health care it: the real (and hidden) costs of...

Health Care IT: The Real (and Hidden) Costs of Ownership

WHITEPAPERathenahealth, Inc. | Published: January 2015

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The U.S. health care system is undergoing significant upheaval as policy makers and industry leaders strive to achieve the triple aim of reduced cost, improved quality, and a better patient experience. In the current environment, where health care costs comprise 18 percent of the U.S. gross domestic product, every cost-related decision matters. The administrative burden alone from billing-related tasks (for example, filing claims, obtaining prior authorizations, and managed care administration) costs the U.S. health system approximately $470 billion annually.1

Uninformed or under-scrutinized decisions about investments in health care IT (HCIT) are particularly problematic given the large expenditures often required to install and operate new technology and the increasingly runaway costs to deliver clinical and financial results.

IT investments are just a means to an end – the end being to improve financial results, clinical outcomes and the patient experience. Despite an estimated $69 billion that will be spent in the U.S. on HCIT systems over the next six years span, too often, technology purchases are not held accountable to results.2 According to a December 2014 report by the Office of the National Coordinator (ONC)3:

• Only 34 percent of eligible hospitals have attested for Stage Two Meaningful Use

• 41 percent of EHR adopters can’t enter lab and imaging orders or request a consult electronically

• 72 percent of adult patients can’t access their medical records online

• 87 percent of physicians can’t exchange information electronically with others outside their organization

• Approximately 200 hospitals and 257,000 eligible professionals will be penalized by the Centers for Medicare and Medicaid Services in 2015 for not meeting Meaningful Use standards, a penalty that will result in a one percent decrease in Medicare reimbursements, according to an Advisory Board report.4

These numbers represent an alarming and costly failure, given that HCIT investments can have a significant impact on a provider organization’s overall finances. In fact, there is arguably no more important calculation that decision-makers charged with evaluating HCIT investments must make than assessing the “total cost of ownership”.

In this whitepaper, we argue that traditional models for estimating HCIT costs are inadequate and overlook several business-critical variables. Our intention is not to provide a comprehensive TCO model, but to expose and examine the operational considerations that most TCO

models fail to recognize or account for, and to equip executives to ask the right questions about the cost of delivering clinical and financial results stemming from technology procurement.

Focus on Results HCIT is just a tool to drive results. Implementing EHR, revenue cycle management, population health and patient engagement tools are the beginning of the total cost model — not the end.

Currently, publically available TCO models tend to focus primarily on upfront purchase costs (software licenses, upgrades, maintenance, and so on) and upfront incremental labor costs (training, support, consulting fees, etc.). Even the term ownership—the act of merely buying and installing software—is more apt for an era pre-dating the availability of cloud, mobile, and social technologies.

While the majority of many TCO models only factor in costs associated with IT-related variables, IT spend is just one of five buckets organizations must account for when putting together a holistic cost model in a results- oriented landscape. The other cost buckets include: front-office work, clinical document management, billing and collections, and management of risks associated with security, compliance, and data integrity.

“Hospitals can reject technology partners who lack accountability for advancing clinical, technological, and operational outcomes, and play an undesirable role in terms of balance sheet trauma.”

– Dick Escue, CIO of Valley View Hospital, Glenwood Springs, Colo.5

Operational and opportunity costs must be part of the equation formulated to calculate the cost of HCIT systems because the technology can impact numerous aspects of the business outside of the IT department. “You have to figure out how to work people more wisely, especially as you are putting these electronic systems in. You have to make sure you are not just digitalizing junk processes,” cautions William Cors, M.D., chief medical quality officer at Pocono Medical Center in East Stroudsburg, Pennsylvania.6

Therefore, we encourage health care leaders to think in terms of not the total cost of ownership but the total cost of driving results, and adopt a calculation that accounts for labor and operational costs across several departments, as well as the opportunity costs of an underperforming system.


