When traditional funding sources for EHR implementations fall short, healthcare finance leaders should not lose hope: Alternative funding sources abound for these critically important undertakings.
At a Glance
- The meaningful use incentives under HITECH may be inadequate to address the financial challenges many hospitals face in implementing electronic health records (EHRs).
- Hospitals can fill the capital gap between EHR costs and available funds by exploring other potential funding sources.
- These sources include additional grants, funding permissible under EHR regulations, vendor financing, and tax benefits under IRS Section 179.
The 2015 deadline for meaningful use of an electronic health record (EHR) is fast approaching. EHR adoption, however, has not proceeded as smoothly or swiftly as planned. In a June 2012 survey, 51 percent of respondents identified financial concerns as their primary barrier to EHR adoption.a
To overcome financial barriers, the Health Information Technology for Economic and Clinical Health (HITECH) Act incentive program provides $19.2 billion to qualified hospitals and physicians. A 2011 survey by the American Hospital Association (AHA) found that more than 95 percent of hospitals had an interest in participating in the Medicare and Medicaid EHR incentive program.b
Hospitals that look to the incentive program only as a financial resource, however, face some problems. First, the AHA survey found that fewer than 2 percent of hospitals met the specific requirements of meaningful use and had a certified EHR, which means many healthcare organizations will not be qualified for the HITECH incentives. Second, the HITECH Act incentives to Medicare physicians total $44,000 per physician for adopting an EHR and showing meaningful use, yet a survey conducted in 2004 found that the average initial EHR cost was $44,000.c And the current cost of a qualified EHR is bound to be higher because of inflation and meaningful use technology requirements. Thus, the HITECH incentives, which were signed into law in 2009, will not be enough to cover the current expense of acquiring and implementing a qualified EHR.
Moreover, since the economic slowdown in 2008, the ratings agencies have downgraded more hospitals than they have upgraded, making it more difficult, or even impossible, for many hospitals to access traditional financial resources, including bonds, bank loans, philanthropy, and equity and venture capital.d
So despite the federal subsidy, many hospitals and physicians continue to fret about costs.e Hospitals can fill the capital gap between EHR cost and available funds by exploring other potential funding sources, including additional grants, funding permissible under EHR regulations, vendor financing, and tax benefits under IRS Section 179.
Besides the HITECH incentives, other opportunities for federal grants exist at different levels for various types of healthcare organizations.
The easiest approach to identifying federal grants is to search online at grants.gov, a website that is updated frequently to accommodate the needs of grant seekers. This website is an excellent resource for information not only on funding alternatives offered by the U.S. Department of Health and Human Services (HHS)—the largest organization providing government grants for EHR implementation—but also on how healthcare providers can qualify for these grants.
Rural hospitals may access the Rural Development Community Facilities Program administered by the U.S. Department of Agriculture (USDA) for low-cost loans to fund EHR acquisition and implementation. Other USDA sources of funding support include community-based initiatives such as the Community Facilities Direct and Guaranteed Loan Program, Community Facility Grants, and the Rural Community Development Initiative. Rural community health centers also can apply for grants under the Capital Improvement Program administered by the Health Resources and Services Administration as provided for under the American Recovery and Reinvestment Act.
At the state and local level, many states and cities sponsor grants for EHR adoption programs, such as South Carolina’s Center for Technology Implementation Assistance, and New York City’s Primary Care Information Project.
Many independent private foundations—including the Robert Wood Johnson Foundation, Annenberg Foundation, Carnegie Foundation, Bill and Melinda Gates Foundation, John A. Hartford Foundation, and W. K. Kellogg Foundation—have sponsored various kinds of health IT or EHR projects, and they may make similar grants available in the future. Healthcare finance leaders should keep informed of such opportunities.
Hospitals and health systems should consider hiring grant writers to assist them in applying for public and private grants. Grantors operate under a specific set of rules and expectations. Likewise, grant writing calls for skills that may not be part of a healthcare leader’s core skill set. Some vendors provide grant-writing services to help healthcare organizations obtain funding to purchase their products.
A major concern of grant-funded programs is the continuity of the sponsorship. Most grantors require that beneficiaries provide annual progress reports to determine whether a grant will continue after the initial period. Therefore, it is important for hospital grant recipients to adhere closely to the project schedule submitted to the grantors.
Misalignment of incentives also poses a problem for hospitals: Although hospitals bear the cost of EHR implementation, payers reap financial benefits from any ensuing cost savings.f Thus, it is reasonable for hospitals to expect insurance companies to share the responsibility for EHR adoption. Indeed, virtually every major health insurer has some sort of incentive program for physicians and medical groups to adopt EHRs and/or meet the meaningful use requirements.
