Implementing an electronic medical record (EMR) is a major initiative that should be undertaken only after a thoughtful analysis of the costs and benefits involved. Unfortunately, demonstrating financial returns on an EMR often is regarded as an inexact science at best, which has caused many healthcare executives to avoid adopting this technology. With the right approach, however, it is possible to demonstrate convincingly that the financial benefits will far outweigh the costs. To do this, it is necessary to involve representatives from operational areas throughout the organization, because they are best able to identify the potential for cost savings and additional revenue opportunities.

The electronic medical record (EMR) long has been promoted as a means to reduce costs, provide better patient service, and dramatically improve outcomes. Despite several decades of predictions that the EMR revolution is coming, most healthcare organizations still use paper charts and manual processes.

There are many good reasons why EMRs have not proliferated. First, the vendors' offerings only recently have begun to live up to their promises. And as is always the case with information technology, the temptation to hold out for newer, better, and cheaper products is strong. The volatility within the healthcare information technology market also has served as a strong deterrent, as potential purchasers want assurance that their vendor will be with them through implementation and beyond.

Perhaps the most significant roadblock to EMR implementation is financial. Executives are loathe to commit millions of dollars to a project unless they can be assured of positive cash flows within a reasonable period of time. Unfortunately, demonstrating this return can be challenging because many of the EMR's benefits are either non-financial or inherently difficult to quantify. Nevertheless, it is possible to establish a sound business justification for implementing an EMR using realistic assumptions and verifiable data.

One healthcare organization that accomplished this justification is Virginia Mason Medical Center, which consists of a 280-bed acute care hospital, 16 hospital-based and satellite outpatient clinics, a research institute, and a network of about 400 employed physicians. The hospital and several of its clinics are located in the heart of a major metropolitan area on the West Coast, but the satellite clinics extend into the suburbs and beyond.

When the cost-benefit study was initiated in the spring of 2000, the organization's clinical information systems were badly outdated and not extensively used. Only a small portion of patient medical information (laboratory and radiology test results and progress notes) was stored electronically, and most of that information was in unstructured, nonsearchable text. Although some results were available electronically in a readily searchable format, this capability had not been implemented organizationwide. Consequently, paper charts were the standard in day-to-day practice, and clinical processes such as documentation, order entry, and charge capture all were paper-based.

Benefits-Assessment Process

The healthcare organization established a 24-member clinical advisory team, whose duties included conducting a cost-benefit analysis for the EMR. This team consisted of the following people:

* Eight physicians from a broad range of medical specialties;

* Several representatives from patient care services;

* Directors of the radiology, laboratory, and pharmacy departments;

* The medical records manager;

* Information services (IS) representatives;

* Managers from several clinical departments throughout the organization; and

* Consultants.

After viewing demonstrations of EMRs to learn about their features and capabilities and visiting a healthcare organization that had implemented an EMR, the team identified myriad benefits they believed the technology could help to achieve.

Working with the vendor, the team developed cost estimates and, based on the EMR's anticipated implementation schedule, estimated the timing of both costs and benefits. Costs were assumed to be incurred as the various components of the EMR were installed, with the benefits being realized over time as functions were converted and users became accustomed to the technology. All of this information then was put into a financial model to project costs and benefits over seven years.

Costs

The IS staff worked closely with the vendor to develop hardware, software, and implementation cost estimates for the EMR. Based on patient-volume data and the number of system users, the vendor developed proposals for the various software products and server hardware needed to meet the specified performance criteria, as well as professional services related to installation and training. In addition, the IS department developed cost estimates for desktop devices and monitors, biometric (thumbprint recognition) security devices, imaging hardware and software, additional technical-support staff, and other associated costs.

A major cost of most EMR implementations is a temporary reduction in physician productivity during the transition to the new system. In this case, a reduction in productivity was not factored into the EMR's cost analysis because the EMR implementation was scheduled to be phased in over a six-year period.

