Health systems and the IT transformation imperative

Health systems and the IT transformation imperative: Balancing efficiency and effectiveness in a rapidly changing environment

Executive summary

Health system CIOs face a difficult assignment. Technology ecosystems at hospitals are already operationally complex, and the industry’s demand for technology is rising sharply. In the last few years, dramatic regulatory changes have imposed new burdens. Together, these factors have pushed health system IT costs sharply higher.

Rising IT costs are especially problematic now that health systems are making business model changes and trying to create new revenue streams. A health system that is trying to develop expertise in virtual care, or wants to grow by acquiring multiple physician practices, or steps into the burgeoning area of population health management will naturally need the support of its information technology. But with so much pressure to curtail spending, CIOs have been constrained in their ability to deliver new capabilities.

Health system CIOs need to find the right balance between running the business and building new capabilities to grow the business. To do this, CIOs must understand the new strategic imperatives that their hospitals are pursuing at the same time that they are transforming their IT operations. Efficiency and effectiveness, the necessary parts of this balancing act, can be achieved by adopting a better approach to demand management, by restructuring the delivery model, and by optimizing operational processes. More effective practices in these areas can help the IT department reduce its costs by 25 percent or more while also improving service. The imperative for change has become so clear that many health system CIOs will find an unusual level of support from their business-side colleagues as they undertake their transformations.

Between a rock and a hard place

It would be hard to find a sector undergoing more of a squeeze than U.S. health systems. The combined forces of healthcare reform and declining reimbursement rates from all insurers are putting enormous pressure on health systems to reduce costs and become more efficient. The coincident changes in the business of healthcare — specifically, the emergence of value-based care models and the pressure to provide more of a retail experience, with greater convenience, transparency, and choice — have forced health systems to make significant investments in new business models. This is all happening against the backdrop of a stricter regulatory environment; Meaningful Use rules and the move to ICD-10 have raised the bar on what it means to be in compliance.

These pressures are keenly felt in health systems’ IT departments, which already have their hands full with day-to-day operations. CIOs thus have to prioritize and allocate scarce resources, which isn’t easy given the service-oriented culture of IT at health systems. Put simply, health system IT departments are not used to saying no. And that mind-set pushes costs relentlessly higher. Between 2010 and 2014, IT costs as a percentage of revenue at healthcare systems rose sharply, from 3.1 percent to 6.1 percent, according to research firm Computer Economics. The expected level of around 4 percent for 2015 is still about 32 percent higher than in 2010.

Old approaches are no longer working

In trying to manage IT-related costs, health systems typically focus on improving the efficiencies in their IT operations — finding and fixing flaws in how they do things. Though this is important, health systems also need to focus on what they do (especially in the areas of demand management and IT governance); where they do it (in-house or via outsourcing, distributed or through a centralized shared service); and how well they do it (achieving business needs given the level of spending). A unifying focus on all three of these elements — what, where, and how — is needed for a sustained IT transformation.

In addition, the typical approach to reducing IT costs — which involves applying blunt percentage-based cuts to areas seen as too costly — has a number of predictable downsides. For instance, most IT departments trying to execute across-the-board expense reductions will first look to lower their labor costs, by either reducing staff or pushing staff into other departments. This kind of rightsizing certainly has its place in the cost reduction tool kit. However, a broad-based staff cut can inadvertently impact areas where investment in capabilities is needed — such as population health management, analytics, digital and virtual health services, and ongoing electronic medical record (EMR) optimization — and thus significantly harm a health system’s ability to compete.

The limits of benchmarking

The most common way of determining whether one is competitive from a cost perspective is through the use of comparative benchmarks that look at what other health systems or industries are spending. But the disruptions roiling the healthcare industry today can significantly reduce the utility of benchmarking. When peers may have widely divergent strategic objectives and may be aiming at different end points, it’s hard for a health system executive to know how comparable the peer group is.

For instance, a benchmark may suggest that most health system IT departments are devoting a relatively small percentage of their budgets to capital spending. However, if benchmarked health systems are at different stages in their technology evolution, the benchmark might have little relevance. In their IT department costs, other benchmarked health systems may not account for certain shared IT functions, such as clinical informatics, which would make the benchmarked costs appear artificially low. Another limitation of benchmarks is that they usually do not provide insight into the cost drivers influencing the level of spending. The point isn’t that benchmarks have no value. Rather, they should be used as just one factor among many to be weighed in making a decision.

