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Number Crunching

June 1, 1998
by Charlene Marietti
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Today’s general ledger may not be much different from yesterday’s, but forces from within and from without healthcare are converging on the back office and its financial systems--placing new demands and forcing upgrades and new purchases.

Some of the drivers are healthcare-specific--managed care, government regulations, corporate compliance--others reflect the mergers, acquisitions and consolidations that are changing the face of the industry. A third driver is the industry nightmare of year 2000 compliance.

Changing managed care requirements--new types of contracts as well as the move to capitation and global case rates--are pushing organizations toward upgrades and new systems. Although not the sole factor, Y2K is not only driving, it’s stirring up competition within the vendor market, says Catherine Fields, director of financial product marketing for Compucare Corp. of Reston, Va. Upgrade paths offered from the larger vendors are often so expensive that buyers are looking around before committing to an upgrade for a legacy system. "It has opened up a door of opportunity," she reports, "particularly for smaller companies."

Vendors are feeling the weight of Y2K. Threat of litigation certainly plays a role, but a recent study underwritten by Compucare bears out a common theme running throughout the industry. "Many hospital and health system contacts… assume their software vendors will become year 2000 compliant," comments Ron Bernier, president of Compucare.

Vendors in other parts of the market concur. "The importance of Y2K has not hit many of our physician practices who are depending on vendors to bring them up to speed," says Kelly Kavanaugh, vice president of marketing for Reynolds and Reynolds Healthcare Systems, Dayton, Ohio. Such physician practice management vendors have good reason for concern. As she points out, forward scheduling practices dictate Y2K compliance for those systems by year-end.

A horse race

When it comes to general financial applications--that is, true back office accounting packages--there may not be much real incentive to change workhorses. And, according to survey-based research cited by Bob McCullough, market intelligence manager of Infinium Software, Inc., Hyannis, Mass., many healthcare organizations haven’t changed. They typically hold onto financial systems for five to seven years as compared to financial services organizations’ three to five year turnover. It’s even longer in the physician practice management market, according to Kavanaugh. The mind-set there expects a system’s life of greater than five years, she says; the average is seven to 10.

By driving systems to exhaustion, healthcare may extract more return on investment, but at what cost? A period of five to seven years, McCullough points out, passes through many generations of technology and application capabilities.

The front-end lingo may be different--healthcare CFOs speak in terms of patients and billing as opposed to revenues and accounts--but there are no drastic differences between general financial and healthcare financial systems, according to McCullough. It should be no surprise, then, that healthcare organizations are finding more vendors at the door. (See "Cross-market Forays" below) Traditional HIS vendors such as HBOC, SMS and MEDITECH must now compete head-to-head with industrial-strength vendors the likes of Infinium, Lawson, PeopleSoft and Ross.

That makes for a pretty crowded field of HIS and general financial vendors queuing up for the buys. There definitely is an upsurge of interest and more organizational plans to buy, confirms McCullough, but healthcare plans to spend fewer dollars than other industries. Ultimately, cost divides the turf.

Although HIS products typically include financials as part of the core functionality, the strength of traditional HIS vendor products is--and always has been--around the healthcare-specific administrative applications. HIS vendors have always provided adequate financial systems, but they have never been in the same league as those vendors active in financial services and manufacturing industries. Some HIS vendors are partnering with best-of-breed financial companies--SMS is an example here; others are playing to the differences.

Price-point and functionality are the main determining factors in choosing HIS or best-of-breed. McCullough says that if a hospital is considering an HIS mainly for the clinical system, with the financial system as an afterthought, the bundled HIS price is difficult to beat. Conversely, those looking for a very robust financial system tend to look to the best-of-breed vendors. Fields agrees, noting that people seldom come to HIS vendor Compucare just looking for general accounting applications. Sticker prices from a major industry vendor are high--often exceeding $1 million, she says. The $50,000 for an Affinity system plays well to the cost-handicapped. In general, Fields has found that smaller hospitals are more concerned with price than with functionality--and they are more apt to buy the entire HIS system, including financials, from a single vendor.