Hospital Financial Risk Assessment Tools Not Limited to ERM

Payment transparency or lack thereof, opens hospitals up to a boatload of financial risk as the payment environment shifts. Consider that in just four years, the health plan environment has changed drastically from one in which the majority of consumers had little knowledge (or interest) in the cost of their care, to the age of high-deductible, consumer-directed health plans. As consumers grapple with funding more of their own care, they now want to know their care costs. In many hospitals and health systems, these are answers the front office doesn’t have, but they really should.

John McLaughlin, managing director and practice leaders with LECG Corp., a global consulting and business advisory firm, says that managing this risk as the payment environment evolves is vital, albeit challenging in healthcare.

"A health system today is as complex as running a $5 billion company," McLaughlin says. "However the difference is, in corporate America there’s a push for enterprise risk management … that’s not the case in healthcare."

Enterprise Risk Management or ERM is a method, framework, and process to manage risks to an organization by taking a holistic view of the various uncertainties involved across the organization. Before a hospital or health system can address the risks associated with its payment process, McLaughlin says healthcare leaders must know where their financial risks lie. To do so, McLaughlin recommends pulling together a team from all areas of the hospital (financial, administrative, clinical, customer service, etc.) and applying the following principles:

1.       Establish the organization’s objective(s) (e.g., to increase profits by 5%).

2.       Evaluate the hospital’s risk tolerance and add a tolerance metric which is approved by the board. (How much potential loss are you willing to take on?)