Clinical technology: are you getting your money's worth? - several factors should be considered when investing in clinical information technology

Healthcare Financial Management, Feb, 2003 by Barry P. Chaiken

When investing in clinical information technology providers need to consider intangible benefits and opportunity costs among other factors.

Need overnight delivery? Chances are, FedEx comes to mind. Over the past 25 years, the shipping giant has become a formidable force in the next-day package delivery industry.

Yet despite expectations that the company's shrewd business people continually are running numbers and cranking out return-on-investment (ROD studies, such is not always the case. As discussed in The World on Time: The 11 Management Principles That Made FedEx an Overnight Sensation, FedEx cannot perform an ROI study for every investment it makes--it is not practical to do so given the sheer volume and complexity of decisions that an organization of its size must make each day. Rather, effective decision-making requires acceptance that certain purchases are simply a cost of doing business and that overall commitment to one's market should drive key investments.

So, too, can this lesson be applied to health care. Providers often must make capital investment decisions without clearly defined ROI, particularly when it comes to investing in clinical IT.

Rather than solely relying on quantification of costs and monetary benefits, healthcare providers should instead consider making decisions based on best estimations of their organization's and community's overall needs. When considering options, financial managers should incorporate general appreciation for the value of the investment, consideration of both tangible and intangible benefits, and an understanding of relative opportunity costs and competing interests.

An Inexact Science

Measuring value in health care is an inexact science. On the cost side, organizations traditionally have relied heavily on the medical care CPI to determine the change in cost of providing healthcare goods, including clinical IT systems. With this measure, the Bureau of Labor Statistics compares healthcare goods prices, using the years 1982-1984 as a baseline and assigning the value 100 as a reference point.

Although utilization of services is a primary driver of healthcare expenditures, it is not the only one. For example, consider the factors resulting in disparity between general and medical CPI growth. The annual percentage change in the general CPI has decreased from over 8 percent annually in 1982 to just under 2 percent today (see Exhibit 1). In contrast, the medical care CPI annual percentage change in 1982 was much higher than the general CPI annual percentage change, and continues at a higher relative percentage increase today (see Exhibit 2). One could conclude from these data that healthcare costs are increasing faster than the costs of other goods that make up the general CPI. But this conclusion does not account for additional factors that may be contributing to greater value in the healthcare services that are available today, relative to past services, including:

* Changes in the quality of the delivered service;

* Differences in treatment and their associated costs; and

* The provider's ability to prevent illness or morbidity.

Quality of service. Today providers are able to bring patients to a state of wellness with better outcomes much more quickly than was seen 20 years ago. Therefore, what patients pay for health care today, although higher than 20 years ago, is not really comparable to what was purchased 20 years ago. The value of care today exceeds what was received in the past.

Differences in treatment costs. The medical care CPI is based on utilization and its associated costs. Yet calculating healthcare costs by simply adding up inputs, such as hospital days, physician visits, and drugs, does not take into account the fluctuations in the number of illnesses that occur each year and how well providers treat these illnesses. Inherently, some illnesses cost more money to treat than others. (See "Economists' Perspectives of Healthcare Value," p. 68)

Prevention of illness or morbidity. Ability to prevent illness also is important. For example, expenditures on immunizations to prevent polio should be countered with savings associated with preventing a case of polio.

As these considerations show, evaluating healthcare expenditures requires more than the raw numbers presented in spreadsheets documenting utilization and its costs. In addition to these cost calculations, financial managers also must weigh tangible and intangible benefits.

Tangible Benefits

Healthcare providers have long experience measuring the more tangible aspects of value in health care. Clinical IT is no different, delivering many quantifiable returns.

Reductions in length of stay. A long-time measurement of ROT has been length of stay Whether changes in length of stay result from the introduction of a clinical pathway or modification of a hospital process, they easily can be measured in monetary terms and linked to a definitive impact on hospital costs. Even fractional reductions in length of stay can deliver significant financial benefits through both the reduction in cost per case as well as an increase in hospital capacity The latter benefit accrues from a higher utilization of fixed assets and costs (e.g., hospital facility, equipment, and staffing expenses).