Solving cloud computing's CapEx vs. OpEx conundrum once and for all

Hospitals can save big money by subscribing to cloud-based applications rather than buying them outright, but many IT pros struggle to explain the nuances of expenditures. Here’s a look at how those already succeeding are making it happen.
By Tom Sullivan
02:54 PM
CapEx vs. OpEx cloud computing

When the University of California San Diego and UC Irvine Health revealed in mid-November that they started jointly using an instance of Epic in a data center hosted on the vendor’s Verona, Wisconsin campus, the novel approach spotlighted the cloud’s unique advantages when it comes to acquiring technologies from an operational, rather than a capital, expenditure mindest. 

The difference comes down to buying hardware and software up-front versus paying for it on a monthly subscription basis. 

“CapEx avoidance was about $36 million,” UCI Health CIO Chuck Podesta said, citing both the work UCSD already undertook and UCI Health’s shortened implementation timeframe as primary drivers of the capital savings. 

Other hospitals, including Intermountain, Northwell and SCL Health are earning similar results.  Here’s what top executives say about which applications and data to move into the cloud as well as their advice about the CapEx and OpEx considerations. 

CapEx vs. OpEx

Here’s a telling statistic: Even as more and more hospitals are subscribing to cloud computing services, 56 percent of CIOs said it is very difficult to explain the Capital Expenditure or Operational Expenditure ins-and-outs when vying for IT budgets and approvals. 

That’s according to data that Black Book managing partner Doug Brown pulled from research the firm compiled for its pending 2018 Health IT Trends report. 

But guess what’s coming, and quickly. Black Book found that “85 percent of hospital managers in facilities under 200 beds are paring back or freezing new IT CapEx investments in 2018, opting instead wherever possible to fund projects from the OpEx budget.” 

[Cloud computing decision guide: Breaking down 7 top solutions for healthcare]

Wait, there’s more. ”57 percent of large hospitals over 200 beds are also pairing back or freezing IT CapEx investments in 2018,”  Brown added. 

Analyst house IDC, for its part, projected that spending on cloud computing, including services as well as cloud-enabling hardware and software, will more than double to $530 billion by 2021. 

This convergence of predictions means two things: cloud services, which frequently fall under that operational expenditure budget, are likely to become considerably more attractive than purchasing software upfront, and smart CIOs will cozy up to their CFOs to better understand CapEx vs. OpEx in practice. 

More than just EHRs

Electronic health records get considerable attention in the realm of hospital IT shops but they are not the only technologies ripe for moving into the cloud. 

SCL Health in Broomfield, Colorado, moved to cloud-based ShareFile, co-located its data center and has several software-as-a-service programs in action, according to CIO Dave Pecoraro. 

"One of the benefits is capital avoidance. We're being able to thin down our client. So from a security standpoint we're not putting laptops out there with spinning drives and having to encrypt them,” Pecoraro said. “We're moving toward more toward a Chromebook environment. Going from a $1200 laptop to a $300 Chromebook is a significant capital avoidance."

Tapping into Citrix tools and ShareFile enables Pecoraro to essentially equip users with out-of-the-box hardware devices. All they have to do is log-in with their credentials and enter their persona via that device. The setup also means SCL Health avoids the typical three or four year replacement cycle for laptops and PCs. 

“There's more than 8,000 laptops in our organization, and in the past they all had to be touched, and we had to put an image on them and encryption on the hard drive,” Pecoraro said. “That saves a lot of money and time. We've calculated somewhere on the order of three or four million dollars in savings, just on labor and capital avoidance.”

Cloud: Where IT and finance get along

Some hospitals IT shops are already operating in conjunction with the finance team. 

Northwell Health CFO Michele Cusack said that the departments are working together to take advantage of cloud-based services. Cusack added that common applications to evaluate moving into the cloud are email, productivity and commodity apps that don’t contain large amounts sensitive patient data, notably protected health information and personally-identifiable information. 

“Northwell is also in the process of moving its human capital management system to the cloud,” Cusack said. “We also have through third-party arrangements many key applications that are hosted externally in private cloud environments.” 

When deciding what to subscribe to as cloud service and what to buy up-front against overall costs, Cusack said Northwell is also careful to examine which approach best supports the business, in terms of processes and goals. 

“We look at the overall savings by comparing the monthly fees to the upfront capital costs, the potential reduction or elimination of certain on premise IT infrastructure, the cost benefit of seamless future upgrades to systems, and the cost benefit of being able to scale resources quickly in response to demand,” Cusack explained. 

Intermountain CFO Bert Zimmerli agreed that hospitals should educate themselves thoroughly on the strategic issues and work with cloud partners who are the best at what they do. 

Zimmerli also suggested answering two key questions from the onset: can we be more efficient by moving into the cloud and can we use scale where scale matters? 

“Do I think most things are going to migrate to the cloud? Absolutely I do,” Zimmerli said. “If the cloud plays a strategic role we drive toward it on that basis.” 

St. Luke's University Health Network considered the cloud strategic when it co-located servers in a hosted datacenter in 2009, according to CIO Chad Brisendine. 

Brisendine said that St. Luke’s evaluated the total cost of ownership and CapEx vs. OpEx realities of maintaining its own servers against subscribing to a cloud service for that functionality. 

“Our move was strategic so that IT doesn't have to get in the business of managing data centers. We moved 9 years ago to a colocation thinking that we would eventually move to the cloud,” Brisendine explained. “Same decision to move to co-lo -- we didn't want to be in the power and cooling business anymore -- and now 9 years later we don't want to be in the server and storage business.” 

Back in Southern California 

UC Irvine Health’s journey to the shared cloud-based Epic EHR began back in 2015. 

Podesta said that over time it matured into a strategic imperative crucial enough that it survived UCI Health’s management changes, including the CEO, CFO and COO, among other executives either retiring or moving onto new opportunities. 

The organizations maintained momentum for the project and officially kicked off the project in July of 2016, at which point UCSD moved its production EHR environment to a private cloud in Epic’s datacenter. 

Earlier this month UCI Health went live on that same Epic environment, too. 

“Creating a single support model and working on upgrades together will have a positive impact on OpEx savings,” UCI Health’s Podesta said.

Healthcare IT year in review

This was one of our most popular stories of the year.

Mike Miliard, Jeff Lagasse and Beth Sanborn contributed to this report. 

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