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Getting What You Pay For

July 1, 2007
by Kayt Sukel
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PricewaterhouseCoopers report finds that value from IT investment does not come quickly or easily.

For the past two years, New York City-based PricewaterhouseCoopers LLP (PwC), in partnership with the Wharton School of Business at the University of Pennsylvania in Philadelphia, has examined key business data from nearly 2,000 hospitals. In doing so, the organization has created a rigorous macroeconomic model of how information technology (IT) investments affect hospital operating costs and performance.

Nick Beard, M.D.

One of the products of that research is a report entitled, "The Economics of IT & Hospital Performance," released earlier this year. The report's main finding was that IT investment does pay off for hospitals, but only once organizations reach a "tipping point" of spend that relates to performance improvements and business savings. In addition, the researchers caution that those coveted returns on investment are not immediate—it takes significant time for organizations to see the cost benefits of IT systems.

"It's a subtle message," says Nick Beard, M.D., principal author of the report and a director at PwC. "We believe this report shows there are reasons to believe that real financial returns can be accomplished, but one needs to be realistic about the difficulty in achieving them. They are not automatic or immediate."

Measuring capital value of IT

The basis of the model is PwC's proprietary IT Capital Index, a scale that indicates both a hospital's mix and capital value of IT systems.

"It's not simply a measure of how many applications an organization has," Beard says. "When we came to look at how many applications they had, we took account of not just the simple count but their respective complexity and value."

Some critics have argued that hospitals, by their very nature, do not fit so nicely into general business models. But Beard makes a case that the similarities outweigh any differences.

"There is some legitimacy to that point of view, but it is not a major detractor from the findings," he says. "In the end, any organization that is run on a commercial basis—and a significant proportion of healthcare organizations in the United States are run on a commercial basis—has certain basic principles."

Vi Shaffer, vice president of research at Gartner Inc., headquartered in Stamford, Conn., agrees.

"Any methodology attempting to do this kind of analysis will have weaknesses, will have its naysayers," Shaffer says. "But cost is a reasonable thing to measure. Simply put, more effective organizations manage their costs better."

Preparing for change

The study's been lauded as the first of its kind, but its findings reveal issues analysts have been discussing for years.

"The study has taken the time to go out and document statistically what people have thought for quite some time," says Michael Davis, vice president of HIMSS Analytics in Chicago. "It's a problem in this industry that we don't do a good job of measuring processes, and then understanding when we implement expensive IT systems what the impact to those processes might be."

But it's critical to remember that the investment involves more than an organization just cutting a bigger check.

According to Beard, it takes more than a purchase. "Just buying software doesn't bring benefits," he says. "The really hard and painful work is organizational process change. That's where the benefits really come from. And it's difficult and takes time."

Shaffer agrees. She believes that organizations need to do serious assessment before committing to IT systems, setting up key business objectives for the investments and then measuring them after the fact to see that they were met.

"You need to take the time to identify what business value you are going to get from new IT investments before you make them," Shaffer says. "The most important thing is that the organization is prepared and set up to create that impact."

Kayt Sukel is a contributing writer based near Frankfurt, Germany.

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