August 5, 2025 • 18 mins
Rob Gerberry, Senior Vice President and Chief Legal Officer, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery, about the role of the Board, and the Finance Committee in particular, of monitoring the financial affairs of health care organizations, especially after the enactment of the One Big Beautiful Bill Act (OBBBA). They discuss the Finance Committee’s responsibilities, how the Finance Committee should exercise oversight in light of the OBBBA’s potential impact on the financial situation of health care organizations, and the “zone of insolvency” concept.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_00 (00:00):
This episode of AHLA's Speaking of Health Law is
brought to you by AHLA membersand donors like you.
For more information, visitAmericanHealthLaw.org.
SPEAKER_01 (00:16):
Hello, everyone.
This is Rob Gerber.
I'm the Chief Legal Officer ofSumma Health and the
President-Elect Designate of theAmerican Health Law Association.
I'd like to welcome you to thelatest in our continuing series
of podcasts.
on corporate governance issuesaffecting healthcare
organizations.
Today's topic gets us into anissue made current by the
enactment of the Big BeautifulBill Act, the role of the
(00:39):
board's finance committee andthe broader role of the
governance function inmonitoring the financial affairs
of an organization.
Most of our members listening tothis podcast have their own
stories of the financial impactthat Medicaid's changes will
have on their own institution oron their clients.
Whatever the actual numbers are,We know that many healthcare
(00:59):
providers are in for a bigfinancial hit and are wondering
exactly how it's gonna play outfor their organization.
For many, it's tough sleddingahead, and some may flirt with
insolvency.
Management has a tough job aheadin navigating the organization
through this challenge, and theboard's got an equally big job
in monitoring that effort andsupporting management wherever
possible.
(01:20):
And for most organizations, thelogical way for the board to
best conduct that monitoring andoversight role will be through a
committee charged with aspecific responsibility for
monitoring the financial affairsof the organization, whether it
be called the finance committeeor by a similar name.
As the leaving governanceadvisor to the board, the
general counsel likely teamingwith the chief governance
(01:42):
officer is well situated tobrief the board on its basic
finance monitoring obligations,how they're enhanced in the
current environment, and how thecommittee structure can be
helpful in proceeding.
As always, we're joined by ourHLA friend and colleague,
Michael Peregrine of McDermott,Will and Emory, who's also an
HLA fellow and a fellow of theAmerican College of Governance
(02:04):
Council.
So Michael, what's the big dealhere as we look at this month's
topic?
Most of our members' clientsalready have a finance committee
in place.
So why are we having today aspecial podcast to talk about
something that may already beimplemented?
SPEAKER_02 (02:19):
Rob, I think the point today isn't that the board
needs a finance committee oranother committee like that.
Rather, it's that the prospectof significant financial
turmoil, and for some, as you'vementioned, real distress,
heightens the board's oversightduty.
If we look at the big, beautifulBill of Acts provisions, the
(02:39):
board's got to be able todemonstrate that it's on top of
what may be ahead.
Whether it does that as acommittee of the whole or
through a discrete committee isup to its own business judgment.
SPEAKER_01 (02:50):
So a moment ago, Michael, you said heightens the
board's oversight duty as ifthere's an existing
responsibility.
What would you highlight thatduty to be?
Because there isn't a specificjob of the chief financial
officer and is there her staff?
SPEAKER_02 (03:04):
Yeah, Rob, I think you've hit the nail on the head
because this is frequently, inmy experience, an area where
there's particular concern aboutmicromanagement by the board.
But it's pretty well recognizedthat the board has a fundamental
responsibility to monitor theorganization's operating
performance, stability, andlong-term viability.
So it really isn't duplicatingthe effort of the financial
(03:25):
management team.
Rather, it's monitoring theireffort and their actions and the
results.
SPEAKER_01 (03:32):
So if we were to be asked by our colleagues as far
as some specifics as what thatmay entail, what would you
share?
SPEAKER_02 (03:38):
Sure.
You know, there's absolutely noone size fits all charter for
the finance committee or for,again, for any committee that's
tackling financial matters, butit normally includes making
decisions on and monitoring suchthings as, you know, Significant
financial matters, financialpolicies, matters of corporate
finance for a big picture.
