RISK MANAGEMENT FOR HOSPITALS
INTRODUCTION
Increasingly, with the advent of new technology which provides individuals with vast information, patients have developed an increasing bulk of expectations regarding their care at hospitals. Along with this increase in patient’s expectations is also the increase in responsibilities, legal disputes, costs of risk transfers, and the attention of public opinion regarding hospitals, patient care and health care in general.
This also paves way for the increasing need for risk management within health care organizations. But it has to be noted that risk management in hospitals is very complex. Take for example, when faced with events like the birth of a baby whose life is in danger or the abrupt awakening of a confused elderly person in a hospital bed, health care professionals in hospitals are more likely to deal directly with human suffering than their colleagues in other organizations.
The risks faced by health care organizations are therefore numerous, intricate, and inter-linked. Because of this, risk management must be rational, systematic, and integrated. The aim of this paper is to discuss risk management in hospitals in the United States.
BODY
Risk management is defined as a planned and systematic process to reduce and/or eliminate the probability that losses will occur in a specific setting. It consists of three distinct, yet interrelated areas: 1) risk identification and loss prevention; 2) loss reduction; and 3) risk financing. To be most effective in the hospital setting, risk management involves a multidisciplinary and proactive approach (Yale School of Medicine, 2006).
Risk is one of today’s hottest topics. Shareholders, for instance, have organized round company crises and forced a more strategic approach to their causes. The result was risk management, which is a mating of identity politics and corporate social responsibility, and has dramatically reduced many risks: excellent examples are transport and workplaces that are now an order of magnitude safer than twenty years ago (Coleman, 2006). However, risk management is no longer confined to business organizations, as one would probably think. Risk management has also become a hot topic in health care organizations.
The business of healthcare is becoming riskier. Capitation is increasing the risk providers must assume; expansion of the populations they cover makes health-related events (and the cost) more difficult to predict: and competition among providers is eroding operating margins, making the effect of risk on profitability more pronounced. At the same time, the management of risk is becoming more complex as the delivery of healthcare becomes ever more fragmented. Knowing up front what medical conditions and treatment situations are most likely to result in medical errors or problems–and consequent lawsuits–is helping hospitals improve quality of care and save lots of money.
Gone are the years when tax-exempt hospitals and health systems could obtain lowest-cost capital simply by issuing “plain vanilla,” fixed-rate 30-year bonds and essentially forget about the bonds until they matured. To optimize the opportunities created by changing interest rates, yield curves, financial products, and increasingly complex organizational financial structures, today’s healthcare financial executives must manage, with equal attentiveness, both the investment/asset and debt/liability sides of their balance sheet (McKeown, 2006).
Emerging risks’ are usually understood to include anything unexpected that can cause losses. Old technologies can create new liabilities, as is the case with silica and mixed dust, the “new asbestos.” Known drugs that have been widely used, such as Vioxx and Celebrex, are now being questioned or recalled, triggering multiple lawsuits. Likewise, new technologies bring new areas of risk-for instance, genetically modified organisms or nanotechnology, the consequences of which have yet to be fully understood (Verhaegen, 2005).
The goals of the overall risk management program are to identify areas of actual or potential risk, prevent, as much as possible, injuries to patients, visitors and employees, and to prevent or limit financial loss to the hospital and its staff. Financial loss can occur in a number of ways. From a risk management perspective, the primary concerns are those financial losses associated with the inherent risks that exist in providing health care services, which can result in a patient instituting a medical malpractice claim or lawsuit against the hospital and/or a health care provider (Yale School of Medicine, 2006).
Risk management in practice typically involves some mixture of anticipation-“looking forwards”, and resilience-“bouncing back” (Hood & Jones, 1996). Misjudging risk can be very costly to business. Human intuition and past experience are no longer adequate guideposts for handling new exposures. Risks are emerging at an increasing pace and across a broader spectrum-from global Internet liability and hidden construction defects to ever-present terrorism threats (Verhaegen, 2005).
The active management of capital structure requires that financial executives determine the optimal mix of debt and equity financing, traditional versus nontraditional financing employed, and the appropriate levels of fixed rate and variable rate debt. Financing options available to tax-exempt healthcare organizations, including interest rate swaps and other derivatives, have increased dramatically in recent years. These mechanisms can significantly decrease an organization’s all-in cost of capital without requiring the issuance of additional debt (McKeown, 2006).
A comprehensive policy that addresses the strategic issuance and management of debt and derivatives can provide a roadmap to guide a hospital or health system toward achieving increased capital access, added financial flexibility, and the lowest possible cost of capital, all within board-approved risk guidelines (McKeown, 2006).
Measuring risk for a return to the organization is a revolutionary new approach. Risk managers, C-suite leaders and consultants agree: the business of risk management has changed radically in recent years. The days when the job simply meant buying a risk transfer policy for a competitive price are over. Every major aspect of an organization–its finances, its operations, its products and its human capital–either impacts or is impacted by risk, and risk management is becoming a key strategic line item on the balance sheets of organizations large and small (Morris, 2005).
How well an organization handles today’s ever-increasing complexities of risk–especially compared to other organizations in its space–is about much more than the simple mitigation of loss. When risk is managed and reduced, the results are not only internal financial and operational advantages, but a measurable competitive advantage that affects every area of the company, from the costs of risk in the marketplace, to employee morale and retention, to the company’s position in the marketplace. Today’s complex challenges require a new approach. With the right system, process and tools, risk can be fundamentally turned around from its traditional role as a “necessary evil” of business to a positive center of opportunity and gain for organizations of every size (Morris, 2005).
