Health Care: Sharing The Cost Of Recovery

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By Barbara DePompa
Issue date: Sept. 9, 1996

nyone who has repeatedly filled out forms in doctors' offices or seen rooms full of patient records recognizes that the health-care industry has been painfully behind the IT curve. But that's starting to change as health-care organizations are forced to become more efficient and cost-effective. CIOs are using computer technology to cut costs and improve data management.

Widespread co nsolidation is taking place in the health-care industry as small companies join with larger ones to help reduce the costs of doing business and to share the risks. As these organizations consolidate, they're looking at new ways of doing business and adopting technology to help streamline operations. Key technology trends include the implementation of client-server systems, integration of disparate back-end systems, and the adoption of telemedicine to deliver health care across vast distances. These are all making technology indispensible in managing risk and splitting the rewards of providing cost-effective health care.

Health care is a $1 trillion annual business in the United States, but providers have been notoriously tightfisted when it comes to IT spending. While industries such as banking and financial services spend as much as 15% of their revenue on IT, the health-care industry spends a meager 1% to 3%.

But the industry's technophobia is starting t o change with the onset of managed care. Under a managed-care plan, insurance companies set the rates doctors, pharmacies, hospitals, and laboratories can charge for services. The move to managed care has created competition from a variety of new health-care providers and increased the focus on cost containment, forcing theindustry increasingly to turn to technology to help solve its greatest challenges.

That's why companies such as Tenet Healthcare Corp., formed in March 1995 by a merger between two hospitals, is doing much more to share the risks and costs of providing health care.

"In the past, health-care providers were not held responsible for the cost of providing that care," says Steve Brown, CIO of the Santa Barbara, Calif., company. "Now we are accepting some or all of that risk by making information and the need to manage information of paramount importance."

Spending Boost
Observers say the percentage of revenue spent on technology over the next four years will grow as heal thcare providers strive to integrate existing systems. They're developing applications to further control the cost of care, and implementing more patient-centered record keeping. According to G2 Research Inc., a consulting and market research firm in Mountain View, Calif., IT spending in the health-care and insurance industries in 1995 totaled about $11.7 billion. By the year 2000, that figure will grow to $18.5 billion.

"The health-care industry's investment in IT will increase over the next few years as more health-care organizations focus their investments on analyzing [business] data," says Rishi Sood, practice leader for health care at G2 Research.

Because of increased competition and the move to managed care, health-care organizations are implementing more enterprisewide networks, repositories of clinical and business data, and electronic data interchange systems.

Managed care is driving healthcare automation, according to the results of the sixth annual Health Information and Management Sy stems Society (HIMSS) survey of 1,200 health-care professionals. The survey was jointly conducted by HIMSS and Hewlett-Packard last March.

Forty-nine percent of the respondents said controlling costs was the No. 1 reason for investing in new information technology. That's up from 33% the year before. Cost containment outranked other forces such as competition from other providers (20%) and coping with mergers and acquisitions (17%).

The greatest IT priorities in the health-care industry, according to the survey, are upgrading infrastructure (32%), integrating multivendor systems (27%), and reengineering front-office systems to provide better patient care (23%).

In all, about 80% of professionals expect IS budgets to increase in the next two years. One-quarter expect budgets to increase by 50% or more. Health-care providers are counting on technology to help ease the transition to managed care, says Nancy Aldrich, president of HIMSS.

Health-care organizations in the InformationWeek 500 w holeheartedly agree that their IS budgets are increasing. Medical supplier Baxter International of Deerfield, Ill., decided that spinning off its IS division into a separate company was the best way to control costs. The new unit, called Allegiance Healthcare Corp., will develop vertical applications that can give Baxter and other healthcare companies a competitive edge. The spin-off will go out on its own in October and will be based in McGaw Park, Ill.

Allegiance plans to offer health-care information services, including the management and operation of data centers and telecommunications sys- tems. Baxter also plans to spin off its services for distribution, logistics, and health-care cost containment into the new company, which will generate an estimated $5 billion in revenue in its first year.

Allegiance will package an entire health-care delivery system, says Steven Van Kuiken, director of cost management IT for Baxter. "By standardizing each medical procedure into packages, hospitals can reduce inventory, save money, and reduce waste,'' he says.