3| athenahealth.comathenahealth



Enterprise Organizations Are Feeling the PainIn 2013 hospital revenues grew at just 3.9 percent nationally, the slowest rate on record.7 Care continues to migrate toward the outpatient setting, with inpatient discharges declining 12.6 percent from 2006-2012.8 Reimbursements are shifting toward contracts that reward efforts to reduce utilization, improve quality and keep patients out of the hospital. Disruptive new entrants such as retail and urgent care clinics and free-standing emergency departments now compete on price and convenience in many markets.

Amid this downward pricing pressure, health care organizations must look for cost savings anywhere they can. Nearly all institutions have been working to achieve leaner cost structures, with some even flirting with the death spiral of cutting services to reduce expenses and preserve cash.9

Yet in this atmosphere of discipline and austerity in which all cost assumptions are scrutinized, health care IT purchases remain a glaring and stubborn exception. “In many instances, [HCIT] projects represent significant portions of the organization’s capital budget over a period of several years,” writes Brad Spielman, senior credit officer at Moody’s Investor Service. For large systems, Spielman estimates that total costs of HCIT projects can sometimes exceed a billion dollars.

This profligacy has been enabled in large part by financial incentives and penalties of the Medicare and Medicaid Electronic Health Care Record (EHR) Incentive Programs (or Meaningful Use). But it is a dangerous trend. Despite government incentives and penalties, HCIT procurement should not be given a blank check, or treated as just another “cost of doing business.”

What Traditional Models Tell Us About TCOSo what approach do organizations typically take to calculate the total cost of ownership of HCIT systems? The truth is that many do not even try. According to a recent report by market research firm Peer60, “In the vast majority of large capital information technology (IT) purchases, CFOs rarely, if ever, construct a full TCO model to independently project total lifecycle costs for the entire project.”

Those who do undertake TCO analyses often favor models developed by organizations such as the American Academy of Family Physicians (AAFP) and the American Medical Association (AMA). Such methodologies outline the capital planning required for implementation and maintenance of an HCIT solution. A recent review of six traditional models of TCO found that all of them focused on the costs associated with health IT, ignoring important categories of cost that can vary widely depending on which IT solution is selected.11

Figure 1: Costs Included and Not Included in Current TCO Models

Traditional TCO Models Costs Included Costs Not Included

AC Group Inc. • One-time labor costs during implementation (project management, training)

• One-time IT infrastructure costs (hardware, software) during implementation

• Incremental IT staffing

• Infrastructure maintenance (upgrades, monitoring)

• Central Billing Office including patient access, health information management, and patient accounting

• Medical secretaries, medical record transcribers, and other admin support

• Total clinical support staff, including radiology, imaging, and laboratories

• Building and occupancy costs

• Front office support staff, including registered nurses and licensed practical nurses

American Academy of Family Physicians (AAFP)

American Medical Association (AMA)

Healthcare Financial Management Association (HFMA) and Institute of Medicine’s (IOM) Digital Learning Collaborative

Hospital Data Industry Institute

Stratis Health



While there are slight differences among these TCO models, they collectively provide a starting point in helping health care organizations estimate TCO. They do a good job of capturing a portion of IT costs: the one-time costs associated with purchasing and implementing an IT system, as well as the ongoing costs of technology maintenance and upgrades.

Yet none of the models capture the full impact a HCIT system has on an organization’s overall operational cost structure. Some of these models begin to scratch the surface. For example, AAFP’s model includes a line item for “ongoing data entry.” The Institute of Medicine Digital Learning Collaborative’s model, created jointly with individuals from the Healthcare Financial Management Association (HFMA), is the most comprehensive model when thinking of TCO in terms of driving results, listing costs such as “non-IT staff allocated to work flow optimization” and “reduced productivity.” But the concept that staffs may operate over the long-term at differing levels of efficiency depending on which platform they use is not captured. Comparing HCIT platforms without considering these impacts misses the profound effects these platforms can have on an organization’s cost structure.

Below we examine the challenges and impact that operational, labor and opportunity-cost categories can have on TCO.

