Epley Receives AHA Award

Lewis E. Epley, Jr. of Eureka Springs received the Arkansas Hospital Association's Distinguished Service Award during the association's annual awards dinner October 6 in Little Rock.

Epley, nominated by Joe Hammond, administrator of Eureka Springs Hospital, is very active and involved in a variety of healthcare activities throughout Arkansas. Epley is former chairman of the Eureka Springs Hospital Board, appointed in 1963, and a current member of the Eureka Springs Hospital Development Council as established by the Washington Regional Medical System. He is also a former president and member of the board of the Northwest Arkansas Radiation Therapy Institute in Springdale, and a current member of the boards of the Washington Regional Medical Foundation in Fayetteville and the Arkansas Cancer Research Center in Little Rock.

Lewis Epley has enjoyed a long career in law, community service, and banking. In addition to establishing a law practice in Eureka Springs, Epley has served as City Attorney of Eureka Springs, president of the Carroll County Bar Association, and Special Associate Justice of the Supreme Court of Arkansas. He has also served as director and chairman of the board of the Bank of Eureka Springs, president of the Chamber of Commerce, and chairman of the Board of Trustees of the University of Arkansas.

Arkansans to Attend AHA Annual Meeting, Jan. 30-Feb. 2
Arkansas hospital CEOs, administrators and trustees will travel to Washington, D.C. for the American Hospital Association’s annual meeting January 30-February 2. Attendees will hear presentations from speakers such as CNBC’s Chris Matthews; former first lady Rosalynn Carter; and Scott Parker, president and CEO of Intermountain Health Care of Salt Lake City. The annual Federal Relations symposium will feature June Gibbs Brown, inspector general for the Department of Health and Human Services, and Deputy Attorney General Eric H. Holder.

CNN correspondent Judy Woodruff will engage key members of Congress in the annual "Congressional Crossfire," and former U.S. Senators Howard Baker, Warren Rudman and Alan Simpson will participate in a "Reliable Sources" panel moderated by Ken Bode, host of the popular PBS show "Washington Week in Review."

Hospital trustees will have three educational opportunities concerning changes in hospital ownership and control, building higher levels of trust in communities, and leadership issues. And, the annual Capitol Club luncheon for supporters of the AHAPAC will feature political satirist Al Franken.

The group will also visit with Arkansas’ congressional delegation (including Senator-elect Blanche Lincoln) and honor the congressional aides with an appreciation/get-acquainted dinner.

If you haven't registered for the meeting and would like more information, please contact Beth Ingram at the Arkansas Hospital Association, 501-224-7878 or e-mail at bingram@arkhospitals.org.

Today's Profits, Tomorrow's Costs
Hospital operating margins – profits – have come under intense scrutiny during recent years. Questions about the need for hospitals to be paid more than they spend providing patient services are raised so often that the subject is now a focus of public policy debates.

It seems everyone – from Congress to state legislatures; from government agencies and state officials to local businesses, the press and even the neighbors across the street – has an opinion, and many think hospitals don’t need to generate a profit, especially those operated as charitable, not-for-profit hospitals.

The issue is complicated at best, and made more confusing by differing opinions on the value of community benefits provided through local hospitals – the amount of charity care they provide, free community health programs they sponsor, etc. Their status as taxpaying or tax-exempt organizations even enters into the equation as one of the variable factors for weighing the need for a profit.

Regardless of individual opinions, one fact is undeniable. Like the corporate balance sheet, there is a bottom line to the issue that ultimately will translate into the long-term success or failure of any hospital: It must be financially well-managed and operate profitably to continue serving the community with the quality care the residents demand and deserve. Whether the Internal Revenue Service calls a hospital a for-profit venture, where most of the profits are distributed to shareholders, or a nonprofit charitable organization that puts profits into the hospital, the result is the same. Without the reserves allowed by profits, hospitals eventually will close.

Few people would argue that hospitals must be paid enough to cover their operating costs. Payroll, utilities, food, supplies, professional fees, capital costs, pharmaceuticals and other normal "costs of doing business" must be covered or they won’t stay in business long. Hospital profits are actually no more than a part of those costs. They’re the cost of doing business tomorrow.

