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Senior and Post-Acute Healthcare News and Topics

Boards of Directors: Outside Looking In

Over the course of many engagements plus my years as an executive, I’ve addressed and been asked to address, the theme of effective governance, particularly at the Board level.  To bring this topic into full context, one of my many “hats” that I wear (periodically), is as an advisor to graduate and post-graduate students working in the arena of health policy and healthcare management. One of my students currently, is researching this topic of governance especially as the same (effective v. not effective) correlates with organizational prosperity.  Her area of concentration in this research is non-profit health care organizations, though for-profit organizations are included as a contrast subject.

Her research and our conversations, reviews, etc. are fascinating as the content leads me across my many experiences serving on boards (non-profit, for-profit and publicly traded) as well as my many client engagements working with and/or in conjunction with, senior executives and their boards.  Upon further thought it thus occurred to me that I haven’t written anything as of late on this whole issue of governance – what it is, what it should be, where effective and ineffective collide in terms of organizational prosperity, etc.  Of course as always, my episodic journey (fits and spurts over a few weeks where time permits) led me through tons of stuff from my notes on engagements to former lectures and presentations to other research I have gathered.  Being brief: Wow.  I have a collection; quite a bit deeper than I thought/remembered.  The net of my review is that this topic of “governance” lends itself to a series of posts.  This is the first and for simplistic sake, it covers the core duties and the counterbalance of liabilities, for any Board (non-profit or for-profit).

To start, the core duties of a board are completely separate and thus, different from the core duties of management.  A board has a bifurcated role and responsibility.  The first duty is the advise and consult responsibility with management concerning the strategic and operational direction of the company.  The second and equally important duty is to monitor company performance at the macro level (financial, compliance, risk, etc.).  Topically, the latter element includes but is not necessarily limited to (not in particular order);

  • Approval of strategic plans and strategies.
  • Testing of performance measurements and oversight of risk management.
  • Succession planning for the top executive(s) and the process of selection, when required, thereof.
  • Audit – assuring the completeness, compliance and integrity of financial statements
  • Compliance – assurance that the company/organization complies with all federal, state and other related laws and regulations.
  • Approval of major capital investments
  • Protection of company assets and reputation, including tangible and intangible assets (intellectual property, trademarks, name, etc.)
  • Assure adequacy of executive compensation packages and develop and implement, the same in order to assure the security of key executive(s).
  • Represent the interest of shareholders and/or stakeholders (non-profits).

The key issue for a board is the concept of independence; the independent director.  In this regard, the ideal is that a board is solely interested in the welfare of the organization and thus, each director is free of self-interest such that the same would compromise his/her judgment and/or render him/her unable to take positions opposite of management when required.

The board is headed by the Chair(man or woman) who is responsible for agenda, meeting schedules and structure, committee coordination and overall communication within and across the board.  Boards make decisions on a majority rule basis unless specifically required otherwise (certain actions may require a super-majority) and such decisions are based on the information and input from management.

Board committees may exist in large numbers or in smaller numbers.  In healthcare, the following committee functions/board committees require specific attention.

  • Quality/Compliance: This is a major risk area and it is perhaps, the most critical oversight function for a healthcare board today.
  • Governance: Boards need to address new member recruitment, director performance, board performance, board education, etc.  This element also includes CEO performance and may/may not encompass compensation for the CEO.  Some organizations split compensation into another committee.  I have found both split and shared equally as effective if properly managed.
  • Audit/Finance; Second only to compliance in terms of risk, boards need to engaged in the review of investments (capital, other), financial statements, the engagement of auditors, the review/approval of financial plans, budgets, forecasts, and where applicable, any organizational financing activities from feasibility through completion/non-completion.  This function also encompasses financial risk management and review of public release information.

Board terms are all across the map today but the two best practice models I favor are one-year, annual election of members or staggered two or three-year terms.  Each have merit and each have flaws.  The true test of effectiveness of any “term” condition is how effective the governance function is in terms of director review, board review, etc. Boards that have effective director performance review, clear criteria and effective board performance review self-police and thus, make term conditions work regardless of length.

Finally and key for all boards and members to understand is that boards have specific legal duties, typically identified under their respective state laws or as embodied in case-law.  These duties are typically identified as “fiduciary” in nature.

  • Duty of Care: The requirement that decisions are made via deliberation and investigation/data.
  • Duty of Loyalty: The requirement that directors act in the best interest of the corporation or enterprise.  This duty has also been, in some case-law decisions and state laws, expanded to include the best interest of shareholders.
  • Duty of Candor: This is more applicable to publicly traded companies but I have found it universally applicable.  It essentially means that the Board provides all relevant and transparent information to any party where the organization solicits business, solicits investment, or is inclined to be or involved in transactional business.  Effectively, this is the full and honest disclosure rule or as I like to call it, the tell the truth”  principle.

