EHRs and health IT projects: are they battering hospitals' financial profiles?

Jan. 7, 2014

This past November, Standard & Poor's Ratings Services downgraded the credit rating of Wake Forest Baptist Medical Center in Winston-Salem, N.C., from “AA-” to “A+”.

Hospital downgrades stem from various issues, most of which are specific to an individual organization's situation, but they essentially result from two overarching themes: declining margins or rising costs. Wake Forest Baptist officials attributed the downgrade almost entirely to costs associated with the troubled rollout of its Epic electronic health record system. In fact, the project played a major role in the academic medical center posting a $56.6 million operating loss in the most recent fiscal year.

“The ratings change was largely due to the one-time implementation costs and temporary business disruption associated with the installation of a new medical records system at the medical center in the fall of 2012,” Edward Chadwick, executive vice president for finance and CFO of Wake Forest Baptist, said in a statement. “The operating impact was greater than anticipated and affected overall fiscal performance for fiscal year 2013.”
However, the rating change has not been an irreparable disaster for Wake Forest Baptist — just more of an extended hiccup. S&P analysts said they expect the hospital's operating results will “rebound measurably in fiscal 2014 as management's corrective actions demonstrate results and the disruptive effect of the IT rollout diminishes.”
Financial pressures are not new to hospitals and health systems. Medicare reimbursements have declined, commercial rate increases have stagnated and inpatient volumes have continued to trend downward. But what made the Wake Forest Baptist case intriguing was the fact EHRs, and health IT in general, caused the fiscal shock.

As EHRs, clinical decision support systems and other technologies become ubiquitous in hospitals across the country, will the emphasis on Big Data smother healthcare financial profiles?

The rise of health IT capital spending — with EHRs as the poster child

There's little doubt money spent on healthcare technology is on the rise, mostly because hospitals have made it a priority. According to Premier's spring 2013 economic outlook, nearly half of healthcare executives said health IT will be the largest capital investment during the next year. Sharing data across the continuum of care was cited as the main reason for increasing capital expenditures on health IT.

Kevin Holloran, a director in S&P's nonprofit healthcare group, says he has observed this trend in his work. Typically, health IT used to encompass 5 to 10 percent of a hospital's capital project budget, but now that range is anywhere from 25 to 35 percent. “It's ramped up and on steroids,” he says.

Lisa Goldstein, an associate managing director at Moody's Investors Service and a leader within Moody's nonprofit hospital group, says anecdotally, she has seen similar figures. Anywhere from a quarter to a third of all hospital capital spending is now on health IT, and a big chunk of that is being spent on EHRs.

EHRs have become front of mind for hospital executives for several reasons. As mentioned, going to a paperless, electronic records system makes sense for organizations looking to share data and coordinate the best care for patients. EHRs, essentially, are acting as the building block for data analytics and population health management.

But that comes at a lofty upfront price, as a few select companies — Epic, Cerner, Allscripts, McKesson and a few others — dominate the market. EHRs could cost anywhere from several million dollars for a standalone hospital to hundreds of millions of dollars for multihospital systems. Because the government has offered to reimburse for part of EHR installations through Medicare and Medicaid incentive dollars, which was part of the stimulus package in 2009, hospitals “want to have those up-to-date systems” as quickly as possible, Ms. Goldstein says.

Although organizations are ramping up their health IT investments, Martin Arrick, a managing director in S&P's nonprofit healthcare group, says IT capital spending will likely reach a plateau once all providers have completed their EHR projects. “I don't think people are expecting big multimillion-dollar installs to go on indefinitely,” he says.

How health IT affects a hospital's credit profile

During the past several years, hospital credit downgrades have been a familiar sight. A Moody's report from November said hospital downgrades have surpassed upgrades every quarter since late 2012 due to reduced inpatient volumes, more high-deductible health plans and other general operating challenges. With S&P, Moody's and Fitch Ratings each giving gloomy outlooks for 2014, it is likely downgrades will continue to outpace upgrades.

