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A Living Document

September 25, 2008
by Daphne Lawrence
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Savvy CIOs create budgets for the short term, the long term, and everything in between

Rick Schooler

Rick Schooler

“IT budgeting is the toughest budget for health systems,” says Rick Schooler, CIO of seven-hospital Orlando Health System in Orlando, Fla. “Once they figure their revenues, hospitals start to scratch their heads and ask ‘Why is this IT thing getting bigger?’”

And it keeps getting bigger. As EMRs, and HIT applications continue their explosive growth, IT budgets must keep up. “IT is consuming, from a capital perspective; 20 to 25 percent of the capital budget or more, depending on the stage they're at with their EMR,” says John Vitalis, senior principal at the Chicago-based Noblis Center for Health Innovation. In the early stages of an EMR deployment, that figure can easily rise to 50 percent. Numbers like that take some explaining. “CIOs have to fight for every dollar and be very proactive,” according to Vitalis. He says good CIOs relate budget back to the hospital's business strategy.

Historically, long-term IT budget strategy used to project five years out. Today, however, that timeframe is shrinking. “Because technology is developing at such a rapid pace, it's really hard to do a strategic plan and IT budget beyond three years,” says Bill Phillips, CIO of 604-bed San Antonio, Texas-based University Health System. And as national nursing and physicians shortages continue, and patients become more like partners in their healthcare, many project a large push in home health and telemedicine. “There's going to be a lot of technology coming in the short-term future,” says Phillips. “I think predicting out past three years is not valid anymore.”

Bill Phillips

Bill Phillips

Inflation is also shortening the budget horizon and impacting areas like cable acquisition and construction. “The cost of copper cable is out of sight right now,” says Phillips. “How do I deal with that next year?”

Whether one, three or five years, most agree that IT budgeting should be an ongoing continuous strategic initiative, with top level executives kept in the loop. Schooler says his IT budget has doubled in seven years, with the organization endorsing those increases along the way. “You need a thermometer in your hand the whole time,” he says. “People need to be aware of where things are standing when you move forward because you can have radical changes from one year to the next in raw dollars.”

Del Dixon, CIO of 312-bed South Shore Hospital in Weymouth, Mass., says his tactical IT spending to support operations is examined constantly, too. “We never want to get into a position where every three years we're struggling and have to spend a large chunk of the capital budget on upgrading systems.” At South Shore, he tries to stay technology-current as much as possible with PCs and printers, software licensing, etc.“We do a technology refresh every year,” he says.

For long-term projects like an EMR, however, the planning may need to go out to five years — or even more. “We are doing forecasts that go out seven years,” says Schooler. Though he agrees that budgets aren't very accurate past three years, the pressure for capital procurement necessitates those predictions. “We have to forecast bottom line,” he says. “Then we incorporate debt service for bonds along with what kind of margin we're going to make and play that out.”

Whether with year-to-year or long-range forecasts, players in the IT budget process have expanded beyond the CIO. In addition to executive involvement, most agree the complex IT budget needs at least a dedicated FTE to work through the process. Vitalis recommends that large health systems have someone managing expenditures. “It could be an IT staff person or a financial person that resides in the finance department but is dedicated to IT,” he says. “Organizations need to look at the position as a necessary support function for the CIO.”

Schooler has a financial liaison who reports to financial planning, and says building a relationship into that department through this FTE is a best practice. “Though the report is to finance, he's our guy,” says Schooler, adding that when IT liaisons report to finance, there is more credibility. “Our guy knows all the extraordinary items that have been entered. I have to have a guy like that in their camp promoting what I'm doing,” he says. Schooler feels IT financial managers reporting through IT can easily become another mouthpiece for the CIO. “When they're part of the financial team, then you're going to have that support.” And, he says, they can't just show up at budget time and say, “I'm going to be your financial liaison.”

Effective governance calls for others in the organization to help with budget decisions as well. Dixon coordinates his budget through 200 South shore managers. “We ask them what they need, and break it out into clinical, business, and technology strategy,” he says. “Then we ask them to go back and prioritize. The CFO doesn't play in the room until we get near the end.”

