IT in Healthcare

A simple method for developing a business case to evaluate IT investments in the healthcare industry.

2006 Volume 9 Issue 4

Studies in information technology (IT) implementation projects indicate that up to 70 percent of software implementation projects fail in some important area, whereas, 66 percent of all these IT projects either fail outright, or take longer to install than projected. Amazing to note is that close to 98 percent of IT projects over $10 million fall short of expectations or returns.[1] In general, the main explanation for these staggering figures stem from the fact that implementing IT has become more complex in the last 45 years.

Over the next few years, the healthcare industry is expected to be one of the top two industries to leverage information technology (IT) and to recognize significant growth.[2] However, firms are often challenged with being able to successfully implement and accurately measure the benefits and profitability of these IT systems. IT users commonly face a difficult time in evaluating IT systems and in justifying their use with company senior executives.

In this article, we provide the findings of recent research on IT systems evaluation and discuss the elements of a business case so that executives can better understand such systems’ benefits and measures when evaluating and implementing the feasibility of particular IT systems. We also discuss common inherent risks that arise with these types of IT system implementation efforts.

2006-2007 Healthcare Industry Predicted Statistics

Below are a few significant statistics that the U.S. Department of Labor[3] released in a January 2006 report.

  • The healthcare industry is predicted to add nearly 3.5 million new jobs between 2002 and 2012, an increase of 30 percent.
  • From 2002 to 2012, 10 of the 20 fastest growing occupations are predicted to be concentrated in health services. These positions include medical assistants (59 percent growth), physician assistants (49 percent growth), home health aides (48 percent growth), and medical records and health information technicians (47 percent growth).
  • Projected rates of employment growth for the various segments of the industry range from 12.8 percent in hospitals, the largest and slowest-growing industry segment, to 55.8 percent in the much smaller home healthcare services.

On August 22, 2006, President George W. Bush signed an executive order concerning IT’s role in the healthcare industry. The order directly states that improving the quality and efficiency of healthcare delivery is dependent on the standardization and use of interoperable health IT. As defined by this order, interoperability is “the ability to communicate and exchange data accurately, effectively, securely, and consistently with different information technology systems, software applications, and networks in various settings and to exchange data such that clinical or operational purpose and meaning of that data are preserved and unaltered.”[4]

Healthcare providers and payers of healthcare can now tangibly foresee substantial investment in health IT in the coming years. Central to the growth potential in the healthcare industry is the adoption of and reliance on IT. IT plays a multifaceted role in the healthcare industry. According to a PricewaterhouseCoopers[5] report that forecasts the top 10 issues in the healthcare industry, three these issues were directly related to the implementation, adoption, and use of IT. Those three issues include: 1) turning to IT to reduce medical errors and to improve tracking and reporting of safety and quality standards; 2) using IT to enable healthcare providers to improve their ability to capture, store, retrieve, and report quality information, and 3) improving the technology infrastructure to assist in claims processing, create electronic medical records, reduce medical errors, and track performance.

With the enormous investments in IT, one of the most important questions that business managers must answer is “How should we approach the identification and measurement of IT investment payoffs?” The evaluation of IT investments and payoffs in the industry can have both financial (e.g., staff hours saved and reduction of redundant IT) and non-financial outcomes (e.g., customer satisfaction and quality of service). Below, we provide a simple framework that companies can use to evaluate, justify, and measure the payoffs of their IT investments. This framework provides the general elements of a business case and highlights factors to consider while evaluating healthcare IT systems. Although the framework is provided here in terms relative to the healthcare profession, it is also applicable to organizations in general. Managers can also derive practical implications from this framework.





Photo: Miguel Ugalde





Elements of a Business Case


Firm stakeholders who invest in IT to aid firm performance are often concerned because the benefits of the system are frequently difficult to measure. Ultimately, the return on investment (ROI) has become the deciding factor on whether or not to proceed with the investment. However, achieving a positive ROI is not a simple accomplishment. With every potential return come the inherent risks associated with investing. The initial investment, in this case investing capital into health IT, is neither the beginning nor the end of the process to interoperability optimization.[6] This type of investment is similar to installing an enterprise resource planning (ERP) system and must be planned for accordingly. Much like ERP systems, interoperable IT directly impinges upon most areas of an organization and can influence practically every aspect of healthcare delivery. Hence, effective interoperable IT implementation requires a conscious, concerted effort featuring a focused approach that leadership wholeheartedly endorses.

