Business Case and ROI

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EHR RoadmapWebEx

• Business Case and ROI

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Presenter

• Margret Amatayakul
• RHIA, CHPS, CPHIT, CPEHR, FHIMSS
• President, Margret\A Consulting, LLC,
  Schaumburg, IL
• Consultant on the DOQ-IT Project for several
  QIOs
• Independent information management and
  systems consultant,
  focusing on EHRs and
  their value proposition
• Adjunct faculty College of St. Scholastica,
  Duluth, MN, masters program in health informatics
• Founder and former executive director of
  Computer-based Patient Record Institute,
  associate executive director AHIMA, associate
  professor Univ. of Ill., information services
  IEEI
• Active participant in standards development,
  HIMSS BOD, and co-founder of and faculty for
  Health IT Certification

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Objectives

• Identify the purposes for which an ROI is
  performed
• Distinguish between ROI and business case
• Distinguish between estimating ROI and managing
  ROI
• Conduct a cost/benefit analysis and evaluate
  economic indicators
• Identify financing mechanisms for EHR
• Describe the value of benefits realization

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Business Case and ROI

• ROI vs. Business Case

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Purpose of ROI and Business Case

• Purpose of ROI
• Make financing decisions
• Evaluating different financing options
• Identifying cash flow issues
• Evaluating incentive programs
• Establish expectations to which EHR selection,
  implementation, and adoption is managed
• Purpose of ROI
• Determine overall value
• Cash position profitability, expansion,
  enhancement
• Efficiencies productivity, performance, goals
• Effectiveness quality, patient safety,
  satisfaction
• Justify investment as a cost of doing business

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ROI vs. Business Case

• Return on Investment
• Analysis of
• Monetary costs
• Monetary benefits
• Calculation of an economic expression that
  anticipates when and how the investment will pay
  for itself and return profit

• Business Case
• Precise description of
• Total cost of ownership
• Monetary benefits
• Non-monetary benefits
• Alignment with strategic imperatives
• Plan for achieving value
• Measuring results to close the value loop

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Process of Estimating ROI

• Describe intended purpose of ROI
• Engage EHR stakeholders in process improvement
  and benefits expectation setting
• Conduct cost/benefit analysis
• a. Determine costs of supplying functions to
  achieve (all) expected benefits
• b. Estimate monetary benefits
• Prepare pro forma financial statements
• Calculate economic ROI measures
• Present findings to EHR stakeholders, ensure
  alignment with organizational strategic
  imperatives, and obtain commitment to achieving
  benefits

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Process of Managing ROI

• Engage all stakeholders in
• Understand potential of EHR
• Plan migration path to achieve EHR
• Big bang, vs.
• Incremental steps
• Understand current processes and potential for
  improvement
• Map current processes, workflow, and information
  requirements
• Establish goals for improvement
• Specify expectations over a timeline

• Use one or more change management strategies to
  achieve expectations
• Incentive-based
• Example physicians given bonuses based on level
  of adoption
• Behavioral norm-based
• Example peer pressure achieves adoption (or
  retirement)
• Sanction-based
• Example physicians who dont adopt pay for
  parallel chart processing
• Adoption strategy
• Laissez faire approach

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Business Case and ROI

• Conducting
• Cost/Benefit Analysis

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Types of Financial Benefits

• Cost savings direct reduction in expenditures,
  e.g., elimination of paper chart supplies and
  transcription costs
• Productivity improvements can lead to cost
  savings but usually lead to quality, e.g.,
  elimination of overtime through paper handling
  reduction
• Cost avoidance ability to not have to make a
  planned expenditure, e.g., avoiding cost of
  renting warehouse space not currently being used
• Revenue increases ability to add income, e.g.,
  revenue realization through improved coding,
  participation in clinical trials
• Contribution to profit ability to turn added
  income into profit, e.g., avoiding repeat
  diagnostic tests, using less expensive
  mediations, making appropriate referrals

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Estimating Benefits
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Benefits Worksheet
Sample
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Types of Costs (Incl. TCO)

