Due diligence in everyday decision making: the wisest healthcare financial managers are taking their due diligence responsibilities seriously

Healthcare Financial Management, Dec, 2004 by Michael Nowicki, Jim Summers

Our June column introduced the relationship between due diligence and leadership. The column reviewed the origins of due diligence in the Federal Sentencing Guidelines as the concept is applied to important legal decisions regarding mergers and acquisitions and important compliance issues regarding billing and financial relationships with physicians. Although due diligence limits, but does not eliminate, our liability in such decisions and issues, we feel the concept of due diligence and the safeguards it provides can also be applied to other important decisions that managers make daily.

The Need for Due Diligence

The Federal Sentencing Guidelines state that due diligence applies to "high-level personnel of the organization." The guidelines describe these personnel as "individuals who have substantial control over the organization or who have a substantial role in the making of policy within the organization." High level personnel would include members of the governing body, executive officers, managers responsible for the organization's major business or functional units, and individuals with a substantial ownership interest. It would certainly include financial managers.

The organization has granted such high level personnel, and perhaps other personnel, "substantial authority" in making discretionary decisions regarding problems and issues that might not be covered by policies and procedures. In some cases, the substantial authority actually allows managers to grant exceptions to the organization's existing policies and procedures. In this gray area of management decision making, the affected manager must match the amount of diligence due to the importance of the decision. In this context, due diligence is a reasonable search to find all the relevant data necessary to make an informed decision. The amount of diligence due is directly proportional to the importance of the decision (often measured in terms of exposure to legal liability). For instance, although a manager might take a fair amount of time in getting input from employees before posting a work schedule, the amount of diligence due for an important hiring (or firing) decision would be substantially greater.

How Much Diligence Is Due?

How do you know whether you have spent a reasonable amount of time searching for data and whether you have collected all of the relevant data needed for a good decision? Certainly this is a matter of degree. A subjective, but relevant test might include assessing your comfort level with explaining your actions to your management team, to the local newspaper, to an investigative reporter on TV, or even in a court of law.

If you do not feel comfortable thinking about these situations, perhaps you have more due diligence work to complete. All of us have faced these issues.

An Example

A classic example of everyday decision making that requires substantial due diligence is the decision to hire or terminate an employee. While the hiring/termination process is often documented in detail in the organization's policies and procedures, both court cases and actual practice show that some areas of concern requiring due diligence might not be covered by the policies and procedures. For instance, when terminating an employee for a violation of policy, you need to be sure that other employees have not also violated the policy. (In St. Mary's Honor Center v. Hicks, 1993, Mr. Hicks, who had been terminated for excessive absenteeism, claimed discrimination, citing the fact that other employees who had been absent more than he had not been terminated.) Different actions to different employees under the same policy sets you up for a classic "arbitrary and capricious" charge.

Many of us might feel that a hiring/termination decision in favor of the employee might require less due diligence because the favorable decision would reduce the possibility of litigation from the disgruntled applicant/employee. Although this might be true, a favorable decision for the applicant/employee might be an unfavorable decision for the organization in the event the applicant/employee does not work out. Because most of us believe that managers owe a greater duty to the organization than to an individual employee, we might owe more due diligence to the decision in favor of the organization. While the amount of diligence due to a particular decision might be limited by the amount of time that we have to spend making the decision, we must be constantly vigilant to make decisions that can bear the full light of day in these times of full disclosure.

EXECUTIVE INSIGHTS

Read HFMA's monthly newsletter Executive Insights for commentary and best practices on financial planning and leadership skills. You'll find practical, innovative financial strategies addressing today's most pressing challenges. For more information, visit www.hfma.org/ei.> Michael Nowicki, EdD, FACHE, FHFMA, is a professor of health administration, Texas State University-San Marcos, and a member of HFMA's South Texas Chapter. His e-mail address is nowicki@ txstate.edu.