Q:\Current\Prf\Present\STTI2006\ManagingNursingRisks&Uncertainty

1. Q:\Current\Prf\Present\STTI2006\ManagingNursingRisks&Uncertainty.pptQ:\Current\Prf\Present\STTI2006\ManagingNursingRisks&Uncertainty.ppt

2. Sigma Theta Tau International 17th International Nursing Research Conference Focusing on Evidence Based Practice Managing Nursing Risk and Uncertainty: Balancing Expected vs Extreme Service Demands Thomas Cox PhD, RN

3. Objectives Learner Objective #1: The learner will be able to describe the major sources and consequences of risk and uncertainty in nursing environments under normal and extreme operating situations Learner Objective #2: The learner will be able to select and use appropriate actuarial and statistical tools for analyzing, predicting, and managing variations in levels of nursing service demand in normal and extreme situations A new language for describing why managing nursing services in the 21st century is so difficult ‘Up-river’ answer to: “Why are the nurses crying?”

4. Nursing Mathematics Social Work Statistics Insurance Ratemaking, Reserving, and Reinsurance Author Background

5. Why Is This Necessary? Many health care finance mechanisms shift responsibilities for managing insurance risks from 'insurers' to health care providers – Professional Caregiver Insurance Risk How are insurance risk portfolios created and transferred? Capitation agreements Managed Care Prospective Payment Systems Nursing Unit/Department/Division budgets Managing insurance risks exacerbates problems managing clinical risks Most people do not grasp the adverse consequences of replacing variable costs with average costs – assuming more regularity and predictability than actually exists

6. Every client is a clinical & financial (insurance) challenge Not recognizing PCIR induced financial risk is not helpful Some clients are extreme risks – “Medical Outliers” Nurses implicitly accept insurance & clinical risks from 'insurers' in capitation, PPS, MC and operating budgets Aggregate risk reduction decreases when public/private insurers transfer insurance risks to PCs PCs have higher risk as insurers - adversely affecting providers, consumers and geographic/social regions, with limited financial & social capital PCIR  HCP consolidations & lower service capacities Professional Caregiver Insurance Risk

7. The Confluence of Insurance Risk Management and Clinical Management Some managers/executives cut back – rather than increase - supplies, staff, and equipment Insurance + clinical management requires greater than average resources Advocating resource redundancy is difficult – analogy with insurance and risk theory may help Managers/executives can use risk theory to explain higher acuity, peak demands, and the need for reserve nursing resources – using insurance claims trends, development, ratemaking, and reserving analogies in discussions with finance and accounting

8. Large population of potential policyholders IID loss characteristics N(0.80, Se = 0.05) for N = 1,000,000) Random sampling from entire risk population by insurers Random sampling by PCs from insurer portfolios (R/T industry, social class, dependency status, and geography) Free, competitive, and efficient insurance system/markets Free, competitive, and efficient health care system/markets Insurance rates are prospective - not recovery of past costs Steady State Assumptions for PCIR

9. A frequent engineering problem is having an unknown device and learning what it does Imagine a black box with a power cord on one side and many leads coming out the other end – like a computer power supply How can we assess what the Black Box does? Measure inputs and outputs Change inputs - observe effect on outputs Assess the efficiency of the device Efficiency = Output/Input An Engineering Perspective

10. We can use the Black Box analogy to compare the efficiency of different mechanisms for financing health care services: Universal Health Insurance Fee for Service Indemnity Health Insurance Integrated Service Delivery Systems Managed Care Benefit Plans Capitation Financed Health Care Individual Health Savings Accounts Buying Powerball tickets to fund HC costs An Engineering Perspective 2

11. Black Box Analogy

13. Inefficiency of PCIR Paper Transfers NB: Provider efficiencies are far lower due to withheld funds, uncertain coverages, amounts needed to fund bonus plans & other inefficient practices

14. Non-random sampling from Insurer's policyholders Contracts of adhesion between insurers and providers Inadequate actuarial analysis, underwriting & claims skills Documentation systems inadequate for retrospective audits Lack of adequate liquid capital, staff, equipment, and supplies Service capacity more complex than underwriting capacity Insurers motivated to select cost-minimizing providers Conflagration hazard exposures r/t geographic proximity Greater exposure to self-selection risks by ill clients Multiple/different benefit plans => increase PC inefficiency Problems With Insurance Risk Assumption

15. Insurance rates must cover: Losses + Loss Adjustment Expenses Expenses Profits Risk Premium Risk premium ~ F(Population variance, Portfolio size, Financial status, Risk aversiveness) Large Insurer: Small se – Lower risk premium/risk charge Large insurer: More data = better estimates of expected losses Smaller insurer should collect higher risk premiums PCs are very, very small and extremely inefficient insurers Risk Premium

16. Insurance risk assuming PCs face concatenated losses: Costs of clinical services Bonuses reward decreased utilization – not high costs High costs jeopardize future contracts/employment High costs trigger reviews & retrospective audits Non-random losses are not compensated because other PCs do not have them – May be deemed to result from your ‘inefficient’ operations High losses + high current risks threaten PC financial stability PC Risks

17. As insurance risks move through HCOs and closer to clients Variability in costs and services rise in small samples Organizational/Professional/Personal risks rise Risk premium adequacy drops to zero Retrospective reviews of clinical decisions target “medical outliers” not average or random cases Breakdown in provider - consumer relationships Insurance agents rarely punished for ‘bad’ risks – while clinical decisions for “medical outliers” are routinely reviewed clinically and financially PCIR Induced Clinical Issues 1

