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Proper governance key to mergers

Trustees are taking a more active role in assuring that their entity has a strategic plan that the trustees jointly own with management

With pressure high to reduce costs, the healthcare industry is experiencing increased consolidation, particularly through mergers and acquisitions. Healthcare mergers present significant challenges that should be addressed both before and after integration, especially regarding alignment of culture, goals and values.

The key to successful alignment is governance. A best practice governance structure can combine the best features of each of the consolidated entities. For example, Tenet Healthcare Corporation recently announced plans to acquire Saint Mary’s Hospital in Waterbury, Conn., subject to the satisfaction of certain approvals and conditions. As part of this transaction, Tenet and Saint Mary’s have agreed that Saint Mary’s would maintain its Catholic identity and continue to adhere to its religious directives, as well as its charity care policies. A local advisory board is to be established to provide oversight of Saint Mary’s operations post-closing.

For healthcare boards contemplating or engaging in mergers or acquisitions, the need for proper governance practices is magnified in the pre- and post-integration environment. Insufficient discussion and alignment on cultural norms and values pre-merger can cause costly challenges for the consolidated entity that could have been proactively addressed and resolved.

To execute their duties effectively, healthcare boards must engage in proper oversight of critical areas. The primary oversight responsibilities for healthcare boards can be grouped into six functional categories:

Culture – Culture encompasses the values, attitudes, norms, and behaviors of the entity – who they are and how they interact with others. When two or more healthcare entities with different backgrounds merge, it is critical for them to reach alignment on culture and have an assured commitment for the going-forward culture before merging. Developing and maintaining the right culture maximizes the benefits of integration, allowing the consolidated healthcare system to achieve synergies and efficiencies greater than the sum of the individual capacities. Boards should devote time and attention to proactively defining, communicating and reinforcing the going-forward culture.

Talent – Emerging best practices are to have a more interactive, full board discussion around robust succession and talent development planning for the CEO and senior management. Boards must demonstrate independence in undertaking executive compensation and evaluation decisions.

Strategy – As the oversight duties for boards increase, trustees are taking a more active role in assuring that their entity has a strategic plan that the trustees fully understand and jointly own with management. Involvement in the strategic process is best achieved through a meeting or retreat after integration devoted to strategy, not only educating on strategic issues, but also permitting the trustees informal time together to promote collaboration through socialization and trust building. Such meetings allow boards and management to mutually develop their respective macro and micro roles – an invaluable asset for the consolidated system. Effective strategic plans for healthcare entities will take into account compliance and the changes on the horizon for the industry resulting from the Affordable Care Act.

Compliance – Complying with laws and regulations, while simultaneously assuring the highest ethical conduct, is largely dependent on a board’s commitment to best practices in compliance. The government places additional compliance requirements on healthcare entities and expects healthcare boards to be aware of the applicable complex regulatory structures. The board must continually monitor the entity’s compliance risk assessments, education/prevention, and detection processes to ensure that all are working well on an integrated basis.

Risk – As board and trustee responsibilities increase, boards are expanding their oversight of risk management. Specific to healthcare entities, the Office of Inspector General requires an ongoing process of risk assessment. Best practice is to establish and maintain an Enterprise Risk Management (“ERM”) program with clear allocation of accountability. The board should (a) oversee ERM and assure that it receives sufficient attention at all levels of the entity and (b) ensure that remedying of major risks is discussed by the full board and addressed in the entity’s strategic plan.

Governance – Boards should be large enough to accommodate the need for diverse skill sets, resources and experience and small enough to promote collegiality, flexibility and effective participation. Some healthcare boards are decreasing the size of the board and creating a board of visitors or board of advisors. Thus, the board operates more effectively while still involving well-respected advisors who provide access to experience, resources and networking.

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