Hospital charges not only have to include the direct expense incurred providing care to patients – medicine, tests, labor, room and board – they also must cover the cost for repairing or replacing worn-out facilities and equipment next month, next year or five years down the road. Just like your business, a hospital should be able to make needed capital improvements when necessary.

Possibly more important, profits allow a hospital to keep pace with technological advances. Patients expect their hospital to offer access to the most recent technology that yields better diagnostic information, improves treatment outcomes and leads to more rapid recovery times. They must also be able to employ people with the expertise to operate these sophisticated, computerized biomedical machines.

Profits are also necessary to provide new programs to meet community health care needs; to support care provided to patients who can’t afford to pay; to hire and retain highly trained health care professionals who are in short supply across the country; and to fund hospital-related research and education projects. And, as government programs and private health plans continue to reduce the amounts they pay for hospital services, profits are needed to ensure those payment shortfalls are covered in the future.

Last year, almost 40% of Arkansas’ hospitals were paid less than it cost them to provide patient services. They made no profit. Instead they had to rely on income from other sources such as cafeterias, gift shops, interest income, private donations and locally designated tax revenue. Even with the money from those sources, about a quarter of them spent more than they received in overall payments for the year. But, they didn’t have to close. They’re still providing care for their communities because of the reserve funds built up in past years from the profits they’ve made.

As we enter 1999, hospitals in Arkansas and across the country are beginning to feel the effects of Congress’ 1997 Balanced Budget Act, which reduced future Medicare spending by $116 billion. At least $44 billion of that will come from Medicare payments to hospitals. In Arkansas, Medicare will pay hospitals about $500 million less between this year and 2002 than would have been paid without the budget cuts.

Hospital profit margins probably will shrink, but hopefully won’t disappear. They’re important for meeting our future health care needs.

(Editor's note: This article was reprinted from Arkansas Business, November 16, 1998.)

IRS Rules Hold Board Members Accountable
"Organization managers" such as trustees, directors, and corporate officers of nonprofit organizations including healthcare systems will be held liable for compensation and benefit transactions that are deemed excessive, according to long-awaited Internal Review Service (IRS) regulations on intermediate sanctions published in the August 4, 1998 Federal Register.

Intermediate sanctions give the IRS the authority to penalize individuals at tax-exempt organizations without revoking the facility's tax-exempt status. The sanctions are intended to discourage "private inurement," where private individuals benefit from the earnings of a tax-exempt organization.

Organization managers who knowingly and willfully participate in an excess benefit transaction such as unreasonable compensation for executives or the sale of a hospital that exceeds fair market value, may be taxed 10% of the excess benefit or up to $10,000.

Healthcare attorney Michael Peregrine and hospital governance specialist Thomas Holland advise boards to follow some general guidelines as they operate in today's wheel-and-deal world:

• Ask tough questions of executives.

• Seek outside counsel before approving transactions.

• Know what the purchaser's return on investment will be.

• Determine how the marketplace may react to the transaction in the future.

• Seek help or training when in doubt about deciphering balance sheets and other information pertinent to the transaction.

• Delegate work on the transaction to the board's financial subcommittee to render a report.

• Review the board's composition to ensure consistent turnover — tenures longer than 10 years often create insiders rather than trustees.

• Recruit trustees from beyond the community at large if hospital revenues and liabilities extend into billions of dollars.

For further information on the IRS rules, contact Maureen Mudron, AHA Office of General Counsel, at 202-626-2301. (Reprinted from Governance Update, October/November 1998)

Hospital Trustee is 1999 American Hospital Association Chair-Elect
The American Hospital Association's (AHA) House of Delegates has elected Carolyn B. Lewis as chair-elect of AHA's Board of Trustees for 1999. As chair-elect, she will preside over the AHA's Strategic Planning Committee, which identifies the association's priority initiatives. She will assume the AHA Board chairmanship in the year 2000.

Ms. Lewis is a member of the AHA's Committee on Governance and a trustee of the Greater Southeast Healthcare System in Washington, D.C. She is the first hospital trustee and African American to be elected as AHA chair-elect in the Association's 100-year history. Lewis said, "I am honored to be chosen to lead the AHA into a new century. I accept the position with pride, humility, and a commitment to carry out the AHA's mission. While the challenges ahead are many, the opportunities to advance the health of individuals and communities are endless."

