By Dick Escue, CIO, Valley View Hospital
According to the Big Three credit-rating agencies, more than 30 American hospitals and health systems have received credit score downgrades in the past year. These hospitals are losing access to capital, being charged higher interest rates on their investments and diverting resources from their own bedsides. An overwhelming majority of these downgraded systems are non-profits.
What is fueling the financial meltdown of these pillars of our healthcare system?
In many cases, it's software-based IT forcing non-profits into the red. Implementations can cost hundreds of millions of dollars--and in extraordinary cases, like the recent go-live at Partners Healthcare in Boston--upwards of $1 billion. These projects require massive outlays of capital, teams of consultants and support staff, recurring licensing fees and annual maintenance costs.
Slow onboarding can impinge productivity for years. One of the largest costs associated with software--and oftentimes, one of the most difficult to project--is IT personnel, who engage in an endless stream of server maintenance, patches and troubleshooting. It's nearly impossible for hospitals and health systems to accurately forecast all of the downstream costs associated with getting the results they need from software.
It's no surprise, then, that these institutions are struggling under the weight of their outsized, sometimes unpredictable, financial pressures. And yet, there is a thriving market supporting these practices. Why are so many hospitals working against their own self-interest, continuing to swallow exorbitant costs for static technology?
As a CIO who has worked for both non-profit and for-profit health systems, I have observed shocking discrepancies in financial approaches to IT decision-making. Non-profits treat IT as an asset or fixed cost--a 'one-and-done' investment which depreciates, and whose initial cost is amortized across the many departments and patients it serves. This is the standard total cost of ownership (TCO) framework used for asset-based investments, and most of the time, it works beautifully.
The notion of health IT as an asset, however, is misguided. Any tool that requires a complex web of support personnel to extract results is, by definition, central to hospitals' operating model. A simple TCO analysis can't forecast all of the operational costs necessary to increase margin under this model. That's because operating costs are variable, subject to fluctuation over time. In the case of enterprise software, operating costs have an insidious way of inching up, not down. Years after their initial TCO analyses, many non-profits on software find themselves carrying costs far beyond what they predicted.
By comparison, for-profit health systems tend to favor a cloud-based service model over hosted software, effectively shifting their IT expenses into the variable operating cost category. For-profits' rules for purchasing technology are simple: increase operating margin through efficiency and reduced overhead. One of the most efficient and most effective ways to get those returns, as well as accurately predict costs, is to buy cloud-based services. This model reflects the full value of an always-on network, continuous free updates, and an army of service workers behind the scenes. Thanks to the cloud's economies of scale, the total cost to generate results is less than the army of IT workers and support staff powering a traditional software-backed approach. And unlike software, whose operating costs fluctuate unpredictably, cloud-based services are charged as a fixed percentage.
I think of this financial model as the total cost of outcomes, not ownership, because it requires an IT investment to actively earn its keep. For profit, publically-traded companies have arrived at this model through a total fixation on creating shareholder value.
Ultimately, non-profits need to take a page from the for-profit playbook. That requires a clear-eyed, pragmatic assessment of the costs involved in making IT an active tool for growth. Cloud computing converts fixed costs into variable costs and has proven to be a nimble tool with better returns than even the most pedigreed software. It's a shift in mindset that will get non-profits thinking about their margins--and by extension, their missions, too.
Dick Escue is the Chief Information Officer at Valley View Hospital in Glenwood Springs, Colorado.