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Strategic 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 quantification, 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
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 significant measures
— focused on quality, results and efficient 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 specific
competitors? Are we adequately prepared to manage the risks associated with
significant 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 specific 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?

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. “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. there’s just too much at stake to look at risk management as anything but a core business process with significant implications for a hospital’s strategy. We develop a risk/return framework of mitigation solutions tied to the hospital’s strategic and financial goals. In this environment. and defining your organization’s appetite for risk. processes and documentation. towerswatson. and the risk mitigation strategies and tactics best suited to the organization’s circumstances. Review the current risk management environment. 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. ensuring full alignment with critical strategic goals. such as patient or worker satisfaction. This involves meeting with various members of the management team to understand your organization’s business strategy. KPIs are often financial but may also take the form of a critical There are four steps involved in the process. we can validate the appropriateness of your organization’s risk appetite. Next. The output is a formal risk appetite statement from which we can begin measuring and modeling the actual risks. We then prioritize these risks from the standpoint of their probable impact on the organization and their likelihood of occurrence.” Strategic Risk Management for the Hospital Industry in Transition 2 . That provides a foundation for the organization’s management team to determine how much risk it is willing to take on. and current risk governance procedures. HSRM begins with a comprehensive identification of the current and emerging risks most relevant to each hospital’s ability to achieve its near. the addition of physicians and physician groups to hospital staff. Below is a more detailed look at each step. Towers Watson’s Hospital Strategic Risk Management (HSRM) is just such an approach. 1. we help you identify key performance indicators (KPIs) along with the thresholds of risk appetite for each indicator. risk management philosophy and objectives. and an aging workforce that will hit the hospital industry harder than most other businesses. 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.Enter Strategic Risk Management Answering these and related questions requires an approach to risk management that goes well beyond a technical exercise. financial health and growth prospects. which create a road map that culminates in HSRM implementation. We begin by looking at your current risk-related activities.and longer-term objectives. key issues and concerns. Once these are defined. industry consolidation. which enables hospital leadership to make better risk-adjusted decisions.

In this case. The map below shows the output of a recently completed exercise. help to quickly pinpoint the organization’s priorities. given that the highly probable dropping/restructuring of Medicare and other reimbursements could significantly slow or derail the organization’s ability to complete some of its most important initiatives. Perhaps not surprisingly. Catastrophic 9 Sample key risks prioritized for the hospital industry from a typical exercise Risk-ranking matrix Risk map Rank Risk name Major 7 1 2 Impact Moderate 5 3 7 6 5 8 4 10 9 12 Minor 3 11 Insignificant 1 13 1 Rare 2 Unlikely 3 Possible 4 Likely 1 Uncertainty of the level and timing of reductions in reimbursements 2 Inability to extend services to a new model 3 Changing compensation will alienate MDs/MLPs 4 Inability to compete with other industries for talent 5 Inability to respond to new forms of competition 6 Doctor and/or nurse recruiting/retention 7 Compliance with governmental billing regulations 8 Inability to effectively engage patients 9 Our workforce is resistant to change 10 Impact of trend toward value-based compensation models 11 Information privacy and cyber-security 12 Aging workforce 13 Clinical risk 5 Almost certain Likelihood towerswatson. hospitals could find themselves struggling to successfully implement changes critical to their growth plans.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. while virtually a certainty in occurrence. prove unwilling or unable to adapt and exert a disproportionate influence on their peers. The results of the exercise. They then evaluated each risk in terms of its potential impact on the organization (vertical axis) and the likelihood of occurrence (horizontal axis). by contrast. plotted on the map’s color zones. particularly those critical to implementing new care models. has a far less pervasive impact. in part because it is expected. the top risk here is financial. Clinical risk. Perhaps most interesting is the placement of workforce change resistance — a risk traditionally downplayed by senior executives across all industries. But if employees. budgeted for and chiefly mitigated through significant clinical risk management programs and Strategic Risk Management for the Hospital Industry in Transition 3 . the leadership team began by brainstorming all the risks most relevant to the organization — both existing and emerging.

