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CloudView blog

Ideas and insights to help health care providers stay informed and profitable in today's challenging health care environment.

The Hidden Costs of Health Care IT

by Kristi Matus, Executive Vice President and Chief Financial and Administrative Officer

The United States is wasting an enormous amount of money on health care. Numerous factors are pushing up prices, including a broken fee-for-service model that encourages unnecessary consumption and industry consolidation that leaves patients and providers with less choice. But an overlooked culprit is the cost of healthcare IT. Thanks to government incentive programs like the HITECH Act, hospitals have largely implemented electronic health records (EHRs). Yet even the newest systems have a fundamental flaw: they are far too expensive to operate, and they don’t deliver results.

Our most prestigious hospitals and health systems run software platforms whose costs can be ruinous. Hospitals like Wake Forest Baptist and Memorial Hospital at Gulfport have suffered bond rating downgrades, which resulted in shrinking access to capital markets and money stolen from the bedside. Others, such as Bronson Healthcare Group and UNC Health Care System, have attributed weak financial performance to higher operating expenses and lower revenue associated with new IT system implementations. These investments have created inefficiencies that drive up costs and weaken our health care organizations.

Traditionally, health care leaders have leaned on Total Cost of Ownership (TCO) frameworks to evaluate their technology investments. These models work well for assets. But investments in health care IT underscore health systems’ very operating models, including their approach to services. For that, traditional models fall flat.

The popular concept of TCO originated in tech and traditionally has encompassed hardware, implementation, licensing, software upgrades, training, and security. But these costs presume the necessity of owning and operating a technology that can now be administered remotely. Furthermore, for healthcare IT, these models consistently exclude considerable operating expenses associated with driving results from these software platforms. Ten years ago, hosted software was the only option for hospitals. That business model has since experienced substantial disruptive innovation. Next-generation cloud-based platforms can slash costs traditionally associated with managing IT, as well as contribute services and support at scale to improve overall performance.

Cloud-based partners offer service-backed delivery systems founded on the notion that clients should pay for results, not features. Revenue for such partners is tied directly to outcomes such as increased collections, coordinated care, and ability to meet quality benchmarks. Health system leaders who appreciate the value of risk and reward alignment love the cloud because it negates the need for fixed asset investments; they love the services that come with these partnerships because they drive tremendous efficiencies in staffing and offer predictable operating expenses that scale and adapt easily as the industry transforms. Rather than building out massive IT infrastructure in an effort to gain visibility into and control over their own organization, leaders who embraced cloud-based services enjoy visibility and control into their own organization as well as into the activity outside of it. They join a network that evolves at the pace of their needs and at times, ahead of it. All of this generates greater labor productivity, clinical and administrative efficiency, and improved collections. IT teams that traditionally stay busy running data centers can focus on tasks that drive more value, such as application development and customer features.

The case for cloud-based models has grown stronger as the pace of health care delivery transformation has quickened. Just as hospitals are being forced to adapt in the face of consumerism at their own risk, so must traditional IT mindsets shift to recognize the benefits of cloud-based. Those with fewer resources as well as those organizations with a for-profit orientation have been among the first to shift; cloud-based technology has already freed a generation of ambulatory practices from the large capital expenditures required to purchase traditional software. Outsourcing IT infrastructure, software upgrades, and other non-value add operational jobs to cloud-based service partners has freed staff traditionally focused on all aspects of billing, collections, and clinical document management to perform more high-value tasks, to grow clinical staff, and to lead brick-and-mortar expansion or investments in telehealth. These organizations transitioned from treating technology as a commodity to technology as a strategic differentiator. And they haven’t looked back.

With the health IT industry forecast to reach $31.3 billion in spending by 2017 as revenue from traditional reimbursement models declines, health care simply cannot afford to conduct business as usual. Industries from finance to hospitality to education have embraced the lightweight, nimble approach of cloud computing to scale, grow, and serve customers. The same approach should apply to hospitals’ bedrock tools: their IT.

To shore up the strength of our health care institutions, health care organizations need to redefine the prevailing model of total cost of ownership to account for results and the opportunity costs of an underperforming system. When they do, they will find that the total cost to operate and deliver results is a far more accurate forecast of how their technology purchases will serve their organizations’ bottom lines.

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Ideas, insights and analysis to help physicians, medical groups and health systems stay informed and profitable in today's challenging health environment.

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Submitted by Dan Munro - Thursday, September 03, 2015

I think it's REALLY important to note that the $31B in HIT spending (by 2017) referenced here is less than 1% of our total National Healthcare Expenditure (NHE) which will run $3.2 trillion - this year (a full 2 years ahead of the rosy HIT spending forecast). So - if everyone in healthcare moved the cloud - exactly how much of that $31 billion (again - less than 1%) would actually be saved? Basically a small fraction of less than 1%.

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