The value of healthcare IT - Special Advertising Section - determining the value of potential investments in healthcare information technology

Healthcare Financial Management, Jan, 2003

IT ROI. Some snicker at the juxtaposition of these acronyms, believing their coexistence to be the ultimate in contradiction. Others set their jaw and bear down for a long, tough, but necessary justification process.

Nationwide, financial leaders in healthcare are struggling with the issue of how to determine the value of potential investments in information technology (IT). For most, if not all, this is a significant issue. IT has become an increasingly large portion of the total capital spending allocated by healthcare organizations and is expected to account for up to a third of the increase in new spending during the next few years. (1)

Up to this point, the business case for investment in IT for financial and other administrative systems has been reasonably clear. However, the case is not as clear for investments in clinical decision making systems, computerized order entry systems, and other new systems needed to improve quality and competitive advantage, patient safety, and regulatory compliance.

Current State of Affairs

A revolution in information technology is occurring in healthcare, with a growing body of evidence supporting the conclusion that new clinical IT applications yield improvements in safety, effectiveness, patient-centered care, timeliness, efficiency, and equity. Traditional IT applications focus on financial, patient accounting (admissions, billing and collections), and diagnostic systems. Contemporary IT applications more frequently focus on patient care/clinical systems and clinical information/decision support systems. Both traditional and contemporary applications support a hospital or other healthcare organization's core business of taking care of patients. Most experts contend that IT plays a critical role in the ability of healthcare organizations to improve quality of care and enhance patient safety.

Yet, progress to date has been slow. The Institute of Medicine's 2001 report bemoaned the fact that "IT has barely touched patient care," as evidenced by the storage of the vast majority of clinical information in paper form. (2) The report's authors noted the pressing need for far greater than current investments in IT by most healthcare organizations. As a point of reference, healthcare organizations typically spend between 3 and 4 percent of their budgeted capital on IT. (3) This is low compared to other industries.

Capital decisions about IT investments are being made in an environment in which benefits are difficult to quantify. (4) This has undoubtedly slowed the pace of such investment and certainly has slowed the pace of thorough financial analyses of IT investments. So has concern about privacy of information, resistance of health personnel, and other factors. The Leapfrog Group, a coalition of more than 100 of the nation's largest public and private health care purchasers and organizations, is trying to jump start investment in computerized physician order entry (CPOE) in order to reduce medication errors. It has established implementation of a CPOE system as one of the three initial methods hospitals should use to improve patient safety. (5) Hospital compliance with this standard will be used by the Leapfrog Group for future contracting purposes. Researchers are eager to establish the direct positive link between IT investment and organizational performance (Sidebar 1).

The Capital Crunch

Healthcare organizations have a limited supply of the capital needed to fund new investment opportunities. Investment in IT applications must compete with all other opportunities, many of which are much "sexier" or fun, such as upgrading or expanding facilities. "How board trustees resolve the dilemma of how to allocate the organization's limited capital may be one of the most difficult challenges they face over the next 10 years perhaps second only to finding sources of capital in the first place," notes Jeff C. Goldsmith, president of Health Futures, Inc., of Charlottesville, Virginia. (6)

Due to scarce capital resources, reimbursement constraints, and the need to protect the balance sheet and operating margin, organizations must assess the costs and benefits of all new investments. But how is this done?

Traditional Analyses

A traditional return on investment (ROI) analysis weighs the financial impact of operating expenses with the revenue gains expected from service delivery. To determine whether the organization should proceed with an investment, staff forecast likely revenue that would be generated from the investment. If revenue exceeds cost, the investment is justified and approved, given the availability of capital.

In health care, benefits are more likely to be gained from cost avoidance rather than from revenue enhancement activities. (7) Thus, traditional methods of calculating ROI in health care focus on costs that will be reduced or avoided as a result of implementing an IT system. Given availability of capital, if the investment eliminates more costs than it generates, it is approved. IT is viewed as a tool to help organizations operate more efficiently or effectively.