The Board and "MACRA"

It is exceedingly important for the health system board—and its key committees—to be briefed on the strategic implications of CMS' recently released proposal to implement the physician payment reforms required under "MACRA." Given the legal and compliance components of MACRA, the system general counsel is well-positioned to provide this briefing.

As most general counsel know, MACRA will impact how CMS pays physicians for services provided to Medicare beneficiaries by substantially linking such payments to performance metrics and incentivizing physicians to reduce hospital utilization and to participate in alternative payment models that bear substantial financial risk. MACRA will create powerful incentives that will accelerate the reshaping of the physician services market.

MACRA will likely encourage physicians to consolidate into larger groups, enter into arrangements with physician specialty management companies, or, most likely, become employed by or otherwise contractually aligned with health systems in order to have access to the IT and other care management infrastructure that they will need to achieve the MACRA metrics. Accordingly, MACRA presents a significant opportunity for health systems to create greater clinical and financial alignment with their physicians (and to manage the hospital utilization incentives described above) —as well as a greater risk of losing this opportunity to their competitors. MACRA will create futher impetus for the creation of hospital and physician systems that are fully integrated, clinically, operationally and financially.

The need for board awareness lies in the profound change these reforms are expected to have on health systems, their physician relationships, strategic planning and legal compliance. MACRA will affect the roles and responsibilites of key board committees such as Strategic Planning; Audit & Compliance; Physician Compensation and Finance, to say the least. The general counsel can be a highly effective advisor to governance in all MACRA-related briefings.

Audit/Compliance Committee Briefing

Several important developments in June merit the attention of the system's Audit & Finance Committee. These include new DOJ rules that would nearly double penalties under the False Claim Act, and the latest public comments on application of “Yates Memorandum" principles from senior DOJ officials.

DOJ's interim final rules (issued on June 29) substantially increase both the minimum and maximum per claim penalties. They are set to go into effect on August 1, 2016 and will apply to claims after November 2, 2015. McDermott’s "white collar” attorneys expect that, among other factors, the new rules will likely not result in increases in the actual amounts paid by entities settling cases, because DOJ typically settles for a multiplier on single damages only (2-3 times absent a financial inability to pay), and foregoes penalties altogether.

However—and this is key for the Audit & Compliance Committee—the expectation is that the new rules will increase the pressure on entities, whether for-profit and not-for-profit, to settle cases because of the enormous potential exposure. Bond and other financing could be jeopardized, which may affect settlement decisions in marginal cases. Thus, the "business risk" implications of FCA penalties become potentially far more significant, which is a serious board/committee oversight consideration.

Committee members may also benefit from reading the June 9 speech of Acting Associate Attorney General Bill Baer. In his comments, Mr. Baer discussed the rationale for the government's commitment to individual accountability, and the core elements of corporate cooperation, in the context of a larger discussion on FCA enforcement.

Level of Director Engagement

The June 8 comments of United Airlines CEO Oscar Munoz draw meaningful attention to the critical fiduciary responsibility of "engagement" and the risks that can arise when a governing board becomes isolated from corporate operations. 

While not capable of precise measurement, "engagement" generally refers to the broad level of commitment of the director to his/her fiduciary duties given the circumstances at hand. It extends beyond the mere calculation of hours spent by board members in the performance of governance responsibilities, to subjective factors such as attentiveness, diligence, exercise of constructive skepticism, awareness of operational results, sensitivity to trends and developments, and commitment to service (i.e., no over-boarding).

In his comments, Mr. Munoz was critical of the United board's level of engagement. Indeed, he attributed much of the operational decline of the airline in recent years to the board's isolation—reflected in part by the infrequency of its meeting schedule. This, according to Mr. Munoz, resulted in lack of operational insight and the board's inability to respond more quickly to problems, such as the company's challenging reservations system.

When scrutinizing board conduct, regulators and third-party interest groups increasingly focus on evidence reflecting the level of board engagement generally, and on particular board agenda items in particular. As health systems agendas become increasingly more complex, important third parties will likely expect a level of engagement by board members that is commensurate with that complexity. As Mr. Munoz suggested, infrequent board meetings may manifest to some a lack of necessary engagement.

Tax Exemption Enforcement

The long term future of the Exempt Organizations (EO) Division of the Internal Revenue Service in terms of regulating the tax-exempt organizations sector is the subject of a June 8 report of the IRS' "Advisory Committee on Tax Exempt and Government Entities" (ACT). As such, it is worthy of notice by the Board's Mission, and Audit & Compliance committees.

ACT is an organized public forum for discussion of relevant exempt organizations; tax-exempt bonds and other tax issues. It enables the IRS to receive regular input on the development and implementation of IRS policy concerning the EO community. ACT members are selected by the IRS Commissioner and appointed by the Department of the Treasury.

The ACT report mirrors the perspective of many tax-exempt organizations that the EO enforcement and technical educations functions of the IRS have significantly declined over the past several years. As a result, the ACT report expresses concern that the IRS may be unable to regulate the EO community "consistently and effectively." Accordingly, the ACT makes a series of recommendations intended to assist the IRS in reclaiming its role "as a regulator of tax-exempt organizations" instead of what ACT described as "its nearly exclusive focus on tax administration."

The ACT report can serve as a reminder to health system boards and their legal risk evaluation function that compliance with exempt organization tax laws remains important, and that there are credible public voices calling for the IRS to return to more active oversight of the exempt organization sector.

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