Wall Street should support health care IT investments.
Nonprofit hospitals and health systems are investing in technology at an increasingly rapid pace. Wall Street needs to understand why. * All evidence indicates that technology adoption will remain a top priority for health care organizations and the federal government is a driver of this trend. Last year, President George W. Bush launched an initiative to develop a national electronic health record within 10 years. The Office of the National Health Information Technology, overseeing this effort, is seeking $125 million in funds for 2006.
Will Wall Street match the enthusiasm of health care organizations and the federal government? It's possible that investors may be wary to embrace this trend, especially given the large amounThursday, November 04, 2004 9:38:15 PMthat Wall Street funded-physician practice management companies, which promised to change the landscape of health care delivery. The failure of these companies may lead many investors to hesitate before funding diagnostic, therapeutic and information technology.
Investors should support health systems in building the technology infrastructure. Those health systems that make the right investments in technology will be competitive and financially viable in the long term. It is these organizations that will be able to deliver higher quality care at a competitive price.
Playing Catch-Up
Health care-particularly the hospital provider sector-has lagged behind other industries in technology spending. According to Gartner Dataquest, the health care industry as a whole spent approximately 2.5 percent of net revenue on information technology in 2002 compared with the 3.9 percent spent by all industries. Health care ranks right along with the utilities and education industries in information technology spending-both of which have lagged significantly behind the manufacturing, telecom and financial services industries.
But our industry is changing. According to a survey conducted by the Healthcare Financial Management Association and G.E. Capital and reported in their series "Financing the Future," an invaluable resource to members of Wall Street and the health care industry alike, 75 percent of chief financial officers said that capital spending in their hospitals would increase an average of 14 percent annually over the next five years.
What is more revealing is the type of capital expenditure that these CFOs are anticipating. The top three planned expenditures- digital radiology systems, computerized physician order entry systems and major information systems-are all technology related (see chart).
The Timing
Now may not seem like a wise time to invest heavily in technology because health care organizations have other pressing capital obligations. The average age of hospital plants in the country is at an all-time high, and hospital executives and investors alike are concerned about a capital gap.
While the federal and state governments have made health care technology a public policy issue, many in the health care industry believe these governments will not support technology investments financially.
But there are good reasons to invest in information technology now: Advanced health care technology systems are emerging. And, health systems have concluded that the return on technology investments will qualitatively and quantitatively contribute to market differentiation and ultimately long-term financial viability. The result will be healthier communities and financially sound health systems.
The Wall Street players-investors, rating analysts, credit enhancement providers, bankers-need to understand that these reasons merit investments in technology.
Better Positioning in a Free Market
Governmental payers, commercial payers and employers are all shifting more of the cost of health care to consumers. We see this in higher co-payments, coinsurance, dductibles, premium payments, consumer driven health plan models, which focus on financial incentives or deterrents, and health savings accounts.
Hospital. CFOs discuss Planned Capital Purchases over the Next Five Years
If the adoption of these plans is as broad as many believe they will be, the behavior of "engaged" consumers will likely change, and the impact on health care providers will be significant. One need only look at the three-tier pharmacy benefit program, which was widely introduced by managed care companies in the late 1990s. Before it was introduced, the yearover-year increase in pharmacy expensaes was escalating. Since its introduction, the year-over- year increase has declined, and this trend is expected to continue. This example and other studies conducted by managed care companies indicate that consumer behavior in health care is affected by the amount consumers pay out of pocket.
Hospitals and health systems, therefore, must demonstrate that their technology investments in this new consumer-directed environment will lead to a quantifiable return. The pricing structure and underlying cost structure must be competitive, and the health services being offered should be ones that engaged consumers will choose. Health care organizations can use a number of methodologies to determine the return on investment.
In evaluating return on investment, health care organizations need to focus on quality of care. Particularly, they must focus on investments that result in early and more accurate diagnoses, enhance outcomes, and decrease medical errors and ultimately reduce costs. New technology investments must support a competitive cost structure. Over the next several years, as Wall Street is asked to fund technology investment initiatives, the hard questions regarding the ultimate cost need to be answered. In many ways, it is about the money.
Health care organizations can use a number of methodologies to determine the return on investment. In evaluating return on investment, health care organizations need to focus on quality of care.
Frederick A. Hessler is co-head of the health care finance group at Citigroup and managing director, Citigroup Global Markets Inc., New York City.