(03:58):
Significant investments,including M&A activity.
Management's capital allocationdecisions is always a biggie.
The retirement of debt andcompliance with debt covenants
is also another important taskof the committee.
Being aware of upcomingmaturities and liquidity needs.
certainly credit ratings andrating strategy, revenue cycle
(04:18):
management and relatedactivities.
As always, going back to ourSarbanes history, the integrity
and clarity of financialreporting and related
disclosures, operating budgetsand plans prepared by management
and their implementation.
And then I think coordinatingwith the Risk Management
Committee on practices toevaluate liquidity, credit,
(04:39):
market and pricing and otherfinancial risks.
And the from a big pictureperspective, the tax planning
strategies of the company.
I want to emphasize, Rob, it'snot the committee's
responsibility to come up withthese strategies and come up
with the data.
It's to monitor the preparationof it and to confirm and be
comfortable that it's accuratelyprepared and to understand where
(05:01):
the data and the informationfits within the organization's
broader profile.
SPEAKER_01 (05:06):
That seems to be a pretty comprehensive list.
What else would you expect of acommittee before they take steps
that may be seen asmicromanaging the CFO?
SPEAKER_02 (05:15):
Well, you know, as we've talked about in these
podcasts periodically, when westart looking at how a board
satisfies its recognizedfiduciary responsibilities, like
oversight of finance, you got todo so through the lens of the
prevailing facts andcircumstances.
And those circumstances are, asyou mentioned at the top of the
program, pretty challenging.
(05:36):
If you look at the Wall StreetJournal from last week, I think
it is, they're reporting thatover the next 10 years, payments
to hospitals will be reduced bynearly$665 billion, which is
roughly an 18% decrease.
And on top of that, the journalreports that uncompensated care
costs are expected to increaseby about$84 billion.
(05:59):
That's just simply stuff thatthe board has to be aware of,
has to understand, and has tounderstand what the responsive
measures are.
SPEAKER_01 (06:08):
So what's the plan in the case we do face those
headwinds?
What should the general counselbe advising the CFO and the
board to do?
SPEAKER_02 (06:14):
Well, actually, I think that's a good point that
you make, Rob.
It's really saying what shouldbe the general counsel saying.
And I think in...
Part, the general counsel has tomake sure that the financial
management team understands theboard's responsibility, first
and foremost.
We don't want any frictionthere.
And the management team,financial management managers
have to understand that it is acritical role of the board to
(06:35):
work with them and to monitorwhat's going on.
And in these particularcircumstances, the advice and
the information to both thefinancial team and the board is
that the board of directors iswell advised to assume they're
likely going to need to up theirgame on financial oversight
unless or until the Medicarechallenge recedes.
(06:56):
But again, it's a question ofthe board's got to show that
it's upped its game in terms ofmonitoring financial matters.
SPEAKER_01 (07:05):
So Michael, what does up your game mean in this
context?
Isn't the board alreadyperforming at a high level?
How much more do they need to doto show they're meeting the
standards that we're outliningtoday?
SPEAKER_02 (07:14):
Rob, I think there's a lot of practical issues here,
and we're going to get into thearea where creditors' rights
intersect with fiduciary duty.
I think the basic answer to yourquestion is the board's got to
take what they believe to begood faith steps to demonstrate
heightened overstep.
In other words, let's create arecord.
Let's implement a series ofsteps that are intended to put
(07:37):
the board in a situation, in aposition to be effective
partners with management asmanagement develops responsive
financial strategy.
strategies in monitoring thewarning signs of financial
distress.
It's all about being aneffective partner to the
management team on these, andyou can't be an effective
partner to management if you arenot up to speed on what's going
(07:58):
on.
It's that firm finger on thefinancial pulse of the
organization.
SPEAKER_01 (08:04):
So, Michael, I feel like I'm deposing you in this
month's podcast, but can youelaborate more on just what some
of those steps might be?
SPEAKER_02 (08:09):
Sure.
And again, this podcast, thereare a lot of kind of note-taking
issues here, and so I'll go slowon these.
But I don't think there's amaster list of what good faith
efforts might be.
