Strong Medicine

Can a $19 billion spoonful of sugar help doctors swallow the cost of going digital?
Josh HyattMay 1, 2009

There is a ray of hope for CFOs who would like to upgrade the condition of corporate health-care plans from “critical” to “stable.” Boosted by a substantial injection of cash from the federal stimulus bill, electronic medical records may help relieve the pain of rising premiums by improving efficiencies in the medical system.

The $787 billion stimulus bill, which President Obama signed into law in February, included $19 billion aimed at offering incentives to hospitals and physicians to replace their tattered manila folders with electronic systems that store patient records. The goal is to improve coordination among health-care providers and make the data easily accessible to doctors, nurses, and lab technicians. Today, the major vendors of such programs take proprietary approaches to electronic medical records (EMRs) — also sometimes referred to as electronic health records — that prevent or inhibit one system from talking to another. Part of the legislation aims to break down that barrier by assigning responsibility for setting interoperability standards to the Department of Health and Human Services, which must issue criteria by the end of the year.

The idea of computerizing medicine is hardly new. President George W. Bush, for instance, hailed its arrival in 2004, vowing that every American would have an EMR by 2014. But doctors have been slow to swallow that prescription. The return on investment in EMRs, after all, mainly benefits insurance companies and the government. Why would doctors — who would reap around 10% of the savings — spring for the upfront costs, not to mention the requisite training and potential disruption to daily operations? Now, thanks to the stimulus bill, there’s a clear answer: they’ll make less money if they don’t do it soon, and if they put it off for too long they’ll actually lose money.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

Beginning in 2011, physicians deemed to be “meaningful users” of EMRs — that is, fully automated and conforming to standards that have yet to be set — will be eligible to receive between $44,000 and $64,000, paid out over five years in the form of increased Medicare and Medicaid payments. Those who start sooner, in 2011 or 2012, will be able to receive bigger first-year incentive bonuses ($18,000) than those who start later. Incentives for hospitals start at $2 million annually, and include additional money based on Medicare-patient volume. But come 2014, the payments disappear, and in the following year the stimulus reverses direction: physicians and hospitals that have failed to institute an EMR system will see reimbursements for government-financed care decrease by 1% a year, reaching a maximum of a 5% reduction by 2020.

Hospitals also have another new incentive. As of last year, 23 states had passed laws declaring that Medicare will no longer reimburse hospitals for avoidable medical errors, known, curiously, as “never events,” such as amputating the wrong limb. Some private insurers have followed suit, adding a similar provision to their contracts. A move to electronic recordkeeping should safeguard hospitals against such expensive, reputation-mangling errors, reducing malpractice suits and facilitating more preventive care. “Human beings make mistakes,” says Rick Jung, chief operations officer of Medsphere Systems, which markets open-source health-care software by subscription. “So the hospitals with EMRs have a big advantage.”

Positive Side Effects

Just as technology streamlined industries like retailing and financial services, it should create efficiencies in health care that will slow premium growth from its traditional annual rate of about 7%. Malpractice insurers have already linked electronic systems with better-quality care; some will reduce premiums by as much as 5% for doctors who have gone digital. “If the overall cost of medical care goes down because we are managing those costs better, then in theory premiums ought to go down,” says Chuck Orlando, senior vice president and CFO of LifeBridge Health, a nonprofit that runs two acute-care hospitals in Baltimore. “It’s a competitive industry, so you would expect that.”

Once small practices and big hospitals have shifted to a reliable electronic platform, health plans may be able to look for patterns in the data, using it to assess the cost-effectiveness of different treatments. Such an aggregated database could also be used to advance the cause of “evidence-based medicine” and to set performance goals for doctors. “EMRs capture and analyze data instantaneously at the point of care, which can then be processed and supplied to providers,” notes Ed Dallwein, CFO of CareTech Solutions, a supplier of health-care IT and information-management solutions.

As one result, the government and insurers may change how they reimburse health providers, and may set benchmarks for different aspects of a patient’s care. CFOs and insurers may agree, for instance, to reimburse 85% of a hospital’s fee, using the data to back up their conclusion that some steps in a patient’s surgery yielded suboptimal results. “CFOs are going to have to become literate about clinical processes because payments are going to be based on breaking down the various clinical processes and rewarding the outcomes,” predicts Paul Keckley, executive director of the Deloitte Center for Health Solutions.

As EMRs are phased in, “you’ll see payments flowing according to qualitative measures of performance,” notes Jung. “The basic principles of business and the market-economy will start to show up, and incentives will follow.” Automation will make it much easier for insurers and others to find — and understand — the documentation that doctors and hospitals use to justify billing.

Doctors will likely find their work being tracked more closely. “Health plans have been putting doctors under more and more scrutiny, to evaluate how we are doing,” says Dr. Arnold Pallay, a family physician who is medical director of Changebridge Medical Associates, a four-doctor practice in Montville, New Jersey. “With computerization, they will be able to do that much more thoroughly. For us, the handwriting — however messy it may be — has long been on the wall.” An early adopter, Pallay has been using an EMR system for eight years.