Incentive programs vary from insurer to insurer. For example, a 2009 study cites an Ohio medical practice that negotiated a 50 percent reduction in annual premiums (from $400,000 to $200,000 per year) on the basis of having adopted an EHR.g Pittsburgh-based Highmark encourages primary care physicians to adopt EHRs and e-prescribe through a $29 million Health Information Technology Grant Program
The EHR Stark law exception and the safe-harbor for EHRs under the anti-kickback statute are collectively known as “the EHR regulations.” The Stark law and anti-kickback statute prohibit a physician from referring federal healthcare program patients for “designated health services,” including clinical laboratory services and hospital services, to an entity with which the physician has a financial relationship, including receiving remuneration. These regulations were relaxed in 2007, however, as policy makers recognized that collaboration was vital to adoption of EHRs.
The EHR regulations allow a hospital to provide physicians with EHR products and services as long as certain requirements are met.
Specifically, the donation must be in the form of software or IT and necessary training and support services, and it must be used predominately to create, maintain, transmit, or receive an EHR. Also, donated software must contain an electronic prescribing capability.
Other requirements are as follows:
- Hardware and staffing are not permitted.
- The software must be interoperable.
- The donor may not take any action to limit or restrict the use, compatibility, or interoperability of the items or services with other prescribing or EHRs.
- The donor may not limit the physician’s use of the donated EHR with respect to any patient, regardless of payer status.
- Before receiving the donation, the physician must pay at least 15 percent of the donor’s cost.
- The donation must include a written, signed contract.
- The physician may not already have equivalent items or services, either with or without the donor’s knowledge.
- When determining a physician’s eligibility, the donor must not include the volume or value of referrals or other business between the parties among its direct considerations.
- The physician must not place any conditions on the receipt of the items or services.
- The donor may not shift the costs of the items or services to any federal healthcare program.
The EHR donation safe harbor to the Anti-Kickback Statute also provides that such transactions must be completed by Dec. 31, 2013. The Health Information and Management Systems Society (HIMSS) has recommended that the safe harbor be made permanent, but no official indication of the current expiration deadline is available.h Physician practices that wish to take advantage of the exceptions should consider doing so before the current deadline. Both hospitals and physicians should discuss any such plans with legal counsel before acting.
The EHR regulations restrict the approaches for making such donations to two implementation models.
Model 1: Hospital-hosted EHR. Under this approach, a hospital may organize all medical staff who would like to implement a qualifying EHR in their private practices. The hospital then selects one or more EHR vendors as candidates and, on making its final choice for a vendor, negotiates terms under which the physicians may purchase the EHR from the vendor. This approach gives the hospital leverage to bargain with vendors as a collective block. The hospital must host the EHR at its data center, and all participating physicians must pay at least of 15 percent of the cost for the end-user license to use the EHR.
Model 2: Turnkey EHR. With this model, the hospital simply pays the vendor up to 85 percent of the EHR cost for physicians who are interested in implementing a qualifying EHR. The payment can be made via a one-time stipend or from a special funding pool. In either scenario, the hospital must establish criteria for determining a physician’s eligibility to receive the payment.
Almost all vendors offer finance options. An article in the Winter 2010 issue of the Journal of Healthcare Information Management provides excellent insight into this type of purchase.i Authors Steven Fox and Vadim Schick note: “Vendor financing may seem like a win-win proposition for the vendor and the healthcare provider…. [H]owever, such deals are often created with an unusually distorted balance of power between the vendor and customer, with the vendor gaining significant leverage from financing the transaction.” They suggest that in a vendor-financed transaction, providers should consider four areas of concern:
- Warranties that meaningful use will be achieved and providers will qualify for incentives under the American Recovery and Reinvestment Act (i.e., whether such warranties can be trusted)
- Testing and acceptance provisions
- Financing, pricing, and payment terms
- Termination rights
Another vendor-financed purchase option is to lease an EHR from an application service provider (ASP). The obvious advantage of this approach is its low up-front cost. Another advantage is that the leasing experience can help providers get a better sense of the EHR before making a purchase decision.
However, the leasing model also poses some disadvantages. First, leased EHRs may have limited ability to customize applications for specific organizational needs. Second, providers have no access to or possession of their data, giving ASPs greater leverage in the event of unexpected disputes. Moreover, because the ASPs have possession rights, the providers lack any control over data security, raising a significant HIPAA compliance risk. Last, the ongoing cost in leasing will be higher.