But again, I want our listenersto think of this in terms of
setting a record that the boardearnestly and efficiently tried
to address theirresponsibilities here.
(08:30):
So I think if we make that list,it would encompass the
following.
Number one, I think absolutelythe board's got to be familiar
with the ACTS Medicaidprovisions, the timing of their
implementation, the impact onthe organization, and
management's responsive plan.
That's a biggie.
In other words, they don't haveto be experts on every line of
the BBA.
(08:50):
Or is it BBB?
I can't remember.
But they've got to be able to beconversant on what the act does
to the Medicaid program.
It's elevator talk.
It's whatever.
But they've got to understandwhat that's doing, what's its
impact on the organization, andthe timing.
That's where the role of theFinance Committee comes in
taking the primaryresponsibility for that.
(09:13):
But even if there is a financecommittee, Rob, I think the
board has to have some kind ofbasic working knowledge of
what's going on.
Another thing I think is veryimportant is to make sure
everybody's clear on thesufficiency of the management to
board reporting on financialmatters, as well as specific
protocols on reporting what wewould call mission-critical
financial risks.
(09:34):
I think oftentimes these are thekinds of things that can fall
through the cracks.
The board and management shouldbe in lockstep with each other
in terms of information flow.
Then I think along the samelines, the board's got to be
able to have access, not that itdoesn't already have, but
perhaps enhanced access to itsfinancial management team, as
well as to its outside financialand strategic advisors that may
(09:58):
have been engaged on a generalbasis or also to help with
respect to the Medicaid responseplan.
the board needs to be able totap these outside advisors as
their deliberations and theirmonitoring suggest.
Then I think we have to makesure that the finance
committees, or again, whatevercommittee is responsible, that
(10:19):
their role and scope on specificMedicaid oversight matters is
spelled out.
Again, part of building a listshowing what we've done, making
sure that the committee charterspecifically includes oversight
of the organization's responseto the Medicaid changes in the
big act.
I think it's very important thatthe whether it's the finance
(10:42):
committee or other committee,includes members with a
sophisticated financialbackground, people who can talk
the talk with the financialmanagement team.
It's important not only from theperspective of comprehension and
reporting to the board.
I think it's also important interms of making sure that the
financial management teamrespects the finance committee
(11:03):
and what it's trying to do.
One area, Robin, I'm alwaysgoing to be a compliance guy at
heart.
I think it's important that thefinance committee or the board
as a whole crank up complianceoversight over those new
management initiatives designedto generate new lines of revenue
(11:23):
that potentially implicate theanti-fraud and self-referral
laws.
We know they're coming.
We've got to find new revenue.
We'll come up with creativeideas.
Sometimes those creative ideashave increased legal risk.
We want to make sure thatthere's a process that those new
revenue-generating initiativesdesigned to provide new lines of
income to the organization areprepared and implemented
(11:46):
consistent with compliance withthe fraud and abuse and
self-referral law Then, youknow, it's something as simple
as formalizing the process bywhich the board or the finance
committee meets to addressfinancial matters.
We're looking at that list.
We're looking to say what we'veacted in good faith and making
it very clear in writing howoften the board and the finance
(12:08):
committee meet on financialmatters and how often they're
sending information back andforth is in the record.
Then I think it's reallyimportant, especially as we get
into the question of creditors'rights, really important that
the chief legal officercontinues to brief the finance
committee and the full board ondevelopments that address
fiduciary responsibilities forfinancial oversight and
(12:30):
creditors' rights.
Again, I think it's essentiallya fairly general approach, but
it's important that there'ssomething new that comes out in
the case law following theenactment of the Big Beautiful
Bill Act.
It's important that the boardknows what are the rules of the
game here?
What am I expected to do?
What will the courts expect ofour conduct in terms of
(12:54):
supervising So, Michael, that'sa lot to ask from our board
members.
The job's not getting anyeasier, is
SPEAKER_01 (13:13):
it?
SPEAKER_02 (13:17):
You're absolutely right there.
Absolutely right.
It's a lot.
And that's why the smart play isto delegate those
responsibilities to a committeewith the expertise and the
bandwidth to take them on.
