A Step-by-Step Guide to Quantifying and Mitigating Operational Risk

"The rapidly changing healthcare landscape demands a disciplined approach to risk assessment," said Matt Weekley, leader of the national healthcare industry practice at Plante Moran, during a May 23 webinar hosted by the accounting and consulting firm.

During the webinar, panelists Mr. Weekley and Plante Moran Partner Anthony V. Colarossi, along with moderator and Plante Moran Partner Betsy Rust, explained that hospitals need quantitative risk assessment to prepare for coming changes in the industry, such as the move to value-based purchasing and the impending insurance exchanges.

The panelists agreed that having a risk assessment plan in place aids in the development of a strategic plan, is effective in creating mitigation or contingency plans, encourages outside-of-the-box thinking and, most importantly, turns risk management into a proactive rather than reactive activity.

The webinar offered a step-by-step guide for quantifying and mitigating risks.

1. Identify threats.
"You want to look at threats coming in that would hurt your organization in some way," said Mr. Colarossi. From the formation of ACOs to state exchanges to vertical integration, each organization should identify the threats most imminent or pressing in their market. These will currently mostly be regulatory, but not always, said Mr. Colarossi.

For example, an impending insurance exchange in a hospital's state might threaten the hospital with decreased reimbursements.

2. Gauge vulnerability. "Once threats are identified, the next step is to ask 'How vulnerable are we?'" said Mr. Colarossi. He said organizations need to ask "the right follow-up questions" to determine how an event or regulation could affect the organization.

In the above example about insurance exchanges, the follow-up question for the organization would be: "How many employers, and therefore patients, would switch to the exchange market?" Questions like these involve a deep investigation into the issue, as Mr. Weekley said, "You need to gather enough perspective to allow you to accurately quantify risk."

3. Map the organization-wide impact of the risks. "You need to understand the flow of risk," said Mr. Colarossi. The panelists said hospitals should track the impact of a threat throughout four areas of their organization to understand the full effect: financial, strategic, operational, and quality compliance.  

For example, a limited access to capital affects not only the financial operations of the hospital, but could also lead to deteriorated facilities, affecting a hospital's quality and compliance, which could lead to the operational hazard of decreasing patient satisfaction.

Mr. Weekley cited quality as the largest risk areas for hospitals due to the ripple effect it has throughout the organization: "If quality suffers, that has revenue impact, reputation impact, and now, payment impact," he said.

4. Examine each service line. Since risk is often associated with a particular service line, "quantifying on a service-line level is key," said Mr. Colarossi.

Hospitals should examine their ability to recruit and train new specialty physicians, technology changes in the field, overhead and direct costs, quality and patient satisfaction and new competitors within the service lines, and compare the magnitude of threats faced by each service line in the organization.    

Mr. Weekley acknowledged that discontinuing or scaling back a service line, even when necessary, is often a difficult or unpopular decision. He said this kind of risk examination at the service-line level is "a tool that can help executives and board members justify getting out of a service line."

5. Discuss risk regularly with board members.
When polled, the majority of the webinar audience said they do not meet regularly with board members to discuss risk management and mitigation.

According to the panelists, they should be: "There is a definite need to have more regular and consistent discussion about risk factors with board members," said Mr. Colarossi. A minimum of one meeting per year was recommended by the panelists.

"When I was a hospital executive, we spent too much time talking about history and what we had done," said Mr. Weekley, explaining that he should have kept the focus on the future and mitigating risks that could negatively impact the hospital's strategy and mission. "You can't spend too much time addressing risk," he said.

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