Domain 6 Assessment of HIT Value. Lecture Part #1: Tools for Assessment of the Value of HIT Investments. Script

Transcription

1 Domain 6 Assessment of HIT Value Lecture Part #1: Tools for Assessment of the Value of HIT Investments Script Slide #1 Welcome to Module 6-A, Assessing Value from Health IT Investments. Slide #2 The developer for this module is Dr. Brian Malec (pr. MAH-leck) Professor of Health Administration Department of Health Sciences California State University, Northridge Slide #3 Introduction to Module Assessing the value of Health IT investments is a challenging process. Information technology is interwoven through the business process of any organization. Any additions or upgrades to information systems have consequences across an organization. Health care organizations in particular are challenged by the rapidly increasing availability of technology, and the expectations of consumers and patients, to receive the best and most effective care. This lecture is divided in three parts to investigate how to best assess the value that is achieved, or not achieved, from HIT investments. Part-1 is focused on understanding the tools available to managers to evaluate business cases for the addition or upgrading of HIT. These tools are standard quantitative methods that are common in evaluating investment opportunities for organizations. The concept of a Return on Investment (R-O-I) is used here as a generic term with many approaches to determining the ROI. Part-1 will review tools for assessment such as: Benefit Cost Analysis (B-C-A), Cost Effectiveness Analysis (C-E-A), Break Even Analysis (B-E-A) and Internal Rate of Return (I-R-R). All of these tools, and others, are available in Excel. ( continues next page ) 1

2 Part-2 of the lecture will focus on identifying and measuring the tangible and intangible costs and benefits associated with Health IT investments. This section of the lecture will use insights from practitioners and academics on the strategies and challenges in measuring outcomes from Health IT investments that are often not quantifiable. Part-3 of the lecture will deal with administration and organizational governance structures, and policies necessary for the successful selection and implementation of Health IT. There are many approaches to the development, selection, implementation and post-evaluation of Health IT. There is no single solution, but this section of the lecture will explore some practices that appear to set some ground-rules for success. Slide #4 Part 1 of the lecture will enable the student to: Understand the relationship between time, benefits and costs for Health IT projects Understand and apply the steps taken in a benefit/cost evaluation process Evaluate the strengths and limitations of various tools of assessment Identify and discuss tangible and intangible benefits and costs Be able to apply the use of Excel to calculate various assessment tools. 2

3 Slide #5 Health IT investments typically take a long time to mature and deliver the expected benefits that justified their undertaking. The steps outlined on the slide show the relationship between time on the X-axis and benefits on the Y-axis. The time period could be weeks, months or years depending on the complexity of the Health IT investment. After the decision-process and the selection of a new Health IT system, there is the deployment and implementation of the business plan. Few benefits can be expected during this initial phase. The stabilization phase occurs when the HIT system has been successfully deployed and is working as expected. The integration phase is a difficult time when the new system is meshed with existing systems, perhaps from other vendors, or perhaps older legacy systems. Heavy emphasis is on change management as the new systems disrupts the workflow with other applications. The optimization phase occurs when integration is achieved and the new systems begin to deliver more of the expected value that was predicted. Full benefit realization is the final phase when benefits are full extracted and costs are managed effectively and the initial business objectives are achieved. This hypothetical sequence illustrates the many steps in the assessment of the value brought to the organization by the HIT system. Slide #6 The graph represents an illustration of the relationship between time and costs and benefits. The time periods across the bottom could be months or years, depending on the complexity of the Health IT investment. The reality is that costs will always be high in the beginning, and benefits will be low. Over time, costs should decrease and become manageable, and benefits should increase and contribute to the business case. 3

4 Slide #7 The term Return on Investment, or R-O-I, is often used as a generic statement that refers to a variety of methodologies for assessing the value of an intended investment. It is used extensively in finance. In this Module, ROI will refer to tools such as Benefit Cost Analysis (B-C-A) Cost Effective Analysis (C-E-A) and Internal Rate of Return (I-R-R). Benefit Cost Analysis (B-C-A) is a tool that measures benefits and costs from an investment over a time period, and then determines the current or present value of the stream of the projected future outcomes by discounting them using an interest rate. This interest rate is often a standard rate used by the organization for all investment decisions. Basically, a benefit-cost analysis finds, quantifies, and adds all the positive factors. Then it identifies, quantifies, and subtracts all the negatives, the costs. The difference between the two indicates whether the planned action is advisable. The real key to doing a successful cost-benefit analysis is making sure to include all the costs and all the benefits and properly quantify them. Cost Effective Analysis (C-E-A) is a technique that is used when gaining an additional benefit from a project is determined to be worth the additional cost. The focus is on achieving those benefits in the least costly manner. Not all benefits can be measured in dollars, so C-E-A is an assessment tool that is useful when alternative programs are assumed to achieve the same effect on the objective, and are measured in the same units. For example, when considering alternative programs that increase patient or provider satisfaction with the organization, the objective is to increase a score or rating on some survey, rather than an increase in revenue or reduction in costs. ( continues next page ) 4