A general approach to transforming a paper-based healthcare delivery system to a digital healthcare delivery system is to organize implementation into five interrelated stages: Discovery, Planning, Procurement, Implementation, and Support.[7]

Discovery Stage

The discovery stage is an in-depth analysis of the state of the external and internal healthcare environments. The external environment should examine what is happening outside of the organization, such as evaluating the healthcare, IT, and other relevant industries. The internal environment analysis should assess the current state of the medical facility, vendors, or any other stakeholder institutions. Major issues to consider are the existing barriers to interoperable health IT, such as the role of leadership at the federal and institutional levels, available investment capital, earning stakeholder buy-in, identification of legal issues, and facilitation of cultural change. For a more detailed analysis of these issues and others, please refer to the report “Ending the Document Game: Connecting and Transforming Your Healthcare through Information Technology.”[8]

Planning Stage

The objectives of the planning stage are to determine the following: 1) whether or not the current infrastructure will sustain the proposed investment; 2) the amount of IT investment that is appropriate for the organization, and 3) the future of interoperable IT investments. The technology may prove useful in the short-term, but it cannot be expected to support the increasingly heavy demands of healthcare delivery in the long-term. In order to address the infrastructure issue, the current U.S. administration has set a goal that “all Americans should have affordable access to broadband technology by 2007.”[9]

Once the proper infrastructure is in place, the scope of IT investment should be defined. From the determined project scope, medical facilities will need to create a business case to support the planned IT investment. What follows is a skeleton framework for a business case involving health IT investment based on relevant factors outlined in “Beyond Bankable Dollars: Establishing a Business Case for Improving Health Care,” from The Commonwealth Fund.[10]

Under the financial component, stakeholders should consider implementation costs, savings, and ROI.

  • Implementation Costs: Calculate direct expenses such as raw materials (i.e. software, hardware, etc.) as well as costs of training and education. Indirect costs such as lost revenues due to reduced productivity when initiating new processes should also be tracked when possible and worthwhile.
  • Savings: Retain cost savings from the new processes or invest in other areas of the institution. Additionally, the savings area includes avoided costs, such as expenditures for keeping the status quo system and not changing anything. Lastly, factor newly generated revenue into the overall savings.
  • ROI: Using data from the first two categories, calculate ROI. In analyzing the return, it is common that during the earlier years of roll-out, the return may be low or even negative. Such return results are typically due to the front-end expense of the initial investment. Consequently, decision making should be based on long-term analysis such as the ROI at the end of the roll-out period and the annual ROI thereafter. Table 1 below illustrates the two ROIs of investing in an interoperable system by stakeholders based on a 10-year roll-out timeline.
Table 1: ROI for stakeholder groups
in millions
(2003 USD)
Cumulative ROI during roll-out period Annual ROI after implementation
Laboratories 85,050 13,100
Payers 137,310 21,600
Pharmacies 5,631 1,290
Providers 55,587 33,500
Public Health 583 93.6
Radiology Centers 52,839 8,170
National $ 337,000 $ 77,753.6
Per group or hospital Cumulative ROI during roll-out period Annual ROI after implementation
Small Group $ 9.03 $ 1.13
Medium Group 18.09 2.30
Large Group 47.92 5.73
Small Hospital 2.18 0.38
Medium Hospital 5.78 1.01
Large Hospital 17.72 2.81
Jumbo Hospital 45.65 6.86
*Source: “The Value of Healthcare Information Exchange and Interoperability.” CITL, 2004

Under the strategy component, healthcare stakeholders should consider how IT investment affects business decisions, the organization’s image/appearance (a.k.a. brand equity), and strategic positioning.

  • Business Decisions: External influences such as the political climate and public opinion can affect an organization’s overall business strategy. Within the scope of health IT, a neighboring hospital may raise the bar by rolling out a comprehensive initiative to reduce medical errors and adverse drug effects through investment in interoperability.

    Both the desire to invest in health IT and actual investment in IT are based on a question asked by most stakeholders: “What financial incentives does my organization have for investing in IT?” Reimbursement and incentive programs are not new to the healthcare industry; however, their makeup is evolving from paying for volume or service to paying for quality care. Better known as Pay-for-Performance programs, these incentives base rewards on action items such as IT investment as well as on improvements in clinical measures and patient satisfaction.[11]

    Incentives can help defray some of the investment expense for providers choosing to move towards interoperability. For stakeholders such as single-physician practices and small clinics that may have difficulty freeing up money to make substantial investments, incentives may be the only feasible path available. The market has already taken note of providers’ needs for financial assistance and the associated value in relation to health IT. Some payers are offering providers incentives to adopt these types of technologies with the understanding that providing healthcare will become safer and cheaper to provide through implementation.[12]

  • Brand Equity: Basically, investing in interoperable health IT can boost an institution’s image and reputation. Lowering operating costs, improving processes and making fewer medical errors should be attractive to insurance agencies, employers, and other payers.
  • Strategic Positioning: Whatever the IT investment, it will have implications regarding the future direction and positioning of the organization. This new position should be directly linked to the scope of the investment determined in the Planning Stage.

