Wednesday, August 25, 2010

McKinsey Quarterly: Reforming Hospitals with IT Investment

Most of the stories I have heard about the impact of electronic health records have been negative, with claims of software bugs, development costs that will never be recovered, and the general contention that there is not much money to be saved anyway. This article (free registration required to view), Reforming Hospitals with IT Investment, finally provides some good news.

Let’s start with the bad news first. The stimulus and the health care bills together make a transfer to electronic medical records and computerized-physician-order-entry (CPOE) systems mandatory and set standards for the systems to be implemented. This report quotes a figure of $120 billion to bring hospitals into compliance. Only a small portion of this is subsidized by the government. The report points out that the implementation must be done carefully if it is to be successful and affordable.

The good news is that there are examples in place which indicate that this expense can be quickly recovered in lower operating costs. The authors also point out that their estimates of cost savings are conservative and the actual savings could be considerably higher.
"The productivity and resource savings often pay back the initial IT investment within two to four years while also producing better health outcomes for patients. We estimate that total savings across the US provider landscape could be on the order of $40 billion annually. (By comparison, about $1.3 trillion a year is spent on inpatient and outpatient services across the United States and about $80 billion on health care IT.) Achieving such a positive return on investment (ROI), however, requires distinctive change-management skills among hospital leaders, better governance, and sustained engagement from key clinicians."There are multiple areas in which the IT investment will contribute to cost reduction.
"Optimizing the use of labor

Many hospitals continue to rely on manual charting, paper records, and outdated software to manage bed counts, schedule staff, and reserve key resources, such as operating rooms and imaging machines. Electronic health records and computerized physician order entry bring these elements together online, automating charts, records, and medical information about patients and directing medical staff toward protocols clinically proven to be more effective in treating illnesses.

When these technologies are linked to bed-management and equipment-scheduling software, doctors, nurses, and administrators can assess current and projected bed counts and optimize the scheduling of key equipment (for instance, x-ray systems) and the level of staffing. This approach reduces not only administrative waste (such as time spent tracking down medical information or calling to secure needed services) but also the level of overbooking, simultaneously improving bed turnover. The results can save upward of $20,000 per bed in labor utilization alone.

Reducing the number of adverse drug events

Electronic health records and computerized-physician-order-entry systems can sharply reduce the risk of prescription error and negative drug interactions by mapping patient histories with information from drug manufacturers to highlight the risks of prescribing a particular product. Problems with drugs cost hospitals $8,000 to $15,000 per bed each year, or between $1.6 million and $3 million for an average 200-bed hospital. Access to medical information allows physicians to adjust prescriptions or dosages to prevent complications, improve the quality of care, and reduce the human impact of adverse drug events.

Managing the revenue cycle

Every year, roughly 0.4 percent of hospital services go unbilled, at a cost per bed of just over $4,000. Some of the billing issues result from coding errors or eligibility questions. Coupled with data standards such as ICD-10, computerized-physician-order-entry systems promote the consistent naming, coding, and classification of treatments, allowing hospitals to improve the oversight of all procedures and to increase the first-time pass-through of claims.

Reducing the number of duplicate tests

When all health records are stored in electronic format and providers gain access to them through health information exchanges, they become more widely accessible to doctors, insurers, hospital administrators, and patients, regardless of location. This kind of visibility gives clinicians a more complete sense of a patient’s history and reduces the need for duplicate tests that can affect the quality, cost, and speed of care.

An average hospital can pay back its initial (and usually onetime) investment in two to four years; cost savings accrue year on year. Health care providers with better-integrated systems often realize even higher ROI."
Paying for a significant technology implementation in two to four years is an impressive return on investment. Presumably at least $40 billion will then be saved each year in the future.

Let us now think really positive. The report gives as an example of the potential of the IT-driven approach, of a group of Canadian hospitals who invested $100 million (Canadian) in a new system over a period of four years. They observed annual savings equal to the cost of the entire four-year implementation.


  1. I hope the government is not too involved in setting the standards for this IT system. It has a great track record of trying to design systems so complicated that by the time the system is done it is obsolete. IT systems, including software, generally turn over in five years or so. I would think someone should prototype a something in less than a year to see how well it works. Steve

  2. I think the government is just issuing broad requirements. There is enough of an industry out there, with successful examples, that there is no need for anyone to try to impose specific and detailed requirements. Kaiser is a pretty good example of a successful system.


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