Like the finance committee, butI want to be clear, I'm not
saying it has to be a committeethat says finance.
You can create a specialcommittee, however you want to
do it.
What I would avoid, Rob, is asituation of adding this
(13:37):
responsibility on to an alreadybusy committee like the audit
committee, which is unlikely tohave the bandwidth to take on
these duties with the kind ofattention that I think is
needed.
SPEAKER_01 (13:48):
So, Michael, you mentioned the zone of insolvency
concept that we've heard aboutover the years.
How do you feel that kicks in?
SPEAKER_02 (13:55):
It's one of my favorite phrases in my entire
practice and getting the kind ofquestions about it's like some
kind of outer space thing.
The zone of insolvency isactually a theory of board
conduct that suggests that thedirector's fiduciary duties
actually shift in whole or inpart as the organization
approaches financial distress orinsolvency.
(14:15):
And at that time, those dutiesbegin to be owed to creditors,
whether in whole or in part.
It's all part of the conceptRob, that when you get into
financial distress, thecreditors actually have a piece
of the action and their rightsneed to be protected.
And so again, the theory is atthat point, the board has to be
thinking about how this decisionand oversight affects the
(14:37):
interests of the creditors, aswell as the organization's
mission.
It's a concept that's garnered alot of attention a number of
years ago, but I don't thinkfrom my perspective, it really
gained broad traction with thecourts.
SPEAKER_01 (14:50):
So has the courts evolved their thinking on this
at all?
Are you seeing anything currentor recent?
SPEAKER_02 (14:54):
The leading case from Delaware, and it's not a
new case, that provides thatwhen a solvent corporation is
navigating in the zone ofinsolvency, the focus for
directors, at least underDelaware law, doesn't change.
Directors have to continue todischarge their duties to the
corporation and itsshareholders, or for a
not-for-profit, its mission, byexercising their best interests.
(15:16):
business judgment in theinterest of the company for the
benefit of its shareholderowners, or again, for a
not-for-profit, its mission.
What does that mean?
Business judgment rule, youknow, with enough focus to
reflect the financial situationthe organization is in.
But we're just not seeing a lotof cases that confirm broad
(15:37):
application of the zone ofinsolvency.
SPEAKER_01 (15:40):
So from what I'm hearing, you say the boards then
do have some slack to navigatethis?
SPEAKER_02 (15:44):
I wouldn't go that far.
I think the basic message toboards is to be smart, to be
practical, to recognize thereality of the projected
financial situation and tomonitor it closely, to know
enough about the causes of theproblems and possible solutions,
to be a good partner tomanagement, to be able to say we
(16:05):
own the situation and we'vestayed on top of it.
SPEAKER_01 (16:09):
And so circling back, the finance committee can
play a role here withoutoverstepping?
SPEAKER_02 (16:14):
Oh, absolutely.
They can get into the weeds ofit all.
By keeping, again, using theanalogy, their collective finger
closely on the pulse offinancial matters, they're going
to be able to reflect those goodfaith steps that I think are
absolutely critical toprotecting directors from
exposure.
they'll know and be able toadvise the full board when the
company may be approachinginsolvency.
(16:35):
And Rob, I think that's the mostimportant trip wire here.
I'm not suggesting that theorganizations that our listeners
serve are in danger of trippinginto financial insolvency
because of the act, but it's socritical that there has to be a
system in place that the fullboard knows, A, what would be
(17:00):
the warning signs of financialinsolvency?
And B, is there a reportingsystem that's going to let us
know when we get near there sowe can take appropriate action
above and beyond that whichwe've already done?
That, I think, more thananything else is the most
important part.
Can it be done by the financecommittee, a dedicated finance
committee?
You bet.
Can it be done by anothercommittee?
(17:21):
Sure, as long as that committeehas the time and effort and
expertise to do it.
SPEAKER_01 (17:27):
Well, Michael, thank you for throwing out all this
guidance and advice as ourboards and our management team
members navigate these currentheadwinds that we're facing.
Next month, we'll look atanother topic we'll dig into,
which is the latest developmentsaround the bismuth judgment
rule, what it means not only forboard members, but for officers
of organizations as well.