Under the third component of the business case, which focuses on the internal consequences to the organization, healthcare stakeholders should assess how IT investment will correlate with organizational values and affect the institution’s unique culture.

  • Organizational values: While creating and establishing values may be difficult and even painful to accomplish, if the process is successful, employees should be able to take genuine pride in their work. Total buy-in at all levels should eliminate the chance for cynical attitudes that may result from witnessing hypocrisy within the organization.[13] Aligning investments that support an organization’s mission and values can support adopting a business case.
  • Culture: Within each organization exists a culture that grows organically, is naturally unique, and possesses an infinite number of idiosyncrasies. Consequently, determining how to invest and implement IT is not as easy as imitating your neighbor. Integrating IT into an organization and its culture can be accomplished through establishing a unified identity among stakeholders who pursue common goals by sharing knowledge in a standardized technological infrastructure.[14] In other words, stakeholders should have one voice, one vision, one mission, and one direction when moving towards interoperability.

    Leadership is usually what binds the solidarity and common purposes necessary for IT implementation. Physicians increasingly feel the burdens associated with being leaders, however, they often do not have the appropriate skills to assume the leadership role. Teaching physicians leadership skills that are essential in other high-performing service industries will help physicians through the transformation process.[15] Developing an “emotional intelligence” helps create leaders within an organization who can stimulate an environment of trust among employees, who are then in turn motivated to share the common vision.[16]

    Management should also note the need for an internal “communication campaign,” which must educate the appropriate employees on integrating the new IT with providing improved quality care. Like the new proposal that promotes enhancing curricula by teaching the benefits and uses of health IT, these same lessons should be taught in-house to all providers. Having the technological capabilities is like seeing only the background of a beautiful painting; using such capabilities the right way (best practices) is what creates all the elements of a masterpiece.

After finalizing the business case, executive approval and allocation of the necessary resources are the next steps in the Planning stage. Although these steps may seem to be a formality, support from the top including the board of directors can show the organization’s dedication and can create a sense of urgency.[17] After all, one cannot move forward without a green light.





Photo: Tomasz Kobosz





Procurement Stage

Based on what is discovered and assessed in the Discovery and Planning stages, the leadership team may acquire a technology that meets the appropriate standards and that should eventually address customization issues farther down the road.[18] Since technology is not a barrier to interoperability, the market can adjust to the industry’s demands.

The leadership team should be selected based on the individual team members’ abilities to include internal representatives from each area of the medical facility in which IT will function. Experts will be necessary to work through issues that arise from the choice and customization processes.[19] By integrating the experts into this process, buy-in from the various departments as well as from the staff can be easier to earn.

These team members can then identify the processes that should be modified and amended. This process is sometimes coupled with a concept called Lean Manufacturing. For example, the Indiana Health Information Exchange has invested in an interoperable system that allows doctors to log onto a network and order specific information on a patient. Then the request is processed, and data is sent to the physician’s account. The overall process change cuts down administrative work time as well as doctor wait time.[20]

Other responsibilities of the leadership team include setting appropriate milestones and promoting stakeholder buy-in, which means that all parties who receive value from the implementation can personalize the health IT investment. Earning trust through communicating the shared vision helps guide the stakeholders through the transition period.[21]

Implementation Stage

The Implementation stage is typically the longest stage, since the technology and process changes are finally being implemented. Activities within this stage should be relatively manageable because of the organization’s planning and meticulous preparation. Visible leadership and appropriate leadership styles can be critical to the overall implementation’s success or failure. The leadership team’s technical command of project management should help organize the overall roll-out.

Support Stage

After the Implementation stage, the organization should be able to realize tangible benefits from the IT investment. Highlighting early successes can also provide quick relevance to encourage further process change and health IT investments. Another way to identify benefits is to establish metrics that track and report the implementation’s effects on targeted operations. Through the wisdom gained from the various reports, best practices should be adopted that range from providing quality medical services to the implementation process and project management.

Preliminarily, go-live and continual training should be a major component of the support stage. New roles and required skills will evolve from the health IT and process changes.[22] Even though the costs of education and support may be difficult to assess, continuous efforts in these areas are critical to the success of IT implementation and to achieving the optimal method for organizational transformation.[23]

Conclusion

We have documented that the healthcare industry is projected to show significant progress in using IT to improve data management and to streamline processes. This article acknowledges the difficulties that businesses are experiencing in measuring, evaluating, and justifying IT investments. In the long run, stakeholders should receive substantial financial benefit from interoperable health IT investment. However, most important is to improve the quality care and health of patients. This framework can also be applied to the evaluation of other IT investments within your organization.


