David McMillan
Larry Vernaglia, Esq.
Pershing Yoakley &
Associates, P.C.
Foley & Lardner LLP
(800) 270-9629
(617) 342-4079
dmcmillan@pyapc.com
lvernaglia@foley.com
AHLA Annual Meeting
June 26-29, 2011
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Cast of Characters
David the COO performed by David McMillan
Larry the GC performed by Larry Vernaglia
Mike the CEO performed by Himself
AHLA Annual Meeting
June 26-29, 2011
Page 1
Last Week
After a Strategic Planning Retreat…
AHLA Annual Meeting
June 26-29, 2011
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One Week Later…
AHLA Annual Meeting
June 26-29, 2011
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Connecting the Dots:
Comprehensive Enterprise
Risk Management
AHLA Annual Meeting
June 26-29, 2011
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Making the Case for
Enterprise Risk Management
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
AHLA Annual Meeting
June 26-29, 2011
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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
AHLA Annual Meeting
June 26-29, 2011
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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.
AHLA Annual Meeting
June 26-29, 2011
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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.”
AHLA Annual Meeting
June 26-29, 2011
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Managing Risks in
Healthcare is Complex
Alignment
Financial Performance
Patient Access
Technology
Real Estate
Information
Physician
• 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.
Capital Planning
Regulatory Compliance
• Health systems operate
multiple businesses with
divergent priorities within
one entity
AHLA Annual Meeting
June 26-29, 2011
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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
AHLA Annual Meeting
June 26-29, 2011
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A Practical Approach
Ability to
Disciplined
Right
Right
=> Evaluate
+
*
Approach
Processes People
Risks
(
)
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June 26-29, 2011
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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
AHLA Annual Meeting
June 26-29, 2011
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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
AHLA Annual Meeting
June 26-29, 2011
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The Right Process – The Tool
Risk Measurement
Minimal
Moderate/
Acceptable
Untenable
Clinical Quality
Financial/Economic
Legal/Compliance
Marketing/Brand
Patient Experience
Relational
AHLA Annual Meeting
June 26-29, 2011
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Little Sigma
Prospective
New Initiative/
Transaction
New Initiative/
Transaction
Senior
VP
Departments/Services
Departments/Services
Departments/Services
New Initiative/
Transaction
Comprehensive
Comprehensive
Risk Profile
Risk
Profile
Departments/Services
Perspective
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June 26-29, 2011
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Isolated Risk vs. Systemic Risk
Risk Profile 2
Isolated Risk
Risk Measurement
Minimal
Moderate/
Acceptable
Untenable
Clinical Quality
Risk Profile 1
Systemic
Risk
Risk Measurement
Minimal
Moderate/
Acceptable
Financial/Economic

Legal/Compliance
Marketing/Brand
Patient Experience
Relational
Untenable
Risk Profile 8
Clinical Quality
Risk Measurement
Minimal
Financial/Economic
Moderate/
Acceptable
Untenable
Clinical Quality

Legal/Compliance
Financial/Economic

Legal/Compliance
Marketing/Brand
Marketing/Brand
Patient Experience
Relational
Patient Experience
Risk Profile 53
Relational
Risk Measurement
Minimal
Moderate/
Acceptable
Clinical Quality
Financial/Economic
How many “Moderate”s = “Untenable”?
Legal/Compliance
Marketing/Brand
Patient Experience
Relational
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June 26-29, 2011
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
Untenable
The Right People
(
Right
Right
Processes+ People
)
Ability to
Disciplined
* Approach => Evaluate Risks
• 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
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June 26-29, 2011
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The Right People
CEO
CIO
CFO
Human Resources
COO
Legal Counsel
CMO
Risk Manager
CNO
Real Estate/Facility
Management Key Leader
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June 26-29, 2011
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Accumulating the Results
CEO
SVP
Operations
SVP Quality
Risk
Survey
Risk
Survey
SVP
Finance
SVP
Information
Risk
Survey
Risk
Survey
AHLA Annual Meeting
June 26-29, 2011
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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
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June 26-29, 2011
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The Ingenuity of Complete Fools
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June 26-29, 2011
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Disciplined Approach
(
Right
Right
Processes+ People
)
Ability to
Disciplined
* Approach => Evaluate Risks
• Frequency
• Transparency
• Board Involvement
• Accountability
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June 26-29, 2011
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Ability to Evaluate Risks
(
Right
Right
Processes+ People
)
Ability to
Disciplined
* Approach => 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.
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June 26-29, 2011
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Challenges to Implementing a
Contemporary ERM System
Communication
Objectivity
Lean and Transparent
Culture
Having the courage
to embrace the value
proposition
“Objectivity requires
taking subjectivity
into account.”
- Lorraine Code
Scale
Predictive
Element
Ability to evaluate
future associated risks
The sheer number of
risk elements to be
assessed
AHLA Annual Meeting
June 26-29, 2011
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Connecting the Dots:
Comprehensive Enterprise
Risk Management
AHLA Annual Meeting
June 26-29, 2011
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