The final cost estimate reflected the vendor's proposed prices, which were later negotiated to a substantially lower amount. Although the vendor's pricing estimates are confidential and cannot be provided in detail, total costs for the seven-year period were estimated to be approximately $19 million.

Benefits

The cost-benefit analysis indicated that anticipated benefits would far outweigh the cost of implementing and maintaining the EMR. The EMR was projected to produce tangible financial benefits in a variety of operational areas. Although the most significant benefits are discussed here, a wide variety of other, less significant benefits also were identified but were not included in the analysis. Because the combination of these benefits would have been quite substantial, the analysis is intentionally conservative. Exhibit 1, page 54, summarizes the approach to projecting these benefits and their estimated annual dollar value once the EMR is fully operational.

Laboratory/radiology order entry. In a paper-based system, laboratory and radiology orders require manual procedures for placing the order at the clinic/hospital unit and in processing the order at the ancillary service site. With the EMR, orders would be placed by the physician at the workstation and automatically transmitted to the appropriate ancillary department. This procedure would eliminate the need for clinic, hospital, and ancillary staff to clarify, transcribe, and manually enter orders into the ancillary department's information system, for a total projected annual benefit of about $1.1 million.

Pharmacy order entry. The EMR would provide immediate feedback if a physician attempts to order a medication that is clinically contraindicated or improperly dosed and would eliminate many of the adverse drug events related to illegible drug orders. In addition, the EMR contains logic to help physicians adhere to formularies and select the most cost-effective medications for the patient's condition, resulting in significant savings. Finally, the elimination of manual procedures involved with placing medication orders would reduce the need for pharmacy staff in the same manner as previously described for laboratory and radiology Total projected annual benefit would be about $3.1 million.

Documentation. Much of the information that is dictated and manually transcribed is redundant, such as social and past medical history, allergies, current medical conditions, and medications. Because the EMR would make this information readily available, transcription would not be needed each time a physician dictated, thereby reducing transcription costs. The team determined, however, that during the transition to on-line documentation, transcription costs temporarily would increase. Total projected annual benefit would be about $1.0 million.

Availability of information. Considerable effort is spent creating, filing, searching for, and transporting charts. The EMR would eliminate these activities, resulting in reduced staffing in the health IS department, clinics, and hospital units. Eliminating paper charts would reduce office-supplies expense. Total projected annual benefit would be about $2.7 million.

Charge capture. The EMR would interface with the billing system, so that whenever a service was performed and documented, the charge would be generated automatically without a need for paper charge slips. In addition, the technology would help ensure that providers document all billable services and that these services would be coded correctly, thereby helping the organization avoid lost revenue owing to:

* Incomplete documentation of care that has been provided;

* Delayed or missing charge slips;

* Poor management of advance beneficiary notices; and

* Denied claims.

Although it is impossible to quantify the extent of these missed revenue opportunities, some healthcare organizations have estimated them at 10 percent of total charges--an amount the team felt was realistic. Nevertheless, the team conservatively estimated that interfacing the EMR with the billing system would improve charge capture by only 2 percent. This produced a total projected annual benefit of about $8.5 million, approximately equal to the cost savings from all the other benefits combined. Interestingly, though, the EMR was roughly a break-even proposition even if no reductions in lost charges were assumed.

By interfacing directly with the billing system, the EMR also would speed the submission of claims, resulting in quicker payment. Finally, the EMR would eliminate the need for charge data entry and quality control staff, as well as support-staff time spent collecting, batching, and tracking charge slips. Total projected annual benefit minus costs was expected to be about $9.6 million.

The results of the analysis, summarized in Exhibit 2, clearly suggested that the EMR was a sound financial investment. Although the project would require a significant cash outlay in the first two years, by the third year the financial benefits would outweigh the costs. Moreover, this differential would grow in subsequent years because most of the implementation costs would occur early in the project, while the benefits would increase over the course of the seven-year period.