As we can see, the currentenvironment is not getting any
(17:49):
easier.
Michael, we thank you for yourexpertise.
SPEAKER_02 (17:53):
Rob, thanks again for having me.
I appreciate it.
SPEAKER_00 (18:00):
Thank you.
(18:30):
you
This episode of AHLA's Speaking of Health Law is
brought to you by AHLA membersand donors like you.
For more information, visitAmericanHealthLaw.org.
SPEAKER_01 (00:16):
Hello, everyone.
This is Rob Gerber.
I'm the Chief Legal Officer ofSumma Health and the
President-Elect Designate of theAmerican Health Law Association.
I'd like to welcome you to thelatest in our continuing series
of podcasts.
on corporate governance issuesaffecting healthcare
organizations.
Today's topic gets us into anissue made current by the
enactment of the Big BeautifulBill Act, the role of the
(00:39):
board's finance committee andthe broader role of the
governance function inmonitoring the financial affairs
of an organization.
Most of our members listening tothis podcast have their own
stories of the financial impactthat Medicaid's changes will
have on their own institution oron their clients.
Whatever the actual numbers are,We know that many healthcare
(00:59):
providers are in for a bigfinancial hit and are wondering
exactly how it's gonna play outfor their organization.
For many, it's tough sleddingahead, and some may flirt with
insolvency.
Management has a tough job aheadin navigating the organization
through this challenge, and theboard's got an equally big job
in monitoring that effort andsupporting management wherever
possible.
(01:20):
And for most organizations, thelogical way for the board to
best conduct that monitoring andoversight role will be through a
committee charged with aspecific responsibility for
monitoring the financial affairsof the organization, whether it
be called the finance committeeor by a similar name.
As the leaving governanceadvisor to the board, the
general counsel likely teamingwith the chief governance
(01:42):
officer is well situated tobrief the board on its basic
finance monitoring obligations,how they're enhanced in the
current environment, and how thecommittee structure can be
helpful in proceeding.
As always, we're joined by ourHLA friend and colleague,
Michael Peregrine of McDermott,Will and Emory, who's also an
HLA fellow and a fellow of theAmerican College of Governance
(02:04):
Council.
So Michael, what's the big dealhere as we look at this month's
topic?
Most of our members' clientsalready have a finance committee
in place.
So why are we having today aspecial podcast to talk about
something that may already beimplemented?
SPEAKER_02 (02:19):
Rob, I think the point today isn't that the board
needs a finance committee oranother committee like that.
Rather, it's that the prospectof significant financial
turmoil, and for some, as you'vementioned, real distress,
heightens the board's oversightduty.
If we look at the big, beautifulBill of Acts provisions, the
(02:39):
board's got to be able todemonstrate that it's on top of
what may be ahead.
Whether it does that as acommittee of the whole or
through a discrete committee isup to its own business judgment.
SPEAKER_01 (02:50):
So a moment ago, Michael, you said heightens the
board's oversight duty as ifthere's an existing
responsibility.
What would you highlight thatduty to be?
Because there isn't a specificjob of the chief financial
officer and is there her staff?
SPEAKER_02 (03:04):
Yeah, Rob, I think you've hit the nail on the head
because this is frequently, inmy experience, an area where
there's particular concern aboutmicromanagement by the board.
But it's pretty well recognizedthat the board has a fundamental
responsibility to monitor theorganization's operating
performance, stability, andlong-term viability.
So it really isn't duplicatingthe effort of the financial
(03:25):
management team.
Rather, it's monitoring theireffort and their actions and the
results.
SPEAKER_01 (03:32):
So if we were to be asked by our colleagues as far
as some specifics as what thatmay entail, what would you
share?
SPEAKER_02 (03:38):
Sure.
You know, there's absolutely noone size fits all charter for
the finance committee or for,again, for any committee that's
tackling financial matters, butit normally includes making
decisions on and monitoring suchthings as, you know, Significant
financial matters, financialpolicies, matters of corporate
finance for a big picture.
(03:58):
Significant investments,including M&A activity.
Management's capital allocationdecisions is always a biggie.
The retirement of debt andcompliance with debt covenants
is also another important taskof the committee.
