Strate gic Risk Management For the Hospital Industry in Transition For the evolving hospital industry, managing risk is a high-stakes business issue. For hospitals and other organizations caring for people at their most vulnerable, risk to the enterprise is always top of mind. It can literally be a life-and-death business issue. As a result, most health care organizations have a long history of identifying, assessing and prioritizing risks. Yet prior efforts at risk quantifi cation, especially outside the traditional clinical arena, have generally been dismissed as expensive, bureaucratic and overly complianceoriented, failing to deliver clear or measurable value that could be convincingly articulated. Few regularly quantify their key risks or use metrics analyzing those risks to make business decisions. Even fewer integrate risk metrics into their workforce budgeting and planning process, which is particularly surprising given that today, nearly half the revenue of most hospital systems is budgeted to workforce-related costs, and this one action has the greatest potential to defuse risk and improve operating margins. But now, risk has risen to the top of management s agenda. Unprecedented economic pressures and an increasing focus on the value rather than the quantity of services performed are generating new risks and exacerbating traditional ones. Increasingly, hospital executives and boards recognize that the time has come for a more strategic and quantitative approach to risk management for the enterprise one that transforms it from an ad hoc activity into a core strategic business-planning process. With more hospitals now hiring physicians and acquiring physician groups, they need to rethink both the duration and magnitude of their risk exposures. Mounting Risks The forces reshaping the health care industry are well documented and are already ushering in new challenges and risks, ranging from new payment mechanisms and quality standards, to coordinated care delivery models and changing competition. With federal health care reform legislation upheld, many of its signifi cant measures focused on quality, results and effi cient care have been, or soon will be, implemented by employers, insurance companies and Medicare. In addition, with more hospitals now hiring physicians and acquiring physician groups, they need to rethink both the duration and magnitude of their risk exposures. Amid all this change, hospital executives and boards are asking important questions: Are our risk management practices on a par with industry norms or those of specifi c competitors? Are we adequately prepared to manage the risks associated with signifi cant capital projects from upgrading facilities and restructuring operations, to merging with another organization or acquiring a physician group? Do we have processes in place to address specifi c critical risks, such as physician or nurse recruiting and retention, leadership succession, patient privacy and pharmacy management? Are we well positioned to comply with the regulatory requirements affecting our industry?
Enter Strategic Risk Management Answering these and related questions requires an approach to risk management that goes well beyond a technical exercise. In this environment, there s just too much at stake to look at risk management as anything but a core business process with signifi cant implications for a hospital s strategy, fi nancial health and growth prospects. Towers Watson s Hospital Strategic Risk Management (HSRM) is just such an approach. It combines our in-depth experience working in the health care industry and our deep expertise in human resources and risk management to shape leading-edge risk management processes to the unique needs of the industry. HSRM begins with a comprehensive identifi cation of the current and emerging risks most relevant to each hospital s ability to achieve its near- and longer-term objectives. We then prioritize these risks from the standpoint of their probable impact on the organization and their likelihood of occurrence. That provides a foundation for the organization s management team to determine how much risk it is willing to take on, and the risk mitigation strategies and tactics best suited to the organization s circumstances. We develop a risk/return framework of mitigation solutions tied to the hospital s strategic and fi nancial goals, which enables hospital leadership to make better risk-adjusted decisions. We also bring specialized experience in developing hospital workforce programs to mitigate the new workforce risks that are emerging in the wake of an intensifying focus on primary and preventive care, industry consolidation, the addition of physicians and physician groups to hospital staff, and an aging workforce that will hit the hospital industry harder than most other businesses. There are four steps involved in the process, which create a road map that culminates in HSRM implementation. Below is a more detailed look at each step.. Review the current risk management environment. We begin by looking at your current risk-related activities, processes and documentation, and defi ning your organization s appetite for risk. This involves meeting with various members of the management team to understand your organization s business strategy, risk management philosophy and objectives, key issues and concerns, and current risk governance procedures. Defi ning risks in the context of stated business objectives will generate discussion about the pros and cons of the current risk strategy and risk tolerance metrics. Next, we help you identify key performance indicators (KPIs) along with the thresholds of risk appetite for each indicator. KPIs are often fi nancial but may also take the form of a critical outcome, such as patient or worker satisfaction. Once these are defi ned, we can validate the appropriateness of your organization s risk appetite, ensuring full alignment with critical strategic goals. The output is a formal risk appetite statement from which we can begin measuring and modeling the actual risks. Defining risks in the context of stated business objectives will generate discussion about the pros and cons of the current risk strategy and risk tolerance metrics. Strategic Risk Management for the Hospital Industry in Transition
