Health Care Enterprise Risk Management

Are You Ready for the “Cloud”?

Presented by:

Dr. Jack Hampton, PrincipalPrinceton Consulting Group

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Question

Is this the Cloud?

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Answer

Could be for Liability Insurers

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Premise

Two distinct areas for health care liability.

• Mediocristan. Few extreme successes or failures. • Extremistan. Rare occurrences with widespread impacts.

Let us call these “normal times” and “extreme times.”

Hats off to Nassim Taleb, author of The Black Swan

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Normal Times

In the 95% world, the likely, best, and worst outcomes look something like this:

Worst Best

2σ Expected 2σ

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Extreme Times

In the “non-normal” 5% world, the 95% risk analysis reminds us of other possible outcomes.

2.5% 95% 2.5%

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Normal Times

Liability risk is largely under control in normal times.

• Traditional risk management• Best practices• Quantitative tools• Accounting audit• Internal audit• Compliance• Loss control

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Extreme Times

Risk is not under control in extreme times.• Identify changing conditions• Share changing conditions• Think about changing conditions• Expect the unexpected

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Can ERM Handle Extreme Times?

Areas where ERM is most developed: Financial Services Companies Electric Utilities Hospitals

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Financial Services Companies.

Lehman Brothers Washington Mutual AIG Merrill Lynch Grade of F

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Electric Utilities Enron’s 38 Electricity Plants Pacific Gas & Electric Bankruptcy TEPCO’s Fukushima Daiichi Nuclear Disaster Grade of C

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Hospitals

Avoidance of “Never events” Complex successful procedures and technology

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Hospitals

Offset. In the U.S., negligence allegations of 250,000 injuries or deaths annually

Grade of A minus

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Question

Why do hospitals receive a higher score for effective risk management?

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Answer

Hospitals receive a higher score for effective risk management because:

They are prepared for extreme events.

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Enterprise Risk Management

Comprehensive management of hazard, compliance, operational, financial, and other risks.

Breaking down organizational silos that failed to share and coordinate risk management.

Greater senior management and board of director roles in risk management.

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Contributions of ERM

ERM contributions are:

#1. Upside of Risk#2. Risk Owners#3. Alignment with Business Model #4. Central Risk Function#5. High-tech Platform

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Question

Can enterprise risk management help reduce liability exposures in healthcare?

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Answer

Yes, in normal times at a provider: Parking Lot. On camera. Entranceway. On camera. Limited access. Admissions. Full disclosure. Verification. Room Assignment. Enter into care. Care. Testing, diagnosis, treatment Recovery. Treatment. Monitoring. Departure. Standard processes. Parking Lot. On camera.

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Question

What risk management processes are found in a health care facility?

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Answer

Health care risk management processes that create liability exposures.

Expectations. People have them. Irrational Behavior. People have illogical expectations. Expected Losses. They occur. Unexpected Losses. They also occur.

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Question

What should you expect of a health care facility with regard to liability risks?

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Answer

Excellent risk management procedures helped by luck.

We can be smart. We rely to a large degree on luck. Can we help ourselves to be lucky?

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Helping out Luck

Technology is the ally to “luck” in risk management. Particularly two factors:

The “Cloud.” A linkage of computers. Non-legacy systems. New tools for understanding risk.

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What is the “Cloud?”

The “cloud” refers to providing computing service from a location not known to the user with software not fully maintained by the user. Services include:

SoftwareStorage of dataAccess to data

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What is a Legacy System?

This is an information and storage structure using old technology. It commonly has been:

Built over a period of time with different levels of technology.

Patched to avoid obsolescence, with many of the patches not understood.

Created as isolated systems that do not share information or capabilities.

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What is a Non-Legacy System?

It is a high-tech platform where: A company can conduct all its information technology

activities. All the systems can communicate. The system itself is maintained on the cloud. The company does not have to maintain the software or

systems. The company does not have to provide security for its

data or systems.

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Amazon Elastic Compute Cloud (EC2)

EC2 allows users: To rent virtual computers on which to run their computer

applications. To run software provided by third-party vendors. Create and terminate server connections. Pay by the hour for usage.

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IBM Holistic Services

Using the cloud and a non-legacy system, IBM helps companies:

Simplify and standardize information technology infrastructure.