The Challenge of Miscalculating HCIT Costs Given the enormous sums of money on the line, the implementation of a HCIT system is one of the most important and costly decisions a hospital or health system will ever make. On the upside, the right HCIT system can modernize health care delivery by improving financial and clinical results; on the downside, the wrong investment can lead to profit losses, credit downgrades, security breaches, patient safety errors, bankruptcy, lawsuits, and termination of top officers.

When it goes wrong, the enormous capital expenditures of traditional on-premises HCIT can immediately weaken both income statements and balance sheets. In such cases, the capital needed for acquisitions, facilities, and other important strategic initiatives are depleted. Seeing such vicious cycles unfolding in various markets, credit ratings agencies Moody’s, Standard & Poor’s, and Fitch all downgraded the credit ratings or outlooks of at least 11 provider organizations in 2014, citing costly and disruptive IT implementations as one of the drivers of their weak operating performance.

Figure 2: When HCIT “Upgrades” Lead to Credit Downgrades

Health System Key Factors in 2014 Credit Downgrade

University of Arizona Medical Center Tucson, Ariz.

Higher operating expenses and lower revenue and patient volumes associated with conversion to a new HCIT system.

Henry Ford Health System Detroit, Mich.

Marked downturn due largely to the system-wide implementation of its new electronic health record (EHR) system.

Lifespan Rhode Island Providence, RI

Operating cash flow margin expected to remain below 3%, providing little cushion during a time of increased capital spending and installation of an HCIT system.

St. Luke’s Health System Boise, Idaho

Absolute operating cash flow dropped by $49 million, from $170 million, a nearly 30% decline, due in part to investments in information technology and data analytics.

Providence Health Services Renton, Wash.

Overall capital investment has come down in recent years coinciding with the system-wide implementation of their EHR system; the project had a total capital cost of approximately $750 million, took three years to implement, and outsized operating expenses suppressed margins.

Genesis Healthcare Kennett Square, Penn.

Physician productivity suffered in 2013 due to the implementation of a new EHR system, and the new accounts receivable system, in part resulted in a negative 3.1% operating margin for Genesis in FY 2013.

Bronson Medical Group Southwest Michigan

A $10 million bad debt write off, increased expenses, and lower productivity from the installation of its EHR system. The negative outlook reflects the continued EHR integration challenges.

Sources: Arizona Daily Star, Modern Healthcare, Moody’s Investor Service,

Becker’s Hospital Review



Given the stakes, decision makers require a rigorous and comprehensive methodology for calculating the cost of HCIT purchases. Yet no consensus exists on the best way to measure total cost of ownership (TCO), especially when factoring clinical outcomes and financial results. As a result, different models can arrive at wildly different estimates. Take the calculation of the cost to transition to the ICD-10 code set:

• According to estimates from 3M Health Information Systems, the transition for the average small medical group will cost approximately $5,900.

• But the American Medical Association (AMA) says that the transition could cost anywhere from $22,560 to $105,506.

• The range is due to the inclusion or exclusion of operational and administrative costs, including training, assessment and planning, engaging vendors, internal and external testing, and process updates.12

• The difference between $5,900 and $105,506 could be financially devastating for a small medical group.

When cost estimates of switching to ICD-10 fluctuate so widely for small medical groups, how are large provider organizations supposed to confidently evaluate the costs of implementing and operating an enterprise HCIT platform across their system and affiliates? As George Washington University health economist Steven Eastaugh recently put it, “The total cost of ownership [of HCIT] can vary dramatically—up to 200 percent—depending on which system is selected.”13

Operational Cost ConsiderationsAll organizations need to reduce costs to remain financially healthy. According to a survey of 263 health care executive leaders across the U.S. in late 2012, organizations are attempting to remove upward of six percent of their operating costs from their total budget in the coming years to stay competitive.15 HCIT systems that drive operational efficiencies for organizations can have a positive financial impact. For example, if the total cost to collect on claims is 9 percent of medical revenue for a $100 million provider organization, reducing the cost to collect to 6 percent would save the organization $3 million annually.

When factoring in operational costs to drive results of IT spend, the trickle-down effect and impact on the budget can be significant.

