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By Jeffrey Rothfeder  |  Posted 11-01-2004

Can IT Save the Healthcare Industry?

A healthcare industry consortium in California may have discovered the perfect way to convince physicians in the Golden State to provide high-quality healthcare: Pay them bonuses to do so.

In 2003, under a program that has spawned imitators nationwide, the Integrated Healthcare Association, which brokers partnerships among medical providers and payers, debuted a program in which six health insurers, representing 7 million patients, measured the level of medical care doled out by 45,000 doctors, based on a set of performance measures.

The doctors who scored best received a tidy windfall from the insurers at the end of 12 months. In all, the top-ranked physicians logged about $50 million in bonuses in the first year of the pay-for-performance program.

Health professionals generally agree on what constitutes superior clinical and patient satisfaction standards—everything from the use of appropriate medication to timely access to care to appropriate communication between doctors and patients—and these criteria became the basis for measuring physician performance in the California project. But the program's developers decided to add another, more unconventional benchmark: investment in information technology.

Ten percent of the rankings were based on whether physicians had installed electronic records systems in their practices and were using clinical decision-making tools when seeing patients.

The results were telling: Physicians who spent the most on computer systems also scored highest in clinical and patient satisfaction.

"There's no doubt that IT makes a difference in quality of care," says Tom Williams, IHA executive director and a 25-year veteran of health insurance administration. "The IT component provides the structure to support the process of clinical care. When you undergird the process with a good foundation, you will get a better outcome."

Williams is so convinced of the value of information technology that IHA has doubled its weight in the physician performance rankings for 2005, to 20 percent.

While IT can help, its impact is limited as long as healthcare remains the poster child for dysfunctional business models. In the fun house that is the healthcare industry, hospitals and doctors have no incentive to cut costs and to become more productive because so few of their consumers—that is, patients—are footing the bill.

The task of paying falls primarily on insurers, which are obviously interested in trimming the costs charged by providers, but only by using their vast numbers of customers as leverage to dole out less money, rather than by installing technology to create the collaborative networks that could improve communications between payers and hospitals.

But by squeezing providers, insurers frequently end up lowering the quality of healthcare that patients receive. And even though they feel the pain of the industry's acutely ill business model, patients can't complain when they are asked to pay higher insurance premiums for lesser care; in most cases, they have no other place to go. In such a distorted business environment, with thousands of organizations sharing a growing economic pie that survives despite the turmoil, the idea of investing millions of dollars in innovative computer-based solutions to streamline operations and upgrade quality is anathema.

"Healthcare is a trillion-dollar-plus market, and IT spending has been little more than an afterthought," says Jeffrey Green, director of compliance for financial solutions at Laserfiche, an electronic records provider based in Long Beach, Calif. "There are thousands of companies with a stake in the market and no dominant firms to drive automation or demand more efficient behavior."

Next Page: Strong medicine.

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: Strong Medicine"> Strong Medicine

IT may not be a panacea yet, but most healthcare experts agree with IHA's Williams that technology is critical to solving the nation's healthcare woes, which are reflected primarily in skyrocketing prices and clinical care that is inconsistent at best.

In the past few months, while promoting a ten-year plan to modernize the U.S. healthcare system, Secretary of Health and Human Services Tommy Thompson has repeatedly complained that the nation's medical information system is stuck in the early 1900s, in the age of manila folders. Thompson argues that electronic record systems would improve patient care, diminish dangerous medical mistakes and in the process cut the nation's $1.6 trillion-a-year healthcare bill by at least 10 percent.

The lack of computerization is at least symptomatic of why the healthcare system in the U.S. is in such dismal shape.

While most industries spent the 1980s and 1990s installing computers and adopting leaner, customer-targeted operational systems, the healthcare industry lagged woefully behind.

In 2004, healthcare companies spent about 3 percent of revenue on IT, compared with about 5.5 percent for financial services firms, according to META Group Inc. That gap was even more pronounced a decade ago. By 2002, only about 13 percent of hospitals and 28 percent of physicians' offices had electronic records systems, according to a recent HHS report.

Among healthcare companies, medical plan insurers have been the most enthusiastic users of IT, in part because they are as much financial services firms as medical companies.

Chiefly, they have built electronic claims networks to automate the reimbursement and payment process with the goal of squeezing labor and other administrative costs out of their payment systems and directing these savings straight to their bottom line. And they've done a fairly good job of that, as evidenced by the recent spate of improved insurance company profits and margins.

But in the grand scheme of the nation's massive healthcare system, these claims networks are the equivalent of stand-alone devices—without permanent links between insurers and healthcare providers to offer real-time information on individual clinical history and plan coverage at the doctor's office or the hospital bed. As a result, they've had little impact on improving the level of treatment patients receive.

