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The next IT in health care

Sophisticated information technology is a must-have for health care organizations.

January 1, 2007


Ron Wirtz Editor, fedgazette
The next IT in health care

Some of the most expensive capital projects in health care today have nothing to do with hard hats because there are no bricks or mortar. No clean white lab coats either, or fancy diagnostic machines that can look through you easier than Superman. Rather, they involve the electronic veins and nerve center of a medical facility in the 21st century.

Information technology has always been a part of capital spending. But today, both the increasing complexity of health care and the sophistication of software applications are making IT a must-have for health care organizations.

For a long time, IT was relegated to back-office assistants, helping with administration and finances. Now IT is bedside, applicable to all phases of the care model, assisting with order entries from doctors, keeping medical records up to date and accessible, and sharing that information with any health care provider who might need it on your behalf.

IT makes life easier and harder for the average hospital or clinic. Easier because sophisticated IT systems allow for better, more efficient care; in particular, hospitals that replace or upgrade outmoded systems can realize dramatic improvements in productivity. But IT makes life harder as well, because it has become a must-have item on an already long capital wish list. And we're not talking about a few hundred bucks for the next version of Microsoft Windows.

IT spending appears to be growing, though by how much is mostly guesswork; neither governments nor industry associations track the matter very closely. And despite the wealth of applications, they're integrated into health care facilities unevenly. That's because IT competes with more traditional capital investments like buildings and medical equipment. Given tight operating margins at many hospitals, IT spending is often cut because IT is considered a luxury, not as important as updating other facilities and equipment.

Hey, big spender

Reports by industry consultants suggest that health care IT spending rivals investment in buildings and equipment. IT spending by hospitals was estimated to top $31 billion nationwide last year, up from $19 billion at the start of the decade, according to the Dorenfest Group, a health care consultant. That spending is expected to keep growing, as new generations of software enable picture archiving, order-entry systems and other applications. Last year, Datamonitor estimated that health care providers will spend $40 billion on IT by 2008, with 7 percent annual compound growth between 2005 and 2010. A survey of health care executives by PricewaterhouseCoopers found that more were devoting a larger share of their capital budgets to IT projects.

IT vendors such as Epic Systems, a software company that specializes in medical records and other applications, have capitalized on this increased spending. The company (which declined to comment for this article) has grown from about 60 employees in 1993 to about 2,400 today and recently moved into a new $150 million campus outside Madison, Wis.

One of Epic's clients is Gundersen Lutheran of La Crosse, Wis. CEO Jeff Thompson said health care providers contemplating IT investments commonly encounter two big obstacles. One is cultural: Investing in IT requires organizational change—people have to adapt the way they work to fully utilize the technology's capabilities. For example, changing from handwritten charts and medical orders to the electronic equivalent requires doctors (particularly older ones) to shed a lifetime of habit.

The other? "It's expensive as hell," Thompson said. Still, the organization has taken the plunge. A decade ago, Gundersen's capital IT budget was less than $2 million a year; today it's $12 million, according to chief information officer Deb Rislow.

Where that money goes is indicative of the new IT role in health care. In the average year, Rislow said, half of the capital IT budget goes to clinical documentation systems, while 30 percent goes to IT infrastructure and the remainder to business and financial systems. That shift in IT priorities at Gundersen started about eight years ago when it began implementing an electronic health records system. The latest add-on is an inpatient documentation system that will cost an estimated $10 million over two to three years.

And that's just the capital investment side. On the operations side, Gundersen will spend about $8 million this year just for software and hardware licenses and maintenance. That figure doesn't include other major IT operating expenditures like staff salaries or supplies.

For small rural hospitals like Mountrail County Medical Center in Stanley, N.D., cost can be a huge obstacle. Though the facility is only a few years old, the organization is still looking to modernize its IT capabilities, particularly an inefficient admissions and billing system, according to CEO Mitch Leupp. But at a cost of at least $650,000, "we're not sure how we're going to fund it," Leupp said. An additional $65,000 for annual upkeep was also hard to justify given the facility's $2 million operating budget, he said.

Still, he added, "given our current situation with our software, we don't see that we have a choice. We need a different IT solution, especially for the hospital." So the organization, like many of its rural peers, has had to get creative. Leupp said the organization appears likely to receive grants to help defray costs, including a network grant among three organizations that would share as much as $180,000 annually for three years.

Several sources noted that large, integrated health care providers can manage IT expenditures more readily because they can spread costs among many facilities, and total costs on a per patient basis are lower because of the system's economy of scale.

That's what's happening at Avera McKennan, which operates a major hospital and clinic along with specialized care centers in the Sioux Falls, S.D., region. The organization is in the midst of a multiyear, $36 million project to install an electronic patient record system that will convert existing business and clinical applications "to a consistent and standardized platform and structure" so data can be used fluidly by staff at the hospital, clinic or other sites, according to Ron Farr, senior vice president of finance, who responded via e-mail.

The next generation of IT

Though IT investments have to battle tight budgets and more traditional capital projects for favored status, demand for next-generation IT will only become more urgent over time. Already, the lines between IT and medical equipment are starting to blur, according to Farr. "We are finding that almost all new medical equipment and technology are so integrated into IT that it's getting hard to really categorize the project as IT, equipment or otherwise."

Interoperability is the new buzzword. Simply, it refers to the ability of software and hardware systems to share data. Avera McKennan's current project is a small-scale version of interoperability. Ultimately, health care executives and politicians alike have much bigger information-sharing visions: data flowing not just within a single health care organization, but among all health care entities nationwide and even globally.

Interoperability is exceedingly difficult, even within a single organization where different facilities and departments—pharmacy, clinic, radiology, billing, admissions—have unique needs and different software systems. Patching them seamlessly together can be akin to electronic surgery.

A currently passive but potentially critical driver of IT spending in the future is government. In 2004, for example, President George W. Bush pledged to help establish an interoperable system of health records. Such a system, it's been estimated, could cost upward of $300 billion. Even states are offering small incentives: In Wisconsin, Gov. Jim Doyle has pledged $10 million in his next budget for grants and loans to help health care systems replace paper records with the electronic version.

Ron Wirtz
Editor, fedgazette

Ron Wirtz is a Minneapolis Fed regional outreach director. Ron tracks current business conditions, with a focus on employment and wages, construction, real estate, consumer spending, and tourism. In this role, he networks with businesses in the Bank’s six-state region and gives frequent speeches on economic conditions. Follow him on Twitter @RonWirtz.