Being aware of upcomingmaturities and liquidity needs.
certainly credit ratings andrating strategy, revenue cycle
(04:18):
management and relatedactivities.
As always, going back to ourSarbanes history, the integrity
and clarity of financialreporting and related
disclosures, operating budgetsand plans prepared by management
and their implementation.
And then I think coordinatingwith the Risk Management
Committee on practices toevaluate liquidity, credit,
(04:39):
market and pricing and otherfinancial risks.
And the from a big pictureperspective, the tax planning
strategies of the company.
I want to emphasize, Rob, it'snot the committee's
responsibility to come up withthese strategies and come up
with the data.
It's to monitor the preparationof it and to confirm and be
comfortable that it's accuratelyprepared and to understand where
(05:01):
the data and the informationfits within the organization's
broader profile.
SPEAKER_01 (05:06):
That seems to be a pretty comprehensive list.
What else would you expect of acommittee before they take steps
that may be seen asmicromanaging the CFO?
SPEAKER_02 (05:15):
Well, you know, as we've talked about in these
podcasts periodically, when westart looking at how a board
satisfies its recognizedfiduciary responsibilities, like
oversight of finance, you got todo so through the lens of the
prevailing facts andcircumstances.
And those circumstances are, asyou mentioned at the top of the
program, pretty challenging.
(05:36):
If you look at the Wall StreetJournal from last week, I think
it is, they're reporting thatover the next 10 years, payments
to hospitals will be reduced bynearly$665 billion, which is
roughly an 18% decrease.
And on top of that, the journalreports that uncompensated care
costs are expected to increaseby about$84 billion.
(05:59):
That's just simply stuff thatthe board has to be aware of,
has to understand, and has tounderstand what the responsive
measures are.
SPEAKER_01 (06:08):
So what's the plan in the case we do face those
headwinds?
What should the general counselbe advising the CFO and the
board to do?
SPEAKER_02 (06:14):
Well, actually, I think that's a good point that
you make, Rob.
It's really saying what shouldbe the general counsel saying.
And I think in...
Part, the general counsel has tomake sure that the financial
management team understands theboard's responsibility, first
and foremost.
We don't want any frictionthere.
And the management team,financial management managers
have to understand that it is acritical role of the board to
(06:35):
work with them and to monitorwhat's going on.
And in these particularcircumstances, the advice and
the information to both thefinancial team and the board is
that the board of directors iswell advised to assume they're
likely going to need to up theirgame on financial oversight
unless or until the Medicarechallenge recedes.
(06:56):
But again, it's a question ofthe board's got to show that
it's upped its game in terms ofmonitoring financial matters.
SPEAKER_01 (07:05):
So Michael, what does up your game mean in this
context?
Isn't the board alreadyperforming at a high level?
How much more do they need to doto show they're meeting the
standards that we're outliningtoday?
SPEAKER_02 (07:14):
Rob, I think there's a lot of practical issues here,
and we're going to get into thearea where creditors' rights
intersect with fiduciary duty.
I think the basic answer to yourquestion is the board's got to
take what they believe to begood faith steps to demonstrate
heightened overstep.
In other words, let's create arecord.
Let's implement a series ofsteps that are intended to put
(07:37):
the board in a situation, in aposition to be effective
partners with management asmanagement develops responsive
financial strategy.
strategies in monitoring thewarning signs of financial
distress.
It's all about being aneffective partner to the
management team on these, andyou can't be an effective
partner to management if you arenot up to speed on what's going
(07:58):
on.
It's that firm finger on thefinancial pulse of the
organization.
SPEAKER_01 (08:04):
So, Michael, I feel like I'm deposing you in this
month's podcast, but can youelaborate more on just what some
of those steps might be?
SPEAKER_02 (08:09):
Sure.
And again, this podcast, thereare a lot of kind of note-taking
issues here, and so I'll go slowon these.
But I don't think there's amaster list of what good faith
efforts might be.
But again, I want our listenersto think of this in terms of
setting a record that the boardearnestly and efficiently tried
to address theirresponsibilities here.
(08:30):
So I think if we make that list,it would encompass the
following.
