A new hospital information system (HIS) is often the single largest purchase a hospital ever makes, outside of a new building. Unfortunately, even though the cost of computers has been dropping over the past few years, the cost of installing systems has grown alarmingly. Today implementation fees often make up the largest portion of an HIS's costs, frequently equaling or exceeding software license fees.
To better respond to shifting HIS cost dynamics, healthcare executives need to understand the growing importance of implementation fees and develop effective strategies to account for such implementation costs within the context of a financially savvy selection and negotiation process.
Growing Costs of Implementation
To study the dramatic shift in costs for an HIS, we examined more than 400 proposals submitted by vendors to over 100 hospitals that our organization assisted in selecting systems over the course of 12 years. In 1990, implementation fees represented less than 20 percent of the typical vendor's bid, while hardware and software constituted the majority of costs. By 2002, implementation fees grew to become as great or greater than software costs, while hardware dropped to less than 20 percent of the total.
Also notable is that the total cost of system implementations is sometimes higher than software license fees. Hospitals also routinely incur large internal costs for overtime, use of temporary employees, and travel to fly employees to the vendor's headquarters for training. In addition, many hospitals still employ consultants for large sums above these figures, so system implementations today easily represent the majority of HIS costs. Several influences have contributed to rising implementation costs. In many instances, vendors are increasing these fees because they see the money that consulting firms are making on their system implementations. Also, they have noticed that hospitals are more likely to evaluate costs associated with software and hardware than system implementation.
Since implementation costs have grown to be such a large portion of an HIS's total costs, hospitals should carefully analyze and evaluate each vendor's fees. Currently, most hospitals follow a relatively rigorous system selection process, retaining consultants to lead the information system and end-user departments through a careful evaluation of competing systems' features and functions. Some hospitals still issue voluminous feature checklists attached to requests for proposals (RFPs), even though experience has shown that the vendors' proposals tend to exaggerate the system capabilities. Many hospitals also employ elaborate checklists for end users to verify system performance through telephone reference calls, review of vendor user manuals, and unchaperoned site visits.
By investigating beyond the RFP, a hospital can be reasonably sure it will get the features it is being sold. However, to be absolutely sure about what services the vendor will actually deliver for the large implementation fees, it's equally important to consider the following points.
Require vendors to submit detailed implementation work plans with their proposals and review them as thoroughly as the RFP feature checklist. This work plan should describe the steps the vendor will perform, how many hours each task should take, and the start and stop times for each task.
When calling or conducting site visits with the vendor's references, ask them to rate the quality of the installation. Were installers experienced and on site enough? Was the installation on time and under budget? What, if anything, would the hospital have wanted done differently regarding the implementation?
Require vendors to send the implementation team, not just marketing representatives, to your hospital to present their work plan in person. Meeting these individuals in person is important so you can evaluate their work style and communication skills. The team should spend at least a full day on site to address technical issues. At least one to two hours should be spent with each major department and several hours with the information system department.
Ask how many people would be on site and for how long. Comparing staff presence is just as important as comparing the number of software features or the size of central processing units. Some vendors send a team of 20 or more people to perform almost all tasks during an installation, while others send only a handful of installers who mainly issue to-do lists to users.
Ask to see the resumés of implementation personnel who will be assigned, and review the staff's experience. Vendors may claim they do not know who will be assigned to your project, but almost every organization has certain staff assigned to geographic regions and selected products. Good vendors are willing to discuss the expertise of the people for whom they are willing to charge such large fees. In essence, the hospital is buying people, not just hardware and software.
Negotiating Implementation Fees
Contract negotiations for a new system also present a significant opportunity for hospitals to control implementation costs. Unfortunately, hospitals all too often give implementation fees and services far too little scrutiny. To negotiate cost-effectively, healthcare executives should consider the following points.
Identify reasonable rates. Review the vendor's rates just as you would review those of any consulting or auditing firm that charges by the hour or day. To yield an effective daily or hourly rate, divide the total implementation fees being charged by the number of hours vendor reps will be on site. Typical rates should be in the range of $125 to $150 for installers or system analysts, and $200 and up for managers or specialized personnel, such as physicians.
Vendor mark-ups on these services can be enormous. Vendors generally pay implementation personnel from $50,000 to $100,000 per year, or $25 to $50 per hour, yet in some cases, they have been known to charge hospitals as much as $200 to $400 per hour.
Set limits on billable time. Exclude any off-site meetings from rate-setting calculations, because you cannot be sure whether such meetings ever occur and whether they are the vendor's general territory reviews or held specifically for your organization's benefit. Also, refuse to pay for the time installers spend traveling. The clock should start when they show up for work at your hospital, not while earning frequent-flyer miles.
Demand experience. By the time contract negotiations occur, vendors have no excuse for withholding the resumés of the installers they will assign, since the implementation start will be only a few weeks away. Read these resumés carefully, and examine staff experience with past installations. You do not want to train new vendor employees at high rates. Minimal standards for installers should be five years of experience in healthcare settings, two to three years of experience with the vendor, and at least one prior installation of the product you are buying.
Insist on a "right of refusal" in the contract for any implementation personnel who do not pass muster. When you are paying such an enormous premium for these personnel, you deserve the right to send them packing if they are not meeting your expectations. Also, any replacement personnel should be brought up to speed on the vendor's nickel, not yours, and any delay in the live date due to personnel changes should result in no penalty to the hospital.
Establish payment terms. If the installation fees are fixed and flat rather than determined per diem, then spread payment terms based on actual accomplishments, rather than calendar dates. For example, 10 percent of the payment should be for initial training classes, 15 percent for file building, and 20 percent for integrated system testing. By structuring payment this way, if the installation takes more time than expected (or is never completed), the vendor feels the same financial pressure that the hospital does, rather than having received all of its money up front before the system is (ever) live.
Negotiate a limit on both the implementation fees and out-of-pocket expenses. The former cap is to prevent costly overruns if junior installers are assigned who take longer to accomplish tasks than more senior installers or if the vendor cannot deliver the system. The latter cap is to control the risk of vendors exceeding the hospital's budget or travel policies.
Control travel costs. Limit all airfare to advanced tickets (often a fraction of "walk-up" tickets), ask that small-sized rental cars be shared by two to three installers (instead of a caravan of rental cars), and negotiate a reduced rate at a local and low-cost hotel, rather than an airport or downtown facility that charges premium rates.
Implementation can either make or break a new hospital information system. Countless hospitals have bought the "ideal" system, only to encounter problems such as unhappy users, uninstalled modules, or an installation that is late or over budget. Yet most system-selection processes and contract negotiations skim over this critical piece of the HIS pie, concentrating instead on software functionality. Because implementations now cost as much or more than software license fees, hospitals need to be as thorough in evaluating and negotiating system implementations as they are with examining system features.
Vincent Ciotti is principal, H.I.S. Professionals, LLC, Sante Fe, N. Mex., and a member of HFMA's New Mexico Chapter. His e-mail address is firstname.lastname@example.org.
Richard Schopp is a partner, H.I.S. Professionals, LLC, Wheaton, Ill., and a member of HFMA's First Illinois Chapter.
Publication Date: Monday, December 01, 2003