The Next-Generation Budgeting Strategy

by Kevin Featherly

Is it finally time to smash data walls between providers? Can health care afford not to?

Few hospitals have not made budgetary commitments to healthcare IT. However, the rationale behind IT investments has always been somewhat scattershot. Five to seven years ago, it was sometimes driven by a notion that IT investment was the right thing to do, based on then-nascent evidence about improved quality and safety. Others thought it was a way to get ahead of the competition. Some simply wanted to be first.

Federal healthcare reforms pushing IT investment have changed the strategic drivers. But are the government’s carrots and sticks the main motivators behind continued IT investment? Is patient safety still the best reason to commit capital budget to healthcare IT investment? Is competition the issue, or is it operating efficiency?

The industry analysts, consultants, and healthcare executives queried by HIT Exchange generally agree: It’s all of the above. But beyond that—it’s a question of survival.

The federal government has threatened to reduce Medicare payments to hospitals that fail to achieve Stage 3 meaningful use of certified electronic health records by 2015—a goal complicated by the fact the government has yet to map out a path to anything beyond its Stage 1 criteria.

“There are no ifs, ands, or buts about it,” says Mike Davis, a managing director at Washington, D.C.-based Advisory Board Co. “If you don’t have the appropriate automation, you’re not going to be able to compete.”

Shawn McKenzie, president and CEO of Ascendian Healthcare Consulting in Sacramento, Calif., agrees. The wild, wild west fee-for-service reimbursement model is rapidly falling out of favor with both governmental Medicare and Medicaid payers and with commercial payers, he says. It soon will be incumbent on hospitals to understand and measure their true costs and find ways to prune back—and that will require sophisticated system automation.

“I hate to be Chicken Little and say the ‘sky is falling’,” McKenzie says. “But I think that if these IT systems aren’t in place, and if you can’t engage in that episodic pay structure because you don’t have interoperability, it could be a major blow to the organization.”

Federal healthcare reforms pushing IT investment have changed the strategic drivers. But are the government’s carrots and sticks the main motivators behind continued IT investment?

Such urgency is felt throughout the industry, which features widely variable rates and levels of hospital IT adoption, particularly on the clinical side.

Researchers at Chicago-based HIMSS Analytics have formulated an Electronic Medical Record Adoption Model (EMRAM) scoring system for hospitals. An EMRAM score of zero means an institution has failed to implement even basic ancillary lab, radiology, and pharmacy systems. A score of 7 indicates an institution is fully equipped to handle continuity of care document transactions, deep-dive data warehousing and mining, full physician documentation and clinical decision support, and fully fledged CPOE, among other rich applications.

Most of the 5,310 U.S. hospitals surveyed fall somewhere in the middle of the scale. As of the second quarter of 2010, the median EMRAM score for all U.S. hospitals was 3.2. That means that while many hospitals now have automated nursing documentation and clinical decision support, most are not yet in line with the government’s Stage 1 meaningful use mandates, which require CPOE. This application is also a requirement for achieving an EMRAM score of 4 or higher.

New England ranks highest regionally with a 3.4 aggregate EMRAM score. The West South Central portion of the country including Texas, Louisiana, Arkansas, and Oklahoma ranks lowest, with a regional score of 3.1 Though scoring slightly higher in the aggregate, only the East South Central region of the United States—Kentucky, Tennessee, Mississippi, and Alabama—has no hospital with an EMRAM score of 7. Throughout the country, academic hospitals generally score higher (median 4.2) and rural hospitals rank lowest (2.15).

A Case of Good Timing

The wired institutions approached by HIT Exchange say they got serious about IT investment in the period roughly between 2004 and 2007. Most judged at the time that it was simply the right thing to do. None claims to have initially foreseen, or built their budgets around, government reforms such as meaningful use, population-based accountable care organization reimbursements, or quality-based payments. All, however, are glad they started down the road of automation early.

Brian Sterud is director of information management at Brookings Health System in Brookings, S.D. His is a 49-bed acute care hospital coupled with a 79-bed nursing home, plus a group of independent-living apartments. All are owned by the city of Brookings. The institution has an EMRAM score of 6.

Brookings started planning for clinical and business IT in 2005 under former CEO Vern Carda, who modernized the company’s IT infrastructure by adding bigger bandwidth and greater server-side firepower. Before that, Brookings had only limited clinical IT applications in place, including stand-alone lab, pharmacy, and patient accounting systems.

If you don’t have the appropriate automation, you’re not going to be able to compete.

By the time Sterud came on board as director in 2008, Brookings had implemented an EMR and nursing documentation on the clinical side, plus automated billing, accounts receivable, and materials management on the business end. The whole system was rolled out under the unified rubric of a single vendor, MEDITECH.

“[Carda] was obviously an advocate for technology and what IT can do,” Sterud says. “At the time, it was fairly visionary because there was no legislation pushing anybody toward that then.”

