Building the Financial Case for Electronic Health Records

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.

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