How Much Should Healthcare Organizations Spend On IT?

Healthcare Dives Into Big Data

"How much should we spend on IT?" I have been asked this seemingly simple question for more than 30 years. The answer has always been the same: It depends on what you want to get back.

The answer was less complicated when computers didn't do very much and the automation of mundane manual tasks was obvious. Providers tackled mainframe-based billing in the 1970s. We developed functional ancillary systems when the mini-computer explosion took place in the 80s, and we started using smart desktops for order entry by the 90s. In the early years of the new millennium, computers and software finally began to directly impact patient care. Technology has now become ubiquitous, and healthcare is highly dependent upon both its effectiveness and its availability.

[Under the microscope: Healthcare Organizations Prep For Increased Audits.]

As technology moved from the back rooms to the bedside, we fought a related series of skirmishes as we centralized and standardized IT functions, from departments to hospitals to delivery systems. Each battle revolved around the specific need of a group vs. the collective need of the integrating entity, but little was said about how IT was measured and evaluated. Adding complexity was the fact that we are a highly regulated industry. At every turn, the direction has been heavily influenced by the newest regulation; if diagnosis-related groups (DRGs) were a teaser, the American Recovery and Reinvestment Act (ARRA) and the Patient Protection and Affordable Care Act (ACA) were tidal waves. And as the waves passed through, we still managed to avoid the question of how to view IT assets. Leadership instinctively bought more stuff, but the collective insight and communication about incremental value simply did not take place.

During the past five years, the industry has poured money into IT to comply with ARRA and the ACA, even as the economics of healthcare has become more challenging. The piggy bank is depleted and depreciation is pounding operating margins. The cost-cutters have been summoned, and that nasty question is now being asked across the nation: How much money should we spend on IT?

As with most important questions, there is no simple, off-the-shelf answer. You must have strong people, a powerful culture and consistent leadership to even know that it is a hard question to answer in a meaningful way. After spending too much of my career as an expert witness on benchmarking litigations, I can assure you that the answer will not come from a hired gun with a proprietary database. You must dissect your expense structure, align incentives, and stop treating IT as some mystical overhead expense. IT, for the most part, is an investment and should be treated that way. Expect hard return on investment (ROI), but understand that you will only achieve that ROI if you baseline and measure.

Here are seven steps to help you better position your organization to answer the IT spending question:

1. Establish a baseline of all your technology assets. This includes people, equipment, licenses, and contractual obligations.

2. Once you have a baseline, keep it current. Figure out a way to make this a regular discipline.

3. Acknowledge that most of your "lights on" production support costs are fixed. They should be understood and compared to similar organizations, but they're not going away unless you turn off the associated systems. The expense is directly tied to how much and how well you are expected to support operations.

4. Have strong IT governance and establish guiding principles to ensure you do not inflict long-term pain. A few frightfully obvious areas include business continuity, security, and refresh cycles. If you're still fighting to get off of Windows XP, for example, you have a problem. And remember, just because we call these fixed costs doesn't mean they won't increase. It just means that they are not discretionary.

5. Differentiate between fixed and discretionary expense. Some projects are mandated or unavoidable (ICD-10, meaningful use). Most projects, however, are discretionary and should be treated that way. What is the hard dollar return and how does it improve both the patient and clinical experience? Who owns the investments and how will we know if the effort was successful? Most important, who owns the responsibility to collect that return?

6. Most provider organizations continue to have too many small projects that consume too many resources without keeping score. These activities also make macro-level benchmarking an exercise in futility. Keep small projects short (and finish them). Develop strong IT governance to keep the number under control.

7. Steal the best from the commercial IT outsourcing model. Continuously measure scope, service levels, and the cost of production services. Treat new investments (projects) as investments, expect a return and remember they will become part of the future production environment.

Finally, consider putting an end to annual allocations of IT expense. Direct costing to a central source increases system alignment and removes the unfair taxation argument that is part of every budget cycle. When you understand how and where your IT expenses are going, it helps a great deal. It helps much more if you understand the value derived from the technology that you deploy. If you understand both, you won't have to ask how much you should spend on IT.

Here's a step-by-step plan to mesh IT goals with business and customer objectives and, critically, measure your initiatives to ensure that the business is successful. Get the How To Tie Tech Innovation To Business Strategy report today (registration required).