In the latest application of the law of unintended consequences….

As you may know, on May 16, 2012, CMS issued a final rule revising the conditions of participation by hospitals in the Medicare and Medicaid programs. (Download the final rule.) Among other things, the final rule includes a provision requiring that at least one member of a hospital's medical staff be included on the governing body of the hospital or hospital system.

This provision did not appear in the proposed rule, and was apparently added to the final rule in response to commenters who suggested that CMS's proposal to allow hospitals, including large multi-hospital systems, to be managed by a single governing body (which is embodied in the final rule) would reduce the level of communication and coordination with local and medical staff personnel necessary to ensure effective patient care. On its face, this may appear a logical approach – it allows a degree of flexibility in structuring governance arrangements, while encouraging and promoting the involvement by clinical staff in hospital management, which many believe is key to reducing costs and improving health care delivery.

So what's the issue?

For a county or municipally owned hospital with a publicly elected board, this provision of the final rule raises the not-so-theoretical question of whether a physician would effectively be "forced" to stand for office in order to ensure CMS mandated representation by the medical staff on the hospital's board. While this is not a problem facing the vast majority of hospitals, this question will have practical, and potentially material, significance for many facilities. As of this writing, there is no clear answer or resolution to the issue. Some have suggested that CMS will "address" the matter by simply declining to enforce the provision. CMS may try to clarify the issue in subsequent sub-regulatory guidance. Most seem to agree, however, that requiring an individual to run for public office in order to ensure an institution meets a technical requirement of the Medicare and Medicaid programs is not likely an outcome that was consciously intended by CMS.

So if you do not work with or represent a county or municipally owned hospital, what does this latest example of an "unintended consequence" mean for you? Among other things, this open question highlights the need to evaluate and address governance issues at the earliest stages of an acquisition, merger or affiliation transaction. To ensure a well-executed transaction with minimum issues and surprises, the transaction team should, among other things:

  • Identify which boards, committees or other internal organizations or constituencies need to know or may be required to approve the transaction.
  • Develop and execute an effective communications plan to keep the parties' governing bodies and key constituencies "in the loop".
  • Ensure that all internal deliberations are appropriately documented, and that any required consents are appropriately drafted to incorporate all relevant (but no extraneous) detail.
  • Identify at the outset what the "optimal" governance structure for the surviving entity(ies) may be post-closing.
  • Evaluate whether the transaction may present an opportunity to implement a new or enhanced governance structure or approach.
  • Consult with legal counsel to evaluate the potential benefits and risks of any proposed new or modified governance structure.
  • Consider raising and addressing key governance issues and concerns as early as the term sheet or letter of intent stage to help "level-set" expectations of the parties.

To paraphrase American inventor Charles Kettering, it pays to think about the future now, because ultimately we'll be spending a lot of time there. Careful attention at the negotiation and documentation stage to governance challenges that may face a new, combined or affiliated organization will help pave the way for a smooth transition to that organization's new – and hopefully bright – future.


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