Report: Best practices using health IT could create significant ROI

A healthcare provider that creates a best practices IT platform to house and share medical records, manage hospital resources more transparently and define precise guidelines for medically authorized tests and procedures can generate significant operating efficiencies, according to analysis published in McKinsey Quarterly.

“Automating and standardizing healthcare information can bring benefits that extend beyond meeting demands for compliance,” wrote Francois Laflamme and Nilesh Rajadhyax, associate principals in McKinsey’s Chicago office, along with Wayne Pietraszek, a principal at the office. “Such a platform minimizes paperwork, reduces the number of unnecessary treatments and lowers the risk of drug and medical error.”

The authors suggested that mandated upgrades to health IT will demand heavy investments by providers but will help them minimize waste and standardize best medical practices.

The productivity and resource savings often pay back the initial IT investment within two to four years, according to the authors, while also producing better health outcomes for patients. Laflamme and Rajadhyax estimated that total savings across the U.S. provider landscape could be around $40 billion annually. (Comparatively, about $1.3 trillion a year is spent on inpatient and outpatient services across the U.S. and about $80 billion is spent on health IT.)

However, achieving such a positive return on investment requires distinctive change-management skills among hospital leaders, better governance and sustained engagement from key clinicians, the authors noted.

“Estimates suggest that a wave of U.S. legislation and regulatory changes [including the American Recovery and Reinvestment Act (ARRA), revisions to HIPAA and the switch to ICD-10] will affect up to 80 percent of the existing hospital IT applications,” wrote the authors. “To meet these various requirements, U.S. hospitals will need to spend approximately $120 billion, at an average cost of $80,000 to $100,000 per bed, for the required project planning, software, hardware, implementation and training.”

The financial incentives from the ARRA under Medicare reimbursement will offset approximately 15 to 20 percent of total expenditures. “For an average provider, the result is a spending gap of about $60,000 to $80,000 a bed. With costs already rising by approximately 10 percent annually—and outpacing revenues—these investments will place new financial burdens on hospitals,” the authors stated.

According to the authors, EHRs, CPOE and clinical decision support tools could reduce medical errors and foster better health outcomes while decreasing waste and administrative time further strengthening the financial health of hospitals. “[O]ptimizing the use of labor, reducing the number of adverse drug events and duplicate tests, and instituting revenue cycle management can help typical hospitals generate savings of some $25,000 to $44,000 per bed a year. On an industry-wide basis in the U.S., this translates into $30 billion to $40 billion annually,” the authors found.

EHRs and related technologies can be applied to improve the delivery of healthcare in several core areas including optimizing the use of labor, reducing the number of adverse drug events, managing the revenue cycle and reducing the number of duplicate tests.

For example, every year roughly 0.4 percent of hospital services go unbilled, at a cost per bed of just over $4,000 where some of the billing issues result from coding errors of eligibility questions, noted the authors. "Coupled with data standards such as ICD-10, CPOE systems promote the consistent naming, coding and classification of treatment, allowing hospitals to improve the oversight of all procedures and to increase the first-time pass-through of claims."

The realization of the benefits from health IT investments will require a radically new approach to IT on the part of the CIOs of healthcare providers, as well as the business leaders and clinicians those CIOs serve. According to the authors, three success factors distinguish the best IT implementations among healthcare providers:

• Governance with real authority: Involving key stakeholders, such as clinicians and hospital administrators, early in the decision process is critical to ensure buy-in and to inform requirements.
• Radical simplification of architecture: Diverse IT applications and platforms create a significant degree of complexity, raise costs and lengthen implementation time lines.
• Methodical planning and execution: An implementation team should address the IT architecture, standards and changed medical practices in the early planning stages. It’s important not to underestimate the amount of time and due diligence that goes into planning a megaproject.

Hospital management over the next decade will be under pressure to demonstrate an appropriate return for every dollar spent, concluded the authors. “Hospitals that take a system-wide approach to overhauling IT … will be well positioned not only to meet their compliance responsibilities but also to lower their operating costs significantly while improving the quality of patient care.”