what benefits 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. mitigation strategies are within management’s control (in contrast to most regulatory or financial risks) and. depend on their active involvement and outreach to employees. most recently. As a 4. selfinsurance or captives. to nontraditional solutions for newer workforce-related risks (such as physician recruiting or retention programs. Regular updates to management and all risk stakeholders will help explain the organization’s risk profile on a riskby-risk basis.2. This level of consistent communication reveals the full scope of the HSRM work and the impact of its benefits. many tend to do it retrospectively — relying on historical data or patterns — rather than looking forward. developing solutions to minimize internal change resistance could provide the most immediate return for two reasons. While organizations measure risk all the time.” a hospital’s already-thin operating margins. Modeling helps define the full range of impact — all the potential outcomes — of any risk. mitigate. timely reporting to ensure management can make decisions that add value for the long term. you can test alternative strategies and conduct real cost/benefit analyses to guide decisions. This starts with monitoring the efforts and implementing a reporting framework to communicate results. Strategic Risk Management for the Hospital Industry in Transition 4 . making sure to achieve a significant return on HSRM spending. it becomes easier to choose the best strategies that will reduce risk to acceptable levels. Develop priorities for implementation. One. controls. timely reporting to ensure management can make decisions that add value for the long term. tools and capabilities. analyzing correlations and interrelationships among the risks. 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. Conduct a gap analysis. Two. Implementation. retain or transfer risk. and develop recommendations. In the example shown in the sidebar on page 3. 3. which run the gamut from traditional approaches like insurance. and then develop recommendations to close those gaps. allowing executives to test-drive the process and see tangible results. workforce involvement in rapid process improvement initiatives or patient engagement initiatives). This is a critical stage in the process because it demands a look ahead rather than a look backward. 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. tail liabilities for physicians now on staff and. The question is. 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. employee medical stop loss. processes. Key risk indicators should be reviewed as often as possible and acted on in a timely manner. this involves a review with management of key risk mitigation strategies. quantitative framework for evaluating risk — the potential effectiveness of solutions is readily apparent. across business functions. including network liability. towerswatson. in fact. With a clear understanding of the current situation and the probable severity of various risks. Whether your organization plans to avoid. With the risk management planning foundation firmly in place. One interesting trend right now is expanding the coverage traditionally handled through health care captives. but can actually improve the final outcomes for both the organization and its workforce. By using the right models and metrics. to illuminate their path through the organization and illustrate where risk mitigation could deliver the highest return on investment. Captives are an established and efficient risk financing vehicle that have traditionally been used for the significant medical malpractice and workers compensation liabilities that can erode “The final element in HSRM is consistent monitoring and accurate. we work with your team to identify gaps in organizational structure. The final element in HSRM is consistent monitoring and accurate. implementation often begins with the development of a hierarchy for talking about risks internally. The control and flexibility they offer — including the potential to recapture surplus funds — is making them an attractive option for other coverages. it will face consequences. Typically.

TW-NA-2012-25374 towerswatson. deploy strong change management disciplines to optimize workforce involvement and acceptance. About Towers Watson’s Health Care Professional Liability Practice • Best-in-class human resource and risk consulting organization. Yet all key stakeholders need a common understanding of risk management objectives and a shared view of their importance. reliable and provided on a regular. and position risk management as an integral part of its corporate culture. with the breadth of workforce and risk assessment experience to tackle the unique challenges facing the hospital industry • The leading independent actuarial. Where . rather than creating more bureaucracy or overburdening leadership with decisions and tasks that can be handled by the rest of the team. • Create an efficient organizational structure with clear roles and responsibilities for everyone on the team. risk objectives and management style. with more than 25 years of experience • Relationships with 600 professional liability clients and more than 200 health care captives • Consultants to the majority of the top 100 health systems in the U. established basis. • Put a transparent. • Develop and implement those tools and templates needed to efficiently standardize and sustain the risk management process. Leverage existing functions and teams. risk management and insurance consultancy for health care professional liability and alternative risk Or visit towerswatson. repeatable process in place.gooch@towerswatson. including sponsorship of the World Captive Forum Conference For more information Contact: About Towers Watson Towers Watson is a leading global professional services company that helps organizations improve performance through effective people. All rights reserved. and establish a process for monitoring risk metrics to make sure information is relevant. One Size Does Not Fit All Every hospital begins its risk management journey in a different place and needs its own road map. To succeed. Off-the-shelf solutions don’t take into consideration differences in culture. and risk and capital management.Critical Success Factors for Effective Strategic Risk Management • Align your strategy with the risks most relevant to your ability to achieve your near. • Determine appropriate risk metrics and meaningful reporting formats. talent management. risk and financial management. an organization needs to overcome the obstacles to risk management that have traditionally prevented it from addressing risks in the past. conferences and thought leadership for the captive insurance Corey Gooch +1 312 201 5572 corey. make use of existing processes to ensure minimal disruption. And to help win over any key influencers — 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.bohn@towerswatson. emphasizing practicality and cost/benefit optimization. and provide clear direction and well-defined deliverables.and long-term strategic objectives. and Physician Insurers Association of America companies • Central source for developments on captives and other alternative risk financing vehicles • Contributor to research. It needs to build or expand on existing programs.S. With 14. organization. Where new approaches are needed. Copyright © 2012 Towers Watson. we offer solutions in the areas of employee benefits. Christopher “Kip” Bohn +1 312 201 4689 christopher.000 associates around the world.