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The Financial Implications of Electronic Health Records

Thomas P. Noonan
Hahn School of Nursing and Health Science, University of San Diego
HCIN 540: Introducti on to Health Care Informati on Management
Prof. Giff ord
October 26th, 2020
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Abstract

Electronic Health Records (EHRs) have many implications on an organization. One

such implication is on the financial performance of the organization. EHRs have the

capacity to improve financial performance by reducing costs, improving efficiency, and

boosting reimbursement recognition. These results are achievable when EHR

implementation is successful. It is possible that EHR implementation fails and significant

financial loss is recorded. Organizations must evaluate any EHR implementation project

to determine profitability, risk and long-term return on investment. All organizations

considering implementing an EHR system into their operations must fully weigh the

benefits and hindrances pertaining to EHRs. Those who are successful in their planning

and analysis will ultimately have the opportunity to gain financially from a successful

EHR implementation endeavor.

Keywords: Electronic Health Record, EHR, financial implications, cost savings,

revenue boost, reimbursement recognition, risk mitigation, improved efficiency, profit

and loss
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The Financial Implications of Electronic Health Records

The introduction of an Electronic Health Record (EHR) system into a healthcare

provider setting has numerous implications. One such implication, is the effect an EHR

system has on the financial statements of the healthcare organization. Over the past

few decades, health care costs have been on the rise. Providers have since been

turning to applications that will help improve efficiency, reduce expenses, and increase

the quality of health care (Bar-Dayan et al., 2013). Cost savings are very important to

the industry because more capital available means more areas to invest it. Time is

money, so instead of working with clumsy paper forms or repeating processes already

completed, EHRs will allow providers to work more efficiently, therefore boosting

revenue. This increase in available capital can then be spent more effectively on

improving the quality and availability of the care being provided. There are numerous

articles available detailing the financial implications EHRs can have on the healthcare

industry. According to Ryan Mcaskill, “Between 2014 and 2019, EHRs will deliver cost

savings to the global healthcare industry of $78 billion” (Mcaskill, 2014). These cost

savings will allow providers to reinvest the savings into critical areas of need within their

facilities. Whether this be new medical devices, supplies, or physicians; the impact of

EHRs, financially, will come full circle. There are, however, new costs these systems

bring that will have to be weighed appropriately by health organizations. The

Commonwealth Fund states that, “the cost of installing and maintaining electronic health

records systems is the biggest barrier to their adoption by medical group practices,

particularly for the smallest physician groups” (The Commonwealth Fund, 2005). It can

be a challenge implementing an EHR. The cost of the system and the loss of efficiency
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when it is first set up can be enough to detract interested parties. This appears to be

especially true with smaller providers who might not have the capital to withstand the

initial burden. There are many things to consider financially with EHRs. In this paper, I

will discuss the importance of EHRs as a tool to boost financial performance as well as

some ways in which they could increase costs.

EHRs and Finance

It is no secret that the implementation of Electronic Health Care (EHR) systems

can make an impact on a healthcare organization’s finances. From boosting overall

efficiency to reducing the need for clerical workers, EHRs can create a plethora of cost

savings. The long-outdated paper forms are time consuming to fill out. This lost time

translates to less patients being seen and, therefore, less revenue generated. EHRs

allow organizations to maximize time treating and seeing patients. When a healthcare

organization is operating at its maximum efficiency, it is possible for it to maximize its

revenue and lower its costs. However, there are also financial risks involved that may

negatively affect the organization. EHR implementation must be considered carefully.

The wrong system could be far too costly for one organization but financially sound for

another. This paper will analyze the financial pros and cons of EHR software.

Financial Benefits

The positive impacts have been well documented. Kevin McCarthy (2016) at

NueMD argues for the positive financial benefits of EHR software stating, “Practices and

hospitals that use advanced EHR software can cut down on wasteful spending, and

studies show that these savings can often be passed along to the patients as well.” Cost

savings for both the healthcare organization and the patient should be paramount.
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Healthcare organizations must strive to provide the most effective care for the lowest

cost to patients, all while generating revenue. EHRs have the potential to create a

generous amount of cost savings for organizations that utilize them compared to

organizations that do not. It can cost 9.66% less to treat patients when advanced EHR

systems are in place (Kazley et al., 2014). This figure proves that organizations have

the opportunity to create massive cost savings over the long term. Even if the cost of

implementation is large, organizations that have the capital to handle the initial costs will

stand to save a generous amount over time.