Organizations in every industry can also apply and benefit from a return-on-risk approach. For example, a hospital that improves risk management in clinical operations will be able to see measurable improvements in medical outcomes as a result of these enhancements. Better outcomes will, in turn, result in reductions in medical liability costs, improved nurse retention, enhanced patient safety and patient satisfaction, lower workers compensation costs and a stronger reputation in the community (Morris, 2005).
A hypothetical example of a hospital that is especially vulnerable to adverse effects of risk can be used to illustrate how return on risk can deliver on its promise. Suppose that a medical error in the operating room results in a million malpractice case. When the verdict is handed down, the hospital can expect a huge malpractice insurance premium hike. But with a return-on-risk approach, that hospital has not just been waiting for the proverbial shoe to drop. Immediately after the incident, a systems-wide analysis of the risk drivers behind the incident would begin. A team including representatives of finance, clinical care, marketing and human resources would be assigned to evaluate both the potential causes of the incident and the risk implications for patient care, for finance, for marketing and for risk and retention of staff.
Knowing the hazards of a certain situation is the starting point of every process of risk management. It is also the most important since every succeeding phase of the risk management program depend on it. Hazards must therefore first be detected; then possible risk scenarios analyzed and assessed in reference to past and present history.
Once this identification and analysis is completed, the team would do three things. First, the data would be converted into benchmarks that could be measured against national and local standards. Key benchmarks for in this industry, which for this industry would include mortality rates, length of stay for various diagnoses and standards to prevent infections. Such data could be obtained through various organizations, including state and federal government, employer watchdog groups, insurers, regulators and consultants.
Also, new resources such as clearing houses make public and private data resources more readily available for benchmarking, cost analysis and operations improvement, and compile and integrate current medical outcomes data with traditional historical claims data and professional liability studies. These major data resources provide a multi-dimensional window on risk and improvement tracking that has never been available to organizations of any size but is now available to all. Much of this data is available through a wide array of online, self-service and pre-packaged tools.
Second, the team takes this benchmarked data and compares it to other hospitals nationwide. This comparison is converted into an index that measures the organization’s relative risk compared to its peers. An index greater than one, for example, indicates a less-than-average risk compared to its peers. An index less than one means a greater-than-average risk.
Third, the team develops a plan to address those areas where the hospital is vulnerable and where improvement can occur. Among the areas that may be identified for remediation are: education and training of staff; the use of technology during the operation to reduce risk; the use of hospitalists (physicians who specialize in hospital care) to manage the patients pre- and post-surgery to standardize and enhance the level of care these patients receive; and automated systems to manage medication dosage.
After implementation of that plan, the measurement process occurs again. This time, the hospital’s ranking should indicate substantial improvement due to the enhanced ability to manage risk. The facility’s ability to better manage risk is measured in the hospital’s ability to produce superior medical outcomes–to produce a superior product.
Effective risk management does not happen automatically. Managers who aspire to enable their organizations to be good at managing risk must recognize that the road to effective risk management is long, twisting, and occasionally hazardous. Beginning the journey is not difficult. It may be triggered by a one-page directive issued by the chief operating officer following a small disaster, exhorting the organization to implement good risk management practices. But after the initial hoopla, when the confetti has settled and the noisemakers have been thrown away, the journey toward effective risk management grows difficult (Frame, 2003).
An important rationale behind risk analysis is to avoid surprises. You may not be able to stop the hurricane that is rushing toward your home, but if you know that it is on its way and will reach your area in six hours, you can prepare to deal with it. If you are unaware of its impending arrival, you will be caught unprepared, and this may have serious consequences for your home and personal safety.
The key element in the success of the risk management program in preventing and reducing these particular claims and associated financial losses, is the participation of physicians, nurses, other health care providers and hospital employees in implementing effective risk management strategies. Each individual must be committed to reducing risks (Yale School of Medicine, 2006).
Risk management should become the central point to gather information in the hospital and provide feedback to the hospital’s safety committee on compliance with state and federal regulations. Risk management should not just be a department in a hospital, it is an understanding throughout the organization from the top of the organizational structure to the bottom (Bradford, 1997).
To foster that understanding, emphasis is placed on educating employees about risk management and their role in helping control losses. The education starts when an employee comes to work at the facility. On a monthly basis, nurses new to the facility and those who want a risk management update on issues such as claims and legal issues are brought together for a meeting. The concept here has been to involve all employees in the risk management program. It doesn’t get done by itself. Everyone within the hospital should help set direction, coordinate and plan.
CONCLUSION
Ironically, today’s risk-filled world demands that organizations develop good capabilities to handle risk, even as chaos and complexity make it difficult to implement effective risk management policies. At a minimum, they need to implement a structured approach to managing risk. Efforts to identify risk, assess its impacts, prepare to handle it, and control it must be carried out explicitly. While the employment of formal risk management processes may not allow you to estimate the likelihood of specific risk events accurately, it will increase the risk sensitivity of managers and employees and reduce the number and impact of the surprises the organization is likely to encounter. Leaders within organizations must act ethically while working to resolve legal dilemmas in ways that are beneficial to the organization’s finances and public image.
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