The views and opinions expressed in this article are mine personally and are not necessarily representative of current or former employers. Objects in the mirror may be closer than they appear. MSRP excludes tax. Starting at price refers to the base model; a more expensive model may be shown.
The Budget Paradox
Hospital IT budgets come in two forms: capital budgets (one-time project expenses) and operating budgets (staff and ongoing expenses.)
I probably don’t need to write much by way of background to make the case of why hospitals are under pressure to reduce expenses. It would be fair to add that the pressures are more intense these days. The larger problem involves how we deliver care, but that does not mean that hospital systems aren’t equally focused on cutting expenses.
To be more precise, most budget reduction efforts are macro projects to either hit a specific target or to “bend the curve” such that operating expenses don’t rise or rise at a slower pace. This can be particularly vexing for IT for a number of reasons.
The first big one relates to how organizations view information technology. Often, to the chagrin of IT leaders, IT is seen (or willed) to be a magic bullet. As such, solutions are ordered in increasing numbers, creating scenarios of increasing IT demand. Often these systems are justified around the capital budgets alone, with the operational budget implication not fully understood until a year or two later.
If IT shops were standalone businesses, this increased demand would be a good thing (more customers! ) But IT shops aren’t standalone business, so they often have loose ROIs to carry. The resulting consequence is more weight added to the operating budget.
This in itself does not really create a paradox, but it does add to the pressure of trying to meet a budget target. The budget paradox is tied to a changing philosophy and approach around IT pricing.
Before I tie the pieces together, let me talk about Meaningful Use. Forget for a moment stages and government regulations. At its core, MU was a great idea to reward or incent organizations not for just installing IT, but for using IT. Some ideals and subjective concepts were added to aim beyond “use” and to strive for something higher (Meaningful Use), but that aside, of the things MU did was legitimize the pricing strategy that IT software could (and maybe should) be measured by use, not by installation.
Prior to this thinking, most hospitals bought large IT purchases around capital budgets and booked the expense based upon install. Reflecting the early days of IT, we took credit for simply getting a system in.
I support and like the idea that we should get credit for success upon use. While it’s hard to measure and define what might be “meaningful use” versus “use,” I think as long as we are generally focused on having IT measured beyond the install, we are aiming in the right direction.
Back to the budget paradox. Traditional thinking around operating budgets is that as you continue to operate, you should be able to control or reduce costs. Experience, efficiency, and maturity of operations should all lead to cost reductions. This manifests itself in common year after year quests to either keep operating budgets flat or reduce them.
But as IT pricing models have shifted to use-based or volume-based, and with the magic venture capital words of “recurring revenue,” the idea of year-over-year reductions and rising costs from growing use begin to conflict.
Take the following example. A hospital deploys an EMR. Over the course of the year, it builds upon its success and increases its user base. Let’s imagine more orders entered, more concurrent users, and maybe even new modules and functions turned on. Juxtapose this against an expectation to achieve operating maturity and flat or reduced budgets. You are aligned for a paradox as you pay new fees for new use.
Of course, like every good CIO, I keep great records for my “guilty but with an explanation” budget list. I use sophisticated spreadsheets to demonstrate that on a “same-store basis,” my budget is trending down. But none of this matters if the organization’s macro demands are for budget control.
How do we solve our paradox? How can we continue to grow and contain costs?
No doubt the answers are different for everyone and deeply tied to specific situations, but I think we need to work on a few themes.
- We need to get as good at turning off older systems as we are at turning new ones on. Incremental gains don’t much help here. A discipline of measuring off or on must be applied.
- We need to look at ways to leverage infrastructure at scale beyond our own individual sizes.
- We need to find ways to use more of what we have to gain richer functionality from the systems (and costs) that we already own.
- We need to be close to our labor costs and understand how best to balance all the levers.
The challenges ahead are complicated and will require us to think about things in new ways. The hospital IT budget is only going to be faced with new demands. It’s time to get innovative.