Case studies: the legal implications for health care's bad business practices.

Bad, or unethical, business practices have always been a concern for physicians and health care organizations. But recent high-profile business catastrophes refocused our attention on the responsibilities physicians must keep in mind when functioning as officers or board members.

Following federal legislation arising from the corporate scandals at Enron and WorldCom--and in light of the recent litigation against health care organizations for fraud or unethical billing practices--a review of potential ethical conflicts and pitfalls is important.

Case study 1: I was merely doing my duty as a medical staff member when I agreed to serve on the hospital's board of directors.

Dr. Smith, the president of a local multispecialty clinic, was flattered and pleased to be nominated to serve on the board of directors of his local hospital. Competent in medical management from his tenure as a medical staff officer at the hospital and his experiences at the clinic, Smith gladly accepted the board position.

While serving on the board, Smith learned much about hospital governance and operations. Additionally, his expertise on quality and patient care served the other non-medical board members well because many operational and financial issues required both clinical and non-clinical guidance.

While attending the annual spring board of directors' retreat, Smith participated in many strategic planning discussions. The hospital's census was declining and hospital management engaged a national health care consulting firm to present the board with new ideas for producing revenue.

The consulting firm studied both national and local health trends, accessed both national and local utilization and demographic information, and formulated three specific strategic opportunities to reverse the hospital's declining revenues.

1. The first involved building facilities for a comprehensive oncology program and recruiting both a medical and radiation oncologist.

2. The second called for the alignment and merger with other hospitals in a 200-mile radius to form a regional, multi-hospital corporation to achieve some economies of scale.

3. The final strategic opportunity called for development of an outpatient imaging and surgery center.

As a practicing physician at the hospital, Smith raised numerous issues regarding operational inefficiencies at the hospital, all of which, if remedied, would cut costs and increase profitability. While Smith liked the oncology program plan and was neutral on the regional merger concept, he did not feel that the hospital should expand into what he felt was a physician outpatient imaging and surgical market.

After lengthy discussions and analysis by hospital management, the consultants and the board, however, it was decided that the best strategic opportunity for the hospital would be to build and to operate an outpatient imaging and surgery center.

Later the following summer, Smith's multispecialty clinic held its own strategic planning meeting. Suffering from the same declining revenues as the hospital, the clinic physicians began brainstorming ideas to enhance their revenues. Several suggested building an outpatient imaging and surgery center.

Should Smith participate in these discussions?

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Duty of loyalty

Any time a person has a duty of loyalty to a competitor or potential competitor, ethical conflicts often arise.

Here, Smith has a duty of loyalty to both his clinic as its president and to the hospital, as a member of the board of directors. He must be very careful with the information he learns at both the hospital and the clinic. Using information learned at one place to assist the other forces an ethical and legal conflict. Because he is the president and an officer in the clinic, and before accepting a board position, Smith should fully disclose his position and duties as the clinic's president to the hospital and his position and duties as a hospital director to the clinic.

Even after full disclosure, as a director on the hospital's board faced with attending part or all of a strategic planning retreat, Smith should

* Get the hospital to consent, in writing, that he can share any confidential information learned at the retreat or in his position as a director with his clinic (very unlikely)

* Not attend any board or planning retreat presentations or discussions regarding issues that may potentially conflict with the clinic

* After intentionally or accidentally attending any board or planning retreat presentations or discussions regarding potentially conflicting issues with the clinic, dismiss himself from any discussions and decisions the clinic may make regarding the information he learned from the hospital.

Courts take very seriously a breach of one's duty of loyalty. If the clinic were to use the information Smith learned from the hospital in his role as a director to "beat the hospital to the market" in an imaging and outpatient facility, any lost profits the hospital suffered from having two competitors in the market rather than one may come from Smith's personal assets.

Case study 2: Dr. Jones is a surgeon and the president of a medical clinic. The other directors also are physicians in the clinic. So why should her own clinic hold her and the board of directors responsible for billing irregularities that led to a government investigation of the clinic?

