By Barbara C. Robbins and
Howard C. Werner. Originally published in the December 2003 issue
of Advance for Health Information Executives.
The business of healthcare requires that executive management look
closely at capital expenditures to justify expenses affecting the
bottom line. As healthcare organizations move increasingly toward
implementing information technology (IT) to improve overall
communication, process efficiency, and patient care, financial
considerations require that facilities document the
return-on-investment (ROI). Healthcare facilities are increasing
the use of Electronic Health Records (EHRs) and administrators
must rely on financial modeling and analysis to document the
investment in the clinical and business practice.
Healthcare Management
Healthcare expenditures have skyrocketed in the last decade. U.S.
healthcare spending is currently $1.4 trillion according to the
Health and Human Services Department. Hospital and prescription
drug spending are responsible for a large portion of this expense.
To manage this big business, facilities must rely on increased
productivity and profitability. Today, executives must closely
manage efficiency in work process, productivity in treatment
delivery, cost containment in the business practice, and positive
returns on any capital expenditures, including an EHR investment.
Implementing EHR Technology
The rise of electronic systems to manage patient care came in
large part due to medical reports released from the Institute of
Medicine (IOM) and Leapfrog Group documenting the efficacy of EHRs
to pinpoint medical errors and enhance patient safety. Recent
regulatory mandates, such as the Health Insurance Portability and
Accountability Act (HIPAA), have also contributed to the increased
use of EHR patient information management systems.
While the healthcare industry has increased IT spending relative
to other business sectors, only 20% of the healthcare provider
facilities have an EHR that combines an integrated computerized
physician order entry (CPOE) capability and medication
administration record (MAR) component that simultaneously captures
the patient information and practice management aspects. The
qualitative benefits of using an EHR are well understood and its
use is widely accepted as a way to improve patient care and
benefit the business of healthcare, yet 80% of facilities are
trying to answer the question of whether or not a fully integrated
EHR is a financially sound investment for their facility.
There are three steps a facility should embrace when implementing
an EHR:
1) Identify the problems to address in order to determine the
amount of capital investment. Identify the required outcomes and
progressively work towards these goals—beginning with the end in
mind.
2) Develop a quasi-partnership with healthcare professionals
experienced in implementing an EHR and leading change.
3) Monitor and document the qualitative and quantitative return
prior to implementation and at intervals during and after the
implementation.
Approaching ROI for EHRs
Traditionally, healthcare executives and administrators have not
examined the value of implementing an EHR in a rigorous way. Most
have accepted the system based on the inherent advantages it
provides. Some may have gathered ROI through historical data
to track trends, but few or perhaps none have applied a financial
modeling tool that identifies the internal rate of return (IRR) or
net present value (NPV) to project ROI.
Another ROI approach is to capture the productivity of the
business practice through EHR implementation and use. While the
benefits to patient care are obvious, implementing a system can be
challenging. A healthcare professional’s learning curve can slow
the way patient treatments are ordered, documented, and
communicated, and software development and upgrades can delay the
rollout of new features and benefits. Achieving a positive ROI
during an EHR implementation is a continual goal that must be
recognized by the business of delivering healthcare.
The methods used to identify the ROI financial modeling tools
are presented in three different approaches: historical data
tracking analysis, IRR and NPV calculations, and productivity and
quality return.
The Benefit of ROI
Whether institutions are faced with contemplating if and when to
implement an EHR or are plodding ahead or even persevering with a
formal project management approach with timelines and designated
resources, the bottom line is that the EHR is a standard operating
procedure in the patient record world.
In order to competitively position healthcare practices for
clinical safety, communication, global access to patient
information, as well as recruitment and retention of staff by
providing efficient and reliable patient information management
systems, it is imperative to recognize the positive aspects of an
EHR return-on-information and return-on-investment. Facilities
must quantify the benefit to the bottom line. The EHR is not
categorized as an expense if the business practice can demonstrate
its validity as an investment to the work processes, revenue
generation, and cost containment.
ROI – Historical Data Tracking Analysis
Many administrators use historical data tracking trend analysis
when performing EHR ROI. 7-11 What do we look at when we asked for
an analysis of the proposed cost and the impact on the business
practice?
Figure 1 is an example of a historical data model that can capture
your return on information. This model has basic assumptions that
link to the cells within the model. As real data is entered into
the assumptions, the model will capture your return on
information. The model spans four years: the year before the
implementation, the year during the initial phase of
implementation, and the first full year of use with integrated
modules of the EHR capabilities. A fourth year is added to capture
the use of all the integrated modules of the technology.
It is important to first look at what exists today or before the
implementation of the EHR. The sheet lists various situations,
like number of FTE nurses, or number of patient visits/month over
various intervals. To ease the analysis and account for various
fluctuations, divide the yearly number by 12. The historical data
tracking analysis highlights four questions that can be answered
in the areas of consideration:
1. What existed initially?
2. What needed to change?
3. What changed?
4. What are the identified benefits or weak areas in the practice
or facility?