Partly as a result of this cost-benefit analysis, the organization's executive leadership accepted the recommendation to develop the EMR. Its implementation currently is under way.

Lessons Learned

This experience provides some useful lessons for other organizations considering investment in an EMR.

Involve users in the process. Probably the most important factor in the success of this effort was the involvement of so many users. Although the 24-member team might have been considered unwieldy by some, its broad representation of multiple departments was a tremendous advantage. If the team had been limited to consultants, IS representatives, and/or senior management, many of the benefits would not have been identified, and none could have been reliably quantified.

Involving the managers whose departments were directly affected gave considerable credibility to the analysis.

Before any team can identify the benefits of an EMR, it first needs to understand the EMR's capabilities. Therefore, any organization attempting to analyze the benefits of EMR technology should educate team members at the outset about the technology through product demonstrations, site visits, and other presentations.

Keep the analysis objective and close to home. Healthcare organizations that conduct this type of analysis often are tempted to focus on savings from things such as less expensive but equally effective clinical protocols, or enhancing clinical outcomes to reduce future costs dramatically. In fact, many academic studies attempt to quantify these benefits and generally show tremendous potential for saving money. However, most organizations cannot easily produce the detailed information regarding patient mix, clinical costs, and other factors needed to replicate such an analysis. Therefore, the analysis will gravitate naturally toward those areas for which data are already available, such as the ones described in this article.

The numbers do not tell the whole story. The healthcare organization described in this article represents an ideal environment for demonstrating an EMR's economic value because the organization encompasses both inpatient and outpatient services and employs a single group of physicians to provide patient care. In outpatient-only settings, such as a medical group, the smaller size of the organization and the reduced scope of the EMR benefits may make the economic advantages of an EMR less obvious. The same also may apply to an inpatient-only environment, which often will have the additional challenge of persuading a disparate collection of nonemployed physicians to use the system.

Organizations that provide care only to inpatients or outpatients therefore will need to pay closer attention to benefits that would have a financial impact but that may not be readily quantified. These benefits would be in addition to those described earlier and may tip the balance in favor of an EMR. Examples include:

* Elimination of wasted effort that may not translate into staffing reductions but ultimately should increase productivity and quality;

* Decreased risk of malpractice lawsuits or compliance violations;

* Enhanced management reporting and feedback to physicians;

* Improved negotiating position with insurers through better HEDIS scores by better management of patient populations through such services as breast cancer screening and childhood immunization; and

* A more in-depth understanding of the organization's existing lines of business, which will help it to recognize and respond to new opportunities.

Finally the EMR provides many purely qualitative benefits that should not be overlooked, such as:

* Reduced errors and better clinical decisions resulting from having information available to the physician when and where it is needed;

* Enhanced ability to practice team medicine by making a patient's medical record available to several providers in different locations at the same time;

* Improved patient satisfaction; and

* Improved physician satisfaction.

These benefits sometimes can be difficult to evaluate in a cost-benefit analysis, but their strategic importance cannot be overestimated. Organizations that lag behind their competition in adopting EMR technology will have difficulty catching up and eventually will lose patients. An even more pressing concern is the issue of physician recruitment and retention. Increasingly, clinical information technology is becoming a major factor in attracting top-quality physicians who have trained on, and have come to expect, EMRs.

The benefits are not automatic. A cost-benefit study will benefit a healthcare organization only if it follows through with a focused effort to realize the projected benefits. Implementation of an EMR requires a strong, organizationwide commitment. An EMR is valuable only if users are willing to change the way they do business so that the technology works for them. Physicians who are used to having an administrative staff person transcribe medication orders, for example, may resist performing this function themselves at the workstation. Depending upon the organization's culture, overcoming this resistance may not be feasible.

Therefore, when beginning such an undertaking, it is helpful to assess the organization's receptiveness to EMR technology and to adjust (or even postpone) its approach accordingly. Questions such as the following should be considered:

* How technologically savvy are the physicians and administrators? To what extent have they already embraced other forms of information technology (eg, e-mail, the Internet, or personal digital assistants)?

