Healthcare organizations should consider support costs, upgrade fees, and other long-term costs of EHR systems in determining the total cost of ownership.
At a Glance
- Consider total cost of ownership, not just initial cost of acquisition and annual maintenance, when reviewing electronic health record (EHR) system bids.
- Support costs—a key part of total cost of ownership—include FTEs dedicated to the system.
- The long-term costs of an EHR system can vary dramatically (up to 200 percent) depending on which system is selected.
As the nation’s healthcare system transitions from volume-based payment to a system of payment for value, provider organizations are scrambling to acquire electronic health record (EHR) systems to help improve, track, and report patient health outcomes.
But at what cost?
A September 2012 survey of hospital CFOs by an independent research firm indicates that CFOs rarely construct a total-cost-of-ownership model to independently project total life cycle costs for large capital IT purchases (“Discovering the True Cost of Electronic Health Record Purchases: An Initiative For Hospital Finance and Operations Executives,” Katalus Advisors). This finding and anecdotal evidence suggest that many hospital executives and boards may be considering only the initial cost of acquisition and annual maintenance when they review EHR system bids.
For an EHR system, total cost of ownership includes not only the initial software and infrastructure costs and annual maintenance, but also the ongoing cost of additional licenses, upgrade fees, and support costs including staff FTEs dedicated to the application. Per the survey, these long-term costs can vary dramatically depending on which EHR system vendor a hospital selects, with some systems costing up to 200 percent more than others (see the sidebar below).
Key Drivers of Cost Overruns
Unfortunately, reliably predicting the long-term costs of deploying an enterprisewide EHR system has proven an elusive goal for most hospital CFOs. Two factors—the number of required support FTEs and the fees charged for major software upgrades—are often overlooked but fairly easy to predict. Depending on which EHR vendor a hospital selects, these costs alone can produce a differential of nearly 28 percent in operating margin, or $2.3 million in annual operating costs for the average 350-bed hospital.
For organizations unable to develop complete total-cost-of-ownership analyses vendor by vendor, analysis of required EHR support personnel and upgrade fees provides a good proxy for comparison of ongoing, post-implementation costs.
Support requirements. HIMSS Analytics, the not-for-profit research arm of the Healthcare Information and Management Systems Society (HIMSS), collects a wide variety of information from its hospital members. Here, data sourced from HIMSS Analytics on EHR support staff are used to compare EHR support staff levels for three of the leading EHR vendors—referred to as vendors A, B, and C—after controlling for organization size. These three vendors were selected for comparison based on the size of their acute and ambulatory EHR installed base, their ability to deploy an integrated acute-ambulatory solution, and their leadership in computerized provider order entry (CPOE) adoption within hospitals. The last criterion ensured that compared vendor systems are on par in terms of system functionality and usability.
The HIMSS Analytics data reveal noteworthy findings. Hospitals that operate an EHR system from Vendor C require more than twice as many support staff dedicated to EHR support per 100 beds as similar hospitals operating Vendor A’s EHR system, and two-thirds more than those required to support Vendor B’s EHR system (see the exhibit below).
Based on these data, a 500-bed hospital that selects Vendor C instead of Vendor A can be expected to require an additional 16 FTEs to support its EHR system. Although the cost of EHR support staff varies from place to place, adding 16 FTEs at an annual support staff salary of $100,000, for example, could amount to more than $16 million in incremental costs over a 10-year period.
Current HIMSS Analytics data on specific hospitals’ use of EHR vendors further illustrate this point. Examining a few like-size hospitals by revenue and bed size reveals significant variance between systems from vendors A, B, and C for current EHR support staff (see the exhibit on page 69). The Mountain View, Calif., hospital running an EHR system from Vendor A has one-third the EHR support staff of the Evansville, Ind., hospital running a system from Vendor C. Using the midpoint of its estimated 10-year FTE costs, the Mountain View hospital is saving $24 million in EHR support costs alone.
Upgrade fees. Significant disparities in upgrade fees, especially for major (or full-version) upgrades, exist as well, judging from responses of hospital CFOs in the September survey by Katalus Advisors regarding the three vendors assessed in this article. Because the surveyed CFOs were reluctant to share the actual price of the EHR system they had selected, they were asked to estimate the cost of major and minor EHR software upgrades as a percentage of the original contract price. This approach had the advantage of compensating for differences in pricing between the vendor systems, making the comparison apples to apples.
Per the survey, major upgrade costs for Vendor A’s system averaged between 20 percent and 22 percent of the original contract price; costs for Vendor B’s system averaged between 33 percent and 35 percent of the original price; and costs for Vendor C’s system averaged between 40 percent and 49 percent of the original price.
Reducing EHR Impact on Hospital Margins
Operating margins for hospitals are already thin. For an average 300-bed hospital, operating margins are around 2 percent (Running on Medicare Margins: Restructuring Costs and Building the Care Management Enterprise to Prosper on Radically Lower Pricing, The Advisory Board Company, 2011). Over the next decade, hospitals will contend with multiple forces putting even more pressure on margins.
Choosing an EHR system that requires less ongoing support and lower upgrade fees may provide opportunities to improve operating margins.
Reducing support costs. To estimate the impact of reduced EHR support staff on hospital operating margins, consider a hospital served by Vendor C, with an average of 6.22 EHR support staff per 100 beds. If this hospital had an EHR support-staff ratio closer to that required by Vendor A’s system, it would require only 20 EHR support staff. Based on a conservative total compensation estimate of $75,000 per FTE (including benefits), this hospital could save $1.5 million per year.