5 The Internal Rate of Return (I-R-R) is closely related to B-C-A, and evaluates whether or not an investment will return an economic value at an acceptable interest rate compared to other investments. Slide #8 Any organization needs to establish policies and processes for the introduction or upgrading of a new H-I-T investment proposal. The following steps suggested in the Glandon textbook are a reasonable checklist of how organizations should proceed. Step 1. Health IT must align with organizational strategies. H-I-T is there to move business plans and strategies forward, not to just introduce a new technology. Part-3 of the lecture will explore this further. Step 2. Alternative strategies should always be explored. This might be done through Requests for Proposals (R-F-P) from competing vendors or thinking of different pathways to the business objective: outsourcing, cloud computing, in-house development, et cetera. Step 3. Organizations should have in place processes that form a framework of analysis. Preferably, this would be a standard process for any new investment whether H-I-T or other investments like buildings or equipment. Part-1 of this lecture explores tools that can provide quantitative assistance in the decision process. Step 4. Measuring Costs can be tangible or intangible, and requires careful analysis using the tools that have been identified in Step 3. 5

6 Slide #9 Step 5. Measuring benefits can be tangible or intangible as well, and often accrue to a broader audience that enjoys the benefits but has no role in paying for it, or who cannot be charged. For example, the proposed project might result in increased patient or physician satisfaction with the hospital experience. Step 6. Decision makers need to factor into their analysis process the product life-cycle of HIT investments. With rapid evolution of technology, will the current HIT selection be out of date quickly, and will the benefits be achieved in the forecast timeline? Step 7. Because of the uncertainty of technology investments, it is critical that during the decision-making process a bracketing approach be used to explore the window of reality between best and worst-case estimates in the decision process. Not having to worry about alternatives that lie beyond the two extreme ends allows the decision-maker to concentrate on the alternatives that are realistic, given the underlying assumptions. For example, an alternative that has an Internal Rate of Return that is far below the organization s standards can be put to the side and no longer considered in the process. Step 8. Health care organizations, in particular, need to factor in the point that advances in medical technology accrue to those who most likely did not bear any of the organizational cost. Healthier communities and lower rates of manageable diseases might be the outcome of a health IT investment for which the costs are internal, and considerable benefits are un-reimbursable externally. Given the social mission of many non-profit hospitals, improving patient access to care or keeping the community healthier does generate outcomes that meet the strategic initiatives of the organization. 6

7 Slide #10 If you are comfortable with the calculation methods of N-P-V and I-R-R, then the following is a review. The next several slides are optional and go into depth on how to use Excel to calculate these values. For those who are new to this methodology or to the use of Excel in such calculation, you can approach these slides as an introduction and overview. Net Present Value or N-P-V is the value in current dollars of a net stream of future revenues and costs of an investment. The basic premise of N-PV- is that dollars in the future are worth less then dollars in the present as inflationary trends continue. An interest rate is used to discount the future projected revenues or costs, so that decisions in the present can be made with comparable values. Excel has a function that will easily calculate the net present value of a stream of future revenue or costs. The next slide provides the steps necessary to perform the calculation in Excel. 7

8 Slide #11 Using the steps outlined on this slide, one can generate the present value of a future stream of revenues or costs. The challenges of determining the values will be discussed in Part 2 of this lecture. The Excel Steps: External to Excel, data is gathered and projections are made regarding benefits and costs of the health IT investment. Data is arranged in either rows or columns. Each entry is for a given time period, months or years into the future. The net difference between Benefits and Costs is calculated in a new column (B-C). In this example, it is assumed that benefits and costs begin in year 1. Select a cell where you want the N-P-V to be calculated. From the Function choices, NP-V is selected. In the function template, a discount rate is selected. Normally this is an organizational standard. In the function template the range of net values is selected. Press the OK button, and Excel will calculate the Net Present Value of the future net benefits and costs. In some cases, there is an initial year 0 where start-up expenditures are placed. Assumption is that in year 0 there are costs and not benefits. In this case when calculating the N-P-V function you would subtract the expenditures in year 0. This example is not shown in the following slide. The next slide shows an Excel spreadsheet with calculations of N-P-V for some hypothetical data. 8

9 Slide #12 The graph shows a stream of future benefits and costs over seven time periods. These could be months or years depending on the HIT project. N-P-V requires the use of a discount rate or an interest rate that anticipates how future dollars values will be adjusted or discounted. For this example, three discount rates were used for illustrative purposes. The N-P-V column is calculated using the N-P-V function (N-P-V rate and range of values). At 8% this generated an N-P-V of $209. The N-P-V function was also used to generate the present value of benefits and the present value of costs separately. At an 8% discount rate, the stream of benefits over the seven time periods would have a Present Value (P-V) of one-thousand five-hundred seventy dollars and thirty-three cents. The stream of costs would have a present value of one-thousand three hundred sixty dollars and seventy cents. At this point, the decision-maker can look at two important values: 1) the net present value or 2) the ratio of benefits to costs. In this case, the N-P-V (or the difference between the P-V of Benefits minus the P-V of cost) is two-hundred nine dollars. The ratio is 1.15 which translates into one dollar fifteen cents return for every dollar invested or a 15% rate of return. As the discount rate increases to 12% and 15%, both the absolute dollar and the ratio are reduced. The N-P-V is lower because future dollars have decreased in value. In organizations, it is common to use standard discount rates when conducting any valuation of investments. It is helpful to bracket your evaluation by using sensitivity analysis, which means using different values of the discount rate to see how sensitive the calculation is to changes in this variable. Also included in this table is the Internal Rate of Return or I-R-R calculation from the following slides. 9

