate
committees;
- Oversee the hospital's financial plan of operation;
- Appoint medical staff, and regularly/formally communicate with them;
- Appoint CEO;
- Ensure that all patients are under the care of a physician;
- Be responsible for providing an appropriately equipped/staffed
physical plant; and
- Be responsible for raising funds or otherwise arranging for the
availability of funds, adopting a budget for the hospital and approving
schedules of charges.
- The Joint Commission on Accreditation of Healthcare Organizations
(JCAHO) requires that the governing board support quality patient
care by developing the mission, vision, policies and bylaws that govern
the hospital's operations. The Board must:
- Identify how the hospital is governed and the key individuals involved;
- Establish policy, promote performance improvement and provide for
organizational management and planning;
- Adopt bylaws addressing its legal accountabilities and responsibility
to its patients;
- Provide medical staff the right to representation at Board meetings;
- Allow medical staff members full membership on the Board;
- Establish a criteria-based process for selecting a competent CEO;
- Provide for the collaboration of leaders in developing, reviewing
and revising policies/procedures;
- " Provide for a conflict resolution process; and
- Provide for periodic Board self-evaluation.
The Internal Revenue Service requires that:
- Tax-exempt hospital Boards must broadly represent the community
with a majority of its members independent of the organization;
- The Board must adopt and adhere to a conflicts of interest policy;
- All components of a tax-exempt organization must conduct periodic
reviews to ensure the organization operates in a charitable manner;
and
- "Intermediate sanctions" may be applied to impose penalties
in situations where a tax-exempt hospital pays what the IRS considers
"unreasonable" compensation to its high-level executives
or physicians. Hospital trustees who have approved the compensation
are also subject to penalty.
Part II
Trustee's Fiduciary Responsibilities
A fiduciary duty is the highest standard of duty implied
by law. It is a duty to act for primarily for another's benefit, implying
and necessitating confidence, trust, and good faith. Trustees have three
fiduciary duties that outline how the courts expect trustees to conduct
their business.
Duty of Care
Trustee must act in good faith, in the best interest
of the corporation, and with that degree of diligence, care and skill
that an ordinarily prudent person would exercise under similar circumstances.
Specifically, the duty of care requires that a Trustee:
- Be familiar with the hospital governing documents and internal policies
and procedures;
- Regularly prepare for and attend meetings;
- Be reasonably well-informed;
- Monitor hospital management, e.g. corporate compliance programs
and medical staff appointments;
- Exercise reasonable care in reviewing and approving a sale, merger,
or joint venture to ensure that the transaction is in the best interest
of the hospital and consistent with its charitable purpose; and
- Manage corporate funds wisely and in accordance with corporate purposes.
Example: A Delaware court found that the directors breached
their duty of care by approving a cash sale of the corporation without
adequately informing themselves and making the decision too quickly.
Duty of Obedience
Trustees must act in a manner consistent with the hospital's
stated mission, and conduct their activities within the powers conferred
upon them by law and the corporate governing documents, e.g. protecting
the charitable purposes of the hospital.
Example: A court found a breach of this fiduciary duty
and agreed with an Attorney General's argument that a proposed joint
venture between Columbia/HCA and a medical center would "abrogate
a heritage of nonprofit, community based healthcare grounded in principles
of charity and benevolence, in exchange for a delivery system driven
by shareholder greed and motivated by profit and return on investment."
Duty of Loyalty
Trustees must act solely for the benefit of the hospital
with honesty and diligence. This duty means that the Trustee must:
- Not directly or indirectly participate in a transaction which he/she
should reasonably have known would be of interest to the hospital
without first making adequate disclosure of such opportunity to the
hospital, and providing the hospital an opportunity to participate
on the same terms in lieu of the Trustee's own participation;
- Not compete with the hospital or act on behalf of its competitors;
- Not derive profits from inside information;
- Not disclose confidential information;
- Not accept loans from the corporation; and
- Beware of potential conflicts of interest - a Trustee cannot unfairly
profit from his/her fiduciary position on the Board. Any Trustee's
interest must be fully disclosed before board action is taken. The
other trustees must reasonably believe that the transaction is in
the best interest of the corporation, and a majority of all disinterested
trustees should approve the transaction.
Example: A California court case of physician trustees
opened a medical office building across the street from the hospital
resulted in a $14 million verdict against the trustees.