Selecting an EHR system that requires fewer support staff also has the advantage of simplifying the search for scarce IT talent. The Office of the National Coordinator for Health Information Technology estimates that an additional 51,000 healthcare IT workers will be needed in the United States over the next few years to satisfy the demand for EHR implementations (HITECH Priority Grants Program/Health IT Workforce Development Program Facts at a Glance). Hospitals, EHR suppliers, and systems integrators are all competing with one another for these scarce workers.
Reducing upgrade fees. Calculating the impact on hospital margins of an EHR system with lower upgrade fees is more difficult. To attempt an estimate, assume a conservative average time frame of five years between major upgrades. Then estimate the average cost of implementing a fully functional acute care EHR system at $10 million per 100 licensed beds, based on a study that placed the average cost for a 500-bed hospital at $50 million (Secrets of Success on the EMR Journey to Meaningful Use: Leading Hospital CIOs Reveal Key Lessons Learned, Accenture, 2011).
Using the HIMSS Analytics data, the average annual revenue of the 75 hospitals in the database that deploy systems created by Vendor C is $382 million. Using The Advisory Board’s average operating margin of 2 percent, the average organization’s operating costs are estimated to be $374 million. Because the sample hospitals already use Vendor C’s system, assume that the operating margin includes the cost of upgrading the EHR software. If one then calculates how much the organization would save if it were to choose Vendor A’s system, which has lower ongoing upgrade fees, the savings a hospital would experience by using Vendor A’s system instead of Vendor C’s could boost its operating margin to 2.46 percent (see the sidebar below left for specific calculations).
Worth the Effort
The bottom line is this: If the average hospital using Vendor C’s system were instead to use Vendor A’s system, the difference in FTE support costs and upgrade fees would deliver an approximately 27.7 percent increase in hospital operating margins—from 2 percent to 2.6 percent. As a result, the average 350-bed hospital in the HIMSS Analytics sample could save $2.3 million a year, or $23 million over 10 years, in ongoing EHR system costs in these two areas alone.
Clearly, the choice of EHR vendor has a dramatic impact on total cost of ownership.
At a time when hospitals find it increasingly difficult to squeeze sustainable margins from Medicare and Medicaid, hospital executives should approach EHR system selection and implementation prudently. Before considering the purchase of an EHR system, they should conduct a thorough total-cost-of-ownership analysis. Doing so can help to avoid significant cost overruns and high ongoing expenses that can present difficult financial situations down the road.
Steven R. Eastaugh, ScD, is a professor of health finance and economics, George Washington University, Washington, D.C. (email@example.com).
For additional information on this subject, see these reports:
Why Support and Upgrade Costs for EHRs Vary Widely
In examining the costs associated with electronic health record (EHR) support staff for hospitals that deployed systems from the three most commonly chosen EHR vendors (A, B, and C), it is clear that the ongoing costs associated with some EHR systems can be higher than others and that a hospital’s choice of vendor can have a substantial impact on its long-term costs and operating margin.
This variation in cost can be traced at least in part to the high number of personnel required to support an EHR system and to the high variation in the cost of software upgrades. But why do support and upgrade costs vary so widely across the different systems? Possible explanations include the following.
Number of EHR modules deployed. Most of Vendor C’s customers deploy a broader array of EHR modules than do customers of vendors A and B. The latter two EHR systems reportedly are easier to integrate with legacy applications, meaning hospitals can maintain existing systems that are already working well. Vendor C’s system, on the other hand, reportedly requires hospitals to replace nearly all legacy systems with the vendor’s own, presumably increasing the need for support personnel.
Availability of outsourced hosting. Vendor C’s EHR system is the only one of the three studied that does not offer its own hosting services, which typically manage all or part of server processing and storage infrastructure in an application service provider model. When hosting services are included, a hospital is able to focus exclusively on clinical and quality issues, leaving the IT support to the EHR system provider and subsequently reducing its own support FTE count. Proponents claim that application
hosting enables hospitals to more quickly and cost-effectively upgrade to newer versions of the EHR system by managing many of the upgrade elements remotely, without taxing the hospital’s support staff.
Market price. The price variation in upgrades costs may simply reflect what the market will bear.
Database type. Vendor C’s system uses a relatively old, non-mainstream programming language. By contrast, Vendor B’s system is built on a mainstream database and programming language, and Vendor A’s system uses a framework that supports multiple mainstream programming languages. The pool of skilled engineers supporting non-mainstream languages is much smaller than for more mainstream programming languages. Thus, recruiting talent to support Vendor C’s EHR system—for upgrades as well as ongoing support—is likely more difficult and expensive than for either of the other two EHR systems. Major EHR system upgrades typically require a short-term infusion of additional FTEs, whether from the hospital or the EHR provider.
How to Calculate the Effect of Lower EHR Upgrade Fees on Operating Margins
The example in the text calculated the effect of the Vendor A system’s lower ongoing upgrade fees, arriving at a new operating margin of 2.46 percent, for a significant margin lift of 23 percent. Following are how the specific calculations were performed:
- Calculations were based on an average bed size of 350 for the 75 vendor C hospitals in the HIMMS Analytics database.
- The $30.5 million original EHR contract price was based on $10 million per 100 beds.
- Five-year upgrade costs are 45 percent of $30.5 million for Vendor C and 21 percent of $30.5 million for Vendor A (0.45 and 0.21 are the midpoints for the Katalus upgrade cost estimates).
Assuming the cost of Vendor C is to be built into the hospital’s operating costs, taking the difference between Vendor C and Vendor A fees and dividing by 5 years equals $1,433,500. Subtracting that figure from operating costs of $374 million produces a new operating margin of 2.47 percent, which is 23 percent greater than the average operating margin of 2 percent.
Publication Date: Friday, February 01, 2013