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Trends in governance structure and activities among not-for-profit U.S. hospitals

2009–2015

Mazurenko, Olena; Collum, Taleah; Menachemi, Nir

doi: 10.1097/HMR.0000000000000165
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Background: In U.S. hospitals, boards of directors (BODs) have numerous governance responsibilities including overseeing hospital activities and guiding strategic decisions. BODs can help hospitals adapt to changes in their markets including those stemming from a shift from fee-for-service to value-based purchasing. The recent increase in market turbulence for hospitals has brought renewed attention to the work of BODs.

Purpose: The aim of the study was to examine trends in hospital BOD structure and activities and determine whether these changes are commensurate with approaches designed to respond to market pressures.

Methodology/Approach: We examined hospital level data from The Governance Institute Survey (2009, 2011, 2013, and 2015) and corresponding years of the American Hospital Association Annual Survey in a pooled, cross-sectional design. We conducted individual multivariate models with adjustments for hospital and market characteristics, comparing the changes in BOD structures, demographics, and activities over time.

Findings: The sample included 1,811 hospital-year observations, including 682 unique facilities. We found that BODs in 2015 had less internal management (β = −2.25, p < .001) and fewer employed and nonemployed physicians (β = −8.28, p < .001) involved on the BOD. Moreover, compared to 2009, racial and ethnic minorities (2013 β = 2.88, p < .001) and women (2013 β = 1.60, p = .045; 2015 β = 2.06, p = .049) on BODs increased over time. In addition, BODs were significantly less likely to spend time on the following activities in 2015, as compared to 2009: discussing strategy and setting policy (β = −5.46, p = .002); receiving reports from management, board committees, and subsidiaries (β = −29.04, p < .001); and educating board members (β = −4.21, p < .001). Finally, BODs had no changes in the type of committees reported over time.

Practice Implications: Our results indicate that hospital BODs deploy various strategies to adapt to current market trends. Hospital decision-makers should be aware of the potential effects of board structure on organization’s position in the changing health care market.

Olena Mazurenko, MD, PhD, is Assistant Professor, Department of Health Policy and Management, Indiana University Richard M. Fairbanks School of Public Health, Indianapolis. E-mail: omazuren@iu.edu.

Taleah Collum, PhD, is Assistant Professor, Accounting Department, Jacksonville State University, Alabama.

Nir Menachemi, PhD, is Professor and Department Chair, Health Policy and Management, Indiana University Richard M. Fairbanks School of Public Health, Indianapolis.

The authors have disclosed that they have no significant relationship with, or financial interest in, any commercial companies pertaining to this article.

In U.S. hospitals, boards of directors (BODs) have numerous governance responsibilities including overseeing hospital activities, establishing organizational policies, and guiding strategic decisions (Alexander, Weiner, & Bogue, 2001; Widmer, 1993). Overall, BODs can help hospitals adapt to changes in their markets including those stemming from a shift from fee for service to value-based purchasing (Alexander et al., 2001). The recent increase in market turbulence for hospitals because of legislation such as the Patient Protection and Affordable Care Act (ACA) has brought renewed attention to the work of BODs (Smith & Tompkins, 2013).

BODs typically adopt different strategies to guide their hospitals including focusing on mission and strategic direction (Ford-Eickhoff, Plowman, & McDaniel, 2011), fundraising and community engagement (Widmer, 1993), and better monitoring of hospital and management performance (Culica & Prezio, 2009). Evidence suggests that BOD structures and compositions evolve in response to changes in the hospital environment (Alexander, Morlock, & Gifford, 1988). For instance, following the U.S. Supreme Court decision establishing that BODs are legally responsible for the fiscal management of hospitals (Alexander & Morlock, 1985; Molinari, Morlock, Alexander, & Lyles, 1993), BODs saw an increase in the number of Chief Executive Officers (CEOs) serving on the board. Little is known about how BODs have evolved in recent years given changes in the health care environment brought upon by governmental and market pressures to improve quality, reduce costs, and improve patient satisfaction.