EHR Project Planning

Some smaller organizations may not have the capital to take on cost inflating

projects that larger organizations have the capacity for. A great way an organization can

determine if the implementation project will be profitable is through a cost-benefit

analysis. It is important to consider that, “Even with federal incentive payments,

providers will be hesitant to adopt EHRs without understanding the return on

investment” (Wang & Biedermann, 2010). Even though it is generally accepted that

EHRs can reduce costs, not every organization will be able to profit if the project costs

are too large. In a cost-benefit analysis, the long-term cash inflows and outflows can be

displayed and summarized using a simple Net Present Value (NPV) calculation. In the

world of finance, NPV is one way to measure the profitability of a project over the long

term. If the number yielded is positive, the project should be undertaken. If the number

yielded is negative, the project should be avoided. Each organization will have different

needs and goals with their implementation project. When conducting a cost-benefit

analysis, Wang & Biedermann (2010) suggest the following steps:

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1. Determine project goals

2. Estimate project costs and benefits in dollars

3. Discount the costs and benefits at an appropriate rate

4. Complete the analysis with a calculation based on one of several decision-

making methods

This process, along with other financial evaluators, is likely to be utilized by

organizations today that are looking to assess their capacity to take on an EHR

implementation project. One factor likely to be included in these calculations is the rate

of reimbursement.

Reimbursement is a critical aspect of assessing the financial implications of

EHRs. A successful EHR implementation should yield an increased rate of

reimbursement if done effectively. Supporters of EHR integration note that productivity

can decrease by 30-50% initially before returning to the normal baseline roughly three

months later... Once this mark is met, patient inflow and reimbursements return to their

standard figures (Howley et al., 2014). This time period could be costly for the practice.

It is important to weigh decrease in productivity with the long-term uptick in

reimbursement that could be possible if integration is successful. Over a two-year

observation period, it was determined that, “reimbursements significantly increased after

EHR implementation…” (Howley et al.,2014). If organizations can justify the initial

reduction in productivity, they will stand to gain from the increase in reimbursement rate.

This is another encouraging factor for the positive financial plausibility of EHRs.

However, there are also risks that must be considered.

Financial Risk & Mitigation

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It is entirely possible that the integration of a new EHR can go wrong. There are

many risks that need to be evaluated before an implementation project is undertaken. In

a report issued by Moody’s, quoted by Bernie Monegain (2017), it was identified that,

“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.” If the

appropriate risk evaluation measures are not utilized, organizations could suffer great

losses. It is critical that research is done to ensure that the correct EHR system is

chosen for implementation. As mentioned before, financial modelling is a critical piece

of the risk-taking evaluation. Jeff Green (2020) suggests that failure could be a result of

practices failing to properly model costs that can arise during implementation and

afterward. Green also references a study conducted by the MPI Group and Medical

Economics that surveyed practices who implemented EHR software. The study found

that, “65% of respondents who recently implemented new EHR software say their EHR

systems resulted in financial losses for the practice. About 43% of internists and other

specialists/subspecialists outside of primary care characterized the losses as

significant” (Green 2020). These are not encouraging numbers for the proponents of

EHR integration. Although no reasons are provided for these statistics, the best guess

as to why these losses occurred would be inefficient risk analysis protocols. Did these

organizations incorrectly model their cash flows? Were the systems selected

inappropriate or unnecessary for the needs of these organizations? There are a number

of questions that can be asked to clarify why these failures occurred. Again, many of

these issues can be avoided if risks are accounted for properly. Monegain (2020)

echoes a similar sentiment that declines in cash flow and days of cash on hand will
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ultimately improve if there is strong risk management. It is clear that the most important

part of EHR implementation is having the ability to manage risks effectively.

Organizations who have the capacity to do this will be among those who find EHRs to

positively affect their operations.