18. As insurance risks move through HCOs and closer to clients Audits – reduce reimbursements & increase financial uncertainties – and are very inefficient Clinical decisions/consequences are instantaneous – “medical outlier” reviews/audits/lawsuits take years Increased risk avoidance as PCs are held responsible for higher than expected costs => less advocacy, reduced vigilance, earlier discharges… Real insurance blurs individual losses – audits focus on outliers – ignoring average long-term clinician behavior and focusing on aberrant cases PCIR Induced Clinical Issues 2

19. Claims Analysis & Management How insurers analyze and manage claims: Short vs Long tail claims Low cost vs high cost claims Frequency and severity analyses Liability apportionment - Are we responsible? At all? Partially? Completely? Assigning patients to nursing units is ‘like’ insurer underwriting and class plans – just less efficient No ethical/role conflict when insurers deny coverage

20. Trend Analysis Managed care, capitation and PPS planning requires estimates of future costs, severities & frequencies Future costs of equipment and supplies Costs of technological changes Litigation trends – huge ‘denial of service’ potential Projections for epidemiological changes Future labor, materials, utilities costs Current/future claim mix – not past/anticipated mix Responding to unexpected patient characteristics

21. PCIR Related Clinical and Financial Risks Financial Risks Are DRGs, PPS, MC, capitation rates fair and equitable? Are clients served going forward similar to those projected under contracts and budgets? Clients correctly classified and compensated Certainty of reimbursements Retrospective audits Rate inadequacies Reserving and solvency issues Denials of benefits Joint obligations ambiguous Clinical Risks Assigning patients to RNs &units Dx & Tx timely, correct & effective Service demand predictability Are clinical services and costs correctly estimated and clients assigned to minimal cost – maximal efficiency units % of time staff, equipment & supplies to meet normal/extreme demands Deplete resources due to constant rather than intermittently full use Unlike insurers faced with higher than expected losses, replacing nursing unit resources takes a lot of time

22. Cox, T. (2006). Professional Caregiver Insurance Risk: A Brief Primer for Nurse Executives and Decision-Makers. Nurse Leader, 4(2): 48-51. Cox, T. (2004). Doctoral Dissertation: Risk induced professional caregiver despair: A unitary appreciative inquiry. Cox, T. (2001). Risk theory, reinsurance, and capitation. Issues in Interdisciplinary Care, 3(3): 213-218. References

23. More Information http://drtcbear.servebbs.net:81/PCIR

24. Measures the accuracy of health insurer’s estimates of true loss ratios for potential policyholders based on past insurer sampling and underwriting standards Additional meanings for nursing and health care: Ability to analyze/price/select/renew contracts Reduced unit service capacity to avoid insolvency Lost insurance risk aggregation benefit due to PCIR transfers to PCs – increased problems for nursing Lost global health care system capacity Disparity between anticipated/expected service levels in insurer premiums & service capacity after PCIR Reinterpeting the Standard Error in HI

25. Providers experience role confusion, new ethical and legal conflicts, and financial instabilities Risk-transferring insurers can only compete in inefficient insurance markets and are only viable in inefficient and over-funded health care systems Inadequate funding of PC assumed insurance risks Reduced operating capacities deprive consumers of services they deserve and paid to receive Aggregate responses to risk assumption have broad impact – reducing disaster preparedness, reduced social benefits of insurance & lost provider-client trust Problems Caused by PCIR

26. Principal PCIR Induced Needs Forecasting Trend and conflagration risk analysis Claims management Better cost-analysis and more aggressive contract negotiations Analysis of conflagration risk potential Data on catchment areas/contract populations Rapid response to changes in case mix and contract mix shifts

27. Major Actuarial/Risk Theory Tools Utility theory, economics, and insurance Individual and collective risk models Ruin theory Mathematical programming and optimization Class plans and credibility theory Ratemaking and reserving Loss development and IBNR techniques

28. Loss Reserving & Estimating Future Claim Costs Insurers analyze claims cost data in loss development triangles - recording the number (frequency) and costs (severity) over time Insurers estimate future claim costs, their impact on solvency, and are required to report these estimates in statutory financial reporting instruments Problems: Difficult to predict clinical claim frequency & severity Shared liabilities with (re)insurers increase problems Inaccurate estimates of future inflationary trends Controlling claim costs in line with specific aggregate thresholds: insurance limits, reinsurance, stop loss, per case/per contract limits is difficult for clinicians Not a zero-sum game – Other parties want to win

29. Insurance Operations Developing rates for specific coverages, underwriting standards, and risk-rating criteria Estimating unknown future costs of policies Updating manuals to reflect changes in loss costs, coverages, premiums and underwriting standards Credibility weighting of insurer vs industry data Estimating costs of individual large risks Analyse current and future financial implications of alternative pricing strategies Prepare rate filings and other regulatory materials Controlling claims costs through litigation & prevention

30. Consequences of PCIR Medical Outliers - HCPs care for these clients as their employers deal with revenue shortfalls RNs care for higher acuity patients, use up energy, resources, supplies, and equipment, then their behaviors and choices are reviewed clinically and financially – a review they cannot win because cases selected for review are ‘high cost’ cases Increasing clinical and financial acuity is like insurance – small insurers are more adversely affected by claim cost variations than large insurers, cannot prepare for them as well, using ‘surplus,’ reinsurance, and new investment – the equivalent, in nursing, of refreshed staff, and extra staff, equipment, and supplies