McDermott’s Managing the Transition to Transformation series is designed to help health systems and other health care industry leaders address the many challenges presented by the transformation in payment and care delivery models. The goal of this series is to help organizations prepare so that they are not only competitive, but can also thrive under alternative payment models (APMs) and quality-based reimbursement models (QBRs). Fiduciary principles anticipate close board awareness of, and oversight of management's response to, MACRA and related payment transformation issues.

In Depth

It is exceedingly important for the health system board—and its key committees—to be briefed on the implications of the payment transformation from fee-for-service payments to other types of payment models.

This arises, in general, under the board’s basic obligation to be sufficiently informed on relevant strategic and business developments in order to provide effective oversight, and make informed decisions. More specifically, these transformative developments implicate the charters of many key board committees. For the board to be an effective partner to management during the “transition to transformation,” it will need to apply extraordinary efforts at diligence.

For example, it is the board's responsibility to exercise oversight with respect to the development and implementation of the health system's strategic plans. As part of this responsibility, the board, working with management, should assure that industry-transforming developments are appropriately incorporated into the strategic plan.

In addition, board and committee members are expected to receive periodic educational sessions designed to brief members on recent trends, developments and best practices that affect their respective duties and responsibilities. This includes ‘continuous’ education on key business, financial, legal and regulatory issues affecting the company and its industry sector. Where deemed useful by the board, outside experts and advisors should be brought in to inform directors on issues and events affecting the company. The importance of these educational briefings, their scope and their frequency increase with the level of importance of the underlying development to the company. In the health care industry, the most obvious example of a foundational development that required full board awareness was the enactment of the Affordable Care Act, but there have been numerous business and regulatory developments since that time that have recommended board awareness (e.g., in the last year, the Yates Memorandum, and the significant increase in health sector antitrust litigation).

Among recent developments, however, payment reform stands out in terms of its broad-based impact on health care systems. As most general counsel know, the variety of alternative payment models, encompassing quality-based, population-based and procedure-based models (collectively, APMs), can have far-reaching effects. Emblematic and perhaps most significant today of the APMs are the physician reimbursement changes required under the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA). 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 further 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 MACRA and other APMs are expected to have on health systems: e.g., their physician relationships, strategic planning; mergers/acquisitions; capital budgeting and debt financing; information technology; human resources/employee benefits; quality of care and legal compliance. It isn’t difficult to imagine the near countless ways in which “transition to transformation” reforms and related developments will affect future board and committee agendas, and the exercise of director oversight and decision making. And it’s not just about making and implementing the right strategic decisions, it’s also about hiring and developing the necessary executive managers, and nominating the most qualified director candidates, to support the oversight and decision-making processes.

The breadth and impact of “transition to transformation” suggests the need for a core level of full board training and education, because the impact of APMs is expected to have broad-brush significance to health care. More focused training is required for individual committees whose charter responsibilities are implicated by the expected developments; e.g., Strategic Planning; Audit & Compliance; Information Technology; Quality of Care; Physician Compensation and Finance; HR/Talent Development and Nominating, to mention a few. So what are we talking about in terms of director commitment? Pretty significant, given the circumstances. The Board Development Committee (or committee with similar charter authority) is well situated to develop a formal education program that would differentiate between presentations and resources available to the full board, and those presented and made available to individual committees.

Working with senior executive leadership and with the general counsel, the program could combine written resources in addition to presentations by members of the internal management team and by selected external advisors. Each committee meeting must be tailored for the specific responsibilities of the committee and how they are impacted by transformation. The most effective programs will be those that are serial in nature; i.e., that present the relevant information over several board/committee meetings. This will allow the material to be presented in a comprehensive manner; will give board/committee members more time to consider the material and engage in discussions; and underscore, by the commitment of time, the critical significance of the subject matter. Executive staff and external advisors should be available to support this process and, where useful, to engage directly with board and committee members in their consideration of the issues.

The level of commitment envisioned by this type of educational programming is likely to encounter some push back; e.g., from directors, who may feel that they are being asked to do too much; from executive leaders, who may feel that directors are being invited to participate more directly in activities traditionally the province of management. No doubt some of these concerns may be legitimate, but the overarching stakes are more significant. Given the enormity of the fundamental changes suggested by payment reform, a health system director would find it difficult to exercise fundamental oversight and decision-making obligations without the benefit of significant education and training. How can business judgment be exercised without some level of subject matter familiarity? How can effective oversight be extended without knowing what to look for? How can effective support of the strategic planning process be applied without knowledge of key trends and developments?

The additional commitment of attentiveness is warranted by the circumstances as they are currently envisioned. For health systems that do not compensate their directors, these APM-based expectations could reasonably prompt a revisiting of the issue. For health systems that do compensate their directors, these APM-based expectations could reasonably prompt a refinement of the manner and format of compensation.

Through it all, the health system general counsel is uniquely positioned to support this educational commitment, given the fundamental legal and regulatory implications of the payment reform; the general counsel’s role as a primary advisor to the governance committee, and the general counsel’s overall prominence within the organization.