That changed shortly after Sterud came aboard as director. 
At the time, he was instituting CPOE—
one of the thorniest and most difficult implementations because it automates and radically changes doctors’ workflows. Almost simultaneously, federal healthcare reforms began emerging, including meaningful use mandates that place a high premium on CPOE.

“It was really timely,” Sterud says. “Suddenly it wasn’t, ‘Hey, we really want you guys to do this.’ It was, ‘You can either do it now or do it later, but you’re going to have to do it, no matter what.”

Gene Thorn, vice president of finance and chief financial officer at Union Hospital in Dover, Ohio, went through a similar implementation process, and for much the same reason. His 150‑bed, independent hospital has spent between $7 million and $10 million during the past six years deploying a unified MEDITECH business and clinical information system. The hospital also helps subsidize integration of that system with applications used by various affiliated physician practices—which can total anywhere from $2,000 to $20,000.

Is there value in what you are spending this money on? Is there a return on investment?”

“We didn’t do this from a financial perspective, we did this from a patient outcomes perspective,” Thorn says. “That in and of itself hasn’t changed. What has happened is it has kind of shifted from just an internal desire to do that within the organization to, essentially, a federal mandate.”

Indeed, the federal government has threatened to reduce Medicare payments to hospitals that fail to achieve Stage 3 meaningful use of certified electronic health records by 2015—a goal complicated by the fact the government has yet to map out a path to anything beyond its Stage 1 criteria.

“You don’t really have a choice. You have to do this stuff to survive. You’re not going to survive if you don’t, and it doesn’t guarantee that you will survive if you do. Screwy business.”

Union Hospital is confident it will reach Stage 1 meaningful use by 2013, but the unknowns beyond that have Thorn’s undivided attention.

“Our margins are so tight that even if you get 1-percent reduction in your Medicare payments it becomes significant to your overall financial environment and survivability as a business,” he says.

Harris County: Take It or Leave It

The Harris County (Texas) Hospital District is an American Hospital Association’s “Most Wired” institution headquartered in Houston. Executive Vice President and Chief Information Officer (CIO) 
Tim Tindle says the organization has an EMRAM score of 6, and is awaiting 
a level 7 survey.

Harris is a taxing authority, not unlike a school district, pulling in $500 million annually through county property taxes. It has three hospitals, the largest being Houston’s 650-bed Ben Taub Level 1 trauma center. The district contains a “giant network” of ambulatory clinics, Tindle says. Its 3,400 doctors see 1.5 million patients a year.

Of those patients, about 35 percent are uninsured, Tindle says, a fact that puts intense pressure on the district to find ways to care for the county’s largely low-income population while trimming the rate of expensive and unreimbursed hospital admissions.

With that in mind, Tindle assembled Harris’ first IT strategic plan in 2000 when he was still a management consultant and got implementation rolling as CIO in 2004. Since that time, the district has spent roughly $71 million on IT implementations.

The switch to next-generation clinical and business systems required the replacement of the district’s existing enterprise resource planning and revenue cycle management applications and all its major clinical information systems. Harris invested $43 million rolling out a uniform, system-wide EMR from Epic. After initially getting nurses up to speed on nursing documentation and other automated applications, the district rolled out CPOE for Harris’ doctors last fall. It was a take-it-or-leave-it situation.

“This is what we told the docs,” Tindle says. “‘If you want to practice here, you’ll use the medical record. If you don’t, we appreciate what you’ve done here in the past, and we wish you all the best.’”

Shawn McKenzie says he urges hospital clients to begin strategizing their IT budgets with what he calls a “synergistic model” in mind. It means investing in IT that shares data not only with facilities and people within an institution, but also with outside with competitors, in the interest of continuity of care.

Tindle says Harris’ executive governance team pushed ahead with IT investment not because of regulatory pressures or mandates, but after answering affirmatively what he considers the key business questions: “Is there business need? Is there value in what you are spending this money on? Is there a return on investment?”

In Harris County’s case, there has been quantifiable payoff—a projected post-implementation ROI of $150 million during the next five years, partly through IT-related full-time staff reductions.”

“We now have a system where we don’t need 70 people who hang and transport X-rays all over the county,” Tindle says. “And we don’t need as many [paper] medical records people.”

It Gets No Easier from Here

Hospitals like Harris County, Brookings, and the others contacted for this article—Columbia Memorial Hospital in Astoria, Ore., and Mercy Medical Center in Cedar Rapids, Iowa—have formulated IT budgeting strategies that build out systems connecting their affiliated physicians, clinics, and care centers interoperably, with fully wired headquarter hospitals.

It’s a winning formula, several industry observers and even some hospital executives say. Now comes the hard part.

It’s not enough to be wired as an organization, says Ascendian’s McKenzie. The next level of strategic budgeting must be aimed at connecting interoperably to the wider world of health care. And that means connecting and sharing data freely with business competitors.