A different approach to IT transformation

In IT, there’s usually a trade-off between efficiency and effectiveness. IT organizations that are highly efficient create greater value relative to their spending in areas like infrastructure, application development, maintenance, and support. Those that are highly effective do a great job of enabling their organizations’ mission or business objectives.

Some health system IT organizations are willing to sacrifice efficiency for effectiveness; an academic medical center or research institute might do so to provide premium business technology capabilities to support its clinical researchers. Other IT organizations might take precisely the opposite approach and focus on efficiency; one would expect to see this at many for-profit hospital systems. In all cases, though, there’s a target zone on the continuum where efficiency and effectiveness are in balance.

For health system CIOs aiming to transform their departments into IT organizations that are both efficient and effective, the challenge is to save where they can to earn the right to invest where they must. There are four steps to achieving the right balance between IT efficiency and effectiveness: (1) establishing the strategic context; (2) improving IT efficiencies; (3) finding ways to increase effectiveness; and (4) driving sustainable transformation.

1. Establishing the strategic context

Given the squeeze on revenues, most health systems are looking for ways to prevent revenue leakage from existing lines of business while they build profitable new services. The strategic levers that health systems are considering include emphasizing higher reimbursement service lines like cardiology and oncology; improving patient access and geographic reach through the use of telemedicine and mobile health; acquiring and integrating physician practices to build broader networks; and taking on more risk through offerings including episodic care bundles, capitation, and full risk insurance.

Each of these growth (or revenue-stabilizing) strategies requires significant IT investment. Health system CIOs will increasingly be expected to understand the strategic imperatives of their organizations and to partner with their business colleagues to make the right technology moves, whether that means investing in innovation, improving customer service, or enabling new lines of business. This collaboration is essential for CIOs to also clearly see which capabilities are not differentiating and to take steps to reduce or eliminate them.

2. Improving IT efficiencies

With a clear understanding of the strategic context, IT has three main ways to improve efficiency. They vary in their potential value and in the speed at which they can create savings (see Exhibit 1).

Exhibit 1: How to achieve IT efficiency at health systems

How to achieve IT efficiency at health systems

The first area is demand management. This is the “What do we do?” question. It is addressed through an enterprise governance process that ensures the elimination or de-emphasis of IT projects that don’t have a clear link to business strategy and that don’t produce a financial or qualitative return on investment. In our experience, an enterprise approach to IT governance can produce savings of 3 to 7 percent of the IT baseline — meaning it can permanently reset the cost structure at a more economical level.

One goal of IT governance is to keep health systems from funding every initiative regardless of the business value it delivers. Take the example of a pediatric oncology department of a research medical center that enlists its IT department to create a custom cancer patient registry. From the department’s standpoint, the project is eminently sensible because the registry helps automate the management of the department’s clinical studies. But the IT department has a bigger decision to make: whether to devote its IT data architects to building the cancer registry or to put those scarce resources on a broader (enterprise-wide) data analytics or business intelligence project. Executing demand management at the enterprise level quickly makes clear which projects fit a health system’s strategic priorities, and which don’t.

One of the best ways to manage demand is by allocating IT costs back to business units based on their consumption of IT services, and providing transparency into the capacity and availability of IT resources. Doing so creates a shared accountability and decision-making model with the business. The internal clients can then evaluate their options, such as whether they should add costlier contractors to start the project sooner if in-house resources are not available, or whether business objectives can be met through other means, removing the need for the project.

Enterprise demand management can also play a role in reducing variability — the nonstandard workflows and care models that require different kinds of technology and, as a consequence, push IT costs higher.

A second way of improving IT efficiency is through the IT department’s delivery model and structure. Stripped to its essence, the question is this: “Where do we do it?” In other words, how should the delivery of services be organized and to what extent should the services be delivered by in-house resources?