Identifying and Prioritizing Key Hospital Risks Towers Watson uses an interactive process to help a hospital s leadership team identify and rank a broad range of workforceand non-workforce-related risks. The map below shows the output of a recently completed exercise. In this case, the leadership team began by brainstorming all the risks most relevant to the organization both existing and emerging. They then evaluated each risk in terms of its potential impact on the organization (vertical axis) and the likelihood of occurrence (horizontal axis). The results of the exercise, plotted on the map s color zones, help to quickly pinpoint the organization s priorities. Perhaps not surprisingly, the top risk here is fi nancial, given that the highly probable dropping/restructuring of Medicare and other reimbursements could signifi cantly slow or derail the organization s ability to complete some of its most important initiatives. Clinical risk, by contrast, while virtually a certainty in occurrence, has a far less pervasive impact, in part because it is expected, budgeted for and chiefl y mitigated through signifi cant clinical risk management programs and insurance. Perhaps most interesting is the placement of workforce change resistance a risk traditionally downplayed by senior executives across all industries. But if employees, particularly those critical to implementing new care models, prove unwilling or unable to adapt and exert a disproportionate infl uence on their peers, hospitals could fi nd themselves struggling to successfully implement changes critical to their growth plans. Sample key risks prioritized for the hospital industry from a typical exercise Risk-ranking matrix Risk map Impact Catastrophic 9 Major Moderate Minor Insignificant Rare Unlikely 6 0 8 9 Possible Likelihood Likely Almost certain Rank 6 8 9 0 Risk name Uncertainty of the level and timing of reductions in reimbursements Inability to extend services to a new model Changing compensation will alienate MDs/MLPs Inability to compete with other industries for talent Inability to respond to new forms of competition Doctor and/or nurse recruiting/retention Compliance with governmental billing regulations Inability to effectively engage patients Our workforce is resistant to change Impact of trend toward value-based compensation models Information privacy and cyber-security Aging workforce Clinical risk Strategic Risk Management for the Hospital Industry in Transition
. Conduct a gap analysis, and develop recommendations. With a clear understanding of the current situation and the probable severity of various risks, we work with your team to identify gaps in organizational structure, processes, controls, tools and capabilities, and then develop recommendations to close those gaps. This is a critical stage in the process because it demands a look ahead rather than a look backward. While organizations measure risk all the time, many tend to do it retrospectively relying on historical data or patterns rather than looking forward. Modeling gives management a shared language within which to frame a view of the future and consider which mitigation actions will yield the greatest return on investment. Modeling helps defi ne the full range of impact all the potential outcomes of any risk, analyzing correlations and interrelationships among the risks, across business functions, to illuminate their path through the organization and illustrate where risk mitigation could deliver the highest return on investment. In the example shown in the sidebar on page, developing solutions to minimize internal change resistance could provide the most immediate return for two reasons. One, mitigation strategies are within management s control (in contrast to most regulatory or fi nancial risks) and, in fact, depend on their active involvement and outreach to employees. Two, early and focused intervention to help employees participate in developing and adapting to new processes and work arrangements can not only minimize disengagement and disruption, but can actually improve the fi nal outcomes for both the organization and its workforce.. Develop priorities for implementation. Whether your organization plans to avoid, mitigate, retain or transfer risk, it will face consequences. The question is, what benefi ts are achieved by each possible action? Here is where the importance of risk modeling becomes clear. When a business has invested in risk measurement and has built a consistent, quantitative framework for evaluating risk the potential effectiveness of solutions is readily apparent. As a result, it becomes easier to choose the best strategies that will reduce risk to acceptable levels. By using the right models and metrics, you can test alternative strategies and conduct real cost/benefi t analyses to guide decisions, making sure to achieve a signifi cant return on HSRM spending.. Implementation. With