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Key Takeaways
- Avoidance and retention are strategies to manage personal health risks.
- Transferring risk involves using insurance to manage financial burdens.
- Risk management in healthcare improves outcomes and decreases costs.
- Sharing risks with employer benefits can lower individual insurance costs.
- Prevention and early detection are essential loss prevention strategies.
Risk management is an important and useful concept in everyday life and health. Risk management strategies commonly used in finance can apply to health. The five main risk management methods are avoidance, retention, sharing, transferring, and loss prevention.
Avoidance means not participating in activities that could harm you; in the case of health, quitting smoking is a good example. Retention acknowledges the inevitability of certain risks, and in terms of health care, it could mean picking a less expensive health insurance plan that has a higher deductible rate.
Sharing risk can be applied to how employer-based benefits are often more affordable than if an individual buys their own health insurance. Transferring risk relates to transferring the cost of healthcare, beyond the cost of premiums and a deductible, from the individual to the insurer. Loss prevention and reduction are used to minimize risk, not eliminate it—the same concept is used in healthcare with preventative care.
Investopedia / Eliana Rodgers
Health Management: Effective Risk Avoidance Strategies
Avoidance is a method for mitigating risk by not participating in activities that may incur injury, sickness, or death. Smoking cigarettes is an example of one such activity because avoiding it may lessen both health and financial risks.
According to the American Lung Association, smoking is the leading cause of preventable death in the U.S. and claims more than 480,000 lives per year. Additionally, the U.S. Centers for Disease Control and Prevention notes that smoking is the No. 1 risk factor for getting lung cancer, and the risk increases the longer that people smoke.
Life insurance companies mitigate this risk on their end by raising premiums for smokers versus nonsmokers. Under the Affordable Health Care Act, also known as Obamacare, health insurers are able to increase premiums based on age, geography, family size, and smoking status. The law allows for up to a 50% surcharge on premiums for smokers.
Important
Risk management strategies used in the financial world can also be applied to managing one’s own health.
Risk Retention Explained: How It Applies in Healthcare
Retention is the acknowledgment and acceptance of a risk as a given. Usually, this accepted risk is a cost to help offset larger risks down the road, such as opting to select a lower premium health insurance plan that carries a higher deductible rate. The initial risk is the cost of having to pay more out-of-pocket medical expenses if health issues arise. If the issue becomes more serious or life-threatening, then health insurance benefits are available to cover most of the costs beyond the deductible. If the individual has no serious health issues warranting any additional medical expenses for the year, then they avoid the out-of-pocket payments, mitigating the larger risk altogether.
Employer-Based Benefits: Exploring Shared Risk Approaches
Sharing risk is often implemented through employer-based benefits that allow the company to pay a portion of insurance premiums with the employee. In essence, this shares the risk with the company and all employees participating in the insurance benefits. The understanding is that with more participants sharing the risks, the costs of premiums should shrink proportionately. Individuals may find it in their best interest to participate in sharing the risk by choosing employer health care and life insurance plans when possible.
How Health Insurance Transforms Risk Management
The use of health insurance is an example of transferring risk because the financial risks associated with health care are transferred from the individual to the insurer. Insurance companies assume the financial risk in exchange for a fee known as a premium and a documented contract between the insurer and individual. The contract states all the stipulations and conditions that must be met and maintained for the insurer to take on the financial responsibility of covering the risk.
By accepting the terms and conditions and paying the premiums, an individual has managed to transfer most, if not all, the risk to the insurer. The insurer carefully applies many statistics and algorithms to accurately determine the proper premium payments commensurate with the requested coverage. When claims are made, the insurer confirms whether the conditions are met to provide the contractual payout for the risk outcome.
Preventative Care in Healthcare: Strategies for Loss Prevention
This method of risk management attempts to minimize the loss, rather than completely eliminate it. While accepting the risk, it stays focused on keeping the loss contained and preventing it from spreading. An example of this in health insurance is preventative care.
Health insurers encourage preventative care visits, often free of co-pays, where members can receive annual checkups and physical examinations. Insurers understand that spotting potential health issues early on and administering preventative care can help minimize medical costs in the long run. Many health plans also provide discounts to gyms and health clubs as another means of prevention and reduction in order to keep members active and healthy.
What Is Risk Management?
Risk management is the process of identifying and mitigating risk. In health insurance, risk management can improve outcomes, decrease costs, and protect patient safety.
Why Is Risk Management Important in Healthcare?
When dealing with healthcare, risk management benefits both patient and insurer. Patients benefit by avoiding dangerous habits, transferring the risk to the insurer, and preventing future health problems through preventative care. Insurers benefit because people who avoid risk and take care of their health are healthier, less costly patients.
What Are Some Strategies for Managing Risk?
Five common strategies for managing risk are avoidance, retention, transferring, sharing, and loss reduction. Each technique aims to address and reduce risk while understanding that risk is impossible to eliminate completely.
The Bottom Line
Managing health risks can pay off health- and money-wise for individuals, thanks to lower premiums, fewer out-of-pocket expenses, and better health in the long term. Health insurance companies benefit from risk management strategies as well, allowing them to preserve their profits and improve their bottom line. The five predominant risk management strategies are avoidance, retention, sharing, transferring, and loss prevention.