The purpose of the current study is to examine longitudinal changes in hospital BOD structure, demographics, and activities and to determine whether these changes are commensurate with approaches designed to respond to market pressures. We use unique data collected by The Governance Institute on not-for-profit hospitals from 2009, 2011, 2013, and 2015. Because not-for-profit hospitals make up the largest portion of community hospitals, the results of the current study will be of interest to policymakers, executives, and hospital BODs who are interested in how BODs may change in ways that may enhance their performance.

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Background

Timeline of Relevant Policy Changes That Affected the BODs

Two major policies occurred during the study period (2009–2015) that may have affected not-for-profit hospital BOD structure, demographics, and activities (Scanlon, 2013). The first policy was the Health Information Technology for Economic and Clinical Health (HITECH) Act of 2009 whose purpose to incentivize hospitals and physicians adopt and meaningfully use electronic health records systems (Centers for Disease Control and Prevention, 2016). The second policy was the ACA of 2010 whose purpose was to expand access of care and improve both the quality and cost of care in the United States (U.S. Department of Health and Human Services, 2015). One tenet of the ACA involved directing Medicare to adopt value-based purchasing reimbursement models, which offers implicit and explicit financial incentives and penalties to providers for meeting certain performance measures related to quality and costs. Value-based purchasing also encourages improvements in the coordination of care by hospitals with postacute service providers and physician practices.

We used previous BOD literature and tenets from agency theory to predict expected trends in BOD structures and activities over time. Generally, we expect BODs to change as a response to new market pressures, such as increased attention to the quality of care, renewed focus on patient-centered care, the introduction of value-based purchasing, and a focus on population health, which are all part of the recent policy changes. Below is our rationale for the changes expected in BOD characteristics over time with respect to board size, internal management involvement, physician representation on the board, demographic make-up of the BOD, time spent on various board activities, and type of board committees.

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Board size

Research suggests that BODs with a greater number of members may have more diverse skills and opinions that would allow them to process more information, which would lead to better strategic decisions (Dalton & Dalton, 2005; Dulewicz & Herbert, 2004). In addition, larger BODs are better equipped to obtain and process a large amount of information about the firm and its environment (Agrawal & Knoeber, 2000). BODs with a greater number of members are also more likely to have individuals with expertise needed to form specialized committees to monitor management performance (Pearce & Zahra, 1992). Given the current health care market, hospital BODs may need to add members with adequate knowledge to position their organizations in response to initiatives included in the HITECH Act and the ACA such as value-based purchasing and population health management (Berwick, Nolan, & Whittington, 2008; VanLare & Conway, 2012). The addition of board members would lead to increased BOD size. Therefore, given current market conditions, we expect to observe an increase in BOD size over time.

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Internal management representation

Agency theory posits that internal management representation on the BOD can adversely affect organization’s performance because of a potential conflict of interest between internal managers and hospital stakeholders (Eisenhardt, 1989). The evidence is not fully supportive of this assumption, indicating some positive outcomes associated with the use of internal management on the BODs, including improved stock performance (Klein, 1998), financial performance (Adams, Hermalin, & Weisbach, 2010), and internal productivity measures (Hermalin & Weisbach, 2003). Internal management may be better informed and knowledgeable about the firm’s operations, which could explain these findings. Despite these benefits, internal management may not be able to adequately respond to the recent market pressures stemming from the ACA and the HITECH Act, including the need to improve interorganizational coordination of care and the need to form partnerships as a result of new reimbursement incentives. The growth of accountable care organizations (Fisher & Shortell, 2010) and the introduction of bundled payment initiatives (VanLare & Conway, 2012) require hospitals to form several connections with other health care entities. BOD members that are external to the firm are more successful in forming critical commercial connections with other organizations (Agrawal & Knoeber, 2000), securing scarce resources that are crucial for an organization’s survival (Pearce & Zahra, 1992), and maintaining the reliability and credibility of financial reporting (Peasnell, Pope, & Young, 2005). Thus, we expect that hospitals would add external members to their boards to assist with interorganizational coordination. The addition of external board members would lead to less internal management as a percentage of all BOD members over time.

