In Part I of this interview, Healthcare Informatics editor Daphne Lawrence talks with Rick Schooler, vice president and CIO of the seven-hospital Orlando Health network in Florida, about some of the challenges involved with budgeting for IT.
DL: What’s your fiscal calendar at Orlando?
RS: We’re in the middle of getting it finalized because our fiscal year starts on October 1. I spent the last two weeks with my teams across all my areas trying to understand why are we budgeting so much beyond what has been provided as a projection. And I think therein lies a pretty significant problem. If you look at how most hospitals operate, the revenue producing areas generally have some sort of a run rate on volume and they’ll put in an inflation factor into it. In my opinion, IT budgeting is the toughest budget for health systems to do. Once they figure their revenues out, they start to scratch their heads and say, ‘Gee why does this IT thing getting bigger?’
DL: Where are the increases coming from?
RS: The increases are generally driven by new technologies that we decide to put in. We add people along with that, and there’s also maintenance tied in for hardware and software. What happens typically is that those things happen during the year and it’s usually because of the way we budget healthcare. We don’t necessarily get to the point of spending all that capital that’s driving the expense until later in the year. What we do as a health system, and I think most health systems do, is try and establish a run rate based on the first six or seven months of the year, and a lot of this stuff isn’t included in it. So then you get a number as a target, but you don’t know what it really is until you go through the month’s process. And it’s getting all the details.
We have literally hundreds of systems that all have maintenance contracts tied to them. So we have a very detailed process we have to go through to ensure that every year we know what our current contract increases are going to be for hardware and software. Then all the new stuff that’s coming on. And then as we continue to find people paying maintenance on things they shouldn’t be, bringing that in to IS. And it’s all got to be zero based.
DL: So you don’t roll money to the next year?
RS: We roll money over on capital, but not on expense; we’re zero based.
DL: Is nationwide inflation giving you any surprises?
RS: With capital purchases for new systems, I think the companies are going to keep trying to pass it on. I think long term if our economy stays the way it’s going, in two to three years I think we are going to begin to see that it’s going to put pressure on wages. We try and protect ourselves from inflation with the limits on maintenance contracts.
DL: Have changes in the IT arena impacted the way you’re structuring your budget?
RS: We’ve had two major impacts on our budgets. The first, because of effective governance, I now have other people helping make decisions on my budgets in a way that in years gone by never occurred. The second is that we are doing forecasts that go out seven years on capital and expense spending, with some of the financial tools we use for modeling.
DL: Can that be accurate?
RS: I don’t think it’s even close to being accurate once you get out past three years, and it’s not really accurate until you’re in the year you’re in. But with the pressure that’s on us as health systems for long term planning, in particular for capital procurement, we have to forecast bottom line and that will tell how much we think we have to borrow. And then we incorporate debt service for bonds along with what kind of margin we’re going to make, and so we start playing that out over years. We know that it’s not been perfect the past two or three years, but we have to do it.
DL: And getting back to the governance?
RS: Having an effective IT governance means you make the decisions with executives across the organization to do things. And those things that we agree to do are essentially capital investments. At the same time we identify the expense impact that goes along with that capital investment. So each year as we keep spending more capital, you start seeing more FTEs, more education and training required for those FTEs, and more maintenance, hardware and software contracts, so it begins to build. And it’s not linear. So as the expenses continue to increase, you really need to have a team of people that have agreed in putting those increases into place.
DL: So it’s about the ownership?