Beginning as 20 physicians from six different practices, the multi-specialty clinic arose from a merger of these practices. Like any merger, after all of the dust settled, they had an excess of mid-level administrative and management personnel, all of whom they were loyal to and found positions for in the new multispecialty clinic.

Over the next three years their clinic grew to 100 physicians and the complexity of their business operations tested the bounds of our current administrative and management expertise. While they tried to consolidate all of the billing into one central department, a minority of physicians insisted they continue to do their own billing just as they had done so successfully for years prior to the merger.

Not only did this minority of physicians insist on doing their own billing, they refused any central oversight by the clinic management--they did not want business people telling their billing people how to do their jobs. To keep harmony in this relatively new clinic culture, the board of directors decided to allow this minority of physicians to keep their autonomy in the billing area.

Six months later, Jones, as the president of the clinic, received a complaint from the department of insurance and the state attorney general's office, stating that the clinic was under investigation for billing irregularities. It seems that the minority of physicians not only had been routinely upcoding clinic examinations, but they also had been demanding full payment prior to treatment for Medicaid beneficiaries.

After an extensive governmental investigation, which cost the clinic in excess of $200,000 in legal and consulting fees to defend, the clinic was fined, being forced to repay $1.2 million in overpayments for upcoding and prepayments by Medicaid beneficiaries.

And the rank and file physician shareholders want the physician officers and physician board of directors to pay the legal fees and fines out of their own pocket.

How could this have been prevented?

Duty of care

In the wake of the corporate scandals of the 1990s, new federal legislation governing the professional duties of corporate officers--known as the Sarbanes-Oxley Act--arose. While this legislation concerns mostly public corporations, its effect can be seen in the not-for-profit and physician health care arena.

For example, the Office of the Inspector General of the U.S. Department of Health and Human Services has worked closely with the Health Care Compliance Association and the American Health Lawyers Association to develop criteria to assist corporate directors and officers in their roles of corporate responsibility. (1)

Generally, these criteria involve a corporate "duty of care." In ensuring that officers and directors fulfill their duty of care to the organization, the officers and directors must act:

* In good faith, with a level of inquiry and appropriate due diligence which allows for an informed business decision

* At a level of care that other corporate officers and directors in similar organizations would reasonably act

* In a manner that they reasonably believe is in the best interest of the organization.

Specifically, this duty of care encompasses an expectation by the rank and file clinic physicians that the officers and directors of the clinic will act in a business-like manner.

A physician executive or director does not have to be a CPA or billing expert to serve in an officer or director role, but they should ensure that systems and experts are in place to appropriately handle the operations of the clinic.

The responsibility of the board of directors is to provide oversight, not manage the day-to-day affairs of the clinic. Nevertheless, oversight includes building an organizational infrastructure that has a compliance program, an audit committee, access to experts such as CPAs or attorneys for complicated accounting or legal issues, and a commitment by the directors and officers to learn and keep current with the issues effecting health care as they relate to the operations, growth and strategic management of the clinic.

The bottom line is that corporate director and officer duties should be taken seriously and approached in a business-like manner. Gone are the days of the board of directors "rubber-stamping" any decision management makes.

While management is still charged with the day-to-day operations of the clinic, the physician officers and directors must--directly and through expert consultants--educate themselves to the point where they can oversee a clinic infrastructure possessing the checks and balances needed to ensure compliance with the law and good business principles.

In Jones' clinic, the officers and directors had a duty of care to act like any other reasonable business venture, including hiring trained professionals to run the operations of the clinic and to provide adequate oversight, through compliance plans and internal audits, of each physician revenue stream.

As the clinic grew, a more formal, upper-level management infrastructure should have been in place and the board of directors should never give any physician total autonomy over their billing, or any other aspect of the management of the clinic.

References

1. See http://oig.hhs.gov/fraud/complianceguidance.html#2

By Timothy McIntire, MD, JD, MBA, CPE, FACPE 

Timothy McIntire, MD, JD, is an attorney with Baker, Donelson, Bearman, Caldwell & Berkowitz, PC. He is based in Nashville, Tenn., and his primary focus is defense law for physicians and health care organizations. He can be reached at 615-726-5620 or [e-mail]

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