Justifying costs of computer software purchases

Healthcare Financial Management, June, 1990 by Jack G. Rawitz, Walter Y. Cowan, Brian M. Paige

Changes in healthcare payment requirements and procedures, along with tightening payer regulations, have led to comprehensive software systems capable of tracking financial and human resource information from many sources.

Despite hospitals' needs for these systems, financial managers often must justify the costs of their purchases to top hospital executives because of up-front system expenses. All too often, traditional cost justifications are limited in scope, failing to address the need for new systems.

Comprehensive cost justification must go beyond the usual focus on determining needs, vendor offerings, and new system benefits. It must include a calculation of the value of benefits and the return on investment those values represent. Armed with detailed information from all areas-needs, products, benefits, benefit values, and return on investment-managers will possess information needed to successfully justify the costs of new systems.

Tucson Medical Center of Tucson, Ariz., and Hamot Health Systems, Inc., of Erie, Pa., recently conducted successful cost justifications of their system purchases. Both organizations needed on-line, integrated sets of software applications to help them manage growth and monitor costs, but they faced the challenge of justifying complete system replacements.

Tucson Medical Center is a 571bed hospital in southeast Arizona, while Hamot Health Systems is a healthcare system that includes the 560-bed Hamot Medical Center. The organizations used a variety of criteria to justify the costs of their system purchases. Their experiences produced a step-by-step approach that other healthcare financial managers can use as a basis for similar tasks.

The model places an emphasis on calculating the value of benefits and return on investment. More traditional steps of determining needs, vendor offerings, and new system benefits also are important steps to be taken. Step 1: Determine software needs

The most fundamental step in a cost justification process is to determine the healthcare organization's system needs. Many managers fall into the trap of looking for a new system that functions in the same way as the old one, simply because it is familiar to them. In doing so, they will find obtaining approval for new systems difficult because they will be asking for something they already have. Without a basic needs analysis, hospital executives may view a new software purchase as an unnecessary expense. The best way to begin a needs assessment is to assemble a project team made up of end users and data processing personnel to ensure that all system needs are considered. The project team's responsibilities then can be defined.

The team might be responsible for determining needs as well as selecting vendor candidates and analyzing information about the value of new system benefits.

To determine system needs, the team must ask each area - such as accounts payable, payroll, and general ledger-to identify their requirements for a new system, shortcomings of the current system, and the difficulties they have with getting jobs done. This step will help the team prepare a list of short-term and long-term requirements and will show where holes exist in the current system, giving the team a basis for evaluating new systems.

It is best to place requirements from each area into four categories: functional, features, technical, and future expansion. Functional requirements should be performed by financial and human resources systems. These can be either critical or superfluous, but it is important to identify specific system functions, such as multiple employee wage rate calculations according to jobs worked.

For Tucson Medical Center's personnel system, functional requirements included an ability to track and maintain employee information on position authorization and assignment, foreign language proficiency, health benefits, and job descriptions. Hamot identified automatic tax table changes as one of its functional requirements.

Features are ways that systems should perform identified functions and may include on-line query or off-line editing. Technical requirements are based on a hospital's technical environment. They vary with hardware type, operating system, database management system, and other factors in the computing environment affecting software choices.

Requirements for future expansion concern the flexibility of systems and the ease of making changes, as well as a vendor's track record in maintenance, enhancements, and support.

Once needs are determined, they should be further organized into primary, desired, and "blue sky" categories.

Primary requirements are features and functions that are essential to an organization for processing financial or human resource information, such as payroll. A hospital must process payroll-and, like Tucson Medical Center, may need to process separate payrolls for ancillary and nursing staffs at different times.

Desired requirements are important but not vital to a hospital's information processing. For example, a hospital may prefer 20 fields for payroll deductions, while 15 of them are necessary.