Why does the CFO so often offer a blank check for HCIT? The median IT operating costs for hospital-centric multispecialty organizations as a percentage of total medical revenue is only 2.51 percent, according to the 2014 MGMA Cost Survey for Multispecialty Practices (based on 2013 data).16 When thinking of IT as just a small percentage of the overall budget, it is easy to understand why a CFO would feel hands-off in the health IT selection process and give the CIO and CTO unlimited decision-making power.

However, HCIT impacts the operational costs of everything from patient accounting to front-office support staff, clinical support staff, consulting fees, management fees paid to an MSO, billing and collections purchased services, and more. When looked at holistically, these operating costs can reveal that a HCIT system impacts not just the IT-specific 2.51 percent of total medical revenue (or just north of 7 percent for an ambulatory medical group), but rather it affects departments driving costs that are between 15-22 percent of total medical revenue.

The span of departments affected represents a much larger slice of the budget for the CFO tasked with cutting or reallocating costs to stay competitive. Take, for example, CHRISTUS Provider Group, a 300 provider multispecialty group operating 72 clinics across Texas and Louisiana. “We’ve been able to shave off over $10 million a year in some of the expenses that we were incurring and still provide a better experience for both our patients and our physicians,” says Bob Karl, chief financial officer, regarding CHRISTUS Provider Group’s HCIT implementation.

“In the vast majority of large capital information technology (HCIT) purchases, CFOs rarely, if ever, construct a full TCO model to independently project total lifecycle costs for the entire project.”

– Chris O’Neal, Peer6014



Figure 3: Ten-Year Operating Cost of On-Premises Software vs. Cloud-based Services

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

$9.6$16.3 $17.7

$31.7 $26.0

$47.4

$34.5

$63.9

$79.2

$43.2$52.0

$94.7

$110.5

$128.3

$70.2$79.6

$144.7

$161.5

$89.2

$61.0

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Software

Source: athenahealth TCO analysis produced; Upgrade costs derived from The Total Cost of EHR Systems, Katalus, published 2013: Notes: All costs inflated 2% annually, excluding D&A; 0.41 CBO staff to MD ratio used; 1 Software operating cost includes depreciation expense associated with purchasing licenses, hardware, and the capitalized portion of installation fees; D&A expense ($500K - $3M annually in the software model) is not affected by inflation, causing slightly slower overall operating expense growth

Ongoing Labor Costs Missing From Traditional TCO ModelsFor the majority of health care organizations, labor costs actually comprise the largest portion of their TCO—reaching up to 60 percent of spending.17 This fact emphasizes the importance of including operating costs in a TCO model assessment; every department in the health care organization has active users of HCIT, from front desk staff making appointments and registering patients in the patient communications system, to health care providers documenting and coordinating patient care in the EHR, to billing staff collecting and tracking payments in the revenue cycle management system.

Figure 4: Labor costs impacted by IT decisions

Total Cost of OwnershipIT Costs and Labor

• One-time infrastructure purchases

• Implementation staffing• Ongoing IT staffing• Infrastructure maintenance

• Data conversion• Application management• Software upgrades and

patches• Information security

Clinical Labor

• Intake• Encounter documentation• Order tracking & follow-up• Clinical decision support

• Quality reporting• Population health initiatives• Clinical Quality Management

Front Office Labor

• Appointment scheduling• Registration• Co-pay and co-insurance

collections

• Patient outreach call & text campaigns

• Scanning and data entry• Referrals• Patient Statements

Billing Labor

• Coding• Claims submission & follow-up• Collection

• Reporting• Denial management• Charge entry

Systems and Processes Labor:

• Compliance• Data integrity

• Regulatory changes• Reimbursement changes



But even though labor costs associated with HCIT make up the biggest portion of the total cost of ownership, many labor costs remain invisible or, at best, out of focus in most published ROI/TCO models. One of the main reasons organizations invest in HCIT is to improve labor productivity, yet in health care, ironically, these investments end up producing a negative labor productivity curve.18 Failing to achieve the desired results from the investment – resulting in lost physician efficiency, suffering financial performance, the need to hire additional FTEs to prop up the technology, or even jeopardizing patient care – can be costly.

