The national health care system is facing difficulties. Pressure to contain health care costs continues to grow. The public is concerned about the future of health care insurance and the quality of medical care. Not surprisingly, the federal government is proposing new strategies to improve the state of care and reduce its financial costs. Numerous models and policies have been implemented to reduce medical costs and expand the scope of insurance coverage.
Yet, their effects were temporary. Today, the implementation of electronic health records (EHR) exemplifies one of the most promising approaches to financial management in healthcare. The benefits of the EHR listed in the literature are numerous and diverse, from greater productivity and workplace efficiencies to reduced costs and improved workflows. In reality, the impacts of the EHR on financial management in healthcare are quite controversial. Small physician practices and large medical providers should be prepared to face increased financial costs and provide additional financial resources to train their specialists to work with the EHR.
Electronic Health Records: Defining the Concept
To understand how electronic health records impact financial management in healthcare, the meaning of the concept needs to be defined. For this paper, the EHR is defined as a “longitudinal electronic record of patient health information generated by one or more encounters in any care delivery setting” (Sidorov, 2006, p.1079). In other words, the EHR is technology-generated and technology-mediated clusters of information that are used to accumulate and manage the data about the patient and provided by the patient during one or more encounters with a medical professional.
The EHR is used to support several care-related activities, including financial management and evidence-based decision-making (Sidorov, 2006). The implementation of the EHR is mostly justified by the promising cost savings: the system has the potential to reduce the trillion costs of healthcare by at least 20 percent (Sidorov, 2006). Needless to say, the use of the EHR has profound implications for financial management in healthcare, and the organizations, which use electronic health records, will have to review their financial practices both in terms of the emerging benefits and the growing implementation costs.
The growing interest in the use of electronic health records and their implications for financial management is justified by the assumption that the EHR is likely to improve physicians’ time efficiency and nurses’ productivity (Poissant, Pereira, Tamblyn & Kawasumi, 2005). A systematic review of the literature performed by Poissan et al. (2005) confirmed that, after the implementation, the EHR led to a significant reduction in documentation processing time, but only in cases when the evaluation process followed almost immediately the implementation process. However, even these assumptions and findings are not as significant as the mandatory provisions of the Health Information Technology for Economic and Clinical Health Act, or the so-called “meaningful use” policy.
Under the discussed Act, healthcare providers are allowed to apply to Medicare and Medicaid incentive benefits, when they implement the EHR technology and use it to achieve the objectives determined by the Act (Health IT, 2010). The Incentive Program for Electronic Health Records defines the minimum requirements, which providers must meet to qualify for Medicare and Medicaid incentive payments. Standards and Certification for Electronic Health Records further specify the certification criteria and standards for the EHR technology to be used by hospitals and providers, as they are trying to meet the specified requirements and objectives. The meaningful use process incorporates three different stages:
- Stage 1 – data capture and sharing;
- Stage 2 – advanced clinical processes; and
- Stage 3 – improved outcomes (Health IT, 2010).
As a result, all healthcare organizations and providers should prepare themselves to deal with the EHR and their financial management consequences.
Electronic Health Records and Consequences for Financial Management in Healthcare
Taking Other Industries as Example
When it comes to the potential benefits of the EHR in healthcare, other industries are often taken as an example. Before healthcare, numerous industries adopted electronic systems to serve the needs of customers and suppliers. The most advanced in terms of electronic data management were the telecommunications and general merchandising industries (Hillestad et al., 2005). The most visible consequences of the electronic data implementation in those industries were automated teller machines, bar-coded retail checkouts, online shopping, and consumer reservation systems (Hillestad et al., 2009).
Despite considerable investments, the benefits of electronic information in other industries were obvious. The industries mentioned above managed to achieve a 6-8 percent annual growth in productivity and revenues (Hillestad et al., 2009). However, not all benefits resulted from the adoption of IT, and not all industries equally benefited from the use of IT systems in their operations. Moreover, it is wrong to believe that the healthcare industry operates in the same conditions and possesses similar resources to adopt and benefit from IT systems.