the risk management planning foundation fi rmly in place, implementation often begins with the development of a hierarchy for talking about risks internally. This can be the basis for a risk survey and/or a risk assessment workshop that brings the conceptual framework built in the prior steps into the real world of the organization s daily operations, allowing executives to test-drive the process and see tangible results. Typically, this involves a review with management of key risk mitigation strategies, which run the gamut from traditional approaches like insurance, selfinsurance or captives, to nontraditional solutions for newer workforce-related risks (such as physician recruiting or retention programs, workforce involvement in rapid process improvement initiatives or patient engagement initiatives). One interesting trend right now is expanding the coverage traditionally handled through health care captives. Captives are an established and effi cient risk fi nancing vehicle that have traditionally been used for the signifi cant medical malpractice and workers compensation liabilities that can erode The final element in HSRM is consistent monitoring and accurate, timely reporting to ensure management can make decisions that add value for the long term. a hospital s already-thin operating margins. The control and fl exibility they offer including the potential to recapture surplus funds is making them an attractive option for other coverages, including network liability, tail liabilities for physicians now on staff and, most recently, employee medical stop loss. The fi nal element in HSRM is consistent monitoring and accurate, timely reporting to ensure management can make decisions that add value for the long term. This starts with monitoring the efforts and implementing a reporting framework to communicate results. Key risk indicators should be reviewed as often as possible and acted on in a timely manner. Regular updates to management and all risk stakeholders will help explain the organization s risk profi le on a riskby-risk basis. This level of consistent communication reveals the full scope of the HSRM work and the impact of its benefi ts. Strategic Risk Management for the Hospital Industry in Transition
Critical Success Factors for Effective Strategic Risk Management Align your strategy with the risks most relevant to your ability to achieve your near- and long-term strategic objectives. Create an effi cient organizational structure with clear roles and responsibilities for everyone on the team. Leverage existing functions and teams, rather than creating more bureaucracy or overburdening leadership with decisions and tasks that can be handled by the rest of the team. Put a transparent, repeatable process in place. Where possible, make use of existing processes to ensure minimal disruption, and provide clear direction and well-defi ned deliverables. Where new approaches are needed, deploy strong change management disciplines to optimize workforce involvement and acceptance. Determine appropriate risk metrics and meaningful reporting formats, and establish a process for monitoring risk metrics to make sure information is relevant, reliable and provided on a regular, established basis. Develop and implement those tools and templates needed to effi ciently standardize and sustain the risk management process, emphasizing practicality and cost/benefi t optimization. One Size Does Not Fit All Every hospital begins its risk management journey in a different place and needs its own road map. Off-the-shelf solutions don t take into consideration differences in culture, organization, risk objectives and management style. Yet all key stakeholders need a common understanding of risk management objectives and a shared view of their importance. To succeed, an organization needs to overcome the obstacles to risk management that have traditionally prevented it from addressing risks in the past. It needs to build or expand on existing programs, and position risk management as an integral part of its corporate culture. And to help win over any key infl uencers such as highly respected doctor and nurse leaders who might still be resisting the idea of risk management it is important to achieve some quick wins from the implementation process to demonstrate its value and establish momentum. About Towers Watson s Health Care Professional Liability Practice Best-in-class human resource and risk consulting organization, with the breadth of workforce and risk assessment experience to tackle the unique challenges facing the hospital industry The leading independent actuarial, risk management and insurance consultancy for health care professional liability and alternative risk fi nancing, with more than years of experience Relationships with 600 professional liability clients and more than 00 health care captives Consultants to the majority of the top 00 health systems in the U.S. and Physician Insurers Association of America companies Central source for developments on captives and other alternative risk fi nancing vehicles Contributor to research, conferences and thought leadership for the captive insurance industry, including sponsorship of the World Captive Forum Conference About Towers Watson Towers Watson is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. With,000 associates around the world, we offer solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. For more information Contact: Corey Gooch + 0 corey.gooch@ Or visit. Christopher Kip Bohn + 0 689 christopher.bohn@ Copyright 0 Towers Watson. All rights reserved. TW-NA-0-