IRC Section 179
Section 179 of the Internal Revenue Code (IRC) can provide for-profit healthcare providers with immediate tax benefits. The Section 179 deduction allows an entity to immediately deduct an EHR investment rather than depreciate the investment over time. However, Congress revises the permissible amount of the deduction annually. On Jan. 2, 2013, as part of the American Taxpayer Relief Act of 2012 (ATRA), Congress raised the Section 179 deduction amount to $500,000,
with a cap of $2 million in 2013 for all qualified business property that an entity purchases during the year, including new or used equipment and certain software. If an entity purchases more than $500,000 in equipment, it may expense the first $500,000, then depreciate the rest.
Exhibit 3 highlights the unpredictable nature of the deductible limit by showing how it has changed over the 12-year period from 2002 through 2013. Before the ATRA became effective, Congress had set the Section 179 deduction limit for 2013 at $25,000. Yet, as noted, the Section 179 deduction limit for 2013 is currently $500,000. The exhibit on page 91 illustrates the variability of Section 179 benefits by calculating tax savings under different deduction limits in 2013.
As shown in the exhibits, a physician practice may enjoy a tax savings of $110,833 in 2013 using the $500,000 deduction currently allowed under Section 179 compared with the $25,000 deduction limit that was in effect prior to ATRA. This advantage underscores the importance of taking advantage of the Section 179 deduction when favorable tax provisions are available.
Certain limitations apply with this approach with respect to computer software.
First, the “bonus depreciation” in Section 179 does not apply to software. (For details about the bonus depreciation as provided for under ATRA, go to hfma.org/hfm.)
Second, computer software is generally regarded as an intangible under the IRC’s Section 197 (as distinct from Section 179) and cannot be depreciated. But the intangible designation does not apply and the software may be depreciated as long as it meets three tests:
- It is readily available for purchase by the general public.
- It is subject to a nonexclusive license.
- It has not been substantially modified.
Hospital leaders should consult with their tax professionals and vendors to ascertain that the software meets these tests. Assuming depreciation is permissible, the straight-line method should be used, over a useful life of 36 months. j
EHR adoption by the nation’s hospitals and health systems is critical to establishing the foundation for value-based payment and accountable care. Yet the industry’s efforts to achieve this goal are hampered by the inadequacies of HITECH incentives and the difficulties of accessing traditional financing sources for EHR implementation. Healthcare finance leaders should explore alternative financing sources as a means of facilitating and expediting adoption of EHRs.
Meanwhile, healthcare leaders should support public policies that extend regulations favorable to EHR adoption, such as the EHR regulations and the IRS’s Section 179, and to formulate new regulations that will better define the roles payers and large employers should play in accomplishing this important national goal.
Tiankai Wang, PhD, is assistant professor, health information management department, Texas State University, San Marcos, Texas.
Yangmei Wang, CPA, is an instructor, accounting/MIS department, Dillard College of Business Administration, Midwestern State University, Wichita Falls, Texas.
Sue Biedermann, RHIA, FAHIMA, is chair and associate professor, health information management department, Texas State University, San Marcos, Texas.
a. National Council for Community Behavioral Healthcare, “HIT Adoption and Readiness for Meaningful Use in Community Behavioral Health: Report on the 2012 National Council Survey,” June 2012.
b. American Hospital Association, “Survey on Hospitals’ Ability to Meet Meaningful Use Requirements of the Medicare and Medicaid Electronic Health Records Incentive Programs,” Feb. 7, 2011.
c. Miller, R. H., West, C., Brown, T. M., Sim, I., and Ganchoff, C., “The Value of Electronic Health Records in Solo or Small Group Practices,” Health Affairs, September/October 2005.
d. See, for example, Herman, B., “Moody's: Record $20B of Non-Profit Healthcare Debt Downgraded in 2012,” Becker’s Hospital Review, Feb. 12, 2013.
e. Lewis, N., “EHR Implementation Still Costs Too Much,” InformationWeek, July 9, 2012.
f. Ash, J.S., and Bates, D.W., “Factors and Forces Affecting EHR System Adoption: Report of an ACMI Discussion,” Journal of the American Medical Informatics Association, January-February 2005.
g. Jarvis, C.W., “Investigate Funding Alternatives to Support Successful EHR Implementation,” Medical Practice Management, May-June 2009.
h. See HIMSS letter to Daniel Levinson, JD, Feb. 28, 2011, .
i. Fox, S.J. and Schick V., “Negotiating Contracts for Vendor-Financed Purchases of EHR Systems,” Journal of Healthcare Information Management, Winter 2010.
j. Internal Revenue Service, “Overview of Depreciation”.
Publication Date: Wednesday, May 01, 2013