The Importance of Health Care Risk Management

Risk is anything that can result in an unexpected outcome or a loss. You can find risk in just about any industry—the financial sector, in transportation, even the health care sector. While all forms of risk can't be avoided, there is a way they can be managed—through risk management. In the financial industry, you can manage your risks by diversifying your investments and reallocating the assets in your investment portfolio. Companies may be able to manage their risks through innovation, and development. But how does this work in the health care industry? This article looks at the basics of managing risks in this sector.

Key Takeaways

  • Risk management is the process of analyzing processes and practices that are in place, identifying risk factors, and implementing procedures to address those risks.
  • In health care, risk management in health care can mean the difference between life and death, which makes the stakes significantly higher.
  • While the bottom line is important, the health care industry's main priority is and should be saving and protecting lives.
  • The key to success is a centralized reporting system.

What Is Risk Management?

Risk management is the process of analyzing processes and practices that are in place, identifying risk factors, and implementing procedures to address those risks. Risk management in health care can mean the difference between life and death, which makes the stakes significantly higher. In some respects, risk management in health care is potentially more important than in any other industry.

In health care, risks can range from—but aren't limited to—faulty equipment and other hazards, medical malpractice, and procedures. Managing these and other risks is pivotal within the health care industry to keep people safe and secure, and to keep costs down. Once risk management strategies are put into place, hospitals, long-term care facilities, and other health care organizations can minimize the potential for loss.

The Impact of the Malpractice Crisis

Medical professionals in the United States—mainly doctors—have seen malpractice premiums skyrocket since then 1970s. They've increased so much that many doctors are either unwilling to practice or stop practicing altogether. The surges in premiums are due to a rise in health care costs, a drop in the availability of care, and higher jury settlements in cases against health care professionals. This phenomenon is commonly referred to as the malpractice crisis. Although this is certainly a negative, the advent of proactive risk management may be considered a positive outcome.

Risk management was largely reactive before this crisis hit the industry. Problems wouldn’t be solved until they became realities. But it’s a much different environment now. Thanks to proactive risk management, health care organizations are saving both capital and lives.

The key to success is a centralized reporting system. Data wasn't shared across all departments in the past. But that's changed. Since it's now available, patient risks are reduced, costs are cut, and process efficiency becomes improved. This also allows for the identification of opportunities for improvement in clinical, operations, and business areas. Furthermore, by taking a more collaborative approach to risk management, health care organizations can use a policy system allowing them to conduct business to meet compliance standards.

Health care organizations can collaborate by using a policy system to conduct business and meet compliance standards.

Risk Managers

A company's processes are imperative for sustainable success. While having a proactive risk management system in place is a positive step to help mitigate and prevent risks, the system is only effective if all employees are properly trained, know how to implement strategies, and react to the unavoidable. For example, a registered nurse should notice if a bed rail should be modified. But employees, like the nurse in this example, should also know who to report to with their concerns. That person is the risk manager.

A risk manager is often someone who has experience in handling risk-related issues in multiple settings. This individual should be able to identify and evaluate risks, which should then reduce the potential for injury to patients, staff members, and visitors. This professional should also analyze the risk management strategies that are already in place. If certain strategies are used for specific medical conditions and are believed to lead to dangerous side effects, those strategies need to be altered. That being said, all employees should recognize anything that would present increased risk.

But detecting risks and making adjustments to reduce those risks goes much further. Common ways to manage risk include:

  • Not filling expired prescriptions to prevent abuse
  • Following up on missing test results to increase consultations
  • Tracking missed appointments to manage risks
  • Increasing communication with patients to reduce improper taking of medication
  • Preventing falls and immobility

Risk Management Ladder

The risk ladder is also known as prioritization. First, a health care organization must establish what could happen, how likely something is to happen, and the severity of that problem. From there, it must be determined how that organization can mitigate those risks and limit their impact, and what the potential exposure of those risks would be if they were not contained.

As you may notice, the first priority is always the safety of everyone involved when it comes to health care risk management—not finances. That's not to say that finances don't and shouldn't matter. A facility and risk manager's main concern should always be keeping people safe. After all, a lack of safety can lead to injury and even death which, in turn, can result in lawsuits and compensatory damages.

Financial Risk Management

The goal here is to avoid losses and expenses that could impact an organization's bottom line, which is the same in any financially-prioritized organization.

The first step for health care organizations is to research industry trends so they can analyze their current risk management strategies to see where they fall. If an organization is behind the curve, making adjustments could save a significant amount of capital. And while the focus is on the financial aspect, saved capital can ultimately lead to improved care and patient safety.

Common financial-related risk management goals for health care organizations include decreasing malpractice claims, reducing the number of falls, using skin protocols to prevent skin ulcers, and improving communication with insurance companies to earn points and reduce overall costs.

Step-By-Step Process

All of this information can be confusing, so let’s take a simplified approach. If a health care organization implements a proactive risk management strategy today, it could use a simple seven-step process like this one:

  1. Educate employees in all aspects of risk management strategies, including how to prevent and respond to risks.
  2. Keep accurate and complete documentation, which can be studied and used as a reference in the future.
  3. Departmental coordination keeps everyone on the same page. This expedites the risk management process and adds protection against malpractice insurance claims.
  4. Employees take steps to prevent what is avoidable.
  5. Employees react to unavoidable risks with great speed and accuracy.
  6. Learn how to handle complaints to reduce risks to an organization. 
  7. Know how to report an incident to reduce risks to an organization.

Keep in mind that health care risk management goes much deeper than the seven steps above, but they are a good place to start. If your health care organization doesn’t have an in-house risk management team, it should strongly consider creating one or look into hiring an outside firm.

Despite who is in charge of the risk management plan, there are certain points that should always be covered in health care—patient safety, mandatory federal regulations, potential medical error, existing and future policy, and legislation impact.

The Bottom Line

Risk management is important for all types of organizations, but it’s especially important in health care because human lives are on the line. A good health care risk management plan can reduce patient health risks as well as financial and liability risks. As always, regardless of the industry, a good risk management plan needs to be developed, implemented, and monitored.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Beazley. "Beazley U.S. hospital claims data: Medical malpractice more costly; steep increase in largest claims."

  2. Health Affairs. "The Medical Malpractice 'Crisis': Recent Trends and the Impact of State Tort Reforms."