10 Slide #13 The Internal Rate of Return or I-R-R is a companion tool used with N-P-V to look at the value of an investment. I-R-R is defined as the discount rate at which the present value of the investments cash flow is equal to the cost of the investment. The I-R-R measures the percentage return on the investment. Organizations often have an expectation that any new investment should have a Rate of Return or return on investment (R-O-I) that meets some standard, say 10%. Organizations might evaluate alternative investments in terms of the percentage return they expect to receive. If one competing alternative delivers an 8% internal rate of return and another returns 15% rate of return, the organization would choose the latter. Many other factors go into the decision process, but the I-R-R and N-P-V help to frame the discussion. Slide #14: Let s look at a hypothetical example of how Excel performs I-R-R calculations. Data is presented in rows or columns Net benefits minus costs must be calculated I-R-R is selected from Functions The range of net values is selected I-R-R requires that a guess be made of discount rate o I-R-R uses the guess to start the iteration process Answer is, the I-R-R that will equate benefits and cost, or B minus C equals zero. The next slide offers an example of IRR calculation. 10

11 Slide #15 The I-R-R requires the net value, or benefits minus costs, to be calculated for each time period. Excel requires that you enter a guess as to the rate of return in the Excel function, because it uses your guess to perform multiple iterations to find the rate that makes benefits equal to cost or B minus C equals zero. In this example, the guess entered into the formula was 8% and the IRR calculation produced an Internal rate of Return for this hypothetical example of 18%. If you leave out the guess the I-R-R function assume an initial rate of 10%. Slide #16 In the previous slides, you have seen how N-P-V and I-R-R can be calculated using Excel. The decision makers can use this information to assist them in making a choice as to whether the health IT investment is approved. These assessment tools have some limitations that need to be noted. The size of the project can distort the value of the net return and perhaps ignore the ratio of benefits per dollars of cost. Without a clear decision model, a positive N-P-V and a good ratio might not achieve the desired internal rate of return. An organization would also normally calculate several N-P-Vs and I-R-Rs using different interest rates to bracket and perform a sensitivity analysis. This will help to determine if the outcomes of the calculation are particular dependent upon, or sensitive to, a controllable variable in the analysis. The next slide presents some examples of concern when using N-P-V or I-R-R. 11

12 Slide #17 Large projects often produce large residuals between benefits and costs. A project with estimated costs $2,500,000 might deliver benefits of $3,000,000 or a difference of $500,000. That is a ratio of 1.20 or a 20% return. A smaller project might have costs of $270,000 and a return of $380,000 or a $110,000 difference. However, the ratio is 1.40 to 1 or $1.40 for every dollar invested. Finally, it is possible that some projects demonstrate positive cost benefit ratios, but do not meet the organizational standard for an internal rate of return. The key is for organizations to establish decision-making criteria before undertaking a quantitative analysis like N-P-V or I-R-R. Slide #18 In healthcare, achieving goals or business objectives is sometimes necessary regardless of whether the outcome is measurable in economic terms. For example: increasing provider or patient satisfaction; maintaining a competitive advantage in the market; keeping current with the way business is done; meeting regulatory demands, etc. In these cases the outcome or benefit of the health IT investment is assumed to be necessary, and the goal is to minimize the costs to achieve the outcome. In Cost Effectiveness Analysis, the emphasis is on selecting an alternative health IT strategy that produces an additional benefit and is determined to be worth the additional cost. 12

13 Slide #19 Part 1 presented a variety of tools for the analysis and assessment of health IT investments. The term Return on Investment (R-O-I) was used to represent a family of financial tools that are common when evaluating any investment. Net Present Value and Internal Rate of Return were defined and sample Excel calculations were provided. The limitations of these methods are related to clearly defining the expected benefits and costs in financial terms and determining an interest rate that an organization expects from their investment decision. Organizational standards and processes are an essential part of any investment decision. Cost Effectiveness Analysis (C-E-A) was introduced as an alternative assessment tool when the focus is on achieving the expected functionality or expected outcome that meets a strategic goal of the organization. Part 2 of this lecture will further discuss the soft (intangible) and hard (tangible) outcomes from any investment and the challenges that this raises for the decision-maker. This brings us to the end of lecture 1 in Module 6A. Thank you. 13

14 Bibliography Glandon, Gerald, Detlev Smaltz, and Donna Slovenshy, Austin and Boxerman's Information Systems For Healthcare Management, 7th Edition, Health Administration Press, 2008 Torrance GW. "Measurement of Health State Utilities for Economic Appraisal: A Review", Journal of Health Economics, Vol. 5, No. 1, March 1986, pp Cost-Benefit Analysis. Inc. Accessed at: 14