Why Health Care Delivery Is An Exceptionally Different Industry: Board Of Directors And CEOs

First in a series.

The business of health care delivery differs markedly from other consumer and service industries in many ways. First and foremost, the economics differ. Specifically, the payers of medical care are often different from the customers, the government and third-party insurers are the primary payers, demand is inelastic, quality metrics are typically unavailable, and the industry consists largely of nonprofits that avoid taxes. And that’s just the start of the economic differences. These profound economic differences vis-a-vis other industries lead to fundamental deficiencies in health care governance, leadership, organizational design, infrastructure, and operations. We believe economic exceptionalism is the root cause. In this series, we provide four examples of the consequences of economic exceptionalism in health care delivery and then discuss what can be done about it.

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1. Boards of directors (governance)

Large hospital system boards are significantly different from boards of large organizations in all other industries. Typically, across industries, a high-functioning board of directors is vital to a company’s success. A chair leads the board, which has on average ten additional members (range of three to 31), who often fill organizational gaps in skills and expertise. In health care, however, boards of directors are different―institutions often have large, unwieldy boards with members who may be impressive names in social and philanthropic circles but have neither the time nor direct experience to help the institution run more effectively. For example, the board of trustees of New York-Presbyterian Hospital is made up of 100 people, many of whom are prominent New York citizens from investment banking and real estate.

There’s no question that Presbyterian, and others like it, are large, complex organizations. But larger, more complex organizations in other industries make do with smaller boards. Alphabet, Amazon, and Walmart have 8, 11, and 12 directors, respectively. As a $10 billion local health care organization, Presbyterian has a board that is about ten times larger than the boards of the $80 billion to $520 billion global organizations.

We are comparing apples and oranges, you say, in terms of nonprofits versus for-profits? Nope―the $3 billion nonprofit, Red Cross, has 15 board members and the $4 billion United Way Worldwide has 12.

Our point is that in health care delivery, boards of directors are larger than the norm, and members often have less day-to-day relevance to the institution, and less operational impact, than boards of companies in other industries.

2. Health system CEOs

CEOs of health care delivery organizations have different incoming experience, and different tenure, than CEOs at companies across other industries. In the U.S., the average tenure of a CEO is 7 to 8 years. But, the average tenure of a hospital system CEO is 3.5 to 5 years. That’s a significant decrease in tenure―about 43 percent shorter, in fact. A longer time in the top office lends itself to better performance, financials, operations, and culture. So, this major difference in leader tenure at non-health care versus health care organizations is important. Having to find a new CEO every 4.25 years is an inefficient human resources model that takes significant capital, time, and other resources, not to mention the additional leadership turnover that invariably occurs with an incoming new CEO.

A serious disconnect between the low apparent supply of capable, experienced (in health care and in management/leadership) health care delivery CEOs versus high demand for capable, experienced CEOs is a main cause of shorter tenure. The hospital CEOs lack the combined management and health care delivery industry experience to lead their organizations effectively, and they depart earlier than CEOs in other industries. Here’s what was written about the problem in the Harvard Business Review. “Many physician leaders who are promoted to lead an entire enterprise or a business segment . . . lack the necessary experience for the job. They aren’t skilled in managing and blending functional and business strategies, portfolio assessment, factoring in short- and long-term tradeoffs, and taking a longer-term strategic approach to decisions. These shortfalls can render such leaders ineffective.”

When we do the “five-whys” to determine why there is such a gap in supply of leadership versus demand for leadership, we conclude that the board of directors is an underlying cause. A key and core job of a board of directors in every industry is to hire and fire a CEO. For years, health care delivery organization boards have not focused on the “elephant in the room” strategic problem of building a pipeline of qualified CEO talent. Therefore, the disconnect between supply and demand of CEOs for health care delivery organizations exists; CEO capabilities in the industry are lower; and CEO tenure is meaningfully less.

Richard Gunderman writes in The Atlantic about various problems with hospital CEOs and concludes, “To turn the tide, we need to call for a higher degree of expertise, dedication, and accountability from the boards of our 4,000 U.S. nonprofit hospitals. Board members need to deepen their understanding of what quality and value in health care really mean, and then hire, fire, and reward their hospital CEOs accordingly.”

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