Contract Risk Assessment in Healthcare: Where to Begin

Healthcare organizations have to manage a large number of contracts of varying types. On any given day, it’s likely that your organization might have to deal with managed services agreements, patient care transfer agreements, BAAs, physician agreements, staff recruitment and employment contracts, compensation and benefits contracts, medical technology contracts, lease and purchase agreements, and contracts for the purchase of supplies and services. 

All of these different types of contracts carry some degree of risk. To minimize your organization’s potential risk, you need to engage in contract risk assessment in your healthcare operations. Where should you begin?

Key Takeaways

  • Healthcare contracts are subject to financial, legal, operational, and compliance risks
  • To evaluate contract risk, you must assess both the likelihood and severity of each risk
  • Contract lifecycle management software helps manage contract risk assessment and provides numerous other benefits

Identifying Common Healthcare Contract Risks

There are four general categories of contract risk: financial, legal, operational, and compliance. When negotiating new contracts throughout your organization, you need to identify all instances of each type of risk. 

Financial Risks

The primary financial risk of any contract is that the other party will not meet its contractual obligations. The other party may fail to pay on time. They may also fail to deliver products or services that meet your requirements – or they may not deliver anything at all. The reverse is true as well. Your organization may be the one to miss contractual obligations resulting in financial risk.

Legal Risks

Legal risks, just like financial risk, may occur if your organization doesn’t live up to your contractual obligations or violates other legal requirements. You can also incur legal risk if the contract was poorly written or didn’t take all possible circumstances into consideration. Additional legal risk is possible if a contract leads to a dispute. 

Operational Risks

If a contract doesn’t conform to your organization’s internal criteria, it could make it difficult to fulfill your contractual obligations under your existing operational structure. This type of operational risk is almost always the result of a staffer not following your contractual guidelines or not receiving the necessary contract approvals.

Compliance Risks

All healthcare organizations have to comply with a variety of critical administrative regulations, including HIPAA, HITECH, CHIP, ACA, and HRRP. In addition, all healthcare organizations must comply with the rules and regulations dictated by the Medicare and Medicaid programs, as well as the requirements of individual health insurance providers. 

Noncompliance with any of these regulations and requirements can result in legal action, hefty fines, and even the revocation of medical licenses. For example, the fines for violating HIPAA regulations range from $100 to $50,000 per violation. As you can see, it is essential that all contracts in which your firm engages comply with these and other essential regulations.

How to Assess Healthcare Contract Risk

Where to begin assessing healthcare contract risk? The first step is to look at each potential risk and determine how much it can impact your organization. You want to evaluate each risk in terms of likelihood vs. severity, and then determine your organization’s threshold for each. You do this by creating a risk matrix, like the one shown below. After you’ve fully assessed this contract risk, you can then take steps to mitigate that risk. It’s also important to assess risk based on time. For example, does the  likelihood or consequence increase, decrease, or stay the same over time?

A risk matrix assessing probability (likelihood) vs. consequence (impact)

Assessing the Likelihood of Risk

How likely is it that a particular risk might occur? Assign a risk factor of 1 (improbable), 2 (possible), or 3 (probable.) Obviously, you should pay more attention to probable risks than to improbable ones.

Assessing the Severity of Risk

How severe is a risk likely to be? The severity should take several factors into account, including the financial impact, the impact to your operational efficiency, and the impact to your organization’s reputation. Assign a risk factor from 1 (acceptable) through 3 (intolerable). 

Determining Risk Thresholds

You also need to determine how much risk your organization is willing to accept on any specific contract. Most organizations will tolerate obviously low-risk contracts (those with a low likelihood and low severity) but not obviously high-risk contracts (those with a high likelihood and high severity). You’ll need to determine where your organization comes down on medium- and high-risk contracts, especially those with either a high likelihood or high severity. 

How CLM Software Helps Manage Contract Risk Assessment in Healthcare

Contract risk assessment is made easier via the use of contract lifecycle management (CLM) software. Many healthcare organizations use CLM software to manage all aspects of the contract lifecycle, as well as automate many formerly manual processes. CLM software not only reduces contract risk but also offers several other benefits to healthcare organizations. 

Standardizes Contract Terms and Language

By utilizing contract templates with preapproved terms and language, CLM software ensures that contracts won’t contain risky language and eliminates all nonstandard elements. 

Assesses Risk Probability and Consequence

CLM software can provide real-time reports and dashboard that can be used to help get visibility into risks in your CLM processes. You can enter risk scores across your legal agreements likelihood and severity and then easily report on those to deliver actionable insights.

Avoids Missed Dates

Another way that CLM software minimizes risk is by automatically notifying you when key dates are approaching and obligations are due. You’ll no longer miss important contractual deadlines through the use of automated alerts and notifications. 

Optimizes Processes

Because CLM software automates all parts of the contract lifestyle, all processes are fully optimized. This should significantly reduce your organization’s administrative costs. You can use automated workflows the streamline and accelerate processes for things like contract requests and approvals which also drives better compliance to your business rules.

Finalizes Contracts More Quickly

CLM software speeds up the entire contract process, from initiation through negotiation and execution. Key business gets completed much faster than before. Some solutions like Contract Logix offer collaboration tools that help reduce friction in the negotiation process. You can collaborate concurrently, automatically track all edits and comments, and then get contracts negotiated and executed fast. This helps you finalize business faster and eliminates risks such as delays or poor process visibility.

Increases Compliance

By using preapproved terms and language, CLM software ensures that all new contracts comply with the myriad regulations that apply to your organization, greatly reducing the risk of noncompliance. Automated workflows also drive compliance because you know you’re always following your approved processes. 

Provides a Better Patient Experience

Finally, by streamlining the entire process and minimizing human error, your patients receive a better experience all around. It’s the ultimate benefit of using CLM software to manage your organization’s contracts.

Let Contract Logix Help Automate Your Contract Risk Assessment

Contract Logix offers robust CLM software that helps manage your organization’s contract risk assessment and reduce your overall risk factor. Our CLM software automates the entire contract process for your organization – saving you both time and money in the long run. 

Contact Contract Logix today to learn more about CLM software for contract risk assessment in healthcare.

Read More