1. Page 0 June 26-29, 2011 AHLA Annual Meeting David McMillan Pershing Yoakley & Associates, P.C. (800) 270-9629 dmcmillan@pyapc.com Larry Vernaglia, Esq. Foley & Lardner LLP (617) 342-4079 lvernaglia@foley.com

2. Page 1 June 26-29, 2011 AHLA Annual Meeting Cast of Characters David the COO performed by David McMillan Larry the GC performed by Larry Vernaglia Mike the CEO performed by Himself

3. Page 2 June 26-29, 2011 AHLA Annual Meeting Last Week After a Strategic Planning Retreat…

4. Page 3 June 26-29, 2011 AHLA Annual Meeting One Week Later…

5. Page 4 June 26-29, 2011 AHLA Annual Meeting Connecting the Dots: Comprehensive Enterprise Risk Management

6. Page 5 June 26-29, 2011 AHLA Annual Meeting Making the Case for Enterprise Risk Management Healthcare reform is causing many health systems to quickly react/respond to proposed changes (i.e., bundled payments, ACO regulations, value-based purchasing, etc.) Too often, health systems are failing to proactively plan for the response of the reaction to healthcare reform often leaving the system at risk Hastened decisions are often made in silos and without considering the impact/risk to all entities Enterprise Risk Management

7. Page 6 June 26-29, 2011 AHLA Annual Meeting Challenger Mission STS-51-L “… a series of seemingly harmless decisions were made that incrementally moved the space agency toward a catastrophic outcome." SOURCE: Gladwell, Malcolm. Gladwell.com blog post. New Yorker. “Blowup”, Jan. 22, 1996

8. Page 7 June 26-29, 2011 AHLA Annual Meeting What is ERM? Formal Definition “A process, effected by an entity’s Board of Director’s, management and other personnel, applied in strategy [sic] setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risks to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.” SOURCE: Committee Sponsoring Organization of the Treadway Commission. Enterprise Risk Management – Integrated Framework, Executive Summary. September 2004.

9. Page 8 June 26-29, 2011 AHLA Annual Meeting What is ERM? Practical Definition “Creating an effective structure through combining the correct players with an appropriate strategy, equipping these players with a common understanding and appreciation for the direction of the health system and engaging these players in a process to evaluate enterprise risk.”

10. Page 9 June 26-29, 2011 AHLA Annual Meeting Managing Risks in Healthcare is Complex Health systems operate multiple businesses with divergent priorities within one entity An enterprise risk management framework, consisting of an effective structure and a disciplined process, intersects each distinctive business initiative to provide a holistic view of the health system. Real Estate Capital Planning Physician Alignment Information Technology Regulatory Compliance Financial Performance Patient Access Enterprise Risk Management Structure and Process

11. Page 10 June 26-29, 2011 AHLA Annual Meeting Risk Management in Face of Rapidly Changing Environment Challenges for today: defining the parameters “along the way” Yesterday: −Financial derivatives in capital and debt structures Today: −Physician-Hospital Integration Tomorrow: −Managing to the PPACA and private payor models

12. Page 11 June 26-29, 2011 AHLA Annual Meeting A Practical Approach ( + ) * Right Processes Right People Disciplined Approach Ability to Evaluate Risks = >

13. Page 12 June 26-29, 2011 AHLA Annual Meeting The Right Process Risk management must be driven from the top down At its core, an ERM framework is proactive, not reactive A framework acknowledges that confronting risks before they are emergent yields significant benefit A comprehensive risk management framework does not automatically ensure that a system will be void of future and present risks

14. Page 13 June 26-29, 2011 AHLA Annual Meeting The Right Process Risk Mapping: A data generating process using local perceptions to identify and address risks in order to reveal transactions, departments, or processes that face different types and levels of risk SOURCE: Worldbank.org; online at http://siteresources.worldbank.org/EXTTOPPSISOU/Resources/1424002-1185304794278/4026035-1185375653056/4028835-1185375811087/1_Risk_mapping.pdf

15. Page 14 June 26-29, 2011 AHLA Annual Meeting The Right Process – The Tool

16. Page 15 June 26-29, 2011 AHLA Annual Meeting Perspective Prospective Senior VP New Initiative/ Transaction Departments/Services Little Sigma Departments/Services Comprehensive Risk Profile Comprehensive Risk Profile

17. Page 16 June 26-29, 2011 AHLA Annual Meeting Isolated Risk vs. Systemic Risk Risk Profile 1 Risk Profile 2 Risk Profile 8 Risk Profile 53 Systemic Risk How many “Moderate”s = “Untenable”? Isolated Risk

18. Page 17 June 26-29, 2011 AHLA Annual Meeting The Right People The Right People make up the ERM evaluation team Right People, typically members of senior management, are responsible for evaluating risks respective to his or her position within the organization and hold responsibility for strategic initiatives ( + ) * Right Processes Right People Disciplined Approach Ability to Evaluate Risks = >

19. Page 18 June 26-29, 2011 AHLA Annual Meeting The Right People CEO CFO COO CMO CNO CIO Human Resources Legal Counsel Risk Manager Real Estate/Facility Management Key Leader

20. Page 19 June 26-29, 2011 AHLA Annual Meeting Accumulating the Results CEO SVP Operations Risk Survey SVP Information Risk Survey SVP Finance Risk Survey SVP Quality Risk Survey

21. Page 20 June 26-29, 2011 AHLA Annual Meeting The Importance of Process and People “A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools.” – Douglas Adams, British Comic Writer

22. Page 21 June 26-29, 2011 AHLA Annual Meeting The Ingenuity of Complete Fools

23. Page 22 June 26-29, 2011 AHLA Annual Meeting Disciplined Approach Frequency Transparency Board Involvement Accountability ( + ) * Right Processes Right People Disciplined Approach Ability to Evaluate Risks = >

24. Page 23 June 26-29, 2011 AHLA Annual Meeting Ability to Evaluate Risks Risk management must be driven from the top down and embedded in an organization’s culture At the core of the ERM framework, an entity must be proactive, not reactive Health systems should plan for risks, and create an efficient structure and a disciplined process to evaluate potentially risky strategic decisions. ( + ) * Right Processes Right People Disciplined Approach Ability to Evaluate Risks = >

25. Page 24 June 26-29, 2011 AHLA Annual Meeting Challenges to Implementing a Contemporary ERM System Communication Lean and Transparent Culture Having the courage to embrace the value proposition Scale The sheer number of risk elements to be assessed Objectivity “Objectivity requires taking subjectivity into account.” - Lorraine Code Predictive Element Ability to evaluate future associated risks

26. Page 25 June 26-29, 2011 AHLA Annual Meeting Connecting the Dots: Comprehensive Enterprise Risk Management