Health Information Technology: Planning and Financing Upgrades

The article below is reprinted with permission from The Capital Issue, a quarterly newsletter published by Lancaster Pollard.

In healthcare, technology is critical to ensuring patient safety and clinical quality as well as attracting and retaining qualified professionals. With the industry constantly changing, particularly with the enactment of healthcare reform, hospitals and health systems must strategically plan for and finance health information technology.

HIT assets in a hospital can range from software (electronic health records, enterprise resource planning, departmental systems) and imaging equipment/solutions (MRIs, CT's, digital mammography, picture archiving and communication system, vendor neutral archives) to pharmacy equipment (automated dispensing machines, mobile cabinets) and point-of-care solutions (computer or workstation on wheels, wall-mounted CPUs, tablets) to the IT infrastructure that supports all of it (servers, storage, routers, networking equipment, radio frequency identification, Wi-Fi).

It comes down to understanding the organization's HIT challenges and needs by viewing the asset or resource as part of a whole (clinical equipment, IT network, capital project, hospital, system), matching the debt structure to the asset life, as well as to the hospital's strategic goals, and then finding the best source of capital. While it seems deceptively simple on paper, it takes careful research and analysis, with input from multiple stakeholders, including representatives from both IT and clinical staffs.

What’s driving health technology?

Healthcare is an industry that's in transition and rapidly evolving. It's transitioning from independent providers to coordinated delivery systems, from a fee-for-service, volume-based business model to a performance-based business model. Any discussion related to improving healthcare, whether reducing costs or improving patient safety and satisfaction, usually has technology as a key component. The push to leverage information technology to modernize the healthcare delivery system is a priority in healthcare reform efforts.

What macro-factors are pushing the nation’s health technology evolution?

  • Innovations in clinical and information technologies will continue to improve healthcare IT tools.
  • EHRs, or digitized medical records, facilitate sharing patient information, make quality reporting easier and reduce costs over the long term.
  • The federal government incentivizes hospitals and health systems to adopt an EHR and electronic billing. More than 2,250 hospitals have successfully participated in the incentive program as of May, according to the U.S. Department of Health and Human Services' Office of Provider Adoption Support.
  • Hospital consolidations necessitate unifying what were once separate facilities under one IT system, chiefly an EHR component. There were 86 hospital merger or acquisition deals in 2011 — the highest number in a decade. The pace of consolidations is expected to continue as healthcare reform takes effect.
  • Obtaining a competitive advantage in the marketplace. Keeping current with health-care information technology can help increase patient safety and satisfaction, ensure quality medical treatment and attract top-quality clinical professionals.

Make IT a part of the plan

Over the last decade or so, health information technology has been getting more and more attention in the strategic planning process. Hospitals and physicians realized its growing importance in the clinical and business environments as well as the need to keep up to date with the latest innovations in software and hardware to maintain health-care delivery, ensure patient safety and increase efficiency.

In addition to usual stakeholders in a hospital’s strategic planning process (leadership, board members, medical staff, department heads, etc.) care should be taken to ensure interdisciplinary coordination between clinical and IT departments as well as physician groups. The strategic planning committee will develop objectives, weigh alternatives, propose strategies and be the champions for the adoption of new technologies. Additionally, consultants for information health technology and financing also should be included in a hospital’s planning process.

Because of the diversity of technologies that must be acquired from multiple IT and medical vendors, it is essential to develop an effective strategy to address the hospital’s future technology acquisitions and management. Major considerations for analysis include:

  • Susceptibility to change, which encompasses:
    • Market Forces: healthcare reform, shifting payment models, declining reimbursement, ICD-10 and other regulatory/economic forces
    • Technology Forces: IT and clinical equipment advances, updated standards, vendor trials/outcomes
    • Hospital Forces: mergers and acquisitions, recruiting/retaining physicians, market competition and financial profile.
  • Ripple effects: certain technology assets can be affected by the introduction of other assets into the facility. For example, when digital mammography is introduced, hospitals will need to consider the adequacy of current network and storage capacities; that diagnostic workstations may need to be upgraded; and additional software may be needed, (e.g., computer-aided design or other advanced visualization).
  • Expected useful life of the asset:
    • How long does IT leadership believe the technology will be effective?
    • Will the hardware support future software versions?

Additionally, a hospital’s strategic planning committee needs to look at HIT components in any planned renovation or new construction of the capital project, particularly for the hardware infrastructure considerations (wiring, server rooms, work stations, etc.). It also is important to ensure alignment between the capital project’s IT components and the hospital’s strategic technology goals.

Finally, the strategic planning committee is charged with recommending how the hospital will pay for resources included in the strategic plan. Options include a flexible rental model (leasing) or a long-term ownership model (cash purchase /loan). The key to determining the best financing option is to match debt to the asset’s useful life, taking into consideration project scope and the lowest cost of capital available. For each option under consideration, the committee should do an analysis before making a recommendation.

Buy versus lease

HIT assets, in general, depreciate rapidly, quickly become obsolete and their value is derived from their use. Hospitals are faced with the decision of what financing option makes the most economical sense.

Some technologies, usually if they remain useful and cost-effective for more than six or seven years, fit into an ownership model. In today's low-interest environment, a hospital can acquire HIT assets with a shorter lifespan with a short-term bond or private placement to take advantage of the steep yield curve. This is especially feasible when done in conjunction with a renovation or new construction project that uses long-term (25 years), fixed-rate financing for “bricks and sticks.” Within the long-term financing structure a short or intermediate tranche of bonds can be structured to match the life of the HIT assets.

The other financing option is leasing. This strategy can be attractive because it can offer more flexibility in structuring cash flows and provides the agility to change technology as conditions dictate. It can become an organization's "financial cloud" by paying for the use of technology without giving up control or flexibility to customize how and where technology and services are delivered.

Different hospitals will approach the buy-versus-lease decision from different points of view. Those with a heavy existing debt load may not be able to borrow additional capital and may opt to structure a lease to fit within their existing bond covenants, other hospitals may have the financial flexibility to add debt without any negative implications to their capital structure or existing debt structure. Hospital management should make a concerted effort to consult with their existing capital providers to ensure compliance with existing covenants.

Change is the new normal in today's healthcare organizations. Health information technology is necessary to be competitive and to provide patients with quality care. Therefore, it's imperative to develop a strategy to acquire and manage HIT assets as part of a hospital’s strategic plan. As part of the process, organizations need to decide what type or types of financing are appropriate for their situation.

Dan Mandy is director of business development with Winthrop Resources in Minnetonka, Minn. He may be reached at

Jason Dopoulos is a vice president with Lancaster Pollard in Los Angeles. He may be reached at

More Articles From Lancaster Pollard:

Guard Against Inflation: Preserving the Purchasing Power of Your Assets
Mission Possible: Finding Capital for Standalone Hospitals
2012 U.S. Interest Rate Outlook

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