The default option at most health systems is a localized delivery model with IT people stationed nearby providing “at-the-elbow” support. This may make sense for services that affect the patient care experience or that must be resolved quickly for providers (doctors, nurses, physician assistants) to do their jobs. However, there are also IT services that fall outside these parameters. These less sensitive IT tasks should be centralized and automated through increased self-service options, allowing local, at-the-elbow IT resources to focus on higher-value work. For instance, one health system changed its EMR training program for clinicians from a costly traditional classroom delivery model to a more efficient mixed-training approach. After the change, only the training covering workflow processes — which required more individual support and attention — was conducted in classrooms. The initial training — covering basic areas like documentation and order entry — took place via online modules that clinicians could complete at their convenience.

From a sourcing perspective, health systems should investigate alternative options — especially for commodity IT services. For example, commodity services such as application testing, desktop support, and help desk could be sourced rather than built or maintained in-house. In addition, the increase in EMR implementations has led to a greater pool of application specialists in the marketplace. This has allowed health systems to outsource more work to managed services firms, and to refocus their in-house application specialists on higher-level activities including design and process improvement. Software and infrastructure have also become prime candidates for purchased services, especially as the reliability and security of cloud services have improved. Some health systems do not regard their EMR systems as a differentiated asset and choose to outsource application hosting services rather than invest in their own data centers and manage the application footprint.

The key question is this: “How well do we do what we’re already doing?”

Balancing in-house services with purchased services does require that health system IT departments recalibrate their staffing needs and skills. And this is an area where rightsizing the staff makes sense. For instance, the IT department may need to develop deeper capabilities in vendor management, and may also need to become efficient in application design processes. When changes to the delivery model are done right, we see a fundamental shift toward fewer, more highly skilled employees. Collectively, they have the potential to deliver comparable or improved services at a cost savings similar in magnitude to the savings from demand management changes — a “new normal” that is 5 to 10 percent lower.

The third area of improving efficiency is to focus on operational efficiency. Here, the key question is this: “How well do we do what we’re already doing?” Achieving operational efficiency involves streamlining day-to-day processes, consolidating redundant applications, and making better use of infrastructure assets. It’s no secret that most health systems have redundant applications in their application portfolio. This is an inevitable result of health system consolidation, of changes in the vendor landscape, and of decentralized demand management.

On the infrastructure side, many health systems continue to operate with the traditional hardware and device management models of the early 2000s, instead of adopting modern desktop and server virtualization technologies. What’s more, vendor maintenance contracts may be suboptimal, with IT departments paying for outdated or overlapping service-level agreements (SLAs) that are no longer tuned to what is actually needed. It’s similar to the way consumers sometimes pay for mobile phone services that they may not know they have and will probably never use.

Health systems can significantly reduce costs by incorporating a few coordinated measures into their planning. They can rationalize their application portfolio by defining standards at an enterprise level. Another measure is to optimize network, server, storage, and end-user infrastructure costs through consolidation, virtualization, and cloud strategies. A third tactic is to update vendor maintenance contracts and SLAs so they are appropriately sized for business needs. Finally, health systems can improve IT delivery and operational processes, including in the areas of procurement, project management, resource utilization, and performance measurement. In our experience, initiatives focused on improving operational efficiency tend to require a sizable up-front investment but can ultimately yield a net payoff in the neighborhood of 4 to 10 percent.

It should go without saying that these are not just IT or procurement initiatives. The only way to capture these savings is to engage the business. After all, the needs of the business set the context for the services that are needed, and determine what should be part of an SLA. For instance, an ambulatory practice that operates from 8 a.m. to 5 p.m. weekdays wouldn’t need the same SLA or the same uptime guarantees as an acute inpatient hospital facility. That may seem self-evident, but in many cases these are calculations that haven’t been done or that haven’t been done recently enough to be meaningful.

In summary, our experience suggests that looking across all three areas of IT optimization can help health systems reduce their IT costs on the order of 12 to 27 percent (see Exhibit 2).

Exhibit 2: How the different levers lower IT costs

How the different levers lower IT costs

3. Finding ways to increase effectiveness

As they work to make their departments more efficient in IT operations, healthcare CIOs need to make sure they are simultaneously focusing on delivering IT services in the most effective way and increasing the value to the business. IT effectiveness — the extent to which a health system’s IT function is successful at helping the organization achieve its strategic priorities — needs to be improved across four dimensions: people, processes, technology, and governance.