In reality, the healthcare industry and its financial management operations differ dramatically from the ones adopted in other industries. The telecommunications and general merchandizing industries have the necessary ingredients to achieve such growth (Hillestad et al., 2009). These ingredients include but are not limited to substantial investments, competition on quality and cost, integrated information systems, and a strong infrastructure that enables the existing firms to reduce the costs without hiring additional personnel (Hillestad et al., 2009). Other industries set a positive example of financial improvements that result from the adoption of IT.
Yet, the real impacts of IT should be considered within the limits of the healthcare industry, because the conditions of its performance are peculiar and inconsistent with the operational models used by other industry providers. Other industries face the limitations of IT, including interoperability problems in the retail banking industry (Sidorov, 2006). Healthcare providers should realize that IT will not solve all financial issues, while the burden of financial costs due to implementation is likely to grow.
The EHR and the way it benefits healthcare finances
That the EHR holds the promise to improve the state of finances in healthcare is difficult to deny. Most financial benefits and cost-savings that result from the use of the EHR are associated with new efficiencies in health care delivery (Sidorov, 2006). The impacts of the EHR on worker productivity have been widely documented. According to Sidorov (2006), computerized provider entries save time and costs. EHR supporters claim that the decision support provided through the EHR help reduce the errors and omissions of inpatient data (Sidorov, 2006). As a result, the risks and costs of patient errors will tend to decrease. These, however, are not the only financial benefits of the EHR.
The most essential financial benefits of electronic health records include increased revenues and averted costs. Payer-independent benefits associated with the implementation of the EHR apply equally to fee-for-service and capitated patients (Wang et al., 2003). These benefits grow from reduced transcriptions and paper chart pulls (Wang et al., 2003). Every chart pull takes approximately $5 in healthcare costs, and medical professionals also need time to retrieve the information and re-file it. The use of the EHR system allows reducing the amount of chart pulls by 600; as a result, transcription costs reduce by 28% and, depending on the implementation, can achieve 100% (Wang et al., 2003). Of course, these numerical values vary across healthcare organizations, but the overall principle of cost reductions is clear.
Capitated reimbursement also undergoes some changes under the impact of the EHR. According to Wang et al. (2003), these reimbursement values grow from the averted costs which, in turn, result from reduced utilization of health care services. The EHR has a system of alerts and reminders, which reduce the risks of adverse drug events, minimize and optimize the use of radiological and laboratory procedures, and offer hints to replace more expensive medications with cheaper but effective alternatives (Wang et al., 2003). The EHR does have the potential to reduce the risks of adverse drug events by as much as 34% (Wang et al., 2003). Reminders of alternative less expensive drugs can allow reducing up to 15% in total drug costs (Wang et al., 2003).
Finally, the implementation of the EHR system is directly associated with changes in fee-for-service reimbursement, which further impacts the losses and revenues facing the healthcare organization. By using computerized forms at each patient-physician encounter, the organization can minimize the risks of billing errors, while also capturing the most essential features of all in-office procedures (Wang et al., 2003). Such errors can decrease by an unbelievable 78% if applied properly (Wang et al., 2003).
On average, the potential financial gains for the providers, which have the EHR systems established and running, can reach $33,000 per year (Miller et al., 2005). These benefits will come mainly from the two following sources:
- efficiency-related savings and/or
- increased levels of coding (Miller et al., 2005).
Providers that have already implemented their EHR systems have more than half of their financial benefits coming from increased coding levels, whereas efficiency-related benefits account for the remaining 48-50 percent of financial savings (Miller et al., 2005). Healthcare providers also report substantial pay-for-performance and malpractice insurance rewards, which would have been unachievable, had they failed to implement the EHR system on time. Still, the financial management impacts of electronic health records are not always positive.