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Physician representation

Studies examining the relationship between physician representation on BODs and hospital outcomes have mixed and contradictory findings. Some of these studies reported improved hospital financial performance (e.g., higher operating margins, greater occupancy) when the BOD includes a physician, especially one that practices at the facility (Goldstein & Ward, 2004; Kuntz, Pulm, & Wittland, 2016; Molinari, Alexander, Morlock, & Lyles, 1995). On the contrary, other studies reported that physician involvement on the BOD may have negative effects on a hospital’s continuous quality improvement efforts (Weiner, Shortell, & Alexander, 1997). Furthermore, physicians are not always selected based on their governance abilities, but rather their role in the organization and record of clinical quality, which could diminish their effectiveness as BOD members (Anonymous, 2007). Despite these conflicting results, physicians are likely to provide substantial input about the hospital’s operations. Therefore, we expect that BODs would be interested in physicians’ insights into an organization’s strategic decisions. Furthermore, under the ACA, government reimbursement is linked to patient satisfaction, which is a function of the quality of communication with physicians during the hospital stay (Garner & McCabe, 2012). Given that physicians spend more face-to-face time with the patients as compared to hospital management and that they may have important knowledge on how to improve patient satisfaction (Mazurenko, Zemke, Lefforge, Shoemaker, & Menachemi, 2014), we expect to observe greater physician involvement on BODs over time.

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Demographic make-up

The U.S. population is becoming increasingly diverse, with 38% representing an ethnic or racial minority group (U.S. Census Bureau, 2015). At the same time, the health care workforce is mostly composed of non-Hispanic Whites with as few as 6% of racial/ethnic minority physicians (Castillo-Page, 2010) and 17% of racial/ethnic minority nurses delivering care (Phillips & Malone, 2014). Given this racial/ethnic gap between health care providers and patients, health care organizations might be interested in improving their community status by having more diverse representation on the board, including having more women and underrepresented minorities. Previous research has found that gender and racial diversity on BODs is positively associated with firm innovation, reputation, and certain aspects of performance (Miller & del Carmen Triana, 2009). Thus, we expect to observe a growing percentage of women and racial/ethnic minorities on BODs over time.

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Board activities

The current health care market has been described as unpredictable and turbulent (Begun & Kaissi, 2004). To align themselves for success in turbulent markets, hospitals tend to develop different strategies, ranging from greater community engagement (Alexander, Young, Weiner, & Hearld, 2008) to implementation of concierge-type service, to improve patient satisfaction scores (Ramachandran & Cram, 2005). Regardless of the strategic approach taken, BODs in turbulent markets may need to spend more time during normal meetings on strategy formulation and development. Given the increased need to spend more time on discussions around a hospital’s strategy, we expect that other activities such as educating board members and reviewing reports from management, board committees, and subsidiaries would receive less attention during normal meetings.

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Board committees

Quality of care delivered by U.S. hospitals is an ongoing concern (Schoen, Davis, How, & Schoenbaum, 2006). The federal government has been introducing a number of initiatives (e.g., Hospital Quality Alliance program, Medicare Compare website) to measure and publicly report on the quality of care in all U.S. hospitals. Despite these governmental efforts, fewer than half of hospital BODs in 2010 rated quality of care as one of their two top priorities, and only a minority reported receiving training in quality (Jha & Epstein, 2010). Nevertheless, the recent changes in federal reimbursement stemming from the ACA that now takes patient outcomes into consideration may have led to changes in the approach taken by BODs with respect to quality. As such, we expect BODs may be more likely to spend their effort on quality issues during our study period. Separately, the introduction of several cost containment mechanisms under the ACA (e.g., bundled payments, pay-for-performance reimbursements) may force BODs to form committees that would primarily focus on ensuring the financial stability of the hospital, for example, finance or audit committee. Therefore, we expect to observe that BODs will be more likely to have finance and audit committees over time.