* What is the organization's culture regarding decision making? Will a consensus need to be achieved before the EMR is accepted, or will the decision reside with a few individuals?

* Does the organization value group-oriented behavior, or is it more individualistic? Will it enforce the use of the EMR, or will it adopt a more laissez-faire approach?

* What will the organization most want to achieve by implementing the EMR? Some benefits will take priority over others, and this prioritization will drive the implementation schedule, work-flow revisions, and ultimately, the financial results.

* Has the organization received external pressure to automate its clinical processes? For example, has such external pressure become a recruiting issue? Is the competition proceeding along this path?

Conclusion

With many competing demands for scarce capital, financial managers are wise to scrutinize every business proposition that comes their way and reject any proposition that cannot meet the organization's financial objectives. Although building the business case for an EMR is not an insurmountable task, neither is it a small task. It requires a detailed understanding of the organization and the technology, as well as considerable hard work to bring all of the information together and translate it into measurable results.

ABOUT THE AUTHORS

Karl F. Schmitt, JD, MHA, is a principal and head of the healthcare information technology division, ECG Management Consultants, Inc., Seattle, Washington.

David A. Wofford, MBA, is a senior associate, general healthcare division, ECG Management Consultants, Inc., Seattle, Washington.

EXHIBIT I

SUMMARY OF BENEFITS PROVIDED BY ELECTRONIC MEDICAL RECORDS

Benefit Provided             Methodology and Assumptions Used in
by the EMR                   Estimating Benefit

Laboratory and Radiology
Order Entry

Reduction in time spent      Hospital unit staff and certain clinic
managing laboratory and      staff spend on average 11% of their
radiology orders             time processing orders. Approximately
                             35% of this labor could be translated
                             to staffing reductions, saving roughly
                             24 full-time equivalents (FTEs).

Reduction in                 Currently one laboratory FTE and two
laboratory/radiology FTEs    radiology FTEs are dedicated to
needed to process orders     processing orders. These positions
                             could be eliminated.

Reduction in laboratory      Two FTEs currently are dedicated to
FTEs involved in working     working suspended charges. These
suspended charges            positions could be eliminated.

Pharmacy Order Entry

Reduction in adverse drug    The frequency of ADEs in the inpatient
events (ADEs)                setting, their average out-of-pocket
                             costs, and the potential for their
                             reduction are well documented in the
                             medical literature. This estimate
                             for this project assumed:
                             * 15,412 annual admissions;
                             * 6.7% occurrence rate of ADEs, for a
                               total of 1,033 occurrences;
                             * 28% avoidability through automation,
                               for a reduction of 289 ADEs; and
                             * Average cost per ADE of $3,900.

Reduction in capitated       Instantaneous feedback to physicians
drug benefits cost           regarding the cost-effective prescribing
                             was estimated to reduce capitated
                             prescription benefits costs by 10%.

Reduction in pharmacy FTEs   It was estimated that with the EMR, two
because of streamlined       pharmacists would no longer be needed
order-entry processes        to rework/enter medication orders.

Improved formulary           Current costs associated with inpatient
compliance because of        medications are approximately $7.2
instant access to insurance  million. It was estimated that these
companies' formularies       costs could be reduced by at least 10%.

Documentation

Reduction in documentation   After an initial increase in
costs through the use of     documentation costs as users become
structured documentation in  accustomed to the system, a reduction in
the outpatient setting       documentation costs of 20% was estimated.

Availability of Information
at the Point of Care

Reduction of staff used to   It was estimated that 43 positions in
locate, pull, copy, store,   health information services could be
and transport charts         eliminated. Average salary and
                             benefits varied according to position.

Reduction in nursing,        A total reduction of 31 FTEs in a
hospital unit staff,         variety of positions was projected,
and receptionists            based on the number of staff, the
needed to search for         percentage of their time spent
information and check        searching for information, and the
in/check out charts          percentage of that time that could be
                             translated to FTE reductions. Each of
                             these measures varied by position.

