Develop a return on investment (ROI) strategy for the acquisition of a strategic HIT solution in which you consider 2–3 cost saving and/or revenue generating opportunities that you feel apply to Dynamic’s scenario.
This Discussion offers you the opportunity to apply return on investment (ROI) concepts in a real case scenario. As is often the case, technology offerings involve costs that must be justified by virtue of expense reductions for revenue increases in the organization. There are creative opportunities in the Discussion for leaders to facilitate the development of the revenues into the organization and operational changes that reduce expenses.
Scenario: Dynamic Health System is a 3-hospital, 500-bed system in the Midwest United States. This system employs 100 physicians, both primary care and specialists, in 12 physician practices. Dynamic also runs a center of excellence in orthopedic care for the large geriatric population in the area, including an outpatient rehabilitation facility that is currently profitable. Dynamic offers a full spectrum of medical and surgical services to their population with an emphasis on programs of excellence in orthopedic surgery, diabetes, and women’s care.
Dynamic’s typical patient mix is over 45% Medicare with another 35% private pay patients covered by three large insurance companies. Their Medicaid population is approximately 12%, with the reminder of patients self-pay.
Due to market forces, the three private payers have begun to implement a program of bundled payments for their members in the following areas: hip replacements, knee replacements, and lower back surgeries. In these models, Dynamic hospitals and employed physicians will be paid a fixed amount for an entire episode of care from pre- surgery evaluation, through surgery and post-surgery, physical therapy, and rehabilitation. Medicare is likewise proposing a pilot study for a population of hip replacement beneficiaries to assess the outcomes of care as opposed to procedure costs as a result of Dynamic’s petition to receive increased payments for beneficiaries due to age demographics and for being the only orthopedic geriatric center in 200 miles.
As a result of these factors and the aging HIT infrastructure, the Chief Medical Officer (CMO), Chief Executive Officer (CEO), and Chief Information Officer (CIO) of Dynamic are proposing the purchase of a monolithic Electronic Health Record (EMR) solution that will provide complete online documentation, orders, pharmacy, labs, and patient portal for all hospitals and employed physician offices. Because the (1) physician offices are currently using Epic Corporation’s back office billing system with an outstanding record of accurate coding and short “days in Accounts Receivable” and (2) Epic’s EMR has a high ranking in industry HIT assessments, the executive team is proposing the purchase of Epic’s clinical EMR (documentation, ancillaries, orders, and patient portal).
The CFO is supportive but skeptical, as the Epic bid is approximately $1.5 M to implement the clinical software with a continued $300K per year in software maintenance and support. Current clinical technologies information systems are fragmented, disjointed, and don’t meet HITECH Meaningful Use requirements, and it will cost Dynamic about $200K per year to maintain the software and servers needed to run the system.
The local competitive landscape may be changing. Dynamic’s CFO is hearing rumors that an established academic system which is centered 300 miles away is possibly considering buying three local stand-alone surgery centers and hiring orthopedic surgeons. This academic center has published best practices in outcomes for surgery care in a recent CMS Medicare study that implies that they are delivering high quality and cost effective orthopedic care.
Carefully read the scenario and the Pro Forma Explanation Material in this week’s Learning Resources.
Pro Forma Explanation Material
There are two types of costs to consider planning the HIT program pro forma. These two types of costs are capital costs and operating costs. While the accounting definition of these costs varies depending upon the organization, the general definition of these costs are capital costs (being one-time expenses) and operational costs (being ongoing or reoccurring cost of the program). The HIT Program Pro Forma Template provides the opportunity to estimate both capital and operating costs for an HIT program. The following information is a description of each line item on the HIT Program Pro Forma Template. Keep in mind that as you are working through these costs on a year-by-year basis that you are working diligently with teams of stakeholders to best estimates these costs. Therefore, your cost estimates will be generally more accurate for the first fiscal year and second fiscal year of the program and be more vague as the fiscal years of the project go out into subsequent years. For this reason, the HIT program pro forma is updated often, based on new information and changes in the program environment. Capital costs generally consist of the following categories: consultative services, implementation salaries, database software, hardware costs, network costs, and other licensed software costs. The following is a description of the meaning of each of these line item categories on the HIT Program Pro Forma Template. Keep in mind that if your organization organizes capital costs in a different way or asks you to capitalize costs under your program that fall outside of these categories you can add additional rows to your program pro forma file. Consulting services vendor or third-party: Often the help of external consultants from either the HIT vendor or another third-party are used in order to implement systems. Often, these costs are significant at the early stages of a project and are capitalized by an organization. It is possible, as the program progresses, that the chief financial officer of the organization may ask that these costs be moved into operating expenses. A solid understanding of the scope of the project and the project plan enables organizations to have an idea of how to estimate consulting costs. Most accounting rules do not allow organizations to capitalize travel associated with consultants. Thus, these costs will typically only involve the hourly rate paid to the consulting company for the consultants. Implementation salaries: Often, chief financial officers of an organization will allow or prefer that internal staff salaries that are associated with implementing the program to be capitalized with the program. This is an internal decision; it is permitted by General Accounting Principles. If the organization prefers that this be the case, planners work with leaders in the organization to estimate a blended rate for different kinds of staff who are working on the implementation and estimate their hours to come up with the implementation salaries cost estimate. Often organizations purchase software from vendors and have to pay separate software licenses for the database product that runs the vendor applications.
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