For example, in May 2014, Athens Regional Medical Center (ARMC) in Georgia rolled out a costly integrated EHR system. By the middle of May, a group of affiliated physicians sent a letter of concern to the CEO and CIO of ARMC. Among their complaints: emergency department patients leaving after lengthy wait times, an admitted patient who had not been seen by a physician for five days, lost and overlooked orders, and even medication errors. By the end of the month, both the CEO and CIO were removed from their leadership positions by the ARMC board due to a staff vote of “no confidence.”19

While ARMC’s story is a worst-case scenario, it highlights the abundance of non-IT jobs and processes that must be managed in order to actually deliver the results promised by HCIT. These jobs and processes consume resources and attention, and few are ever captured in traditional TCO models.

The Opportunity Costs of an Underperforming System In addition to missing ongoing labor costs, many TCO models not only fail to address other difficult-to-capture costs that impact clinical and operational results, but they also fail to quantify potential benefits. According to the Health Resources and Services Administration (HRSA), organizations should consider the costs of implementation and maintenance, but also “critically review the potential benefits of implementing a particular solution.” These benefits can include improved productivity, stronger revenue, and increased patient and provider satisfaction.

Rob Booth, the chief financial officer of Summit Medical Group, a $200M independent, multispecialty medical group based in New Jersey, recently explained how choosing a technology solution with a low upfront investment freed up his provider organization to focus on higher-value imperatives, such as building state of the art facilities and acquiring the assets of physician practices.

“We can be much more aggressive with that freed up capital to actually grow our business,” Booth said. “No technology solution is cheap, but our IT systems have improved our first pass resolve rate, our cash flow and our margins. We can bring on 75 physicians and scale them up on the platform and be up and running with little

downtime. We can deploy our staff resources into other important areas from the efficiencies we create and that makes our organization really hit its stride.”20

A more complete estimate of the total cost of HCIT should therefore try to account for those harder-to-quantify but legitimate benefits of an HCIT product in a results-oriented era. After all, HCIT decisions reach far beyond the IT department, affecting much more of an organization’s cost structure than just the IT budget. Unwise investments can impact the cost of remaining adaptable and financially flexible to move at the rapid pace of change the industry now demands.

Figure 5: Opportunity Costs Not Accounted for in Current TCO Models

Opportunity Benefit to the Organization

Standardization of Workflows

Increased efficiency, quality, fewer interruptions and distractions, better care coordination among providers.

Agility Ability to quickly scale HCIT up or down as the organization evolves. Responsiveness to changes in reimbursement models, reporting and clinical requirements, and other regulations.

Compliance Having the right reporting, data, and workflows in place to meet new mandates (e.g., Meaningful Use Stage 1 and Stage 2, ICD-10)

Integration Ability to build effective, low-cost connections to clinical trading partners, labs, pharmacies, and other third parties to exchange information; and to build and connect with mobile health applications

Adoption With as much as 70 percent of health care providers dissatisfied with their EHR product, having a system that will encourage rapid adoption and provider satisfaction



TCO Work Sheet: A Baseline for Driving PerformanceAt athenahealth, we work with client organizations to create a complete Total Cost of Ownership profile. Our approach to estimating total cost of ownership includes a holistic view of a prospective client’s organization and is supported by existing, up-to-date performance and efficiency benchmark targets from actual clients fitting a similar profile. Indeed, it is this approach that enables us to be truly accountable for our clients’ results.