In my next post, I’ll explain how the implications of board duties, structures, etc. play out in real life and how public vs. private (non-profit vs. for-profit) situations compare and contrast.


March 18, 2014 Posted by | Assisted Living, Home Health, Hospice, Senior Housing, Skilled Nursing, Uncategorized | , , , , , , , , | 2 Comments

Property Tax Update for Wisconsin Senior Housing

The 2009-2011 Wisconsin budget (Act 28) incorporates a specific change to how the state defines property tax exemption for non-profit senior housing projects.  Up to this point, the existing statutory law was vague and providers were left to contend with a precedent set by an even more vague Supreme Court decision (Columbus Park) and patchwork legislation authored to counteract or more appropriately, counter-balance the Columbus Park decision.  Below is a brief summary of the recent history of non-profit senior housing and property tax issues.

  • Prior to Columbus Park: Wisconsin Statutes 70.11 created a category of exemption for benevolent homes for aged.  The exemption category as poorly defined as it was, fundamentally allowed 501(c)3 providers to argue that their federal exemption and the use of the property for “benevolent” purposes met the definition, provided that the exemption was sought for 10 acres or less.  Limited challenges were made by Assessors to this definition or to the broad interpretation used by non-profit senior housing providers.  Perhaps the statutory challenges most noted up and until Columbus Park occurred in the City of Milwaukee. 
    • In the City of Milwaukee v. The Milwaukee Protestant Home, the City argued that a planned expansion of the Protestant Home funded entirely by new, non-refundable endowments from residents who would still be required to pay monthly rental fees and required to financially qualify, was not justifiably exempt. The basis of the City’s argument was that the new facility was too luxurious, catered only to the wealthy, pre-screened residents to limit the needy, did not provide medical care on-site, and used a health screening to eliminate residency to anyone in need of care.  The Court decided in favor of Milwaukee Protestant Home stating, among other things less relevant to the core exemption issue, that Benevolent does not mean “charity” and as such, a Home can be benevolent and charge fees.  Effectively, the Court said that benevolence can and does in this case mean, allowing people of moderate means to live out their final years, even if the same is not considered charitable.  The Court also said that a new, free-standing housing project must be viewed along-side or as an integral part of the entire sponsoring organization, not in a “vacuum”.
    • In the City of Milwaukee v. Friendship Village of Milwaukee, the city argued that a planned expansion called Freedom Village, built with “refundable” resident endowments and where residents would continue to pay a monthly rental charge, was not justifiably tax-exempt.  As in the case of Milwaukee Protestant Home, Freedom residents were pre-screened as to ability to pay, one resident in a couple needed to be 55 or older, and each resident had to able to live independently (a medical screen).  Residents were provided with a $50 per day credit if skilled care was later required and, as part of their contracts, could opt to convert at a later date, to residency at Friendship Village thereby waiving their refund from Freedom in exchange for residency and care provided at Friendship.  As in the Protestant Home case, the City offered all of the same arguments (too exclusive, no on-site medical care, excluded the needy, etc.) and the facility did not permit residents to live-out the remainder of their years as was the case with the Protestant Home.  The Court reaffirmed the Protestant Home decision stating that benevolent did not mean free and that the Freedom contract provision allowing residents to convert to occupancy at Friendship Village with no additional charge when care was needed, provided the means for residents to “live out their years”.
  • Columbus Park and After: With the Columbus Park decision, the courts began to slowly redefine the interpretation of Wisconsin Statute Chapter 70 as well as to abandon the basis used to uphold the exemptions found in the Protestant Home and Friendship Village cases.
    • In the Columbus Park Housing Association v. City of Kenosha, the Wisconsin Supreme Court ruled that non-profit associations renting housing units to low-income elderly were not exempt from property tax as specified in Chapter 70 (WI State Statutes) unless the tenants themselves could or would be exempt from taxes had they owned the units.  Essentially, the Court said that the only way a non-profit that was renting units to low-income seniors could be exempt was if the seniors themselves were exempt non-profits.  This decision became widely known as creating or establishing the “rent use clause”.  In effect, the Court decided that the only permitted use for rent proceeds derived from low-income projects was property maintenance and debt retirement.  Prior to this point, it was widely accepted and essentially reaffirmed by the Protestant Home and Friendship Village cases that a benevolent association could use rent proceeds for any purpose that furthered or was in concert with, the reason or justification for federal tax exemption and the mission of the benevolent association (e.g., subsidizing other programs within the association).  In 2004, Governor Doyle signed Wisconsin Act 195 which was created to reverse the Columbus Park decision.  This Act prohibited local assessors from collecting property taxes from non-profit providers of low-income housing.  The Act however, did not address with clarity, the “rent-use” dilemma.
    • In Attic Angel Prairie Point v. City of Madison,  a Dane County judge ruled that senior housing was not necessarily a benevolent activity unto itself.  The entrance fees at the time ranged from $230K to $450K and were structured on a life-lease arrangement.  Under this arrangement, residents received 90% of the fee as a refund when they left or vacated their unit.  The contract also provided for a “priority” admission to other Attic Angel care facilities but no guarantee of admission.  While Attic Angel argued the fundamentals found in the Protestant Home and Friendship Village cases (benevolent association status, life lease arrangements, etc.), the Court found that the only use or purpose for Prairie Point was to provide housing to middle and upper income individuals, absent any health care guarantees or provision on-site and in a manner highly similar to other taxable housing developments. Because the case was decided within a Circuit Court, no value of precedent could be used in other cases, a basic ruling on the exemption issue had occurred sufficient enough to garner attention within the non-profit community and across state-wide municipalities, namely with assessors.

