Recommended Health System Board Action Items for Oversight of the Not-for-Profit Mission

See our framework for how organizational leadership can help address the system’s commitment to tax-exempt/not-for-profit organization status.

There are several positive, proactive steps that health system boards of directors may take in supporting their not-for-profit, charitable, tax-exempt mission given recent legislative developments. Continuous refreshment of leadership commitment to the organization’s mission-related commitments can pay tangible dividends when the organization is called to articulate that mission to the public, as well as to legislators and regulators.

Traditional “margin supports the mission” arguments alone may no longer be sufficient to justify charitable, not-for-profit and tax-exempt status – especially given the concerns around the affordability of health care.

The Board Must Be Engaged

The governing board must be involved, at an appropriate level, with the CEO to support the organization’s commitment to tax-exempt and charitable, not-for-profit organization status. Directors have two specific mission-oriented fiduciary obligations. The first is the duty of obedience to corporate mission and purposes – which is subsumed under many state laws within the duty of loyalty. The second is to preserve the reputation of the organization.

The Board Must Be Informed

The board should possess a basic awareness of the key legal principles applicable to tax-exempt, charitable not-for-profit status:

• Separate and distinct nature of charitable, not-for-profit, charitable status under state law and tax-exempt status under the Internal Revenue Code

• Fundamental elements of not-for-profit status

• Community benefit standard for federal tax-exempt health care organizations

• How the community benefit standard is evolving to include community health care needs at the current time

The Tone at the Top

The board must act consistently with the highest standards of rectitude in its stewardship of charitable assets. This includes strict adherence to ethics, personal conduct, compliance and conflicts of interest policies, avoiding appropriation of corporate opportunities and other similar manifestations.

Portfolio Oversight

The board should establish an effective process for exercising oversight of investments made by the organization in for-profit businesses and other activities not directly associated with the not-for-profit mission. This process should provide the board with an understanding of the scope of such investments relative to the overall portfolio, the reasonableness of their return, the financial risks involved, and the extent to which the not-for-profit margin is called upon to support these investments.

Community Boards

Board governance committees should consistently consider for board and committee service qualified, independent leaders from the communities that are served by the organization. In addition, refreshment measures should be applied to stimulate board turnover and increase opportunities to appoint community members and others with particularly relevant expertise.

Organizational Structure

The board should work with management to establish a fundamental leadership-level awareness of the health system’s corporate structure and how it operates to support its charitable, not-for-profit, tax-exempt mission. Board members should develop a working knowledge of the rationale applied to create the particular structure – including legal, tax, and operating elements – and the various control mechanisms in place to protect charitable assets.

Compliance Oversight

Direct board relationships with the chief legal officer and the chief compliance officer will help assure the core effectiveness of the health system’s compliance program. The board is also encouraged to reconfirm the frequency of reporting by the Audit & Compliance Committee to the full board, as well as the reporting relationships of both the chief legal officer and the chief compliance officer to the CEO.

Financial Relationships

Health system governance should be sensitive to the negative perceptions and reputational concerns that can arise from financial relationships between the organization and members of leadership; e.g., arrangements such as “co-investment” opportunities, acting as a vendor to the organization, and providing business opportunities with the organization to friends, relatives and colleagues. The board is thus encouraged to ensure robust processes are in place to promote transparency, address conflicts of interest, and ensure that financial transactions occur at fair market value.

Section 501(r) and Community Benefit

Both the board and its audit & compliance committee would benefit from periodic updates from legal, compliance, and financial staff on the health system’s compliance with special IRC Sec. 501(r) rules for tax-exempt hospitals. Similarly, the board should be familiar with the system’s overall approach to the provision of community benefit – including the organization’s latest Community Health Needs Assessment.

Communications Strategy

The board is encouraged to monitor leadership’s plan to develop a coherent, defensible, and broadly disseminated message
on how the organization promotes health in the communities it serves, and how that can be distinguished from services provided by for-profit owned hospitals.