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Methods

This study uses pooled cross-sectional data to analyze changes in BOD structure and activities over time (2009, 2011, 2013, and 2015). The data are drawn from two secondary sources: The Governance Institute Survey (GIS), which is administered every 2 years, and the American Hospital Association (AHA) Annual Survey of Hospitals. Hospitals were matched in the GIS and AHA data sets based on their AHA identification number. The main dependent variables, BOD structural characteristics and activities, were obtained from the GIS. The GIS covers structures and practices of governing boards of not-for-profit hospitals (Peisert, 2015). It is administered without financial support from the government or other third-party payers. The GIS had the following response rates in years included in the analysis: 17.4% in 2009, 15.5% in 2011, 15% in 2013, and 11.3% in 2015.

Hospital level characteristics were extracted from the AHA Annual Survey, which is administered annually to all U.S. hospitals, but we focused specifically on general nonfederal acute care facilities only. Our university’s institutional review board deemed this study exempt from human subjects research.

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Variables

We derived our main dependent variables that capture BOD structure, voting privileges, demographic characteristics, and committees from questions in the GIS. Specifically, BOD structure was derived from the following question: “Please write in the number of seated, voting board members that fit into each of the following categories” (answer categories: total number of voting board members; number of seated voting management board members; number of seated, voting physician board members aside from the CMO who are employed by the hospital; seated, voting physician board members aside from the CMO who are active members of the medical staff but are not employed by the hospital; number of female voting board members; number of voting board members from an ethnic minority). Each of the above-mentioned variables was transformed as a percentage of a total number of voting board members and used as continuous variables in our analysis. The President/CEO, Chief of Staff, Chief Operating Officer, Vice President of Medical Affairs, and Chief Financial Officer’s participation on the board was derived from the following question: “For each of the following positions, please indicate which category describes the participation on the board.” We dichotomized the responses, with 1 being coded as “board member and a voting member” and the rest being coded as 0. The presence of Executive, Finance, Quality, and Audit committees was derived from the following question: “Does your board have the following standing committees?” We dichotomize the response categories, with 1 being coded as “Yes, we have this committee” and the rest being coded as 0. Finally, the percentage of board meetings devoted to various board activities was derived from this question, “In a typical board meeting, what percentage of time is spent in the following activities.” The respondents had to indicate a percentage for each item listed with percentages adding to 100 percent. We used the following activities that appeared consistently in all GIS waves in our analysis: discussing strategy and setting policy; receiving reports from management, board committees, and subsidiaries; and meeting time devoted to board member education. We treated each of these categories as continuous variables. We excluded two activities from our analysis, such as reviewing financial performance and reviewing quality of care/patient safety metrics, because these categories were first introduced in a 2015 survey.

Hospital level characteristics used as control variables included hospital size (measured as staffed inpatient beds), ownership (not-for-profit; governmental), geographic location (urban, rural), teaching status (whether or not the organization is a member of the Council of Teaching Hospitals and Health Systems), system membership (part of a system or independent), payer mix (percentage of Medicare and Medicaid inpatient days), market concentration (measured by Herfindahl–Hirschman Index), and region based on U.S. census categories (Northeast, Southeast, Midwest, West).

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Statistical Analysis

Data analysis was performed in SPSS Version 21.0 and included descriptive, bivariate, and regression analyses. Bivariate analyses (e.g., ANOVA) were used to examine whether BOD structures and activities have changed over time. Ordinary least square and logistic regressions for continuous and binary dependent variables, respectively, were performed to examine the changes in BOD structure and activities while also controlling for the hospital and geographical variables described above.

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Results

The analytic sample consisted of 1,811 hospital-year observations, including 682 unique facilities. Table 1 displays the organizational and geographical characteristics of hospitals that were included in our sample. Briefly, most of the hospital-year observations were not governmentally owned (69.5%) and were members of a system (69%). In addition, the sample included mostly nonteaching hospitals (95%) and facilities located in rural areas (52%). On average, hospital-year observations in our sample had 150 staffed beds (range: 15–1,087). The hospitals included in our analysis were similar to the not-for-profit hospitals in the AHA survey, with exception of more rural hospitals represented in our sample.