Here is a typical total cost of ownership worksheet we use every day with our clients, which includes the following factors:

One-time HCIT Implementation Costs

¨ Initial Software License Fees

¨ Staff Training

¨ Initial Hardware Acquisition

¨ Maintenance Fees

¨ Interface Fees

¨ Implementation Fees

Ongoing HCIT Costs

¨ On-going Fees Including Upgrades

¨ Software Maintenance Fees

¨ Staff Training Associated With Upgrades

¨ Future Product Purchases

¨ Backup and Disaster Recovery

¨ Server Fees

Ongoing Operating Costs (Labor)

¨ FTE Personnel: Clinical Document Management

¨ FTE Personnel: IT Department

¨ FTE Personnel: Billing Office

¨ FTE Personnel: Front Office / Front Desk

¨ FTE Personnel: P4P Program Support

¨ FTE Personnel: Patient Communications

Ongoing Operating Costs (Non-Labor)

¨ Patient Statements Administration

¨ Lockbox

¨ Eligibility Checking

¨ EDI Transaction Fees

¨ Clearinghouse Fees

¨ Transcription

¨ Paper Claim Storage

¨ Patient No-Shows

¨ Billing Under-performance

Every organization is different. Contact us at [email protected] for a custom total cost of ownership analysis. Or visit athenahealth.com/enterprise to learn more about how we work with organizations like yours.



Endnotes1. http://www.beckershospitalreview.com/payer-issues/billing-and-

insurance-administrative-activities-costs-reach-471b-yearly.html

2. http://www.insight-corp.com/reports/telehealth12.asp

3. http://www.healthit.gov/facas/sites/faca/files/HITPC_CMS_DataUpdate_2014-12-09.pptx and http://www.healthit.gov/FACAS/sites/faca/files/HITPC_InteroperabilityUpdate_2014-08-06.pdf

4. http://www.advisory.com/daily-briefing/2014/12/17/200-hospitals-face-penalties-for-meaningful-use

5. http://blogs.wsj.com/cio/2014/08/12/hospital-cio-says-health-it-needs-major-rehab/.

6. HealthLeaders Media, “Cost Containment: Targeting Cuts, Enhancing Efficiency, and Using IT.” October 2012.

7. http://www.modernhealthcare.com/article/20140830/MAGAZINE/308309927

8. http://www.medpac.gov/-documents-/data-book

9. http://www.thenewsstar.com/story/news/local/2014/12/01/ceo-st-francis-neonatal-unit-jeopardy/19753443/ (for example, consider the recent plight of cash-strapped St. Francis Medical Center in Monroe, Louisiana, which is reportedly weighing whether to cut critical services such as the neonatal unit, pediatric intensive care unit, inpatient dialysis unit and psychiatric services to stay in business due to a $27 million budget deficit in 2013)

10. Building Value: Investments Aimed at New Priorities Create Opportunities for Not-for-Profit Hospitals

11. Review of six TCO models conducted by athenahealth staff, December 2014.

12. http://www.healthcaredive.com/news/battle-of-the-expenses-ama-defends-high-estimates-of-icd-10-transition-cos/337682/

13. Eastaugh, S.R. (2013). The total cost of EHR ownership. Healthcare Financial Management, 67(2), 66-70.

14. http://www.peer60.com/hospitcaltco/2012/08/06/the-total-cost-of-ownership-of-electronic-health-record-systems/.

15. HealthLeaders Media, “Cost Containment: Targeting Cuts, Enhancing Efficiency, and Using IT.” October 2012.

16. MGMA Cost Survey for Multispecialty Practices: 2014 Report Based on 2013 Data

17. http://www.healthcare-informatics.com/article/guest-blog-avoid-implementation-do-overs-well-thought-out-tco.

18. http://www.nejm.org/doi/full/10.1056/NEJMp1109649

19. http://www.advisory.com/daily-briefing/2014/06/18/how-one-health-system-botched-its-ehr-rollout

20. http://www.athenahealth.com/leadership-forum/healthcare-cfo-concerns

21. http://www.healthitoutcomes.com/doc/two-of-three-doctors-dissatisfied-with-current-ehr-system-0001.

we connect care™athenahealth is a leading provider of cloud-based services and mobile tools

for medical groups and health systems. Our mission is to be health care providers’ most trusted service, helping them do well by doing the right thing.

© 2015 athenahealth, Inc. All rights reserved.

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