With the passage of Wisconsin Act 28 (the Budget bill), new provisions are now in-place beginning January 0f 2010 that establish the basis for property tax exemption for benevolent homes for the aged.  The law clarifies the exemption test and creates presumed categories of exemption for CBRFs, SNFs, Hospice (those that operate places of residence) and RCACs as defined under Chapter 50 of the Statutes.  The Act also expanded the number of acres that could be exempt from property tax from 10 to 30.

With respect to residential units or senior housing units, the Act provides that a benevolent association may exempt those units with fair market values less than or equal to, 130% of the average equalized value of residential units in the county where the project is located.  The Act also provides specific exemptions for low-income senior housing provided by non-profit, benevolent associations and removes the requirement that the rent be used specifically for debt repayment or property maintenance.  This same provision regarding “rent use” applies to other categories of senior housing as well.

Where I expect the issues to arise with respect to the new provisions in Act 28 are around the determination of fair-market value and the potential carve-out of certain units in a project having values in excess of 130% of the equalized value while others do not.  In effect, some units may be determined as taxable while others qualify for tax-exemption.  How an allocation of property tax to the taxable portions is determined will no doubt raise a series of court challenges.  Similarly, as the units themselves are typically within a larger complex, often with extensive and at times, quite opulent common space, determining fair market value of the unit will be an interesting exercise.  Truth be told, fair market value for the unit is not by assessment definition, the price charged for the unit.  Fair market value would require a determination of value based on an assessment and/or appraisal methodology and I anticipate wide interpretations coming forth across the various county assessors throughout the State. 

In summary, while Wisconsin Act 28 goes quite a ways in clarifying the issue of property tax exemption for benevolent homes for the aging and senior housing projects, the “waters” remain somewhat murky.  It will be interesting to watch how the process unfolds and where the lines are drawn (likely via the courts) on the open issues of fair-market values and how taxes end up allocated on units within a project that don’t meet the 130% equalized value threshold.

February 20, 2010 Posted by | Policy and Politics - Wisconsin, Senior Housing | , , , , , , | Leave a comment

Non-Profit Health Care Outlook for 2010

Moody’s Investor Service released their annual sector outlook today for not-for-profit health care organizations, stating that they (Moody’s) continue to maintain a “negative” outlook on the industry.  Important to note in this report is that the focus is principally on hospitals and since the report is produced by Moody’s, its primary perspective is on credit and investment.  That said, even with the predominant focus being on hospitals, there is quite a bit of take-away information for non-profit health care providers in general, including those in the post-acute sectors.

The emphasis Moody’s places on their negative or dim outlook is economic related primarily and public policy weighted secondarily.  They point to the continued weak economy as the cause for slack patient volumes and concerns regarding provider debt levels, particularly those providers that may be facing an expiring Letter of Credit (LOC) situation over the next twelve to eighteen months.  With regard to public policy issues, Moody’s points to budget insufficiency issues in Medicare and Medicaid foreshadowing tighter or declining reimbursements and uncertainty of the outcome of health reform although, as they indicate, the legislation today, is effectively in limbo.

According to Moody’s, the weaknesses inherent for non-profits are their reliance on governmental sources for payment more so than proprietary operators and their need to be cautious of their tax-exempt status in terms of a political culture requiring more and more justification of expenditures made on behalf of the uninsured or under-insured population.  I would also add that other forces such as unions are today, targeting non-profits more so than ever and the result is higher labor costs and higher legal defense costs (to abate organizing campaigns).  Similarly, the plaintiff’s bar is far more active today and for non-profits, their fair-haired status once given due to religious affiliations primarily, is all but gone.  It is not uncommon any longer for attorneys to seek damages against large or for that matter, even small to medium-sized non-profit providers. 