Jim LeBuhn, a senior director at Fitch Ratings and head of the agency's nonprofit healthcare group, says a hospital's credit rating has to be viewed from the most basic of perspectives: Can the hospital be expected to make a timely payment on the principal and interest of its debt? Because health IT projects are costly endeavors — and are at a peak investment period — they could have a negative financial impact in the organization's short to medium term, depending on the size of the hospital and speed of implementation, he says.

Health IT and EHRs are not inherently negative credit risks, but they can be if something goes awry, similar to what happened at Wake Forest Baptist. If an EHR costs more than expected, causes accounts receivable to balloon or severely cuts into a hospital's cash flow or operations, that's when it could hurt a hospital's credit profile, Mr. LeBuhn says.

What's most important is hospital leaders communicate how they expect their health IT projects will pan out. For example, Renton, Wash.-based Providence Health & Services, a 32-hospital, multistate health system, approached Fitch a few years ago when it was ready to install its Epic EHR system. Executives said it would cost more than $500 million, and it would likely lead to lower margins in the short term.

“We definitely saw compression in profitability, but it was expected,” Mr. LeBuhn says, noting that Providence's EHR rollout has been successful. “This was projected by management. They came to us and said this is what the impact is going to be.

“We understand anytime you run a business, especially a business as complicated as healthcare, there are going to be challenges that come up in the process of the implementation,” Mr. LeBuhn adds. “From our standpoint, when a problem does arise, communicate that to us. We understand these are not easy installs.”

Ms. Goldstein of Moody's says these projects inevitably lead to more costs for routine maintenance, equipment replacement and new staff. However, hospitals and health systems that plan ahead for every possible financial impact of a health IT installation are generally the most successful.

“One could write an encyclopedia on strategy and execution in healthcare, IT being just one [component],” Ms. Goldstein says. “For hospital EHR installs that have appeared to have gone smoothly, there has been an incredible amount of upfront planning before they flip that switch.”

Several health systems with advanced data capabilities and established EHRs — including Danville, Pa.-based Geisinger Health System, Salt Lake City-based Intermountain Healthcare and Evanston, Ill.-based NorthShore University HealthSystem — are strong “AA” category organizations, Mr. Arrick of S&P says. In May, S&P also upgraded San Diego-based Sharp HealthCare to a positive outlook and affirmed the system's “A+” credit rating. He admits the high ratings, as well as Sharp's outlook upgrade, are not solely due to good IT infrastructure, but it serves as an important foundation.

“Is [Sharp's] rating improvement because they have good IT? I'd be hard-pressed to say yeah, it was the IT,” Mr. Arrick says. “But a good IT system provides the means so these organizations can do a better job” with clinical management and population health.

IT goes beyond the finances

The high capital and operating costs associated with health IT, specifically EHRs, have put some hospitals in a difficult position. Do they absorb the financial hit now, even if they know they can't afford it? Most organizations are doing so, either independently or by joining a larger system, in part because they can only recoup meaningful use incentive dollars from Medicare until next year. And starting in fiscal year 2015, Medicare will penalize hospitals that do not demonstrate meaningful use of a certified EHR system.

However, the overall goals of health IT projects are more pertinent than the upfront capital and maintenance costs — and the potential short-term effects to a hospital's credit profile. “From Fitch's standpoint, we've been wiling to absorb some of [health IT projects] knowing you got to have these systems,” Mr. LeBuhn of Fitch says. “Strategically, these are going to pay dividends over the long term. Without these systems, you can't have clinical redesign or clinical best practices or essentially monitor your clinical quality. They're going to more than make up the cost of investment.”

If anything, hospitals may experience more financial pressures in the future if they don't embrace EHRs and evolving technologies now. “Without data to figure out what that particular care protocol is or treatment procedure is, you simply won't be able to do it how others will,” S&P's Mr. Holloran says.

“The benefits of IT are still to come,” Mr. Arrick adds. “How do you go from just a better record to better medical management? How do you use what new information you're getting and turn that around to improve care? I think that's the Holy Grail where everyone wants to get to.”

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