Two recent examples underscore the high cost of failing to carefully estimate and manage total cost of ownership when implementing an electronic health record (EHR) system.

In 2004, a large California healthcare provider announced a $154 million, two-year program to implement an integrated inpatient-outpatient EHR system for all of its 24 hospitals and 5,200 physicians. Three years later, the provider suspended the implementation after spending an estimated $500 million to deploy the EHR system in just one hospital and for several hundred physicians. In the process, it laid off 150 employees dedicated to the project. In a letter to employees at the time, executives explained that they could no longer afford to fund employee pensions and also continue with the implementation.

Then, in 2010, the health system restarted the implementation and hired back many of the people it had let go. In 2012, its CEO projected the entire cost of the still-incomplete project “right at $1 billion.” At the same time, he announced that the health system needed to cut up to $900 million from its budget through layoffs, suspension of automatic raises, and other means (Rauber, C., “Sutter Prepares to Turn Its Ship to Lower Costs,” San Francisco Business Times, Jan. 13, 2012).

In another example, a major academic medical center, also in California, spent a reported $100 million to purchase an integrated EHR system for its 613-bed hospital and 493 faculty physicians. The organization’s chief information officer reported that the implementation costs used up 30 percent of the medical center’s total available capital in each year of the implementation (Van Susteren, E., “Switch to Electronic Records Takes Bite out of Hospital Budgets,” Silicon Valley/San Jose Business Journal, Aug. 19, 2011). According to another executive, more than 75 percent of the implementation budget was spent on project staffing (“EMRImplementations: The Good, the Bad, and the Ugly,”). The chief information officer added that the annual cost of maintaining and supporting the EHR system currently equals 5 percent of the system’s total revenue, equal to just over $100 million a year.

If these examples were anomalies, they could easily be attributed to individual leaders’ poor management. But the cost of major acute care EHR implementations seems to continue to rise. Consider announcements from Duke University Health System in Durham, N.C., and Partners HealthCare in Boston that they plan to implement enterprisewide EHR systems for the staggering sums of $700 million and $600 million, respectively.

The costs of these systems are excessive not only for health care, but also compared with other industries’ costs to implement and support major information systems (Poston, R., “Financial Impacts of Enterprise Resource Planning Implementations,”International Journal of Accounting Information Systems, December 2001). 

The timing of these investments could not be worse for an industry already struggling to absorb increased capital spending due to new rules in the federal Affordable Care Act and changes in Medicare reimbursement. Not surprisingly, 85 percent of hospital executives say they are worried about how they will pay for the initial investment and ongoing cost of EHR systems, according to a 2011 survey (Lewis, N., “Costs, Training Top Hospital EHR Concerns,” InformationWeek, March 14, 2011). Even with the assistance of federal HITECH incentives, which have compensated U.S. providers billions of dollars for adopting EHRs systems, healthcare organizations cannot afford hefty cost overruns.

And even after spending significant and often exorbitant amounts of money and time implementing EHR systems, are the nation’s leading healthcare organizations satisfied with the results?

Are They Getting What They Paid For?

By at least one account, the California medical center mentioned above did not achieve its goals with its EHR system. Its chief medical officer told a gathering of students in 2010 that the program had achieved just 25 percent of what he thought it would achieve (“EMR Implementations: The Good, the Bad, and the Ugly”). Although the institution had invested a “staggering” amount of money to reach “go-live” with the system, he said, it had not properly invested in optimizing the system to improve the quality of patient care. Similar accounts of EHR system buyer’s regret are common.

Of course, for every example of poor value returned, many organizations contend they have received a fair ROI from their EHR system. For example, in 2009, a large not-for-profit hospital in the New York region implemented a fully integrated inpatient and ambulatory EHR system for its 958-bed hospital and 550 employed physicians. With 700,000 annual ambulatory visits and 130,000 emergency visits, the hospital might have expected to spend up to $100 million for an enterprisewide, integrated EHR system. 

Instead, the hospital’s CFO said the hospital spent about $35 million, including major applications not typically associated with an EHR implementation, such as access management, enterprise scheduling, outsourced IT services, and clinical analytics (author interview, 2012). Moreover, the hospital needed just 22 new FTEs (most provided by the EHR system supplier) to complete the implementation—yet another contrast with EHR implementations at comparably sized institutions, which often require hiring dozens more FTEs.

The entire project was finished in 12 months. Only eight ongoing support FTEs are dedicated to the EHR system. And the cost of the latest major software upgrade (a full version update) totaled just over 1 percent of the original contract price.

Why was this hospital able to implement a fully functional inpatient-outpatient EHR at a fraction of the cost of others? For one, it simply could not afford to implement a vastly more expensive EHR system. As a not-for-profit institution dependent on Medicare and Medicaid for 90 percent of its revenue, the hospital was constrained by its budget to find the most cost-effective solution possible. Another explanation is the hospital’s reliance on application outsourcing, which may explain the low number of support FTEs and the exceptionally affordable upgrade costs.

Despite the relatively low cost of its EHR system compared to other organizations of its size, this hospital’s CFO believes the organization achieved fair value. The EHR system met the hospital’s goal of “connecting our providers across the continuum with real-time information on one database,” he said. Moreover, the hospital’s clinical analytics solution, provided by and integrated with its EHR environment, enables it to extract and analyze data from the EHR system, and report to the Centers for Medicare & Medicaid Services the outcomes for all 15 quality measures required for Stage 1 meaningful use under HITECH. The hospital also uses the solution to analyze clinical data across the enterprise, looking for trends that help it improve care for the most common chronic diseases.

The lesson learned from this particular not-for-profit’s experience is that planning ahead—for total cost of ownership instead of just initial acquisition and infrastructure costs—can really pay off. 

For more information, see Steven Eastaugh's " The Total Cost of  EHR Ownership", hfm, February, 2013 

Publication Date: Friday, February 01, 2013

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