Report: EHR Installs Carry Significant Financial Risks for Hospitals

Oct. 5, 2017
Implementing new electronic medical record (EMR) systems carries tremendous financial risk and hospitals run the risk of incurring operating losses, lower patient volumes and receivables write-offs if there are problems with adoption of a new EMR system, according to an analysis by Moody’s Investor Services published in a report this week.

Implementing new electronic medical record (EMR) systems carries tremendous financial risk and hospitals run the risk of incurring operating losses, lower patient volumes and receivables write-offs if there are problems with adoption of a new EMR system, according to an analysis by Moody’s Investor Services published in a report this week.

However, barring other credit pressures, the disruptions are frequently temporary, if well managed, the analysts stated.

The analysts also noted that if the electronic health record (EHR) installs are combined with unanticipated liquidity or operating pressures, the disruptions can lead to both short-term and prolonged margin contraction and negatively affect credit quality.

For the report, Moody’s analysts Jennifer Barr, Daniel Steingart, vice president, senior analyst and Lisa Goldstein, associate managing director, examined 39 hospitals and found that most hospitals that have recently executed EMR and revenue cycle installations navigated the financial challenges effectively, with performance metrics largely returning to pre-install levels on year later. Most of these hospitals and health systems, with annual revenues ranging from $170 million to $3.8 billion, completed the EMR installation all at once, commonly referred to as the “big bang” approach, rather than staged over a number of months or years.

The analysts found that EMR conversions and upgrades can have a significant impact on hospital operations, but they are usually limited to a one-year decline in cash flow and liquidity. The periods immediately preceding and following an EMR conversion typically create the greatest amount credit stress, the magnitude and discreetness of which will factor into any credit deterioration, the analysts wrote.

Analyzing the 39 hospitals that have recently invested in major EMR and revenue cycle system conversions, the analysts found that increased expenses and slower patient volumes contributed to a median 10.1 percent decline in absolute operating cash flow and 6.1 percent reduction in days cash on hand in the install year. However, many hospitals returned to pre-install levels within a year as implementation costs dissipated and revenue cycle processes stabilized.

Further, the analysts found that strong risk management can thwart a major financial disruption and limit credit deterioration. “Hospitals are managing EMR and billing system transitions by establishing lines of credit and other liquidity sources while engaging their board through committees to oversee projects. Health systems that experience financial problems, such as receivable write-downs or declines in liquidity, face credit deterioration,” the analysts wrote in the report.

Additionally, the analysts noted that investments in EMR and other information technology (IT) systems will continue, while cybersecurity becomes a vital focus. “As IT investments represent a growing portion of hospital budgets, an increasing amount will be allotted to guarding confidential patient data, which make hospitals a prime target for cyberattacks and ransomware events,” the analysts wrote.

The Moody’s report specifically refers to Wake Forest Baptist in Winston-Salem, North Carolina and Chicago-based Presence Health and as examples of EMR conversions resulted in margin deterioration and credit downgrades. Using Presence Health as an example, the analysts noted that deep and prolonged financial and operational hurdles or material decline in liquidity can heighten credit concerns.

With regard to Wake Forest Baptist, the analysts wrote that the health system’s financial performance has since rebounded, contributing to a revision of the outlook to positive from stable in October 2016.

In the case of Presence Health, the hospital experienced significant write-offs in the years that followed EMR and revenue cycle conversions by the legacy health systems which had merged to form Presence, prompting immediate risks of a covenant violation under more restrictive private placement debt. “Presence's management responded to a looming covenant breach by securing a bridge loan to refund the private placement debt and establishing a revolving line of credit to provide further liquidity relief,” the analysts wrote.

Hospitals can take steps to mitigate financial and liquidity difficulties stemming from EMR conversions, and, with a sound strategy, can limit the scope and scale of disruption, according to the analysts.

The report noted that hospitals will continue to invest in EMRs, aiming to improve patient safety, boost clinical quality and provide decision support. “Hospitals and health systems that enter into risk-bearing agreements with payors, or establish their own risk-bearing insurance products, will need sophisticated data analytics generated by EMR systems to manage care, costs and ultimately predict the healthcare needs of the population they serve. IT will also continue to be a selling point in physician recruitment and retention, as new data reporting will be required by Medicare for professional reimbursement,” the analysts wrote.

And, cybersecurity will become a vital management focus, as cyberattacks are a critical threat to hospitals and may lead to disruptions in patient care. The report notes the recent incident in the UK when hospitals experienced a widespread attack that halted clinical operations, leading to patient diversions and the cancellation of services. “In other cases, hospitals may be subject to ransomware extortion. In a rare admission of an attack, Hollywood Presbyterian Medical Center in Hollywood, CA acknowledged paying ransom after an attack in 2016. We expect cybersecurity to be a primary focus of hospital management teams and their boards, with annual capital and operating budgets allotting appropriate levels of expenditures to protect patient data and testing vulnerabilities,” the analysts wrote.

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