David Johnson: Cracks in the Foundation (Part 6) — Overcoming inadequate leadership
Nobody likes getting ripped off. I had that experience on a recent trip to Boston, when Avis charged me a $6 service fee for the “convenience” of paying a $2 cashless toll. Avis usually lives up to its “We try harder” mantra, but this experience left a bad taste. Consumers can have a similar experience with hospital prices and economics.
The American Hospital Association’s (AHA) April 2022 Cost of Caring report pleads for more funding to offset double-digit increases in labor, supply and drug costs. Meanwhile, the latest West Health-Gallup Healthcare Value Index found that 95% of American adults find the perceived value of the healthcare they receive is “inconsistent” or “poor.” Healthcare’s leaders, including board leadership, should sit up and take notice.
A failure of healthcare leadership
The economic principle is not complicated and applies to all industries. Demanding more money for overpriced services is no way to win consumers’ hearts, minds and wallets. Warren Buffett famously observed, “Price is what you pay. Value is what you get.”
It should be immediately clear to healthcare leaders that the disconnect between prices paid and value received is at the heart of our industry’s dysfunction. Like Avis, health systems need to “try harder” to improve care access, outcomes and affordability.
During COVID-19, the proverbial chickens have come home to roost. The healthcare system’s structural imbalances were obvious and catastrophic. Hospitals required a government bailout while big insurance and big pharma reaped huge profits. Emerging from COVID, hospitals confront an existential threat. Doubling down on existing business models, as the AHA advocates, increases both strategic and financial risk.
As a consequence, it’s time for health system leaders to reject volume-based business models and embrace value-driven care delivery. To fix healthcare, they must right-size care delivery, promote health, improve the customer experience and deliver the highest-quality care outcomes at the lowest cost. This shift requires courageous leadership to make the necessary changes, which is unfortunately in short supply,
Yet leaders must make the necessary changes: It has never been more necessary for all leaders to recognize that the value quest is enduring and just. It optimizes individual and community well-being without breaking the bank. Success requires vision, courageous leadership and major structural reforms. Improving governance within nonprofit health systems will speed the nation's journey toward consistent delivery of kinder, smarter and affordable care for all Americans.
The conundrum of nonprofit healthcare’s board leadership
Nonprofits dominate U.S. care delivery. Their boards tend to be large, volunteer, philanthropic and lacking in needed expertise. Like volunteer boards for museums and cultural institutions, they exist primarily to support and sustain institutional longevity. Nonprofit health system boards all too often lack the business acumen to navigate their large, complex organizations through healthcare's dynamic and disruptive marketplace.
Compounding the challenge, these health systems have misaligned management and board incentives. Given their tax-exempt status, the nonprofits cannot grant equity. Board members receive limited or no compensation. Management teams typically work under short-term contracts that incentivize near-term performance, not long-term sustainability.
Consequently, nonprofit health system boards tend to be strategically defensive, supportive of status-quo business practices and reliant on management for organizational strategy. They rarely pursue transformative repositioning. Instead, most give lip service to value creation while pursuing status quo business practices.
Given healthcare's turbulent operating environment, these organizations must become more responsive to customer and community needs. Likewise, their boards must become more proactive in setting strategy and establishing greater accountability for organizational performance and community wellbeing.
These are no small tasks. Accomplishing them requires inspired leadership.
To improve organizational decision-making and risk management, nonprofit health systems must change their governance structure in six key ways:
- Vest governance and long-term strategy in a single, relatively small board (no more than 15 members) with appropriate sub-committees and quarterly meetings.
- Compensate board members for their time and expertise.
- Recruit board members with diverse backgrounds and experience.
- Include a strong community voice in organizational governance.
- Emphasize cultural reengineering and employee empowerment.
- Align performance metrics and management compensation with organizational strategy.
Transforming health system governance is easy compared with rewiring culture, engaging consumers, inspiring employees and operationalizing transformation. America cannot attain the healthcare system its people deserve without full commitment to value creation. This type of commitment is exemplified by the two leaders’ stories in the sidebar below.
Transformation must come from within. Healthcare’s leaders must be equal to the task or risk losing control of their organizations’ destinies. The clock is ticking.
Editor's note: This piece is the sixth and final column in a series of six columns in which David Johnson addresses five structural defects undermining nonprofit healthcare. He outlined all five defects in the first column, which debuted in the February 2022 issue of hfm.