Table 1

Table 1

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Bivariate Analyses

In bivariate analysis, several trends in BOD structures and activities were observed over time. For example, the percentage of board members decreased from 2009 to 2015 for employed physicians (2009: 2.7; 2015: 0.11; p < .001), nonemployed physicians (2009: 12.5; 2015: 3.2; p < .001), and internal management board members (2009: 3.5; 2015: 0.87; p = .003). Similarly, BODs were significantly less likely to spend time on discussing strategy and setting policy (2009 mean: 30.6; 2015 mean: 24.6; p = .035), receiving reports from management and board committees (2009 mean: 52.6; 2015 mean: 24.3; p = .001), and educating board members (2009 mean: 15.7; 2015 mean: 11.2; p = .001) in 2015 as compared to 2009 (Table 2).

Table 2

Table 2

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Multivariate Analyses

In multivariate analyses, several changes in BOD structure, voting privileges, committees, and time spent on different activities were observed (see Tables 3, 4, and 5). Findings in Table 3 suggest that, compared with 2009, BODs in 2015 had less internal management involvement (β = −2.25, p < .001) and less employed physician (β = −2.52, p < .001) and nonemployed physician (β = −8.28, p < .001) involvement on the BOD. Moreover, compared to 2009, racial and ethnic minorities (2013: β = 2.88, p < .001) and women (2013: β = 1.60, p = .04; 2015: β = 2.06, p = .04) on BODs increased over time. We observed no changes in the total number of voting board members on BODs over time.

Table 3

Table 3

Table 4

Table 4

Table 5

Table 5

The President/CEO (2011: β = −.26, p = .05; 2013: β = −0.53, p = .001), the Chief of Staff (2011: β = −.24, p = .04; 2013: β = −.45, p < .001; 2015: β = −.32, p = .04), and the Vice President of Medical Affairs (2015: β = −2.03, p = .05) were less likely to be voting members on BODs over time (see Table 4). The Chief Operating Officer was more likely to be a voting board member in 2015 as compared to 2009 (2015: β = 2.38, p < .001). We observed no differences in the likelihood of a chief financial officer serving as voting members on BODs over time.

We also observed changes in the percentage of time spent on specific board activities over time. Specifically, BODs were significantly less likely to spend time on the following activities in 2015, as compared to 2009: discussing strategy and setting policy (β = −5.46, p = .002); receiving reports from management, board committees, and subsidiaries (β = −29.04, p < .001); and engaging in board member education (β = −4.21, p < .001). With exception of the executive committee, hospitals included in our sample were significantly more likely to have finance (2011: β = 0.43, p = .003; 2013: β = 0.43, p = .004; 2015: β = 0.67, p = .001), audit (2011: β = 0.55, p < .001; 2013: β = 0.93, p < .001; 2015: β = 0.83, p < .001), and quality (2011: β = 0.41, p = .005; 2013: β = 0.64, p < .001; 2015: β = 0.36, p = .04) committees in all observed years, as compared to 2009.

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Discussion

The main finding of our study is that BODs have made several modifications to their structures and activities over time that are generally commensurate with current changes in the health care market. We found that BODs reduced internal management and physician involvement; increased the percentage of racial/ethnic minorities and women serving on the board; and spent less time on strategy, policy development, and review of internal reports. In addition, BODs were more likely to have board committees that focus on quality and financial oversight over time.

Consistent with our predictions, BODs decreased internal management participation on the board over time. Specifically, we found that boards reduced the percentage of management board members and exempted the President/CEO, the Chief of Staff, and the Vice President of Medical Affairs from voting privileges on BODs. Internal management may be better informed about hospital’s operations but lack the abilities needed to form external partnerships and develop adequate strategies to align the organization with the new market. External board members, on the other hand, are more likely to have the expertise required to respond to new market pressures adequately (Agrawal & Knoeber, 2000; Peasnell et al., 2005). The introduction of bundled payment mechanisms and focus on population health are incentivizing the hospital BODs to form alliances and partnerships with other health care organizations. As a result, BODs may be adding external members with expertise in needed areas. The Chief Operation Officer (COO) participation as a voting board member was one notable exception. BODs were more likely to have COO as a voting board member in 2015, as compared to 2009. It is plausible that COOs may be ultimately responsible for coordination of various activities between the hospital and the external entities.