A Leap of Faith

But if insurers do pass on the savings resulting from improved recordkeeping — and that’s a big if — it won’t happen any time soon. According to a study published this year in The New England Journal of Medicine, only about 9% of the country’s 5,000 hospitals and just under 20% of its 800,000 physicians use computerized recordkeeping. Rand, the nonprofit think tank, estimates that when 90% of health-care providers use such systems, the savings will amount to $77 billion a year. Rand’s best guess as to when participation will hit that mark? 2019. “The end-goal is good,” says Stefanos Damianakis, CEO of Netrics, a maker of software for managing electronic records. “But there are going to be many challenges in getting there.”

Indeed, hospital CFOs might do well to keep a portable defibrillator handy as they begin to evaluate the expense. LifeBridge Health has spent approximately $50 million over the past decade implementing EMRs and other clinical information technologies. Karen Barker, vice president and chief information officer, refers to the EMR decision as a “leap of faith” that, as it now turns out, should qualify the company for a payback from the government of at least $20 million over four years. “Hospitals that start now probably won’t be in a position to maximize the incentive,” she says. “It has been quite a journey for us.” Even a physician who qualifies for all of the incentives will have to spend roughly $14,000 a year for five years, according to a study by consulting firm Avalere. The maximum penalty, on the other hand, would amount to $8,500 per year.

Wendy Dorchester, CFO of two southern California hospitals within the MemorialCare system, says that prior to the launch of an EMR system earlier this year, ROI calculations of such a move showed some modest financial benefit. However, she says, “we all felt there would be savings we just couldn’t quantify, and that we needed to move forward to get the right technology in place, not for the ROI, but for patient safety and quality of documentation.” Just a few months after making the shift, she estimates that the system has saved $1 million in transcription, filing, and storage costs. She expects that figure to double next year — as, for example, instances of duplicate testing drop by about 5%.

Resistant to Treatment?

Any CFO who has ever led a companywide software rollout or other major organizational change will empathize with the task hospitals face in getting physicians — many of whom are not employees — to join the movement to electronic records. Given doctors’ need to treat patients, how many have time for the training, the three-to-six-month implementation process, and the fiscal burden of it all?

More than 50% of doctors belong to groups with no more than three physicians. For small practices like these, the price of implementing an EMR system could reach nearly $40,000 per physician — well above the overall average of about $33,000, according to the Agency for Healthcare Research and Quality. General practitioners, whose margins have already narrowed like plaque-clogged arteries, don’t typically have the capital budgets required. The government money will help (as might Wal-Mart, which announced plans to sell a system that will cost $25,000 for the first physician and $10,000 for each additional doctor). But LifeBridge’s Barker says that the best way for hospitals to sway doctors isn’t by using an economic argument. “Find a shared goal,” she advises. “Talk about improving patient outcomes.”

Doctors may respond well to that kind of pitch, but many experts suspect that a sizable percentage will, in fact, get in touch with their inner CFOs and adopt EMRs for profitability’s sake. The prospect of lower malpractice premiums, federal subsidies, and greater efficiency could be enough to inspire new enthusiasm for a far-from-new idea. “If it means they will get paid more, physicians will love it,” says Martin Watson, chief executive of health-care technology provider Triveris. CFOs, too, may soon develop an affection for EMRs — especially if the technology proves to be an antidote to soaring health-care premiums.

Josh Hyatt is a contributing editor of CFO.

For a look at how important it is to include health-care reforms in the economic-stimulus package, click here.

Stealing Your Pain

Right now, anyone who wants to read your medical records probably has to break into a file cabinet and — far more daunting — attempt to read a physician’s handwriting.

Surely electronic medical records (EMRs) will have more-sophisticated ways of keeping intruders away. But will firewalls and encryption be enough? Not necessarily, says James McCartney, an identity-management and privacy consultant at BearingPoint. “Are your records secure where they are now, on paper and filed away?” asks McCartney. “No. But in some ways, they will be more accessible and less secure online. We can’t get rid of the breaches and the thefts, but we have to minimize them by setting high standards for protecting online medical records.”

While the Health Insurance Portability and Accountability Act does address some facets of electronic recordkeeping, additional standards have yet to be spelled out by the government. In addition to identity thieves, who might use information they dig up to submit phony billings, “inadvertent disclosures of sensitive medical data” are also a concern, according to Eric Johnson, a professor of management at Dartmouth’s Tuck School of Business. Johnson conducted a study last year in which he spent two weeks testing how much patient information he could get simply by using peer-to-peer file-sharing networks such as Morpheus.

His conclusion: too much. His haul of barely buried treasure included, for example, data from 9,000 patients — including Social Security numbers, treatment codes, and insurance details — from a single medical lab. He retrieved one spreadsheet with 82 columns of data covering roughly 20,000 patients. “Once we opened that digital door, and a hard drive was exposed, we found all kinds of frightening things coming out of the health-care system,” says Johnson.

Health-care attorney Lori-Ann Rickard, managing partner of Rickard & Associates, handled a case in which a teenager’s medical records were leaked, allowing his classmates to learn of his HIV-positive status. But Rickard, like Johnson, believes that the government’s EMR push will create better safeguards. “With most new technology systems, it takes a while to get the kinks out,” she notes. “So right now, most of what we are seeing are kinks.” — J.H.