Skip to main content

Hospitals Must Decide on Most Effective IT Spend as Costs Add Up

Analysis  |  By Gregory A. Freeman  
   November 27, 2017

After rising in past years, IT budgets are showing signs of flattening out for some hospitals. Health leaders will have to decide whether their goals require spending more.

Health system IT budgets are beginning to settle down after significant increases in the past decade, driven largely by the adoption of electronic medical records and concerns over cyber security, but 2018 could require even more funding for hospitals that want to be cutting edge.

That isn’t the only path, however. Hospital leaders will have to consider the role of IT innovation in their missions and budget accordingly.

A primary concern is the amount of “technical debt” carried by a hospital or health system, says Munzoor Shaikh, a director in the healthcare practice at Chicago-based management consulting firm West Monroe Partners, which recently published a report exploring the three main future approaches healthcare organizations can take when budgeting tech expenses. Technical debt refers to the extra effort and expense incurred when choosing an IT solution that is easy to implement in the short run instead of the best overall solution.

“Every health system has technical debt, and that’s not always something you can eliminate. The goal is to right size your technical debt given your mission and your objectives,” Shaikh says. “But I can tell you most hospitals have too much technical debt, way more than they should have.”

After rising for a period, IT budgets are flattening out more recently and don’t have to continue increasing for all hospitals, Shaikh says. Health leaders who are satisfied with their current IT might hold steady on their budgets, but healthcare organizations that want to be among the most innovative will face higher costs, he says.

The cost of IT is forcing healthcare leaders to make strategic decisions, the report says. Some health leaders are looking for a way to be proactive and more deliberate with investments rather than continuing the reactive mode of past years.

“With no monumental legislation or regulations to further direct IT spend, as [the American Recovery and Reinvestment Act] and Meaningful Use did over the last decade, technology strategy is now at the complete discretion of each health system,” the report says. “Executives now must decide where – and how much – to invest moving forward.”

There are three broad options, the report says. Health systems can:

  • Cut IT spending
  • Continue to invest in new IT solutions
  • Address accumulated technology debt from other neglected systems

The right choice will depend largely on how much a health system relies on IT innovation to fulfill its mission. Each approach will require different strategies for how much to   spend on IT as a percentage of revenue, how to design a technology team, and determining the types of technology in which to invest.

Optimizing an IT budget requires first understanding where the health system stands currently with factors like technical debt, reimbursement pressures, and population shifts that will affect available revenue, Shaikh says. Then the hospital can set goals for growth and determine how its IT structure fits into those plans.

With regards to IT, Shaikh explains that healthcare organizations may be classified as traditional, meaning they use IT simply as a support function and nothing more, or as experimenters that take some steps to use IT to improve operations or drive revenue.  The third category is the innovators, which the report describes as “consumer-centric, seeking to deliver a superior consumer experience via a superior provider experience, and one that is constantly innovating and leveraging technology.”

That sounds like a lot of hospital mission statements, but Shaikh cautions that IT investments should be grounded in reality.

“When you talk about target models for the future, most hospitals talk about how they want to be the biggest innovator on the planet,” Shaikh says. “The reality is usually more down to earth if you look at where they are now and what is reasonable in terms of where they want to go. That realistic assessment is key to determining their investment in IT and where they should devote their resources, especially when there are so many other financial pressures and questions about revenue.”

Gregory A. Freeman is a contributing writer for HealthLeaders.

Get the latest on healthcare leadership in your inbox.