In fact, while hospitals, doctors and insurers have dawdled, medical care in the U.S. has suffered. In most industries, improvements initiated by any player—a real-time, point-of-sale database system at a retailer, for instance, or a supplier's factory automation effort—cascade throughout the supply chain, lowering costs, advancing efficiency and quality, and ultimately offering customers better products and service.

But in healthcare, the relationships among companies are more adversarial than collaborative. As a result, the impact of an initiative tends to bloat the total system, not streamline it, and it can further confuse patient care rather than simplify it.

For instance, although hospitals have generally avoided implementing computerized clinical records, they have freely invested in advanced diagnostic technology, such as million-dollar-plus magnetic resonance imaging machines. These purchases are justified because MRIs are a doctor-magnet—physicians prefer to work in hospitals with the most up-to-date equipment—and the machines pay for themselves since hospitals can charge a high price for these procedures.

In 2001 alone, new clinical technologies accounted for more than 20 percent of the increase in healthcare costs, according to PricewaterhouseCoopers. Some of these higher costs are, of course, acceptable, because these procedures can save lives. But a large segment of the increase is the result of physicians recommending high-tech options when they aren't clinically warranted.

Next Page: Profit motive.

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: Profit Motive"> Profit Motive

That inflames insurers, which in response use their own technology to try to blunt increases in medical costs charged by providers, and to tamp down what they view as overuse of clinical procedures by doctors and hospitals.

A prime example, Aetna, the No. 3 medical insurer, recently completed a $20 million overhaul of its data systems, the goal being to identify physicians who are prescribing procedures and drugs too liberally, among other things.

Treatment and diagnostic orders from such doctors are monitored closely, and in many cases their requests for MRIs must be approved by radiologists on Aetna's payroll. Patients who are using Aetna's medical network too freely are also in the insurer's sights; they're facing curtailed coverage and higher co-payments.

Thanks in part to its new data network, Aetna's operating income rose 40 percent in the quarter ended Sept. 30, to $302 million, from $216 million the year before; the insurer's operating margin improved to 6 percent from 4.8 percent.

But Aetna's greater efficiency—and similar technological initiatives by other major healthcare insurers—has done nothing to slow the ballooning cost of medical insurance and little to stem the increase in healthcare spending.

The results of data mining and improved database management on the part of insurers are not typically shared with the provider side of the industry to enhance performance throughout the healthcare network. Instead, they're used as a prybar to leverage additional profit opportunities; medical plan premiums have risen 60 percent since 2000, despite a general drop in administrative costs. That far outpaces the 7 percent per year increase in the nation's total healthcare bill, which itself is more than double the inflation rate—and is one reason why the number of uninsured Americans has swelled to 45 million.

"The very nature of how we provide healthcare dictates against costs coming down," says John Quinn, chief technology officer in Capgemini's healthcare practice. "Competitive pressures and market pressures—and the technology to relieve them—are not catalysts for cost cuts that are passed along to consumers. In healthcare's coloration, they're a set of incentives for each segment of the industry to find their power points and their counterpart's pressure points to produce better revenue and earnings for themselves."

Given the chaotic business model of the healthcare industry, it's no surprise that the consumer, in this case the patient, is bearing the brunt of it.

Despite the amount of money spent on healthcare, huge quality gaps contributed to as many as 79,000 avoidable deaths last year, according to the nonprofit National Committee for Quality Assurance. More than $1.8 billion in excess medical expenditures are linked to the healthcare system's inability to provide needed care— at a cost of $9 billion to the U.S. economy in lost wages and productivity.

"The system is deeply polarized, delivering excellent care to some people, and generally poor care to many others," says NCQA President Margaret O'Kane. "It's not a question of knowing how to treat heart disease, diabetes or mental illness. We know how. We're just not doing it."

One way to start would be to overhaul the healthcare industry's business model so the productivity and quality gains that technology has brought to virtually every other industry can finally have a significant impact on healthcare. The biggest payback, experts say, could come from computerizing the clinical setting—chiefly, installing electronic patient records and electronic prescribing systems where patients are treated.

According to healthcare experts, about 87 cents of every $1 in premiums received by insurance companies is earmarked for medical care payments, while 13 cents goes to administration, sales and profits. With the industry's operating profit margins about 6 percent currently, administrative and sales costs are in the 7 percent range. Trim administrative costs by 10 percent and the gain to the healthcare system is minimal.

But if clinical expenses are cut by the same 10 percent—primarily though the implementation of electronic patient records networks—a savings of nearly 9 percent in the nation's medical expenditures is possible, notes Vincent K. Roach, president and CEO of healthcare consultants Daou Systems Inc.

