Organization Liability: Impact and Risk Mitigation (Part II)

Impact of Risk Liabilities 

Unmanaged or poorly managed risk can cause devastating effects to the organization from a reputational and financial perspective. 

An extreme example of financial risk, coupled with nationwide reputational risks, was the Tylenol case in the 1980’s. The New York Times describes how, in 1982, Extra-Strength Tylenol capsules were tampered with and laced with potassium cyanide. Seven people in the Chicago area died and copycats caused several more deaths across the U.S. As a result of those incidents, tamper-resistant packaging was created and implemented so over-the-counter products, such as Tylenol, could not unknowingly be laced with a poison which could cause injury or death. 

Despite the fact that the manufacturer had not introduced the poison, this event led to huge financial  and reputational liability for McNeil Consumer Healthcare, the makers of Tylenol. On just the financial side, this cost a considerable amount of money due to decreased sales and increased advertising costs. 

As this example demonstrates, financial and reputational risk for an organization in the healthcare field can have disastrous consequences that threaten to bankrupt or put the organization out of business. If the event or incident is sufficiently egregious, the organization could also face loss of accreditation or state licensure. If this happens, they may also lose Medicare and Medicaid contracts.   

Risk Mitigation 

Proactive risk mitigation strategies include transfer of risk, through such vehicles as contracts and insurance, and early reporting of incidents or events by staff. 

Transfer of risk in contracts in typically done with indemnity or hold harmless clause. Transfer of risk via insurance is done by ensuring the organization has adequate coverages and retentions to meet the organization’s needs.  

The intent of an indemnity clause is to transfer the risk of financial loss from one party to the agreement to another party to the agreement. Generally, this is financial losses or expenses caused by contract breach or default, negligence, or misconduct by one of the parties.  

Hold harmless language in the contract states one party will not hold another party responsible for potential risks or damages. Hold harmless clauses can be unilateral and apply to just one of the parties to the contract or can be bilateral and apply to both parties to the contract. Typically, bilateral hold harmless language is preferred for healthcare organization contracts because each party will assume their own risk and not sue the other party to the contract for the risk which was assumed.   

Early reporting by staff is crucial in order to ensure that appropriate action, discussion, documentation and reporting takes place. Most importantly, this is necessary to ensure that risk mitigation strategies can be implemented to eliminate or decrease risk to the organization.   

PRACTICE TIP:  

1. Develop and conduct risk assessments of insurance policies and large contracts to identify areas for improvement. 
2. Review contracts to ensure indemnity or hold harmless clauses have been included.  If not, add the clauses on renewal.  
3. Work with Risk Management to conduct a risk assessment to evaluate organization risks and implement mitigation plans.  

Denise Atwood, RN, JD, CPHRM 

District Medical Group (DMG), Inc., Chief Risk Officer and Denise Atwood, PLLC 

Disclaimer: The opinions expressed in this article or blog are the author’s and do not represent the opinions of DMG.  

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