ROI – IRR and NPV
In financial management, ROI is usually thought of as the
percentage outcome of the ‘Return of the Purchase’ divided by the
‘Initial Investment’.12,13 In the business sector the ROI is
essentially the same equation but the dividend is the ‘Profit’ and
the divisor is the ‘Source of Capital’. When calculating the ROI
over a number of years the ROI must be calculated in terms of the
present value (PV) of dollars so the formula must have the added
component of the discounted cash flow (DCF) or sometimes referred
to as the discount rate. Dollars in one year or several years to
the business practice must be identified in today’s dollars or the
PV of dollars.
The initial equation to apply in calculating the ROI through
readily identified financial management terms is:
ROI = Return/Initial Investment
When taking into consideration the ‘Return’ becomes available over
a period of the time, the term ‘Return’ becomes the net present
value (NPV). The ROI equation essentially becomes:
ROI = NPV/Initial Investment
The NPV yields informational value of the excess received from the
investment or the profit, which is over and above the initial
capital investment. The NPV equation is the accumulated return and
subtracts for the initial investment. The NPV equation is further
broken down to the equation of:
NPV = -C +
å
1+
r^t
The variable (-C) is used to represent the initial investment or
cost at the current PV of dollars. The initial EHR investment
figure is added to the sum of the payments (negatives) and income
(positives) each year. The sum of the negatives and positives is
divided by the DCF represented by the variable ‘r’ with a ‘t’
exponent with ‘t’ representing the length of time.12
When applying this model, the challenge becomes what to identify
as the payments and income each year. Figure 2 gives an example of
the ROI EHR template model that yields the NPV and the Internal
Rate of Return (IRR). Incorporating the IRR into the NPV model can
give a comparative analysis of other investment opportunity
considerations.
ROI – Productivity & Qualitative Return
Identifying the productivity of the facility is yet another ROI
method of an EHR investment, which examines the ROI analysis more
closely and accordingly provides a more complex spreadsheet. Often
executive management in practices and facilities express the need
and want for EHR capabilities but the difficulty lies in
articulating the actual benefits to the business practice.
The model in Figure 3 is a workbook template with basic
assumptions of the healthcare practice. The first sheet, Analysis
Considerations lists quantitative and qualitative items and
denotes changes and trends over the years. The Analysis
Considerations are applied after first calculating the
productivity factor. The next spreadsheet, Transforming the Return
on Information into the Return on Investment is made up of the
assumptions within the financial model. The EHR productivity in
this spreadsheet is a template that calculates the bottom line of
the productivity each year.
According to the Bureau of Labor Statistics, since 1995
productivity in the United States has increased at an average
annual rate of two percent. Often with the implementation of EHR,
the standard financial ROI with the NPV cannot be fully
calculated--as this technology has qualitative findings. Initially
the ROI may be in the form of qualitative returns or a positive
return-on-information.
The productivity model has a basic concept noted from an
incorporated formula to equate the Total Factor Productivity (TFP),
which is an algorithm used in research to offer an explanation as
to why some countries are wealthier and continue to grow
wealthier, due to their implementation of technological progress.
14 Research analysts have calculated the formula with Fortune 100
companies. This template takes the TFP formula a step further and
is applied within a financial model for a healthcare practice. The
model has basic assumptions. The cells are linked within the
assumptions to the financial model spreadsheet so that individual
facilities can apply their own numbers into the assumptions in
order to evaluate their productivity factor and other financial
leverage aspects.
The productivity analysis yields a percentage. It is important to
further understand and identify the area(s) contributing to the
productivity or lack of productivity. The Analysis Considerations
provides a method to identify what has changed and is a tracking
tool to capture both quantitative and qualitative documentation.
The productivity is related to revenue, assets, and consideration
of the investment in technology as the outcome of productivity.
Usually productivity is configured with labor and productivity is
considered the output of labor. However, the labor factor does not
give credence to the money invested in technology and therefore
the outcome of applying technology to increase the aspect of
productivity provides the rationale that productivity is due to
both labor plus technology.
Upon evaluating the productivity factor, the Analysis
Considerations spreadsheet is used to identify the rationale for
the outcome of this productivity factor. The answers to realizing
the quantitative and qualitative ROI of EHR through productivity
lie first with identifying where this productivity is coming from.
This model can also be used to apply this formula in a regression
analysis or a global view of past occurrences.
Embracing the EHR
By continuing to solve our work process challenges within our own
comfort zone, we often find ourselves using the same approach used
in the past. Fear of change or stepping out of our comfort zone
prevents the use of an application that can provide continual
advances in better methods to accomplish our work.15, 16
Innovation and advances in EHR technology are opportunities for
the healthcare administrator to better lead the practice with
increased productivity and adherence to regulation while striving
to enhance and streamline patient care.6
As EHR technology gains widespread adoption as a standard
operating procedure, we must continue to strive for ongoing
improvements in the work process with cost containment, positive
ROI, and patient care delivery with quality, efficiency, and
accuracy. Giant leaps in proactively managing the business of
healthcare delivery can be made when we combine an efficient
integrated EHR solution encompassing electronic patient charting,
CPOE, MAR, and practice management with rigorous ROI modeling to
identify the positive qualitative and quantitative outcomes.
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