Next Page: Poor prognosis.

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: Poor Prognosis"> Poor Prognosis

While this solution may seem obvious, physicians and other healthcare providers have been extremely reluctant to install electronic patient networks, because they believe they have little to gain and much to lose.

Their concern is that such a system would require a substantial investment and, despite paying the freight, they would not take part in the economic benefits that accrue from it. In fact, their incomes could be lowered because improvements in care would limit the number of times patients need to be seen, and minimize the number of diagnostic procedures doctors perform.

Providers pay about $10,000 a year for electronic clinical data systems, according to an analysis by Partners HealthCare System in Boston, but of the $19,000 they save, two thirds ends up in the hands of those who pay for care.

To overcome this resistance to electronic clinical files, some patient advocates and insurers are taking steps to realign the healthcare model more along the traditional approach used by other industries. They are making those who stand to gain the most from the technology pay for it.

California's pay-for-performance system is one example.

Insurers, which profit directly from lower medical costs, are essentially subsidizing technology initiatives on the part of providers who could achieve savings in cost of treatment. There are about three dozen other similar pay-for-performance programs across the country, many backed by corporations whose healthcare costs are among the highest in the nation, including Ford Motor Co., General Electric Co., United Parcel Service Inc. and Verizon Communications Inc.

Ford Vice Chairman Allan Gilmour recently said the automaker spent $3.2 billion on healthcare in 2003 for 560,000 employees, retirees and their families, a tab that increased the price of each car and truck built in the U.S. by as much as $1,000.

Meanwhile, HHS, through its healthcare modernization plan, which calls for a universal electronic patient records system within ten years, is working on a program that would offer low-interest loans and grants to encourage physicians and hospitals to install this information technology.

The federal government's recommendations and initiatives carry enormous clout, because its massive healthcare agencies, particularly Medicare and Medicaid, are responsible for about 40 percent of the nation's medical payments.

"Everyone in healthcare supports universal electronic records, but the disagreement is over how to get there," says IHA's Williams. "There needs to be an organizing force, and only the federal government has the power and leverage to play this role."

How Do We Get Value From Healthcare It?
Metrics should focus on the relationships between healthcare IT and the following:
Financial
Cost reductions issuing from decreased administrative clinical staffing and resource requirements (i.e., elimination of paper chart pulls and transcription services).
Revenue enhancements resulting from improved charge capture and charge entry to billing times.
Productivity gains stemming from increased procedure volume, reductions in average length of stay, and increased transaction processing rates.

Clinical
Service delivery advances from better adherence to clinical protocols and improvements in the stages of clinical decision-making (i.e., initiation, diagnostics, monitoring and tracking, and acting).
Clinical outcomes improvements represented as reductions in medical errors, decreases in morbidity and mortality, and expedited recovery times.

Organizational
Stakeholder satisfaction improvements resulting from decreased wait times, improved access to healthcare information, and more positive perceptions of care quality and clinician efficacy.
Risk mitigation resulting from decreases in malpractice litigation and increased adherence to federal, state and accreditation organization standards.

Source: Center for IT Leadership, Partners Healthcare system

There's also motivation for some large hospital systems to install electronic records on their own, because improved patient care could lead to better agency rankings and, ultimately, additional revenue. That was the conclusion of the University of Pittsburgh Medical Center, which in 2000 developed one of the most successful computerized clinical care networks yet, a system the hospital calls eRecord.

This network, which will cost about $500 million over 12 years, allows doctors and other clinicians at eight of UPMC's 20 hospitals to see a patient's full medical record during treatment and to input additional steps or results learned during the session. In addition, prescriptions are entered electronically and automatically sent to the hospital's pharmacy to be filled immediately.

The system helps in decision-making, reminding a doctor ordering a CT scan that one was just conducted the day before, or alerting nurses and pharmacists that the patient has an allergy to the a drug they're contemplating prescribing. It also offers advice, such as sending a note to a physician that a patient on antibiotics who has been in the hospital for a long time and whose white blood count has gone up could be at risk for colitis.

UPMC executives are pleased with the results of the network, although so far, those results are mostly anecdotal. Write-ups of as many as 10,000 reports per month are instantly available to all clinicians now and are virtually free to compose and distribute, compared with the 38-hour delay and $10 per report fee that were the norm before the technology was installed.

Pharmacy costs at UPMC's largest hospital were about $34 million last year, down from $35 million the year before—an impressive achievement considering that total pharmaceutical expenditures in the U.S. were up about 12 percent last year—because of more efficient pharmacy management.

