Risk Management Strategies for Small Businesses

Risk Management Strategies for Small Businesses

Risks are a necessary and expected part of running a business.

If you tried to operate your pharmacy without incurring any risks, you would never grow or make a profit.

“One thing people don’t understand when they get into a business is that it’s nothing but one big gamble. If going into business were a sure thing, everybody would do it,” said Brenda Wells, Robert F. Bird Distinguished Professor and director of the risk management and insurance program at East Carolina University. “But the benefits of taking risks are you can make a nice return and you can build a nice business for yourself.”

While risks are part and parcel with running a pharmacy, a process called risk management balances risks with rewards and builds a more durable business.

Identifying risks

Risk management boils down to five steps. The first step, identifying potential risks, is often the biggest hurdle to clear. “There are so many places you can find risks,” Wells said.

Start by looking at your income statement and balance sheet. “The balance sheet shows assets—things of value—so it’s a great place to start your risk identification process,” she explained. “The income statement should indicate where your revenues are coming from, and ultimately those assets need to be protected, too.”

Take inventory of the kinds of losses you’ve experienced in the past. Wells said, “If your employees keep straining their backs lifting things, you’ll probably need to implement some prevention techniques to get that under control, because you could go bankrupt paying those workers’ comp premiums.”

Perform a physical inspection of your pharmacy to identify risky areas. This includes areas where patients are likely to injure themselves or areas where you could accidentally reveal private health information.

In a busy environment like a pharmacy, it’s especially important to look for risks associated with your workflow behind the counter. “It only takes the phone ringing while you’re filling a prescription to mess up,” Wells said. “Recognize that these kinds of things can happen to anybody at any time.”

Your work isn’t done after you’ve completed a single risk management assessment, because the risks to your pharmacy are always changing. Sometimes, you can’t recognize a risk until after the damage has already been done.

Wells pointed out the Tylenol murders of the 1980s when someone snuck cyanide capsules into Tylenol bottles in pharmacies, resulting in the deaths of seven people. “Before that, there was never even concern that something like that would happen. Then, all of a sudden, we have to seal bottles with foil and then seal the lid onto the bottle and seal the box up,” she said. “New risks are always popping up. You can’t just do a risk assessment and say, ′Okay, I’m done.′ You have to constantly be looking for new risks that come into play.”

Types of Risk

Internal risks

Internal risks are things you can take steps to prevent and control.

  • Illness or death
  • Theft and fraud
  • Downtime caused by outdated equipment
  • Patient injuries
  • Financial risks, like poor cash flow

External risks

External risks are ultimately out of your control, but you can still prepare for them with an emergency fund and insurance.

  • Poor economy
  • Regulatory changes
  • Natural disasters
  • Changing demographic needs

Behavioral risks

In risk management, one area tends to be a blind spot for many business owners. “Lawsuits can extend from bad behavior,” Wells said. The lawsuits typically involve HIPAA regulations and Equal Employment Opportunity Commission (EEOC) laws. The “bad behaviors” include releasing confidential health information, firing people, not hiring people, or not promoting people. As a pharmacy, you are always subject to HIPAA regulations, and many EEOC laws kick in with 15 employees.

Because these risks are hard to identify on your own, Wells recommends seeking outside guidance on the HIPAA and EEOC regulations your pharmacy could be at risk of violating. “Even if you don’t violate regulations, if someone accuses you of violating, it could hit the news and your business will suffer,” she said. “From a public relations standpoint, there’s a benefit in just knowing what can get you in trouble.”

Minimizing risks

Once you’ve identified the risks in your pharmacy, the next step is mitigation. This is typically accomplished through loss control practices and insurance.

“Insurance is an expensive tool, so we like for people to implement practices that can prevent and reduce losses,” Wells said.

Some loss control measures are obvious. If you notice a shelving display that could cause someone to trip, you can immediately take action to fix the display and prevent someone from falling. Other measures won’t completely prevent losses, but they will reduce the impact when risks become reality. “When you put fire sprinklers in a building, that’s not going to prevent a fire,” Wells explained. “But when they go off, they can stop the spread of fire and reduce the severity.”

Incorporate loss control practices into your training so your employees are empowered and educated enough to mitigate risks. Discuss your loss control practices at staff meetings and write your risk management measures into your standard operating procedures so employees can avoid risks in their day-to-day duties.

After you’ve implemented loss control measures internally, you should still have insurance to back you up in case of a loss. Wells recommends having an insurance policy with at least a $1 million liability limit per occurrence, which is how much you will pay for a single event. This limit is distinct from the aggregate limit, which how much you’ll pay in a year.

Wells explained, “Let’s say somebody put some bad Tylenol on your shelves and several people get hurt. That million dollars has to pay for all of their damages because that’s one occurrence, so it’s really not that much.”

For pharmacies in particular, Wells thinks $1 million may actually be too low. “It’s a pretty high-stakes game. If a pharmacist uses the wrong dosage or dispenses the wrong medication, it can kill somebody. So I think higher limits are better.”

Bringing in an expert

One problem for every business owner is overlooking risks because their perspective is inherently limited. “Sometimes people are too familiar with their setting, and they don’t see the problems,” Wells said. “I used to have my students choose a business and complete a risk assessment for them. It was always interesting to me what undergrad students with almost no training would find that the business owners didn’t see.”

To find those hidden risks, Wells recommends bringing in an expert. Your insurance company should have somebody in-house to do a risk assessment, or they can make a recommendation for someone who can. “If you go to your insurance agent and say you want a thorough risk assessment and he says he can’t help you, he shouldn’t be your agent,” Wells said.

A third party will go through the standard five steps for risk management assessment—but with an expert’s eye. After their assessment, you will have a comprehensive idea of your pharmacy’s risks, which will help you prepare for the future.


5 Steps of Risk Management

Step 1: Identify Potential Risks

Take a look at your pharmacy’s finances and physical layout to identify areas of potential loss exposure.

Step 2: Analyze Risks

Determine which risks could cause severe loss and which could cause minor loss.

Step 3: Determine a Plan

Decide which tools to use to prevent and reduce losses, like safety improvements or insurance policies.

Step 4: Implement Your Plan

Put your loss control strategy in place by buying the insurance coverage you need or making improvements in the store.

Step 5: Review

Continuously assess your risk management plan and look for opportunities to improve it.

From the Magazine

This article was published in our quarterly print magazine, which covers relevant topics in greater depth featuring leading experts in the industry. Subscribe to receive the quarterly print issue in your mailbox. All registered independent pharmacies in the U.S. are eligible to receive a free subscription.

More articles from the December 2021 issue:

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