Reduction in chart           It was estimated that historical
supply costs                 expenses could be reduced by 33%.

Charge Capture

Faster submission            Instantaneous charge capture will speed
of claims to payers          the processing of claims by 4.3 days.
                             Time value of money estimate was based
                             on net professional revenues of $154
                             million annually and a discount rate of
                             10%. Claims-processing information for
                             hospital services was not available.

Elimination of staff         Currently, 16 FTEs are employed to
performing manual            perform this function at an average
data entry                   annual cost of $30,420. All of these
                             positions could be eliminated.

Reduction in staff who       Support staff must devote an estimated
batch and track charge       30 minutes per physician per day to
slips                        this function, of which 50% could be
                             translated to staffing reductions.
                             Based on 380 physicians, this results
                             in approximately 12 FTE reductions.

Enhanced charge capture      A 2% increase in collections was
                             estimated resulting from the following:
                             * More complete documentation of care;
                             * Reminders notifying physicians and
                               managers when encounters have taken
                               place but no charge has been entered;
                             * Elimination of lost charge slips;
                             * Improved management of advance
                               beneficiary notices;
                             * Reduction in denials that result from
                               incorrect coding and other errors; and
                             * Improved ability to match ancillary
                               services claims to hospital-based
                               outpatient visits, as required under
                               Medicare's ambulatory payment
                               classification methodology.

Total Annual Benefit

Benefit Provided              Eventual Dollar
by the EMR                   Benefit (Annual)

Laboratory and Radiology
Order Entry

Reduction in time spent              $921,044
managing laboratory and
radiology orders




Reduction in                          $93,600
laboratory/radiology FTEs
needed to process orders


Reduction in laboratory               $62,400
FTEs involved in working
suspended charges

Pharmacy Order Entry

Reduction in adverse drug          $1,127,604
events (ADEs)











Reduction in capitated             $1,087,958
drug benefits cost



Reduction in pharmacy FTEs           $200,000
because of streamlined
order-entry processes

Improved formulary                   $720,000
compliance because of
instant access to insurance
companies' formularies

Documentation

Reduction in documentation         $1,027,547
costs through the use of
structured documentation in
the outpatient setting

Availability of Information
at the Point of Care

Reduction of staff used to         $1,257,413
locate, pull, copy, store,
and transport charts


Reduction in nursing,              $1,068,981
hospital unit staff,
and receptionists
needed to search for
information and check
in/check out charts



Reduction in chart                   $418,440
supply costs

Charge Capture

Faster submission                    $180,215
of claims to payers






Elimination of staff                 $486,720
performing manual
data entry


Reduction in staff who               $422,826
batch and track charge
slips




Enhanced charge capture            $8,512,646
















Total Annual Benefit              $17,587,393
EXHIBIT 2

COST ANALYSIS PROJECTION FOR AN ELECTRONIC MEDICAL RECORD SYSTEM

                         Year 1        Year 2      Year 3       Year 4

Total Benefits               $0    $3,455,753  $7,031,681  $10,710,363
Total Costs          $1,917,597    $4,568,313  $2,929,110   $3,705,710
Net Benefits       $(1,917,597)  $(1,112,560)  $4,102,571   $7,004,653
Present Value (*)  $(1,917,597)  $(1,011,418)  $3,390,554   $5,262,700

                        Year 5       Year 6       Year 7        Total

Total Benefits     $14,826,636  $15,731,199  $16,695,407  $68,451,039
Total Costs         $2,461,461   $1,948,318   $1,401,435  $18,931,945
Net Benefits       $12,365,175  $13,782,881  $15,293,972  $49,519,094
Present Value (*)   $8,445,581   $8,558,084   $8,633,048  $31,360,953

(*)Assumes a discount rate of 10%.

COPYRIGHT 2002 Healthcare Financial Management Association
COPYRIGHT 2002 Gale Group