Number one, I think absolutelythe board's got to be familiar
with the ACTS Medicaidprovisions, the timing of their
implementation, the impact onthe organization, and
management's responsive plan.
That's a biggie.
In other words, they don't haveto be experts on every line of
the BBA.
(08:50):
Or is it BBB?
I can't remember.
But they've got to be able to beconversant on what the act does
to the Medicaid program.
It's elevator talk.
It's whatever.
But they've got to understandwhat that's doing, what's its
impact on the organization, andthe timing.
That's where the role of theFinance Committee comes in
taking the primaryresponsibility for that.
(09:13):
But even if there is a financecommittee, Rob, I think the
board has to have some kind ofbasic working knowledge of
what's going on.
Another thing I think is veryimportant is to make sure
everybody's clear on thesufficiency of the management to
board reporting on financialmatters, as well as specific
protocols on reporting what wewould call mission-critical
financial risks.
(09:34):
I think oftentimes these are thekinds of things that can fall
through the cracks.
The board and management shouldbe in lockstep with each other
in terms of information flow.
Then I think along the samelines, the board's got to be
able to have access, not that itdoesn't already have, but
perhaps enhanced access to itsfinancial management team, as
well as to its outside financialand strategic advisors that may
(09:58):
have been engaged on a generalbasis or also to help with
respect to the Medicaid responseplan.
the board needs to be able totap these outside advisors as
their deliberations and theirmonitoring suggest.
Then I think we have to makesure that the finance
committees, or again, whatevercommittee is responsible, that
(10:19):
their role and scope on specificMedicaid oversight matters is
spelled out.
Again, part of building a listshowing what we've done, making
sure that the committee charterspecifically includes oversight
of the organization's responseto the Medicaid changes in the
big act.
I think it's very important thatthe whether it's the finance
(10:42):
committee or other committee,includes members with a
sophisticated financialbackground, people who can talk
the talk with the financialmanagement team.
It's important not only from theperspective of comprehension and
reporting to the board.
I think it's also important interms of making sure that the
financial management teamrespects the finance committee
(11:03):
and what it's trying to do.
One area, Robin, I'm alwaysgoing to be a compliance guy at
heart.
I think it's important that thefinance committee or the board
as a whole crank up complianceoversight over those new
management initiatives designedto generate new lines of revenue
(11:23):
that potentially implicate theanti-fraud and self-referral
laws.
We know they're coming.
We've got to find new revenue.
We'll come up with creativeideas.
Sometimes those creative ideashave increased legal risk.
We want to make sure thatthere's a process that those new
revenue-generating initiativesdesigned to provide new lines of
income to the organization areprepared and implemented
(11:46):
consistent with compliance withthe fraud and abuse and
self-referral law Then, youknow, it's something as simple
as formalizing the process bywhich the board or the finance
committee meets to addressfinancial matters.
We're looking at that list.
We're looking to say what we'veacted in good faith and making
it very clear in writing howoften the board and the finance
(12:08):
committee meet on financialmatters and how often they're
sending information back andforth is in the record.
Then I think it's reallyimportant, especially as we get
into the question of creditors'rights, really important that
the chief legal officercontinues to brief the finance
committee and the full board ondevelopments that address
fiduciary responsibilities forfinancial oversight and
(12:30):
creditors' rights.
Again, I think it's essentiallya fairly general approach, but
it's important that there'ssomething new that comes out in
the case law following theenactment of the Big Beautiful
Bill Act.
It's important that the boardknows what are the rules of the
game here?
What am I expected to do?
What will the courts expect ofour conduct in terms of
(12:54):
supervising So, Michael, that'sa lot to ask from our board
members.
The job's not getting anyeasier, is
SPEAKER_01 (13:13):
it?
SPEAKER_02 (13:17):
You're absolutely right there.
Absolutely right.
It's a lot.
And that's why the smart play isto delegate those
responsibilities to a committeewith the expertise and the
bandwidth to take them on.
Like the finance committee, butI want to be clear, I'm not
saying it has to be a committeethat says finance.
You can create a specialcommittee, however you want to
do it.
What I would avoid, Rob, is asituation of adding this
(13:37):
responsibility on to an alreadybusy committee like the audit
committee, which is unlikely tohave the bandwidth to take on
these duties with the kind ofattention that I think is
needed.
