Eric JordahlHospitals and health systems nationwide are feeling the twin pressures of declining utilization and payments. Organizations are working to protect financial resources by focusing on reducing costs and transforming business and clinical operations. A robust and centralized financial risk management function should be put into place to support these efforts. 

Ensuring the appropriate allocation of risk between operations, assets, and liabilities is critical to the long-term health of providers. Treasury should take on a broader, more integrated role in performing this function. Treasury departments traditionally have focused on managing nonoperating assets and liabilities, which provides the team with a foundation in risk management principles. Extending this focus to achieve a centralized risk function requires better integration between treasury and other disciplines and the development of an analytical platform that can be applied horizontally across the organization.

As part of their expanded responsibility set, treasury staff should clearly define the role of various resources—such as whether the investment portfolio is used primarily to generate income or to hedge risk. The team also should understand how financial risk works on the operating side of the organization. Once treasury has a complete picture of both operational and nonoperational risks—and the reasons behind them—it can catalog, analyze, and prioritize a range of seemingly unrelated risks. 

Armed with additional knowledge and resources, treasury can help hospital and health system leaders understand the total risk portfolio and how to pursue a balanced distribution of risk across all of the organization’s activities. For example, if a hospital is carrying excessive risk on the operational side, it may be prudent to minimize the risks embedded in its debt or investment portfolios. Alternatively, if a hospital has minimal risk in operations or liabilities, it may be positioned to leverage greater risk in its investment portfolio to drive increased returns.

The consequences of not centralizing risk management can be serious. Individual risks that seem prudent when assessed in a silo may combine to create an unsustainable total risk position. Every organization has the capacity to assume a certain amount of risk before viability is threatened; centralized risk management allows consistency in both defining how this capacity is determined and controlling how it is allocated. 

The need to centralize risk assumption and analytics becomes even more pronounced with the move to value-based payment, which is likely to alter traditional risk relationships by producing increased operational volatility. The shift to value-based payment is coming more quickly to some communities than others, but it is important for hospitals and health systems to get ahead of the change curve. Those organizations that are best at centralized risk management can be expected to perform better financially versus those that adopt a more fragmented approach, and the range of outcomes will widen as operating risks increase. Treasury’s responsibility for managing financial risks will force professionals to become familiar with areas that they may not be deeply involved with today. But having a dedicated team overseeing the organization’s cumulative risk profile will help provide protection as hospitals and health systems navigate this period of significant change in healthcare.

Eric Jordahl is a managing director of Kaufman, Hall & Associates, Inc. and co-leader of the firm’s financial advisory practice. 

Publication Date: Monday, March 25, 2013