[1] The Economist.com. Oct 28, 2004. http://www.emediawire.com/releases/2005/2/prweb208636.htm.

[2] Hoffman, T. “Brief: Government, Health Care IT Spending Expected to Grow in ’03,” Computerworld, January 22, 2003.

[3] U.S. Department of Labor, High Growth Industry Profile, January 25, 2006.

[4] Bush, George W. “Executive Order: Promoting Quality and Efficient Health Care in Federal Government Administered or Sponsored Health Care Programs,” 22 August 2006.

[5] http://www.prweb.com/releases/2006/1/inktomi330892.php, (no longer accessible) “PricewaterhouseCoopers Forecasts Top 10 Issues for the Health Care Industry in 2006.”

[6] The Lewin Group, “Health Information Technology Leadership Panel: Final Report,” 10 March 2005.

[7] http://www.army.mil/aeioo/tm/index.htm (no longer accessible) retrieved 19 July 2005.This framework resembles the Transformation Management Guide Map from the Army Enterprise Integration Oversight Office.

[8] Commission on Systemic Interoperability. http://endingthedocumentgame.gov/, “Ending the Document Game: Connecting and Transforming Your Healthcare Through Information Technology,” August 2005.

[9] George Bush, George, 26 April 2006,”Broadband Rights-of-Way Memorandum,” Source: http://www.whitehouse.gov/news/releases/2004/04/20040426-2.html.

[10] Bailit, Michael and Mary B. Dyer. 2004. “Beyond Bankable Dollars: Establishing a Business Case for Improving Health Care.” The Commonwealth Fund, September.

[11] Bailit and Dyer. 2004.

[12] Pan, E. et al. 2003. “The Value of Computerized Provider Order Entry in Ambulatory Settings.” CITL, March.

[13] Lencioni, Patrick. 2002. “Make Your Values Mean Something.” Harvard Business Review, 80(7): 113-7.

[14] Groshal, Sumantra, and Lynda Gratton. 2002. “Integrating the Enterprise.” MIT Sloan Management Review, 44 (1): 31-38.

[15] Prather, Stephen E., and David N. Jones. 2003. “Physician Leadership: Influence on Practice-Based Learning and Improvement.” The Journal of Continuing Education in the Health Professions, 23: S63-S72.

[16] Goleman, Daniel. 1998. “What Makes a Leader?” Harvard Business Review, 82(1): 82-91.

[17] PricewaterhouseCoopers. 2005. Reactive to Adaptive: Transforming Hospitals with Digital Technology.

[18] Ross, Jeanne. “Creating a Strategic IT Architecture: Learning in Stages,” MIS Quarterly Executive, March 2003.

[19] National Committee on Vital and Health Statistics (NCVHS). 15 November 2001. “Information for Health: A Strategy for Building the National Health Information Infrastructure.”

[20] Murphy, Tom. 6 September 2004.”Information Exchange Prepares for Pilot Testing.” Indianapolis Business Journal.

[21] Kouzes, James M., and Barry Z. Posner. The Leadership Challenge. Jossey-Bass; 3rd edition, 2003.

[22] Menachemi, Nir, and Robert G. Brooks. 2005. Exploring the Return on Investment Associated with Health Information Technologies: Florida State University.

[23] Medicare Payment Advisory Commission. Report to the Congress: New Approaches in Medicare. Washington, 2004.

About the Author(s)

Steven Genson, MBA, a 2001 Business Administration graduate of the University of North Carolina at Chapel Hill, Steven Genson, MBA, MPP, has lived and worked abroad for a year in Belgium, traveled to the Republic of Georgia for finance policy research, and worked on developing a business case for digital healthcare with the Commission on Systemic Interoperability in Washington, D.C. He is now pursuing a career integrating business strategy, global banking, and U.S. foreign policy issues. Mr. Genson completed his joint Master of Business Administration/Master of Public Policy degrees at Pepperdine in April 2006.

Mark Chun, PhD, earned his doctorate in Information Systems from the University of Colorado at Boulder; an MBA from the University of California, Irvine, with a emphasis on business and strategy; and a Bachelor of Business Administration with an emphasis in management information systems from the University of Hawaii. His research focuses on the use of IT to create value and to transform organizations, the integration of information systems, and knowledge management. He has been published in the Communications of the Association of Information Systems journal, the Journal of Information Technology Management, the Journal of Global Information Technology Management, and the Journal of Information Technology Case and Application Research. Dr. Chun has worked for Intel Corporation, Pepsi Co./Taco Bell, Coopers & Lybrand, and the Bank of Hawaii, and has conducted research at Qwest, Honda, Hilton Hotels, Kaiser Permanente, Mattel, and Pratt-Whitney Rocketdyne. He has also researched the diffusion of information technology in less-developed Asian countries.

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