How Hospitals Can Cut Medical Liability Costs

Roxanna Guilford-Blake, for HealthLeaders Media, December 13, 2010

Medical liability costs continue to grow for hospitals, but the secret to controlling this isn't necessarily found in the financials. It's cultural. And that may leave a CFO wondering just what he or she can do to bend that cost curve.

"The reality is there's little finance can do directly to reduce those costs," says Jeff Rooney, interim CFO at Saint Agnes Medical Center in Fresno, CA.

But the C-suite is far from powerless. In fact, a CFO can drive change by making it a priority. A greater commitment to patient safety drives lower liability expenses; the changes that reduce medical liability costs are cultural, not overtly financial, say the experts. "First and foremost, the CFO needs to be an ardent supporter of internal quality/safety initiatives," says Rooney, who is a partner with Tatum, LLC, an Atlanta-based executive services firm, and has served as interim CFO at several hospitals and health systems.

Overall medical liability system costs, including defensive medicine, are estimated to be $55.6 billion in 2008 dollars annually, or 2.4% of total healthcare spending, according to a report by Harvard's Michelle M. Mello and colleagues, published in the September Health Affairs. That study looked at the cost of the risk-management function. "Using the most conservative estimate of $185,000, the estimated national cost of risk-management operations for all 5,708 registered U.S. hospitals is approximately $1.06 billion. This figure is also conservative because it does not include risk-management costs for other types of facilities, such as independent ambulatory surgery centers."

Involve the C-suite
Elevate liability coverage issues to the C-suite, counsels says Todd Nelson, technical director in charge of senior financial executives for HFMA (and a former hospital CFO). Discuss these issues at the executive level and the board level. He points out that quality was once a middle-management issue. It moved to the C-suite and board level as payment began to be tied to quality scores.

There are no quick fixes. "It's hard to spend less in the short-term. You have to take a long-term view on this," says J. Garrett Parker, CFO of Risk Management Foundation in Cambridge, MA, and treasurer of Controlled Risk Insurance Company of Vermont, which is based in Burlington, VT. "The CFOs I see that are more engaged in a dialogue about patient safety contribute to the success of an organization."

His advice: Understand where your exposure is and what the root causes are. Once you have a grasp on that, and how your organization is faring compared to peers, you can map a course that's dictated by the data.

Create a risk-management and quality dashboard, suggests Nelson. Each organization's dashboard elements will be different, but, ideally, you want to monitor quality measures related to risk?falls, employee accidents, number of malpractice suits, etc. Make sure the executive team is tracking these trends so they can reverse them before they get out of control, he says.

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