To drive costs down, Allegiance will use data warehousing and mining techniques to analyze data in a variety of ways. This will allow the company to better understand how supplies are used to treat various patient conditions. While one hospital may spend $1,000 on suppliers for a specific surgical procedure, another may spend $1,500, with both hospitals achieving the same outcome. "The question becomes, Why spend the extra $500 to reach the same outcome?" says Kathy White, Baxter's CIO and the future CIO of Allegiance.

Health-Care Network
Meanwhile, Tenet Healthcare, with 75 acute-care hospitals and $5.5 billion in revenue, is building its own health-care provider network comprised of hospitals, clinics, doctors' offices, and alternative health-care providers. The goal is to control costs and become more competitive. "The growth of managed care means the primary decision-maker for patients isn't the patient or even the doctor," says CIO B rown. "Increasingly, it's the company with whom a patient has signed up for insurance. The ability to provide cost-effective health care is what's most attractive to these insurance providers, and that's how they decide to send patients your way."

Brown sees the changes in health care as a natural evolution. And information systems are key to handling the administrative aspects of that consolidation, he says.

Tenet signed a $250 million outsourcing contract with Perot Systems in July 1995 to combine two separate corporate networks. The computer operations of National Medical Enterprises and American Medical Holdings were combined into a single unified system run from a Dallas data center. The outsourcing contract covers all nonstrategic projects such as payroll processing. That leaves Tenet's 30 IS staffers free to concentrate on areas of strategic importance to the health-care provider.

Tenet provides four classes of applications--hospital, physician, alternative health-care delivery, and managed care--all running on a single WAN. The applications run on a Hewlett-Packard 3000 midrange system attached via the WAN to remote PCs at each health-care provider's location.

"Our job is to create a portfolio of applications that work together, delivering key functions to users," says Brown. Getting the entire enterprise network properly administered is a big challenge.

The administration, billing, insurance claims, and communications are all key applications that Tenet is trying to implement at each health-care provider's office.

New Opportunities
Once that project is well in hand, Brown says, his staff will turn its sights on other technologies, including the Internet, intranets, and telemedicine, to reach patients in geographically remote regions. Telemedicine uses high-speed phone lines to connect doctors and patients separated by miles. But none of these applications is as yet in production use at Tenet.

The Internet, or specifically a corporate intranet, is widely accessed by customers of Cardinal Heath Inc., a pharmaceutical products wholesaler in Dublin, Ohio. Cardinal has grown from $30 million in revenue in 1984 to $9 billion in 1995.

"Cardinal's growth strategy has hinged on buying other companies and developing new opportunities from its core businesses," says William Bottlinger, VP of MIS at Cardinal. Some of Cardinal's acquisitions include companies involved in pharmaceutical repackaging, blood products, financial services, distribution logistics, IT services, automated robotics, and pharmacy outsourcing.

With so many different businesses and pharmaceuticals customers numbering more than 5,000, Cardinal's biggest challenge is adding value to customer relationships through technology, says Bottlinger. Cardinal has done that so far by opening its corporate networks to its customers. Since 1988, Cardinal has made it possible for customers to receive best pricing information, place orders, and confirm prescriptions in five minutes or less.

The TCP/IP network of Un ix servers is called CardinalChoice. "It helps our customers [pharmacies and hospitals] buy the right drugs at the right price so they can better manage their inventories," Bottlinger says. The original network has been expanded so that pharmacies with PCs can access Cardinal's corporate information via its intranet, Bottlinger says.

The use of the Internet in the health-care industry is in its infancy but is growing rapidly. About 55% of the HIMSS survey respondents say they use the Internet for clinical research, and 33% say they use it for E-mail between physicians. Nearly 75% of respondents say their institution is either building or already has a World Wide Web site. The biggest uses for sites so far are for information on clinical specialities and services, and providing hotlinks to other health-care Web sites.

Care Via The Web
Another interesting development in information systems for the health-care industry is the formation of Healtheon Corp., a Palo Alto, Calif., service provider founded by Jim Clark, the father of Netscape Communications. The goal of Healtheon is to bring Internet and Web know-how to health care.

Elimination of paper records and reengineering health-care administration are two items Healtheon plans to address. The service already lets consumers sign up electronically for health coverage.

These and other developments indicate that the health-care industry is becoming more attuned to the ways in which technology can help solve its problems.

Efficient and effective application of IT offers tremendous opportunities to provide quality patient care in today's increasingly cost-conscious managed-care environment.

To view the IW 500 Health Care chart in PDF format click here

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