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Health Care Enterprise Risk Management Are You Ready for the “Cloud”? Presented by: Dr. Jack Hampton, Principal Princeton Consulting Group 1.

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Presentation on theme: "Health Care Enterprise Risk Management Are You Ready for the “Cloud”? Presented by: Dr. Jack Hampton, Principal Princeton Consulting Group 1."— Presentation transcript:

1 Health Care Enterprise Risk Management Are You Ready for the “Cloud”? Presented by: Dr. Jack Hampton, Principal Princeton Consulting Group 1

2 Question Is this the Cloud? 2

3 Answer Could be for Liability Insurers 3

4 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 4

5 Normal Times In the 95% world, the likely, best, and worst outcomes look something like this: Worst Best 2σ Expected 2σ 5

6 Extreme Times In the “non-normal” 5% world, the 95% risk analysis reminds us of other possible outcomes. 2.5% 95% 2.5% 6

7 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 7

8 Extreme Times Risk is not under control in extreme times. Identify changing conditions Share changing conditions Think about changing conditions Expect the unexpected 8

9 Can ERM Handle Extreme Times? Areas where ERM is most developed:  Financial Services Companies  Electric Utilities  Hospitals 9

10 Financial Services Companies.  Lehman Brothers  Washington Mutual  AIG  Merrill Lynch  Grade of F 10

11 Electric Utilities  Enron’s 38 Electricity Plants  Pacific Gas & Electric Bankruptcy  TEPCO’s Fukushima Daiichi Nuclear Disaster  Grade of C 11

12 Hospitals  Avoidance of “Never events”  Complex successful procedures and technology 12

13 Hospitals  Offset. In the U.S., negligence allegations of 250,000 injuries or deaths annually  Grade of A minus 13

14 Question Why do hospitals receive a higher score for effective risk management? 14

15 Answer Hospitals receive a higher score for effective risk management because: They are prepared for extreme events. 15

16 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. 16

17 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 17

18 Question Can enterprise risk management help reduce liability exposures in healthcare? 18

19 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. 19

20 Question What risk management processes are found in a health care facility? 20

21 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. 21

22 Question What should you expect of a health care facility with regard to liability risks? 22

23 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? 23

24 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. 24

25 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:  Software  Storage of data  Access to data 25

26 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. 26

27 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. 27

28 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. 28

29 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. 29

30 Riskonnect A complete, “cloud,” non-legacy risk management system. 30

31 Riskonnect Details 31

32 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. 32

33 Question What is the best way to augment the comprehensive, high-tech risk management systems? 33

34 Answer Incorporate weak signals. 34

35 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 35

36 Weak Signals We cannot predict extreme events.  Can we see “weak signals?”  Are they part of the big picture?  Can we respond to them? 36

37 Question Political Paralysis. This is a signal. What are the possible impacts on health care? 37

38 Question Unsustainable Government Budgets. This is a signal. What are the possible impacts on health care? 38

39 Question Declining Job Pool. This is a signal. What are the possible impacts on health care? 39

40 Question Aging Population. This is a signal. What are the possible impacts on health care? 40

41 Question Planetary Pollution. This is a signal. What are the possible impacts on health care? 41

42 Question Health Care Reform. This is a signal. What are the possible impacts on health care? 42

43 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. 43

44 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 44

45 Small Picture (1) Should we increase the production of crude oil? 45

46 Big Picture (1) Should we expand production to: Lower prices? Lower profits? Reduce oil reserves? 46

47 Small Picture (2) Should we build a new refinery? 47

48 Big Picture (2) Should we invest $2 billion to: Drive down the price of oil Lower our profits by $1-2 billion a year? 48

49 Small Picture (3) Where can we build new refineries? 49

50 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. 50

51 Picture Crude Oil in Millions of Barrels per Day: 2011 2013 2014 U.S. Consumption 19M19M? 19M? Chinese Consumption 9M10M 11M Indian Consumption 3M 4M 5M Refining Capacity 86M 86M 87M 51

52 Small Picture Proposed Solutions: Natural gas Coal Railroads Waterways Public transportation 52

53 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? 53

54 Question Did AIG have the big picture in 2006-2008? 54

55 Answer (1) 55 Board of Directors Critical Benchmarks Oversight Controls U.K. Credit Default Swaps Credit Standards Unit #2 Total Exposure Unit #1

56 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. 56

57 Big Picture (1) Build and use technology to: Identify weak signals Integrate risk planning Share information Identify alternatives Create strategies 57

58 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 58

59 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. 59

60 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. 60

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