The people part of effectiveness has to do with whether employees are where they need to be, are assigned in proportions that make sense, and have the skills sufficient to support the business strategy. Part of being more effective is adjusting the IT department’s mix of skills and capabilities as circumstances warrant. With the outsourcing of commodity skills and services in routine areas like application build and support, higher-level skills and capabilities have grown in importance. These include expertise in user experience design, mobile technologies, analytics, and workflow engineering. Being more effective also means anticipating business needs as the healthcare industry itself changes — for instance, as EMR implementations and enterprise analytics platforms become essential parts of doing business.

IT processes make a significant contribution to the effectiveness of the organization. The issue isn’t having good processes but having the right processes given the need and the situation. For instance, to be effective, a for-profit health system operating multiple facilities across the U.S. would probably want to strengthen its IT architecture and standards management processes. A health system interested in acquiring many small physician practices might want to develop a rapid and repeatable process for technology integration and conversion. One practice certainly worth rethinking is the one-size-fits-all process model that health system IT organizations typically adopt; in many cases, a “two-speed” model will make more sense. With a two-speed model, agile methodologies are used to deliver innovation and a traditional waterfall approach is used in areas involving legacy systems.

What passes for technology effectiveness is undergoing a broad reevaluation, not only at health systems but in just about every industry. The growing availability and reliability of cloud technology is one of the big factors driving the rethinking. Cloud-based technologies (including infrastructure-as-a-service, platform-as-a-service, and software-as-a-service) allow for increased utilization, rapid provisioning of infrastructure assets, and better balance of demand and supply. In addition, delivering differentiating capabilities and faster speed-to-market will require new technology partnerships — strategic as well as value-driven. Decisions have to be linked to the health system’s strategic priorities and future plans without removing too much of its in-house technical expertise and therefore limiting its maneuverability.

Though all three of these areas — people, processes, and technology — are important contributors to IT effectiveness, an IT department’s skill at governance is perhaps the most important. Governance involves more than just prioritization and demand management. By aligning the health system’s IT capabilities with business priorities, an effective IT governance model creates a joint accountability between the business and IT from project inception to execution. The governance model is enabled by a robust performance management framework that measures IT performance and creates the transparency to drive the right behaviors.

4. Driving sustainable transformation

Given the number of changes and the amount of coordination required, transforming a health system’s IT department is not likely to be friction-free. To get the cost savings and develop the capabilities most health systems want, there needs to be a programmatic approach — and it needs to be led from the top.

There are three key challenges to overcome. First, health system technology deals with life-and-death problems, where the maxim first, do no harm takes precedence over the speed of putting new technologies and innovations into practice. Second, the technology ecosystem is complex. In such an environment, you would expect to see a lot of standard technology, in order to mitigate the problems that crop up. Yet at most health systems, it’s precisely the opposite; there is a wide variety of business processes and technical approaches. Third, the increasing regulation and new rules imposed by federal and state agencies function like traffic cones. They force health systems to direct their investments toward compliance and remediation efforts and inhibit them from attending to other priorities.

Fortunately, these challenges are not insurmountable. With strong leadership, a disciplined approach, and an explicit change management plan, health systems can succeed with their transformations. If they do, they will generate the cost savings that will allow them to reinvest in innovative and differentiating capabilities (see Exhibit 3).

Exhibit 3: Possible shifts in spending, post-transformation

Possible shifts in spending, post-transformation


There aren’t many industries going through technology changes comparable to those affecting health systems. Like all changes, these will involve a little bit of pain. Yet the changes will also produce significant benefits. A host of new technologies could help health systems improve their service offerings, from wearable devices to cloud computing and the Internet of Things. Together, these developments could make the hospitals of the future look very different from the hospitals of today. Health system IT departments will need to become more efficient and effective in order to create the capacity to build these new capabilities.

By undertaking a transformation initiative, not only can health system CIOs drive down their IT cost, but they also can push their departments to become true partners in a hospital’s fast-developing evolution. A commitment to greater efficiency and effectiveness and a move toward smarter governance are keys to succeeding with this transformation.