The report cites the following reasons as the primary factors contributing to Moody’s negative outlook.

  • Sluggish patient volumes due to high levels of unemployment combined with the loss of health insurance.
  • Pressure on revenue streams, particularly Medicare and Medicaid combined with intensified recovery activity (RACs and Probes).
  • Greater difficulty in cutting costs due to the cost-cutting measures already undertaken in 2009 and late 2008.  There is little room remaining for significant expense reductions. 
  • Increasing bad-debt exposure.
  • Debt structure and liquidity risks driven by high bank exposure, potentially expiring LOCs and less than a full recovery of investment losses.
  • Greater or increasing capital needs after a year or more of deferred capital spending.
  • Expiration of the federal stimulus program at year-end 2010.

In addition to the above negatives, Moody’s cites three positive factors.

  • For some providers, strong management capability that allows the provider to respond quickly to negative operating changes and positive improvements as they occur.
  • Partial recovery of investment losses adding back some liquidity.
  • Likely increase in merger and acquisition activity which Moody’s believes is good for the market.

As I reviewed the report, my conclusions are as follows.  These conclusions I believe, are universal for all non-profit health care providers.

  • The pace of economic recovery will push forward or hold back, the recovery of non-profit health care provider’s fortunes.  A quickening pace including job growth will help providers recover quicker although a lag in terms of patient volume increases will clearly be present.  A slow, mixed recovery with equally elongated new job creation will hurt providers and potentially, lead to insolvencies and failures.  The key to remaining solvent in the event of a slow recovery is debt structure, depth of product/service mix and generally low non-wage related labor costs (turnover, legal issues, compliance problems, supplemental staffing costs, etc.).
  • Access to capital at reasonable terms will remain an issue for the sector throughout the bulk of 2010.  While I see some softening, the present stance the Feds are taking on taxing the banking industry could very quickly, chill any warmth that has softened the credit markets. Within the next twelve to eighteen months, a very large ($19 billion) amount of Letters of Credit will come due.  Providers with struggling balance sheets or under-performing newer projects may struggle to meet new conditions and terms to enhance their credit.  Without question, debt costs and the related costs associated with debt issuance will continue to be higher than any period over the last five plus years.  The significant question remaining about access to capital is what role the Feds will play and will they continue to bolster lending activities via HUD to help stabilize some of the credit/lending markets.
  • Of particular concern to me and in concert with the point immediately above is the growth in deferred capital investing that is occurring, particularly in the SNF industry.  This industry is already dominated by aging physical plants and as providers have been forced to defer capital investment due to the economy and due to the reimbursement climate, the industry continues to shed asset wealth via depreciation and become more functionally obsolete.  With growing regulatory pressure for SNFs in terms of environmental standards and new mandates on fire suppression systems, access to reasonable cost capital will be imperative for this industry to modernize and recapture at least a portion of its physical plant asset wealth.
  • With health reform on the Washington back-burner for the moment, I believe providers will tend to breath a collective sigh of relief – prematurely.  While I believe that a reform conflagration is not imminent, the fiscal woes of Medicare and Medicaid trudge on and as a result, the reimbursement outlook from my perspective, remains rather bleak.  There will be continued financial pressure at the federal and state levels to reduce or reign in the trajectory of entitlement spending and as a result, I believe providers need to be vigilant about the prospects of flat to declining reimbursement rates.  Of particular concern to providers should be Medicaid which today, is heavily bolstered by federal stimulus dollars set to evaporate in December.  With state budgets remaining in the “tank” due to the slow recovering economy, states are going to be looking for Medicaid savings with a vengeance unless the feds continue additional matching provisions or add new dollars.
  • In the merger and acquisition area I’m less of a believer that this market will heat-up than Moody’s is.  I think that the time is certainly ripe for some increase in activity but I believe that the credit markets will have more to say about the volume than the desire of providers to acquire or be acquired.  I do believe however that this is an opportune time for non-profits to look at merger and affiliation arrangements as opportunities are plentiful, the benefits of consolidating balance-sheets are obvious, synergies can be maximized across and within markets, and the costs of mergers/affiliations are far less and can be completed with minimal to no need for new debt.

Any readers that would like a PDF copy of the Moody’s report can go to the Author page and send me an e-mail request.  In your request, please provide me with your full name and a working e-mail address that I can use to forward the document.

January 28, 2010 Posted by | Assisted Living, Hospice, Policy and Politics - Federal, Senior Housing, Skilled Nursing | , , , , , , , , , , , , | Leave a comment