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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 managements 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 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?

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, theres just
too much at stake to look at risk management as
anything but a core business process with significant
implications for a hospitals strategy, financial health
and growth prospects.
Towers Watsons 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 identification of
the current and emerging risks most relevant to each
hospitals 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 organizations management team
to determine how much risk it is willing to take on, and
the risk mitigation strategies and tactics best suited to
the organizations circumstances.
We develop a risk/return framework of mitigation
solutions tied to the hospitals strategic and
financial 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.

towerswatson.com

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.
1. Review the current risk management environment.
We begin by looking at your current risk-related
activities, processes and documentation, and
defining your organizations appetite for risk.
This involves meeting with various members
of the management team to understand your
organizations business strategy, risk management
philosophy and objectives, key issues and concerns,
and current risk governance procedures. 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.
Next, we help you identify key performance
indicators (KPIs) along with the thresholds of risk
appetite for each indicator. KPIs are often financial
but may also take the form of a critical outcome,
such as patient or worker satisfaction. Once these
are defined, we can validate the appropriateness
of your organizations 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.

Dening 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 2

Identifying and Prioritizing Key Hospital Risks


Towers Watson uses an interactive process to help a hospitals
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 maps color zones,
help to quickly pinpoint the organizations priorities. Perhaps
not surprisingly, the top risk here is financial, given that
the highly probable dropping/restructuring of Medicare and

other reimbursements could significantly slow or derail the


organizations 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 chiefly mitigated through
significant 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 influence
on their peers, hospitals could find themselves struggling to
successfully implement changes critical to their growth plans.

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

10

9
12

Minor
3

11

Insignificant
1

13

1
Rare

2
Unlikely

3
Possible

4
Likely

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

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.com

Strategic Risk Management for the Hospital Industry in Transition 3

2. 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
define 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 3,
developing solutions to minimize internal change
resistance could provide the most immediate return
for two reasons. One, mitigation strategies are
within managements control (in contrast to most
regulatory or financial 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 final outcomes for both the
organization and its workforce.
3. Develop priorities for implementation. Whether
your organization plans to avoid, mitigate, retain
or transfer risk, it will face consequences. The
question is, 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, 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/benefit analyses to guide
decisions, making sure to achieve a significant
return on HSRM spending.

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4. Implementation. With the risk management


planning foundation firmly 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
organizations 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 efficient
risk financing vehicle that have traditionally been
used for the significant medical malpractice and
workers compensation liabilities that can erode

The nal element in HSRM is consistent


monitoring and accurate, timely reporting to
ensure management can make decisions that
add value for the long term.
a hospitals already-thin operating margins. The
control and flexibility 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 final 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 organizations risk profile on a riskby-risk basis. This level of consistent communication
reveals the full scope of the HSRM work and the
impact of its benefits.

Strategic Risk Management for the Hospital Industry in Transition 4

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 efficient 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-defined
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 efficiently standardize and sustain the risk management
process, emphasizing practicality and cost/benefit
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 dont 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
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.

About Towers Watsons 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
financing, 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.S.
and Physician Insurers Association of America companies
Central source for developments on captives and other alternative risk
financing vehicles
Contributor to research, conferences and thought leadership for the
captive insurance industry, 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, risk and financial management. With 14,000
associates around the world, we offer solutions in the areas
of employee benefits, talent management, rewards, and risk and
capital management.

Copyright 2012 Towers Watson. All rights reserved.


TW-NA-2012-25374

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Corey Gooch
+1 312 201 5572
corey.gooch@towerswatson.com
Or visit towerswatson.com.

Christopher Kip Bohn


+1 312 201 4689
christopher.bohn@towerswatson.com