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

Healthcare Financial Management, Jan, 2003

Using a Best Practice Capital Allocation Process

Kenneth Kaufman, managing partner of Kaufman, Hall & Associates in Northfield, Illinois, notes that an organization's long-term financial success depends upon the capital investment decisions it makes today. "Decisions must add to the organization's value-to its ability to raise capital for future projects, maintain or improve its creditworthiness, and accomplish its mission," says Kaufman. (10) "Authorization of capital for IT projects must be considered within a thorough corporate finance-based, best practice capital allocation process that comprehensively considers the short- and long-term implications of each potential investment within the overall portfolio of investments," maintains Kaufman.

A high quality corporate finance-based capital allocation process requires rigor and discipline. "If the discipline is broken, which will occur if you allow authorization of capital outside the process, the process breaks down and you dispirit the entire organization," says Kaufman.

Kaufman advises healthcare leaders to create a level playing field by putting each and every investment opportunity, whether for a new ambulatory clinic, CAT scanner, or decision support system, through a rigorous project analysis. The analysis defines the scope of the project unambiguously, outlines its full costs, identifies the value that the project either adds to or subtracts from the organization through net present value (NPV) analysis, delineates risk and success factors, and provides a yardstick for ongoing measurement of the project's progress toward meeting concrete goals.

Does this process rule out IT investment opportunities because they don't have a high enough NPV? "Absolutely not," says Kaufman. "If the leadership team wishes to proceed with an IT investment based on qualitative rather than quantitative reasons, at least the team will be fully aware of the costs involved and the likely outcomes of the expenditure."

IT as a Public Good

Ray Dziesinski, CFO of Southern Regional Health System, which Operates a 406-bed hospital in Riverdale, Georgia, views IT investments as he would investments in public infrastructure. "They are fundamental to the organization, for the most part invisible, and difficult to measure," says Dziesinski.

For example, city leaders who are considering investing in a water treatment plant, power grid, or traffic control system ask themselves whether the investment will put the city on par with what other communities are investing to achieve a certain level of public satisfaction or public good. With IT investments, healthcare leaders have to look at the functionality of what the organization currently has and compare it to peer organizations and industry standards. "From this CFO's perspective, few of us would like to be out on the leading (or bleeding) edge of that curve. Organizations want to avoid being more than two standard deviations to the right or left," suggests Dziesinski.

Southern Regional Medical Center has more than 20 major IT applications and more than 60 secondary applications up and running. "Can we 'count the beans' to analyze the return on a new patient accounting system? This is as impossible as doing so for telephone switch replacements or upgraded elevators," says Dziesinski. He encourages organizations to accept the fact that there are non-revenue producing investments that should be judged based simply on the response to the question, "Are we making a prudent investment in view of what we know about the organization and the state of the industry?" "IT investments are an important part of the mix, even if they don't specifically increase revenue or reduce costs," notes Dziesinski.