That effective IT governance also means making capital investment decisions with senior executives, because those costs can easily spiral. “Each year, as we keep spending more capital, you start seeing more FTEs, more education required for those FTEs, more maintenance, and so it begins to build,” says Schooler. “And it's not linear.”

Another recommendation is being ready to supply finance with items that will drive up the budget. Schooler says the earlier executives get those to finance, the better. “Once they make their projection, typically you're trying to explain why you missed it,” he says. He adds that it is a continuous process, “because everybody's going to forget about that at budgeting time.”

Phillips agrees that bringing information to the table needs to be continuous and timely. He is constantly gathering data to identify the causes of any budget deficits. “Every month, I'm looking to drill down, find out exactly what is the cause, and be ready to explain it to my management team.”

If an IT organization is off in spending, benchmarking is one way to help the rest of the health system understand why. “Benchmarking is really important because you're dealing with other executives who are not used to seeing the way IT spending can climb,” says Schooler. “Though they may say they want the technology, when the chicks come home to roost, they say, ‘How much? A 20 percent increase?!’”

Vitalis says that CIOs should also be looking at investments from a total cost of ownership perspective, including integration costs, implementation costs, third-party costs, and hardware. He says they can double the budget on a project. “Not considering total cost means you've under-budgeted,” suggests Vitalis. “You have to find the money somewhere else, or the project can get delayed, or you may not be able to implement full functionality.” He adds that its like building a house.“If you don't budget the whole house, what don't you finish? The basement?”

Vitalis believes that CIOs also need to manage their portfolios. “Organizations don't always retire older applications,” he says. “And the organization ends up having to maintain and support that application. It's important to look at what can be retired.”

Though CIOs can get the CFO and board to understand where the costs are, they still need to justify increases. And one area of IT spending that's seeing a lot of increases is maintenance contracts, which typically have five percent inflationary clauses built in. According to Phillips, controlling those multi-million dollar contracts takes vigilance. “We monitor them every month, including the percentage of increase. It's an ongoing battle,” he says. “We will call every one of our vendors and say, ‘We won't pay the increase this year.’ It's really about confronting your vendors and negotiating your maintenance contracts year after year, and trying to control those increases.”

Most agree that an IT budget needs to be tightly integrated with the overall health system—and there are some budgeting tools that can help CIOs see the entire process online. Schooler uses a system called EPSi (recently acquired by Atlanta-based Eclipsys.) “If you're still doing your budget on an Excel spreadsheet independent from anybody else's,” he says “that's going to become a problem as you grow.” He believes the key is having budget integration between IT and the rest of the organization. “You need to know where you are relative to others.”

A good example of why it's important to see the entire view is biomed. Though more and more hospitals are beginning to put biomed under the IT umbrella, if it comes under facilities or engineering, an integrated view will help in terms of funding. Vitalis says what should be available is a single view of what the IT expense is, no matter who is responsible for it. “More organizations are taking a more holistic view of IT and IT expenditures,” he says. “They recognize the biomed network is really an IT expense.”

Do savvy CIOs have to ‘sell’ the IT budget? “It's not a problem, but it is a process,” says Schooler. He says CIOs will have success if they've garnered the support of other executives who value what IT is doing. But how to get that support? “When you get recognition for things like the Most Wired survey or HIMSS Analytics,” says Phillips, “that ultimately helps you get your budget across to the board. When you come in and say, ‘We're a leading technology organization and this is how we got here,’ they understand the value of IT.” Phillips says it's important to educate top executive leadership on the value of IT through documented papers and magazine articles.

Despite having to specifically work on the budget from time to time, most agree that budgeting is an ongoing function. “My number one takeaway is, don't think that budgeting is something you do once a year,” says Schooler. “If you do budgeting once a year, you're going to be in trouble. You can't lay that many surprises on the team all at once.”

Healthcare Informatics 2008 October;25(10):18-21

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