Retired from the U.S. Securities and Exchange Commission as assistant director, Division of Investment Management, Lewis is president of The CBL Group in Washington, DC, which provides professional services to clients in the healthcare and services industries.

AAHT Calendar of Events

January 30-February 2, Washington, DC
American Hospital Association Annual Meeting

March 4-6, San Antonio
Spring Forum '99 and Trustee Orientation

May (dates and locations to be determined)
Arkansas Association of Hospital Trustees Regional Dinner Meetings

October 3-6, Little Rock
Arkansas Hospital Association Annual Meeting; CEO/Trustee Leadership Breakfast

Building a Better Trustee
These days, caring about your role as a trustee means much more than a warm feeling in your heart. It also means caring enough to invest the time and energy needed to prepare yourself to face much greater demands.

Peter Senge noted in his recent book that learning organizations have all the advantages in the face of change and uncertainty. Learning organizations plan and manage by continually learning about themselves and their changing environment. As a result, they implement adaptations that produce superior results.

There are four core competencies of governing a learning organization: retooling meeting agendas to focus on the future; engaging in continuous education; adopting and applying new performance measures; and orienting new directors to the organization.

Hospital and chief executive officers cited educating the board as one of the top five challenges they face today, according to Hospitals & Health Networks' 1998 leadership survey report. Because trusteeship is not about day-to-day operations, it is all too easy for board members to be passive and poorly prepared. However, because it is about everything, superior adaptations to the environment will occur more often when boards operate like learning organizations.

For any healthcare organization, potential can be lost or gained based simply on its approach to education. Only about one-third of hospitals have a budget line dedicated to board education, according to a 1997 American Hospital Association/Ernst & Young LLP survey, Shining Light on Your Board's Passage to the Future. Fewer than 10% of hospitals and health systems even have a formal policy or an annual requirement related to board education.

Suggestions from Transforming the Board into a Learning Organization, one of the American Hospital Association/Heidrick & Struggles' "Board/CEO Relationship Builders," include:

• Conduct annual retreats with both trustees and senior management to review the changing environment and explore strategic issues.

• Include a 30-minute educational session and discussion of a strategic issue near the beginning of every meeting.

• Include several brief background articles in each meeting agenda book.

• Establish a policy that each trustee attend at least one educational conference or seminar each year.

• Ensure the organization provides trustees with subscriptions to health industry publications.

• Conduct an annual survey on the educational needs of your trustees.

• Assess each trustee's educational needs prior to his or her appointment or reappointment and as part of an ongoing self-assessment.

For more information, see Building a Better Trustee by Robert Parsons, Ph.D., Trustee magazine, October 1998.

"Where the Rubber Meets the Road" — March 4-6
What do finely-tuned race cars and hospitals/health systems have in common? Both require quality components, careful maintenance, and drivers who can make a difference. In short, boardroom decisions are "where the rubber meets the road."

The Arkansas Hospital Association joins the Texas Hospital Trustees in offering Spring Forum '99 and Trustee Orientation. The March 4-6 Orientation and Forum will take place in the beautiful mission city of San Antonio, Texas, bringing together a host of experts in medical staff credentialing, CEO evaluation, risk-sharing, and much more.

James Orlikoff will lead the Trustee Orientation. Orlikoff is president of Orlikoff & Associates, a consulting firm that has provided guidance to hospital governing boards for more than a decade.

Trustees will also hear presentations by Rick Wade of the American Hospital Association, "Strengthening Public Trust and Confidence;" James Rice of the Governance Institute, "Medical Staff Credentialing;" Peg Neuhauser, an Austin, TX-based consultant, "Mergers and Affiliations, and Their Impact on Governance;" and Scott Roman, J.D., "What Trustees Need to Know about Capitation and Risk-Sharing."

Additional topics include "The Balanced Budget Act: Rural Impact and Urban Impact," "Maximizing Access to Capital for Renovation, Replacement and Survival," and "Effective Practices in CEO Performance Appraisal, Part II."

For more information or to register for the Forum, contact Beth Ingram at 501-224-7878