Create efficient and flexible systems for the development of new services.

Deliver services to customers and suppliers. Build communications, versatility and security in an

integrated system.

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Riskonnect

A complete, “cloud,” non-legacy risk management system.

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Riskonnect Details

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Non-legacy “Cloud” Risk Management

Riskonnect system uses: Visual Risk Clusters. The relationships and interaction of

risks on the screen.

Risk Management Details. Characteristics of the risk, likelihood, expected impact, mitigation activities, scheduled future events, and other backup information can be accessed in seconds.

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Question

What is the best way to augment the comprehensive, high-tech risk management systems?

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Answer

Incorporate weak signals.

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What is a “weak signal?”

It is an early warning of change. Starts at low volume Is usually recognized by pioneers or special groups Is often denied by experts and businesses Grows over time Can have large risk impact

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Weak Signals

We cannot predict extreme events.Can we see “weak signals?”Are they part of the big picture?Can we respond to them?

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Question

Political Paralysis.•This is a signal. What are the possible impacts on health care?

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Question

Unsustainable Government Budgets.•This is a signal. What are the possible impacts on health care?

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Question

Declining Job Pool.•This is a signal. What are the possible impacts on health care?

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Question

Aging Population.•This is a signal. What are the possible impacts on health care?

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Question

Planetary Pollution.•This is a signal. What are the possible impacts on health care?

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Question

Health Care Reform.•This is a signal. What are the possible impacts on health care?

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Crude Oil

This is a signal. Let us explore it in an ERM framework.

Gas at $5 to $12 a gallon. We will look for the big picture. We will acknowledge the small picture.

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Picture

Global crude oil in barrels per day:

•2011 Consumption: 87 million•2006 Refining: 84-86 million•2011 Refining: 84-86 million•2014 Global Need: 90-92 million

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Small Picture (1)

Should we increase the production of crude oil?

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Big Picture (1)

Should we expand production to:

• Lower prices?• Lower profits?• Reduce oil reserves?

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Small Picture (2)

Should we build a new refinery?

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Big Picture (2)

Should we invest $2 billion to:

• Drive down the price of oil• Lower our profits by $1-2 billion a year?

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Small Picture (3)

Where can we build new refineries?

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Big Picture (3)

It does not matter:• Renovated refineries are replacing obsolete refineries.• Few new refineries are planned.• It takes five or more years to construct a refinery.• Yanbu (Canada) proposed 2006. Target completion is

2015.

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Picture

Crude Oil in Millions of Barrels per Day:

2011 2013 2014U.S. Consumption 19M 19M? 19M?Chinese Consumption 9M 10M 11MIndian Consumption 3M 4M 5MRefining Capacity 86M 86M 87M

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Small Picture

Proposed Solutions:• Natural gas• Coal• Railroads• Waterways• Public transportation

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Big Picture

Challenge Assumptions:• Locations. Can our customers and employees get to us?

• Disruption. Will energy shortages damage or destroy supply lines or markets?

• Crisis Management. What must we do to be ready for “black swans” from fossil fuel shortages?

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Question

Did AIG have the big picture in 2006-2008?

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Answer (1)

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Board of Directors

CriticalBenchmarks

OversightControls

U.K.CreditDefaultSwaps

CreditStandards

Unit #2

TotalExposure

Unit #1

Answer (2)

Warren Buffett in 2003. Charlie Munger and I . . are of one mind in how we feel

about derivatives. We are alert to . . mega-catastrophe risk. That posture makes us . . apprehensive about the

burgeoning quantities of long-term derivatives contracts and . . uncollateralized receivables.

Derivatives are financial weapons of mass destruction.

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Big Picture (1)

Build and use technology to:• Identify weak signals• Integrate risk planning• Share information• Identify alternatives• Create strategies

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Big Picture (2)

Technology is the key to getting a payoff from risk management.

• Not more money• Not more systems• Not more committees• Not more people• Not more details

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Big Picture (3)

Modern management.• Could be less money.• Better systems.• Only committees when needed.• Not more people except for Central Risk Function.• Not more details but better organization of information.

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Conclusion

A systematic risk process does have value.• We cannot predict extreme events.• We can only understand risk and opportunity.• We can scan in advance.• We can share what we learn.• We can incorporate the lessons in liability underwriting.

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