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Building the Financial Case for Electronic Health Records

By Edgar D. Staren, MD
09:50 AM
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A colleague of ours frequently comments how he once had a professor that instructed his class "never to do an information technology project with the primary goals of saving money, reducing headcount, or reducing paper." 

Whereas each of these benefits may be desirable, we would agree that none are good reasons in and of themselves to implement an IT project and particularly something as complex as an electronic health record (EHR). 

Rather, IT endeavors such as an EHR should be justified on the basis of the clinical and business processes which may be facilitated as a result. In that regard, last month we discussed the clinical (business) case for implementing an EHR. This month, we'll explore how to make the financial case to the governing body of your organization.

Before we discuss the specific financial benefits, it's important to have a general understanding of benefit categories. Three basic benefit areas exist including cost reductions, cost avoidance, and revenue enhancement. Cost reductions will include any decrease in external spend.  A good test as to whether the effort will lead to a cost reduction is simply if a general ledger account will be reduced in the next budget year.  Cost avoidance includes those circumstances  where a future expense you are expecting will not occur if the project you are considering is completed. Finally, revenue enhancement is the ability to generate new income as a result of the project. Please note that a good faith cost-benefit analysis should only include the profit portion of the revenue enhancement. 

Prior to performing any cost-benefit analysis for technology projects, we encourage setting up guiding principles for which Administration, IT, and Finance all have consensus. So as to assist in this process, the following provide a very popular set of guiding principles:

  • All benefits must have a baseline and well defined measurement approaches.
  • Expense reductions must result in budget reductions to the appropriate accounts.
  • Efficiency must show full time equivalent (FTE) reductions or increased chargeable productivity. 
  • Future FTE cost avoidance is only allowed if the position is previously approved in a budget and an account's budget can be reduced accordingly.
  • Cost avoidance must tie to future expenses that are already contractual bound and budgeted.
  • A hurdle rate for return on investment (ROI) will be defined and measured.

For areas such as bad debt, a 3-5 year historical trending analysis should be used. (In this way one may use a regression analysis to predict future benefits to the account.)

By using these guiding principles we can properly begin to review areas of financial benefit to the EHR. As one might imagine, there are many rocks to turn over in your quest to identify these benefits. Some benefits are quite transparent and easy to identify. Others, such as defining increased productivity, take substantially more and perhaps creative thought. Listed below are some of the more popular areas that should be considered when determining financial benefits.

  • Increased productivity (chargeable) meaning physicians have the time to see more patients
  • Increased charge capture usually as a result of less undercoding by the physicians
  • Reduction in transcription costs
  • Reduction of software maintenance & support for systems that will be replaced
  • Reduction in consulting costs associated with maintaining and supporting legacy systems
  • Reduction in costs associated with filing, retrieval, and storage of paper charts
  • Reduction in costs associated with clinical forms
  • Reduction in mailing costs
  • Reduction in write-off of bad debt
  • Reduction in denial rates
  • Reduction in costs associated with adverse interactions of drugs
  • Reduction in costs associated with eprescribing
  • Avoidance of hardware repairs and replacements
  • Avoidance of investment needed for growth

Left unmanaged, financial benefits realization will never occur. The first step to financial benefits management is to constantly measure performance against the baseline. We suggest a monthly variance report on each financial benefit line item to demonstrate the value being derived from the EHR. The monthly variance report will flag areas of under-performance and provide a management trigger to take immediate corrective action. As they say, "what gets measured, gets managed."

With all aspects of an EHR implementation and including preparation of the financial case, it is worth noting that the project is truly a marathon and not a sprint. That is not to imply that the endeavor need be slow but certainly a well prepared and deliberate pace during all phases of the race is to be expected. Moreover, the race is certainly not finished on the day of going live. For quite some time afterward, and particularly in the immediate post go-live period, constant attention will be required of the entire EHR team. In building the financial benefits realization case, it's important to ramp up the benefits based upon true EHR utilization and impact. 

For example, it is unlikely that the three months post-activation of a fully integrated EHR will demonstrate significant increases in productivity. In fact, many tasks may take longer as the physicians and clinical staff migrate from their paper centric processes to electronic processes. It is critical to not overburden the adoption situation with unpredictable and distracting financial payback targets. That being said, there are logical points post-activation where the user community will experience "stabilization" and followed by "optimization".  Stabilization is generally defined as returning to the pre-activation productivity levels while optimization, although really an ongoing process may have some component of plateauing.

At the point of optimization, you will see break/fix issues at pre-activation levels; however, you will see more enhancement requests. Normally, you will achieve stabilization within 90 days. At this point, the financial benefits will begin gradually as people increasingly utilize the improved technology and associated workflows to better enable processes. 

Our suggestion is that organizations show slow ramp-ups to the ultimate benefits realization. Under-promising and over-delivering in this area is certainly the most logical approach.