• Hardware generally one time costs for all
  equipment (unless any is leased, there is planned
  obsolescence, or there are known
  additions/upgrades in the future)
• Software licenses for operating system,
  applications, and third-party applications
• Implementation and training
• One time costs paid to vendor(s) for installing,
  building, and testing the system, writing
  interfaces and system testing, and initial
  training
• One time costs for additional expenses associated
  with acquiring furnishings, remodeling, temporary
  space acquisition, etc.
• Maintenance
• Annual fees charged to provide upgrades not
  included in license service level agreements for
  help desk support, additional training, and new
  template development or other customization cost
  of service contracts for hardware
• Subscription services beyond third-party
  applications provided by EHR vendor on
  implementation, other IT infrastructure
  maintenance, incremental costs of utilities
• Support ongoing cost of consultants, physician
  advisors, outsourced help desk or other IT
  functions, additional informatics staff

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Cost Worksheet
Sample
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Advice

• Estimate conservatively, but not unrealistically
• Costs should be the most you expect to spend, but
  not the highest price anyone would have to pay
• Savings should be the least you expect to accrue,
  but for all reasonably feasible benefits factors
• Include a contingency budget
• Some estimate total cost of ownership (TCO) can
  be as high as 30 over cost direct costs
• Recheck
• Cash vs. Value

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Representing ROI

• Cash flow
• Payback period
• Internal rate of return (IRR)
• Net present value (NPV)

Costs and Benefits
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Cash Flow

• Benefits for a period minus costs incurred in the
  period cash flow for the period
• Cash flow is the value of the project without
  consideration for the projects cost
• Cash flow desirable to be positive at least
  after first or second year

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Payback Period ROI

• Payback period is the number of years it takes
  for the cash flows to recover the initial cost of
  the project (e.g., 3.3 years)
• Payback period desirable to be as short as
  possible, e.g., 2-3 years certainly not more
  than 5 years

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Other Measures of ROI

• IRR and NPV are economic calculations that factor
  in time value of money. (Their calculation
  depends on present value tables, usually supplied
  in financial calculators and spreadsheets.)
• Internal rate of return (IRR) desirable to be
  better than other forms of investment
• Net present value (NPV) amount needed to be
  invested to earn equivalent return. This is
  generally more important for large, long range
  projects
• Vendors often calculate these based on value
  achievement rather than cash benefits
• Example Savings of 35 of nurse time

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Uses of ROI

• Appreciate value
• Compare projects
• Identify funding
• Solicit financing
• Establish expectations

EHR vs. Property plant enhancements Medical
technology Other IT projects
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Business Case and ROI

• Financing Options
• and
• Benefits Realization

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Sources of Funds

• Cash flow from operations
• Use of reserves
• Philanthropy
• Save a tree donations
• Business interests
• Tax advantages
• Group purchasing
• Debt and equity financing
• Bank loan
• Line of credit
• Lease (usually for equipment)
• ASP (usually for software and operations)

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Financing Options

• Bank Loan
• Lower interest rate than lease or ASP model
  equivalents
• Easy payment option
• Possible down payment required
• Longer approval process
• Less flexibility
• Strong option if product has value when paid off

• Line of Credit (LOC)
• Flexibility
• No down payment
• Lower interest rate than lease or ASP model
  equivalents
• Single large expenditure consumes LOC
• Good option when expenditure is not great

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Financing Options

• Lease (hardware)
• Quick approval
• Often no down payment
• Flexible
• Deductible payments
• Upgrade at end of lease possible
• Higher interest rate than bank loan or LOC
• Dont own at end of term
• No early payment option
• Good option if cash is tight and equipment likely
  to be replaced at end of lease term

• ASP (software)
• Deductible payments
• Technology stays current
• Reduced hardware costs
• Less administrative cost
• Less need for in-house IT
• Less control
• Records stored off-site
• Service level agreements critical
• Easy to administer, lowest monthly cost, but
  generally highest total cost

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ASP Pros and Cons

• Control
• Fewer staffing hassles
• Access to skills
• Customizability of products varies
• Forced upgrades
• Functionality dependent on vendors customer base
  demands
• Records off-site
• Serves as a contingency plan
• Generally stronger security than many health care
  organizations have
• Service level agreements (SLA)
• Learn how to write
• Learn how to manage

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Benefits Realization

• Study of actual costs and benefits after
  anticipated time for adoption
• Advantages
• Manages achieving ROI
• Celebration
• Course correction
• Necessary if monetary incentives or disincentives
• Disadvantages
• EHR projects take a long time to implement and
  many changes occur over that time that are
  confounding variables
• There may have been benefits achieved through
  preparation for EHR decide in advance when you
  count these
• May be inaccurate if initial metrics were
  imprecise

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This presentation was created by MetaStar under a
contract with the Centers for Medicare Medicaid
Services (CMS). The contents do not necessarily
reflect CMS policy.