iProtean—Bylaws, Policies and Conflict of Interest

Hospitals have done relatively well in managing board-level conflicts of interest in the last several years, both as a matter of internal necessity and because of increasing demands from the IRS.  In today’s environment, however, new questions concerning “constituent” interests have surfaced.


“Constituent” interests refer to situations when individuals elected to a joint venture board may be perceived to represent specific constituencies of the joint venture, thus possibly overriding their fiduciary duties to the joint venture itself.  “Constituent interests are particularly prevalent in healthcare,” according to the authors of a recent publication in AHLA Connections.  A noteworthy example of a venture with multiple investments and, thus, possible constituent interests, is the Accountable Care Organization. (Peregrine and Schreck, “Managing Constituent Interests in Healthcare Joint Ventures,” AHLA Connections, March 2012)


In the iProtean course Bylaws, Policies and Conflict of Interest, healthcare attorneys Monte Dube, Elizabeth Mills and Robin Nagele, and healthcare governance expert Lawrence Prybil, Ph.D. discuss the parameters of conflict of interest at the board level.


Monte Dube, Esq., Proskauer

What does the law say, both not-for-profit corporation law and IRS rules and regulations, about managing conflicts?  It’s really simple.  And you should have this procedure set forth either in your corporate bylaws or in a special separate conflict of interest policy. First, conflicts are allowed.  How do you manage them?  Number one, they need to be disclosed . . . annually, in writing.


Robin Nagele, J.D., Post & Schell

One of the things the IRS looks at when assessing whether a hospital is entitled to its tax exemption is the possibility for conflicts of interest within the board, and also the transparency of the board’s decision-making process.  Basically, the notion is the IRS doesn’t want the hospital’s executives and its board to be doing insider deals that will benefit people affiliated with the hospital and its board members, and to be making decisions in a way that is perhaps taking inappropriate factors into account, such as the personal relationships, the family relationships, the business relationships that individual board members may have or individual executives may have.


Monte Dube, Esq., Proskauer

Not-for-profit, tax-exempt hospitals are allowed to have conflicts of interest at the board level.  In fact, it’s the rare hospital board that doesn’t have some conflicts of interest at the board level . . . Conflicts though aren’t per se bad.  On the contrary, the law anticipates that your hospital will have conflicts of interest.  The key is to manage the process of conflicts appropriately.  It is all about process.  Managing conflicts appropriately is all about disclosure and allowing the board to take action without the conflicted board member’s vote being part of the ultimate decision-making.


If you are one of the thousand or so governmental hospitals in America that is owned and operated by a city, a county or a district, you may well have unique and special laws which apply to how you may navigate the conflict of interest problem.  Make sure you talk to your counsel so you know the rules of the road.


Elizabeth Mills, Esq., Proskauer

It takes a lot of talent and interest to be a hospital trustee.  Particularly in less populated areas, there may not be a lot of people in town who are able or willing to take on that role.  In many cases, there will be conflicts on the board.  People who are on the board will provide services to the hospital, perhaps because they are the only ones in town who provide that service.


Having a conflict is not bad.  Having an unmanaged conflict is bad.  That is why you need to identify potential conflicts and then address those in the particular situation in which they arise.  For example, if you need to buy equipment from a vendor who is on your board, he or she doesn’t participate in the discussion or the vote on who to buy that equipment from, but that doesn’t mean that person is a second-class board member.  It just means in this particular case we have to manage the conflict very transparently so that everyone—the attorney general, the IRS—knows that we are taking these steps to act in the best interests of the hospital.


Robin Nagele, J.D., Post & Schell

The IRS is also looking for transparency, and there may be state law requirements as well.  Some states have sunshine laws that require all board deliberations to occur in a public setting.  The transparency requirement is certainly a function of the IRS process . . . Again, [this is] all part of a larger picture in which the government wants to make sure that decision-making is rational, objective, based on the facts and not based on any secret agendas or undo influence from within the board room.


Lawrence Prybil, Ph.D., University of Kentucky

The guiding principal is when in doubt, declare a conflict of interest and absent yourself from any decision-making that could be criticized—either where you could be criticized or the hospital could be criticized.  To be meticulous in disclosures and honoring your conflict of interest policy is the best prescription for avoiding problems.


For a complete list of iProtean courses, click here.


iProtean Symposium & Workshop

Mark the Date!! October 10 – 12, 2012 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Barry Bader, Dan Grauman, Marian Jennings and Brian Wong, M.D. For more information, click here.


For more information about iProtean, click here.