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Moody’s: NFP Hospitals Should Focus on Risk Management

The ability to implement effective strategies to minimize risk will become increasingly important in determining not-for-profit and public hospitals’ credit strength in the changing landscape. These hospitals are focused on risk management to avoid pitfalls and capitalize on new opportunities in anticipation of momentous changes, not the least of which is the fate of the Affordable Care Act (ACA), said authors of a new report from Moody’s Investors Service. (“Risk Management Crucial to Success Amid Changing Healthcare Landscape,” Not-for-Profit and Public Healthcare – US, Moody’s Weekly Credit Outlook, May 26, 2017)


Key areas of risk management include information technology (IT) and cybersecurity, clinical quality and brand protection, balance sheet health and reimbursement.


  • New IT systems bring benefits but also potential hazards. While electronic medical record (EMR) systems can help with customer service and patient outcomes, risk management associated with IT includes controlling costs and guarding against cyberattacks.


  • Maintaining high clinical quality will increasingly impact financial performance and reduce the risk of brand impairment. The relationship between quality of care and operating margins is increasingly linked. According to data from CMS, organizations with better patient outcomes produce stronger operational margins.


“In 2015, hospitals with above-average value-based purchasing (VBP) scores produced a median operating cash flow margin of 11.7 percent, compared to 8.6 percent for organizations with below-average VBP scores. The patient experience, which accounts for up to 30 percent of the VBP score, has a similar correlation,”

The perception of poor quality or management can have a lasting negative impact on an organization’s brand and patient demand, and adversely affect profitability. Organizations with better patient outcomes produce stronger operational margins.


  • A strong balance sheet is integral to an organization’s ability to weather major change. Higher cash balances give organizations the ability to withstand downturns, invest in critical projects, protect against riskier debt structures, and undertake more aggressive investment allocation in pursuit of greater returns.


  • Hospitals face increased financial risks with the shift towards pay-for-performance reimbursement models. With reimbursement becoming more directly tied to patient outcomes – a goal of the ACA – hospitals will increasingly need to strengthen their ability to manage the risks. The risks lie with changing reimbursement models involving both traditional insurers and the growing number of hospital-owned plans.

(“Risk Management Crucial to Success Amid Changing Healthcare Landscape,” Not-for-Profit and Public Healthcare – US, Moody’s Weekly Credit Outlook, May 26, 2017)


The Impact of Health Reform


The fate of the ACA and the AHCA poses risks to hospitals, said a lead author, vice president and senior credit officer with Moody’s.


“It’s hard to plan around unknowns and the future of both laws is presently uncertain. The risk is that large areas of reimbursement will change and regardless of how they change, they create risk,” the Moody’s executive said in an interview. “Both laws speak to the possibility of significant reductions in government-based funding, which will impact hospitals pretty significantly.” (“Risk Management Takes on Increasing Importance,” HFMA Weekly News, June 9, 2017)


A healthcare expert noted that irrespective of congressional action on health reform, it is certain that the current administration will pump more money into fraud and claims enforcement. Having worked for the Office of the Inspector General, he noted that submitted medical claims have gotten many hospitals in trouble with regulators and government contractors.


“The [corporate integrity agreements] that come with settlement agreements are sometimes even more costly than the penalties,” he said. “Yet, we see these two risk areas receiving the least amount of attention in hospital risk analysis. Every hospital should have an arrangements database as part of its risk analysis process and those reviews should be done regularly.”


Successfully Managing Risk


Hospitals should:


  • Select the best risk management techniques
  • Establish strong risk management and patient safety programs
  • Improve the integrity and quality of documentation efforts
  • Proactively review charts
  • Improve training and education of providers
  • Identify and analyze loss exposures, using alternative risk techniques
  • Implement strong service recovery programs
  • Have a disclosure of adverse events program while proactively managing potentially compensable events
  • Have strategies to communicate well with patients and families when something does occur
  • Provide data based on enterprise risk management analysis to engage key stakeholders in the organization
  • Have a formalized procedure for making thoughtful decisions throughout the system
  • Require consideration of protecting the assets of the organization
  • Focus on creating value
  • Monitor and improve the risk management program

(“Risk Management Takes on Increasing Importance,” HFMA Weekly News, June 9, 2017)


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Coming soon: the advanced Finance Course, Financial Risks & Strategic Implications of APMs, featuring Marian Jennings and Seth Edwards. In this course, Ms. Jennings discusses the importance of social determinants of health in a population health management strategy.



For a complete list of iProtean, now part of Veralon courses, click here.



For more information about iProtean, now part of Veralon, click here.