We also found that BODs reduced the percentage of physicians serving on the board over time. Documented growth in a number of employed physicians in hospitals (Berenson, Ginsburg, & May, 2007) is resulting in more physicians taking the role of the hospital employees. We examined trends in the percentage of employed and nonemployed physicians separately and found decreasing patterns of physician representation for both groups over time. Centers for Medicare & Medicaid Services has recently added patient satisfaction measures to the hospital reimbursement formula (Garner & McCabe, 2012). Physicians spend more time with the patients and may have important knowledge on patient’s needs and preferences for their care (Mazurenko et al., 2014). Thus, more research is needed to understand observed preferences to exclude physicians from BODs over time.

Our study also found that BODs have increased racial/ethnic minority and female representation on the board over time. As we hypothesized, BODs may be actively increasing the diversity of their board to more closely mirror the patient population that hospitals serve. The U.S. population is becoming increasingly diverse (U.S. Census Bureau, 2015), and our findings indicate that BODs are attempting to change their demographic make-up accordingly. More research is needed to examine whether BODs that are located in markets with a particularly diverse patient base are more actively diversifying their boards as compared to BODs that are located in less diverse markets.

We also observed several patterns in BODs activities and committee types over time. Contrary to our predictions, BODs were less likely to spend time on discussing strategy and setting policy as well as receiving reports from management and subsidiaries. At the same time, BODs were more likely to have the finance, quality, and audit committees in 2011, 2013, and 2015 as compared to 2009. BOD changes in activities and committees may be reflective of the market pressures, such as value-based reimbursement and increased pressures for higher care quality. The fact that BODs reported having a quality committee is a particularly notable finding given that previous evidence indicated a low prevalence of quality committees among hospital BODs during 2000–2010 (Jha & Epstein, 2010).

Finally, contrary to our predictions, we observed no changes in the total number of voting board members serving on the BODs over time. This may be because during turbulent times smaller boards may be preferable as they need less time for decision-making (Alexander et al., 2001). Given the number of changes occurring during our study period, hospital BODs may have opted to maintain the overall total number of members as a means to streamline the decision-making process. Additional research is needed to examine how not-for-profit hospital BODs adjust their board size as response to the instability in their environment.

Our study has several limitations worth mentioning. First, lack of longitudinal data on substantial number of hospitals limited our ability to examine within-hospital changes in a more robust longitudianal design. Nevertheless, our pooled, cross-sectional study provides important initial findings on the changes in the governance structures that could be useful for managers, policymakers, and future research inquiries. Second, our analytical sample is limited to the nonprofit hospitals that responded to the GIS and may be subject to response bias. Furthermore, given the characteristics of respondents, our results may not be generalizable to all hospitals in the United States, particularly because of the fact that our sample has relatively more rural hospitals, as compared to the AHA survey. However, our sample did include nonprofit hospitals with different sizes, payer mixes, and teaching statuses. Second, unmeasured factors (e.g., group dynamics and decision-making processes, board’s culture) may influence the changes in BOD structure and activities. These unmeasured factors may introduce the possibility of missing variable bias. Future research should examine what role various board processes (e.g., group dynamics, board’s culture) play in influencing BOD structure, composition, and activities.

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Practice Implications

Several practice implications can be drawn from our study. First, hospital decision-makers should be aware that the national trends in BOD structure and activities may be a response to major changes that have ocurred in the health care market such as the ACA and the HITECH Act. Some of the trends we found include reduced internal management and physician involvement on the board and an increased percentage of racial/ethnic minorities and women serving on the board. We also found that the BODs in our sample spent less time on strategy, policy development, and review of internal reports. In addition, we found that BODs were more likely to have finance, quality, and audit committees in 2011, 2013, and 2015 when compared to 2009. Hospital decision-makers can review these national trends in BOD structures and activities and compare them to how their own hospital is responding to the rapidly changing market. One way of doing this would be to perform a gap analysis, to examine how and if board structure and activities are effectively positioning their hospital to respond to changes in the local market. In addition, BOD members can review current trends in the structure and activities of hospital boards to identify the areas of expertise that could strengthen the board and increase the probability of achieving the hospital’s strategic goals.

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Keywords:

board of directors; governance; hospital; trends

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