SPEAKER_01 (13:48):
So, Michael, you mentioned the zone of insolvency
concept that we've heard aboutover the years.
How do you feel that kicks in?
SPEAKER_02 (13:55):
It's one of my favorite phrases in my entire
practice and getting the kind ofquestions about it's like some
kind of outer space thing.
The zone of insolvency isactually a theory of board
conduct that suggests that thedirector's fiduciary duties
actually shift in whole or inpart as the organization
approaches financial distress orinsolvency.
(14:15):
And at that time, those dutiesbegin to be owed to creditors,
whether in whole or in part.
It's all part of the conceptRob, that when you get into
financial distress, thecreditors actually have a piece
of the action and their rightsneed to be protected.
And so again, the theory is atthat point, the board has to be
thinking about how this decisionand oversight affects the
(14:37):
interests of the creditors, aswell as the organization's
mission.
It's a concept that's garnered alot of attention a number of
years ago, but I don't thinkfrom my perspective, it really
gained broad traction with thecourts.
SPEAKER_01 (14:50):
So has the courts evolved their thinking on this
at all?
Are you seeing anything currentor recent?
SPEAKER_02 (14:54):
The leading case from Delaware, and it's not a
new case, that provides thatwhen a solvent corporation is
navigating in the zone ofinsolvency, the focus for
directors, at least underDelaware law, doesn't change.
Directors have to continue todischarge their duties to the
corporation and itsshareholders, or for a
not-for-profit, its mission, byexercising their best interests.
(15:16):
business judgment in theinterest of the company for the
benefit of its shareholderowners, or again, for a
not-for-profit, its mission.
What does that mean?
Business judgment rule, youknow, with enough focus to
reflect the financial situationthe organization is in.
But we're just not seeing a lotof cases that confirm broad
(15:37):
application of the zone ofinsolvency.
SPEAKER_01 (15:40):
So from what I'm hearing, you say the boards then
do have some slack to navigatethis?
SPEAKER_02 (15:44):
I wouldn't go that far.
I think the basic message toboards is to be smart, to be
practical, to recognize thereality of the projected
financial situation and tomonitor it closely, to know
enough about the causes of theproblems and possible solutions,
to be a good partner tomanagement, to be able to say we
(16:05):
own the situation and we'vestayed on top of it.
SPEAKER_01 (16:09):
And so circling back, the finance committee can
play a role here withoutoverstepping?
SPEAKER_02 (16:14):
Oh, absolutely.
They can get into the weeds ofit all.
By keeping, again, using theanalogy, their collective finger
closely on the pulse offinancial matters, they're going
to be able to reflect those goodfaith steps that I think are
absolutely critical toprotecting directors from
exposure.
they'll know and be able toadvise the full board when the
company may be approachinginsolvency.
(16:35):
And Rob, I think that's the mostimportant trip wire here.
I'm not suggesting that theorganizations that our listeners
serve are in danger of trippinginto financial insolvency
because of the act, but it's socritical that there has to be a
system in place that the fullboard knows, A, what would be
(17:00):
the warning signs of financialinsolvency?
And B, is there a reportingsystem that's going to let us
know when we get near there sowe can take appropriate action
above and beyond that whichwe've already done?
That, I think, more thananything else is the most
important part.
Can it be done by the financecommittee, a dedicated finance
committee?
You bet.
Can it be done by anothercommittee?
(17:21):
Sure, as long as that committeehas the time and effort and
expertise to do it.
SPEAKER_01 (17:27):
Well, Michael, thank you for throwing out all this
guidance and advice as ourboards and our management team
members navigate these currentheadwinds that we're facing.
Next month, we'll look atanother topic we'll dig into,
which is the latest developmentsaround the bismuth judgment
rule, what it means not only forboard members, but for officers
of organizations as well.
As we can see, the currentenvironment is not getting any
(17:49):
easier.
Michael, we thank you for yourexpertise.
SPEAKER_02 (17:53):
Rob, thanks again for having me.
I appreciate it.
SPEAKER_00 (18:00):
Thank you.
(18:30):
you
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