The EHR and the financial management negatives
It is difficult to imagine that providers’ transition to the use of the EHR will be costless and smooth. Especially in the case of small providers and physician practices, the costs of implementing and running the electronic health records system are going to be considerable. First and foremost, all major and smaller providers will need time to repay their investments and costs (Miller et al., 2005). One in fourteen practices will have its costs repaid within nine years, and two others will never manage to pay for their EHR (Miller et al., 2005). Some providers and practices will have to reconstruct their billing practices to meet the new EHR requirements, while others may even need to return to paper documentation, in case they lose their investments.
Second, healthcare providers will have to adjust to the growing annual budgets for technology implementation and support. Baron, Fabens, Schiffman, and Wolf (2005) write that businesses, which spent $10,000 annually on maintaining their technology systems, will have to increase their postimplementation budgets to no less than $40,000. The new budget includes annual payments to hardware and software support vendors and the carrying costs for the annual financing of the system purchase (Baron et al., 2005). For solo and small practices, the initial EHR costs can reach $44,000, and the annual maintenance budget can be as large as $8,500 (Miller et al., 2005).
Sometimes, small healthcare practices will have to spend as much as $63,000 to have their EHR system implemented (Miller et al., 2005). The presence of the EHR system does not bring any additional revenues in the first years after the implementation. Moreover, physicians and nurses may display lower efficiencies, because the new system takes more time and generates more work.
Third, training and competence will require additional financial investments. At the very beginning, going technological will render most medical professionals incompetent in their core functions (Baron et al., 2005). Medical assistants will have to learn how to record vital signs on the computer and retrieve the earlier laboratory results. Most likely, waiting time for patients will increase dramatically as a result of EHR implementation. The costs of software installation and training for physicians and nurses can average $22,000 per provider (Miller et al., 2005).
At the same time, healthcare providers should be prepared to lose revenues, while the system is being implemented and physicians and nurses are being trained. Lost revenues due to reduced visits during implementation and training can average almost $7,500 per provider (Miller et al., 2005). Some providers may choose to work longer hours, and the extent of these revenue losses will depend on the number of times physicians and nurses agree to stay at work beyond their normal workday. Physicians and nurses will need the training to learn how to set up new records and manage the existing ones. The workflow will also have to be redesigned.
It is naïve to believe that healthcare providers, especially small ones, will switch to using the EHR without major costs. Financing is one of the main obstacles to adopting EHR systems in medical practice. This paper shows that healthcare providers can face tangible financial benefits due to the EHR, but the costs of implementation and maintenance are likely to zero those benefits. That the U.S. government spends millions of dollars on IT adoption in healthcare means that either provider do not realize its marginal utility or they do not see any tangible benefits from using the EHR in their practices. Baron et al. (2005) suggest that physicians will need between $12,000 and 24,000 financial incentives to adopt the EHR system immediately.
Until then, most providers will be balancing the edge of a belief that electronic health records have the potential to improve their efficiencies and performance. Financial data are more compelling than the promise of feasible improvements, and it is difficult to imagine that the EHR systems will become commonplace anytime soon.
Baron, R.J., Fabens, E.L., Schiffman, M. & Wolf, E. (2005). Electronic health records: Just around the corner? Or over the cliff? Annals of Internal Medicine, 143, 222-226.
Health IT. (2010). Meaningful use. HealthIT. Web.
Hillestad, R., Bigelow, J., Bower, A., Girosi, F., Meili, R., Scoville, R. & Taylor, R. (2005). Can electronic medical record systems transform health care? Potential health benefits, savings, and costs. Health Affairs, 24(5), 1103-1117.
Miller, R.H., West, C., Brown, T.M., Sim, I. & Ganchoff, C. (2005). The value of electronic health records in solo or small group practices. Health Affairs, 24(5), 1127-1137.
Poissant, L., Pereira, J., Tamblyn, R. & Kawasumi, Y. (2005). The impact of electronic health records on time efficiency of physicians and nurses: A systematic review. Journal of American Informatics Association, 12, 505-516.
Sidorov, J. (2006). It ain’t necessarily so: The electronic health record and the unlikely prospect of reducing health care costs. Health Affairs, 25(4), 1079- 1085.