Unpacking hospitals' EHR implementation costs: What's behind the million-dollar price tags?

Numbers are meaningless without context, but those in health IT can often get trapped in a numbers game. When dollar signs related to EHR implementations are ablaze in headlines, it's easy to take those numbers at face value.

Healthcare leaders are enrapt by EHR investments. Hospitals and health systems shell out millions — sometimes billions — of dollars to implement EHR systems, and people want to know who is spending what. Boston-based Partners HealthCare and Rochester, Minn.-based Mayo Clinic turned heads when both said their Epic EHR implementation projects would exceed $1 billion.

EHR price tags elicit some to scoff at vendors and criticize them for overpricing software systems, especially when reported costs reach billions, but vendor costs make up only a fraction of an implementation budget. While Partners' and Mayo's implementations certainly represent extremes in terms of reported EHR costs, the numbers must be considered and evaluated in a more textured context.

What's in a cost? No two are alike
When a hospital discloses a project implementation price tag, those budgeted costs are calculated — and reported — by the hospitals themselves. There is no standard way in which a hospital devises its implementation budget.

All implementation budgets include certain costs, such as those for software licensing, projected maintenance, consulting fees and costs for training and labor. But many costs factored into budgets are not newly introduced; rather, they already exist elsewhere in hospital operational budgets but are still factored into the implementation.

Internal labor costs are a prime example of this, according to Randy Carpenter, senior vice president of strategic services for Stoltenberg Consulting, a health IT consulting firm based in Bethel Park, Pa. What a hospital pays full-time employees on an annual basis is already included in its IT operational budget. If those employees work on an EHR implementation, the hospital may choose to include those existing operational costs in the overall project cost. Or they may not. Not all costs are net additive, Mr. Carpenter says.

Another example: Assuming hospital size and scope of implementation are comparable, some organizations still have to spend more money on needed hardware for an implementation, like new computers and tablets and other hardware. "Some organizations have to buy new devices when they put in a new EMR. Some count them in the project, and some don't," Mr. Carpenter says.

Even if an implementation brings on new costs, they may still reach a net zero as a hospital cancels out costs from a retiring system. Geoffrey Patterson, vice president of clinical transformation at Detroit-based Henry Ford Health System, says this was the case when the system invested in an Epic EHR overhaul in 2011. "When you retire an existing application in favor of a new one, the costs [tend] to be the same," he said. "So you do retire one cost that way." 

What's more, not all costs are linked to the EHR software or system. When an organization replaces a clinical information system, it is easy to attribute the entire IT infrastructure upgrade to one vendor, but doing so isn't accurate. EHR implementations are much broader than the EHR itself.

"It's misleading to say, 'A hospital is undergoing an $X million Epic implementation,' because the install includes far more than simply the Epic software," says Eric Helsher, vice president of client success at Epic. "An EHR from any vendor requires technology like servers and storage to house the software, be it on premise or in the cloud, and laptops and mobile devices to access it. That would be like if you go buy a fully loaded laptop and attribute that full cost to Microsoft Word. You needed the computer to get Word."

Henry Ford's entire EHR overhaul budget totaled $353 million, and to Mr. Helsher's point, Mr. Patterson says approximately two-thirds of that budget was specific to Epic processes. The other third was related to other implementation costs, including a data warehouse.

Not all costs are vendor costs
Despite the best budgeting and planning efforts, implementation costs do run astray, and can have detrimental effects on an organization. In one such example, Burlington, Mass.-based Lahey Health laid off 130 people at three hospitals in 2015 to close a budget gap CEO Joanne Conroy, MD, partially attributed to Lahey Hospital & Medical Center's $160 million Epic EHR and patient portal implementation.

Like many vendors that face backlash and claims of overcharging hospitals, Epic is often scrutinized for its implementation costs. Epic itself is a $2.1 billion company with 400 customers. The math doesn't support its client base paying hundreds of millions of dollars — let alone one company paying $1 billion — in total directly to the vendor.

EHR vendors typically price their software on a per-bed basis that accounts for the size of the facility and projected scope of the implementation. "Epic is upfront about the total costs of deploying the system," Mr. Helsher says. "We don't nickel and dime; 87 percent of our recent installs came in on or under budget, and another 10 percent were within 10 percent of their budget."

Mike Neal, senior vice president for consulting and application services at Cerner, says the company is also transparent about costs and uses a fixed fee structure to most accurately predict spend tied to the implementation work.

"Because we [have a] fixed fee for the implementation cost, the overruns should not be occurring in terms of the services paid to the supplier for implementation," Mr. Neal says. "Our contracts are for a set amount of dollars, and so we're only seeing that set amount."

When costs overrun
Mitch Morris, vice chair and global leader for Deloitte's healthcare sector, says many instances of EHR costs exceeding expectations are predictable. Most instances involve insufficient planning at the beginning of the project.

"The accurately projected cost, including changes that need to occur with revenue cycle and clinical practices and the changes the labor force has to undergo, are predictable. But not everyone has the time and energy to predict what they are," Mr. Morris says. "Executives who are very enthusiastic about putting in new systems say these things won't cost this much, and as time goes on, they find they do have to spend money and do have to go back."

Mr. Morris says this often is the case with training. Healthcare organizations know training is critical to a successful go-live, but it tends to get the short end of the budgeting stick. For many organizations, training is the first thing cut when facing an overrun. "That's the last thing they ought to cut," he says.

If hospitals must implement cost-cutting measures, labor costs are often the first target, according to Mr. Carpenter. Labor generally accounts for the largest cost in an organization, and it's often seen as the target since many other costs within organizations are fixed or committed, Mr. Carpenter says. "They've entered into this agreement and gone through an 18- to 24-month implementation. They can't just throw their hands up and say, 'We don't want to pay for it anymore.'"

Labor costs can be so challenging for hospitals during implementations that Deloitte launched a specialized consulting branch, Evergreen, to lower overall implementation costs by focusing on reducing labor spend. Evergreen seeks to bring down the total cost of EHR ownership by outsourcing certain types of labor to external, and typically less expensive, labor markets during implementations, such as software build, patch application, break fixes and minor enhancements. Doing so allows Evergreen to still achieve scale with labor, but at a much lower cost. Mr. Morris says Evergreen can typically cut total EHR implementation costs by up to 30 percent.

At Henry Ford, Mr. Patterson says the implementation finished in 2014 slightly under budget, "which was fantastic." He attributes the organization's success to governance buy-in across the health system, holding everyone accountable for a proper execution and managing expectations, including revenue losses.

In fiscal year 2012, Henry Ford reported $53.1 million in net income, down 15 percent from the $62.9 million net income in 2011, partially attributing the decrease to its EHR implementation project. But the health system expected these dips, Henry Ford CEO Nancy Schlichting said in a Crain's Detroit article.

"Part of the governance of any project like this is setting expectations and communicating, be it outcomes financially or operationally," Mr. Patterson says, adding anticipating dips in volume and changing expectations helped Henry Ford return to its baseline faster. The system posted a $27.8 million surplus in fiscal year 2014, part of which Ms. Schlichting attributed to its EHR investment helping save $65 million.

More articles on EHRs:

38% of execs want telemedicine programs built onto their EHRs & 6 other survey takeaways 
29 hospitals, health systems seeking Cerner, MEDITECH, Epic talent 
Just 2 in 10 consumers use EHR data to make medical decisions 

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