The Case for "Mission-Hostile Management"? - Should Hospital Leaders Test "Boundaries of Legal Permissibility" to Beat Competitors?

The New England Journal of Medicine earlier this month published a notable article entitled "Regulatory and Judicial Oversight of Nonprofit Hospitals" that is worthy of summary and comment. [Studdert DM, Mello MM, Jedrey CM, Brennan TA. Regulatory and judicial oversight of nonprofit hospitals. N Engl J Med 2007; 356: 625-631.]

The article gave a somewhat dry description of the "legal environment in which nonprofit hospitals operate." The authors started by surveying the US federal law that regulates not-for-profit corporations, section 501(c)(3), and how the US Internal Revenue Service (IRS) has regulated, or failed to regulate the conduct of non-profit hospitals. Importantly, Studdert et al noted that the IRS historically could only use a very blunt negative incentive against misconduct by not-for-profits, eliminating their not-for-profit status. However, in 1996 the IRS developed "intermediate sanctions," "financial penalties on influential insiders, such as board members and managers, who frustrate the charitable purpose [of the organization] by reaping impermissible private gains or 'excess benefits' from the corporation. [Yet,] to the best of our knowledge, intermediate sanctions have only been applied once in health care."

The article then surveyed legal issues at the state level. Although they asserted increasing activism by state attorneys general, spurred by developments such as "the spectacular collapse of the Allegheny Health, Education, and Research Foundation in 1998," the authors found "difficulty of discerning any pattern in the way state courts have viewed questions about nonprofit hospitals' compliance with their charitable purposes."

Finally, the article discussed class-action litigation, such as the many recent law-suits that charged "hospitals have shirked their community responsibilities, particularly in failing to provide free care to poor and uninsured patients." However, most federal class action suits have failed, although there have been a few settlements of state level suits.

The article was long on description, and short on policy recommendations. But one recommendation it did make was striking.

In conclusion, the authors suggested that the "convoluted evolution" of law and regulation reflects major unresolved policy questions. They noted sympathetically the "formidable challenges" which non-profit hospitals face, such as "cost increases that will outpace reimbursement," and "growing competition from medical staffs interested in tapping into profits from procedure based-care." The authors asserted that such challenges should cause hospitals to "develop increasingly aggressive business models." Thus, Studdert et al finally concluded that "one might argue that leaders of nonprofit hospitals are failing to act diligently if they do not test the boundaries of legal permissibility by considering every technique that their for-profit competitors use."

This is an important article, one that deserves to be read. It provided a nice summary of the legal environment in which US nonprofit hospitals operate vis a vis their nonprofit status. Most of the article was descriptive, not prescriptive. But to call its concluding recommendations discouraging would be understatement.

These conclusions seemed to not to assume any ethical or moral standards for leaders of nonprofit hospitals. Rather, the article finally implied that they should put making money, and "increasingly aggressive business models," before anything else. This amoral approach seemed to spawn the notion that hospital leaders ought to approach and sometimes go over the line separating legal from illegal behavior because that is what their competitors are doing. (How illegal behavior by some for-profit hospital chains have landed them and their leaders in hot water was not mentioned.)

Perhaps this underlying amoral approach is why the article failed to mention any of the ethically questionable behaviors of leaders of not-for-profit hospitals. Some that have been cataloged on Health Care Renewal include: accepting or condoning conflicts of interest affecting physicians and managers, including respected faculty paid part-time by pharmaceutical companies apparently to help market their products, and hospital CEOs paid by vendors for "face-time"; hospital CEOs convicted of federal crimes commited as part of their official duties; and hospitals indicted for federal crimes and allowed to continue operating only under deferred prosecution agreements; etc., etc. These behaviors to me suggest the need for higher ethical standards for hospital leadership.

Current events suggest that the leadership of nonprofit hospitals, like other health care organizations, is all to often mission-hostile. Urging hospital leaders to go up to or over the legal line to beat out the competition may produce even more mission-hostile management. If managers heed this dubious advice, higher costs, decreased access, poorer quality, and more demoralized health care professionals would surely soon follow.