These gains, of course, potentially benefit the hospital, particularly its reputation, and insurers, who are paying less for patient care. But so far they're of limited value to physicians' pocketbooks and, thus, could repel rather than attract top clinicians. UPMC argues that physicians have to see the hidden value in clinical data systems, because one way or another, within the next decade these systems will help transform healthcare to the point where physicians will be able to treat some patients with common or recurrent symptoms completely by e-mail.

"Docs won't adopt this technology without remuneration, but they have to consider its possibilities," says Dr. Dan Martich, vice president of eRecord at UPMC and co-director of the cardiothoracic intensive care unit at the hospital center. "If you're a critical-care doctor seeing 20 patients in a day, you're working 8 a.m. to 6 p.m., or something like that, and getting from $10 to $60 a visit. If you lop off two or three visits, go home an hour or more earlier and instead do a dozen e-consults from home at $5 a clip, the whole thing is revenue neutral. And you get to spend more time away from the office. Or you could see more patients in the same amount of time because the technology makes the visits much more efficient. So you walk away with more money."

Next Page: Insurance dilemma.

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: Insurance Dilemma"> The Insurance Dilemma

Network collaboration between payers and providers to handle electronic claims more quickly and with less overhead is in many ways more of a long shot than clinical data systems.

Electronic data interchange and other automated information schemas currently handle upwards of 80 percent of medical insurance claims, but in general they haven't done much to cut the costs of healthcare and enhance productivity, beyond limited scaling back of insurers' administrative expenses. And they have done nothing to improve patients' experiences.

The nature of the networks—point to point, but with very little interaction or information sharing beyond the basic data in the insurance claim—mitigates against true technology gains.

The main problem is the same one faced by the healthcare industry in all its attempts to rein in uncontrolled costs and deficient patient care: A farrago of companies makes standardization virtually impossible.

In fact, when the Health Insurance Portability and Accountability Act of 1996, also known as the HIPAA rules, mandated a set of standards for claims-processing networks, many providers and payers turned to third parties to handle these transactions instead of designing their own systems to meet the legislation's guidelines. In the process, insurers and clinicians are communicating and sharing data even less.

Is a payer-to-provider network that delivers prompt payments, instant coverage approval and, ideally, a wealth of historical information about patients, treatments and medication even possible?

The best chance lies in regions where a few very large providers do business primarily with a few very large insurers. Such systems are still somewhat rare, but one fledgling example is the New England Healthcare EDI Network (NEHEN), a consortium of major Boston-area providers such as Partners Healthcare (which represents big hospital systems such as Massachusetts General and Brigham and Women's Hospital), CareGroup HealthCare System and Lifespan. The payer members of NEHEN—Tufts Health Plan, Harvard Pilgrim HealthCare, Network Health and Neighborhood Health Plan—insure more than 80 percent of the people in Massachusetts who have healthcare coverage.

In business since 1998, NEHEN is essentially a series of networks that link in real time the health plans to the healthcare providers' information systems, which allows the hospitals to determine standard patient insurance coverage in about five seconds, down from what used to take days, and to be reimbursed for treatment in a little more than a month, as opposed to at least three times that in the past.

NEHEN's goal is to slash the claims payment period to within a week. Though NEHEN has yet to include any clinical information applications, it already processes more than 3 million transactions a month, while delivering significant returns to its participants.

Partners Healthcare says it saves $9 million annually in transaction costs by using NEHEN, with the average cost of determining patient coverage eligibility down to about 10 cents from more than $2. On top of that, improved cash flow and quicker reprocessing of patient claims when they are mistakenly denied has brought further savings.

Resources
Report
"The Decade of Health Information Technology: Delivering Consumer-centric and Information-rich Health Care"
July 21, 2004
The Department of Health and Human Services' plan to computerize health and create a nationwide health information network
www.hhs.gov/onchit/framework/hitframework.pdf

Web Sites
www.iha.org
Manages California's Pay for Performance program

www.citl.org
Researches the role that IT can play in improving the quality of healthcare

www.leapfroggroup.org
Consortium of Fortune 500 companies aimed at improving healthcare safety, quality and patient value

"We will have to demonstrate actual and consistent returns in some big programs before payer-provider systems start to be embraced by the entire healthcare community," says Lewis Redd, chief of the healthcare practice at Capgemini.

That sentiment—looking forward and hoping for a future of plenty while living in a present where the situation is rife with serious problems—expresses the state of the healthcare industry.

As long as the industry's business model remains an inscrutable mix of rivals grabbing profits from an ever-growing pie, with no financial motivation to cut prices, to treat patients with the deference they get from any other industry, and to view partnerships with anything but suspicion, it's unlikely that healthcare will solve its ills any time soon.

Information technology seems to hold some answers, but it will take time—and billions of dollars in wasted spending—before IT proves to be the antidote the healthcare industry needs.