The federal government is applying pressure in this arena, too. It has spent $564 million to fund health information exchanges (HIEs), which are meant to move electronic health information among communities, regions, payers, and providers. That funding is part of the more than $30 billion allotted under the American Recovery and Reinvestment Act (ARRA) to advance HIT investments.

However, despite some promising early results in some states and regions, many question the viability of the HIE as a business model. But McKenzie thinks hospitals ought to be questioning their own business models and reaching out to one another, even without government prodding.

Between 50% to 60% of hospitals and physicians are considering ways to collaborate via mergers, consolidations, or joint ventures.
—Health care law firm Epstein Becker Green

McKenzie says he urges hospital clients to begin strategizing their IT budgets with what he calls a “synergistic model” in mind. It means investing in IT that shares data not only with facilities and people within an institution, but also with outside competitors, in the interest of continuity of care.

“That demands technology and interoperability, because we can’t go into battle with one boot on,” he says.

If the model were ever to take hold, McKenzie says, it would result in sweeping business changes. If every hospital in a major U.S. city shared electronic patient data freely, they would discover that they are engaged in huge service duplications, with every institution investing in IT and medical equipment to treat cancer and heart disease, each maintaining obstetrics programs and the like, all at huge, duplicative costs.

That was fine when patients went to the hospital the way they shop for milk, by simply going to the closest location whenever they needed care, says Sean Donovan, CEO and founder of Minneapolis-based RED SKY Consulting.

“Hospitals didn’t need to really focus on efficiencies,” he says. “All they had to do was survive really. So their focus was on providing quality care, but at any cost because it didn’t matter. There wasn’t as much governing control.”

However, as hospitals become more technologically sophisticated, so do patients, aided by Internet services that grade hospitals and determine which physicians do the best job, Donovan says.

And that is the point of McKenzie’s synergistic model. If every hospital in a community mined patient and population data with equal access, they would soon learn for themselves who among them does the best job on various conditions, modalities, and procedures. As a result, in the interest of efficiency and cost savings, a hospital might consider dumping services that another hospital across town does better while building up service areas that are its own bailiwick.

Donovan, whose company counts 12 of the top 20 independent delivery systems among its clients, suggests the synergistic model has already gained currency among clinicians. Where it has yet to take hold, he says, is in the C-suites.

“Those in accounting and financing and those areas on the revenue cycle side of things are the ones who don’t get it,” Donovan says. “They see business going away. But, in fact, it can be a greater streamlining factor in service-area investment. We are sharing with everyone what we do best—let’s build upon it.”

Guy Rivers, CFO at Columbia Memorial Hospital in Astoria, Ore., does not see his 25-bed critical-access facility cutting services.

“Our margins are so tight that even if you get 1-percent reduction in your Medicare payments,” Thorn says, “it becomes significant to your overall financial environment and survivability as a business.”

“We don’t have anything really wild,” he says. “We have ortho, pediatric, oncology, cardio—sort of the essentials. Those are services that we just kind of have to keep up with.”

Nonetheless, he agrees with McKenzie, and he’s building a strategy from the consultant’s core idea. He calls the concept a “community-wide electronic health record.”

“Patients need to be informed about their medical records,” says Rivers. “That participation involves their physicians—whether those physicians are employed by us or not. We are really approaching it from a community EHR standpoint, which also sets us up for connecting to the state and the federal levels through health information exchanges.”

For Harris County’s Tindle, the next level of budget strategy should target full interoperability and process automation. It’s a question of catching up with other industries like banking and retail that shot past health care long ago. And it is a question of survival.

“What happened in the 1980s and 1990s in most other industries is happening here: constant process and quality improvement and more efficiency and automation. And when you do that, lo and behold, you deliver a better product at lower cost. If that is not a prescription that the healthcare industry is in dire need of, I don’t know what is.”

Thorn is also convinced, if somewhat more fatalistic.

“You don’t really have a choice. You have to do this stuff to survive,” he says. “You’re not going to survive if you don’t, and it doesn’t guarantee that you will survive if you do. Screwy business.”

A Perfect se7en

The EMR Adoption Model developed by HIMSS Analytics gauges the electronic medical record capabilities of 5,130 U.S. hospitals and about 700 in Canada. Through August, 60 hospitals had achieved Stage 7.

Stage 0: The organization has not installed all of the three key ancillary department systems—laboratory, pharmacy, 
and radiology.

Stage 1> Stage 2> Stage 3> Stage 4> Stage 5> Stage 6>

Stage 7: The hospital no longer uses paper charts to deliver and manage patient care and has a mixture of discrete data, document images, and medical images within its electronic medical records (EMR) environment. Data warehousing is used to analyze patterns of clinical data. Clinical information can be readily shared via standardized electronic transactions with all entities authorized to treat the patient, or an HIE. The hospital demonstrates summary data continuity for all hospital services.