Conclusion

Electronic Health Care systems can make a great impact on an organization’s

finances, positively and negatively. These systems allow providers to be more efficient,

cut costs, and boost revenue if done correctly. They are costly to integrate but the long-

term return on investment can make it worthwhile for healthcare organizations to invest

in. The ability to treat more patients, boost reimbursements, and operate in a more

efficient manner are enough to justify an upgrade for some organizations. The more

capital restricted organizations can utilize Net Present Value calculations and a number

of other financial modelling metrics to determine if a system is the right fit for their needs

financially. Thorough research on an implementation project can help avoid any of the

serious negative losses that can potentially occur. Poor research can lead to the wrong

project being undertaken and, in turn, heavy losses on the organization’s financial

books. It is extremely important that organizations assess the risk of loss in the initial

stages of implementation. The 30%-50% initial reduction in productivity can harm

smaller organizations that do not properly account for systematic risk (Howley et al.,

2014). Failure to account for this will likely land these groups in the same category as

the 65% of respondents in the MPI Group and Medical Economics survey who deemed

their EHR projects as financial losses (Green 2020). If risk can be mitigated well

enough, healthcare organizations stand to gain significantly over time. There is little
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evidence to suggest that all healthcare organizations could suffer long term losses if

proper planning is executed. The 9.66% in cost savings per patient for practices who

successfully utilize advanced EHR systems will add up long term. (Kazley et al., 2014).

There is still plenty of research to be done on the topic. Ultimately, if healthcare

organizations have an abundance of capital at their disposal choose to integrate an

EHR system, the long-term benefits in cost savings, improved revenue and boosted

efficiency will far outweigh the initial costs.

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References

Bar-Dayan, Y., Saed, H., Boaz, M., Misch, Y., Shahar, T., Husiascky, I., & Blumenfeld,

O. (2013, June). Using electronic health records to save money.

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3715342/

Journal entry discussing various ways electronic health records can save

organizations money and why they should be doing this. Some reasons

why organizations should implement EHR systems to save money include:

improved efficiency, reduced expenses, and increased quality of health

care. These are all outcomes that need to be considered as they effect

organizational finance.

The Commonwealth Fund (2005, September). Cost Is Biggest Barrier to Electronic

Medical Records Implementation, Study Finds.

https://www.commonwealthfund.org/publications/newsletter-article/cost-biggest-

barrier-electronic-medical-records-implementation

Article discussing the factors that prevent organizations from considering

or implementing EHR systems. One of the main factors preventing EHR

implementation is the cost to install and maintain the system. This is a

major factor to consider financially as some systems may be too costly to

purchase or maintain, especially for smaller organizations.

Green, J. (2020). 10 EHR failure statistics: Why you need to get it right first time.

https://www.ehrinpractice.com/ehr-failure-statistics.html
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Article discussing main reasons why EHRs can fail. One of the main

reasons is that the financial burden becomes too great for some

organizations and the implementation results in significant loss. It is

important to consider why a project might fail and what the causes are.

Sometimes these events can be calculated into a financial model. Often

times, this is hard to determine because each organization’s needs are

different and the way they react to changes can be difficult to predict.

Howley, M. J., Chou, E. Y., Hansen, N., & Dalrymple, P. W. (2014). The long-term

financial impact of electronic health record implementation. Journal of the

American Medical Informatics Association, 22(2), 443-452. doi:10.1136/amiajnl-

2014-002686

Article discussing the initial effects of EHR integration. It is important to

consider to the immediate effects of a project such as EHR software

implementation. This article discusses how patient inflow and productivity

will decrease initially before returning to normal roughly three months

later. This a considerable amount of time and losses could mount. It is

important to consider how this will affect the organization financially.

Kazley, A. S., PhD, Simpson, A. N., PhD, Simpson, K. N., DPH, & Teufel, R., MD.

(2014). Association of Electronic Health Records With Cost Savings in a National

Sample. https://www.ajmc.com/view/association-of-electronic-health-records-with-

cost-savings-in-a-national-sample
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Case study with journal summary of actual cost savings from an observed

test. It is always important to provide evidence for thesis. This study was

able to determine that EHRs can generate cost savings of 9.66% on

patients who are treated using advanced EHR systems. Concrete

evidence is critical in proving that these systems can make a positive

financial impact on health care organizations.

Mcaskill, R. (2014, November 25). EHR to Create $78B in Cost Savings Over Next Five

Years. https://revcycleintelligence.com/news/ehr-create-78b-cost-savings-next-

five-years

Article discussing the ways in which EHR systems can create cost savings

for health care organizations. Relates to the subject as cost savings are a

major part of financial analysis. Organizations who can effectively cut

costs have the potential to boost overall revenue, therefore freeing up

capital for other uses.

McCarthy, K. (2016, August 24). EHR software helps both patients and providers save

money. https://nuemd.com/news/2016/07/22/ehr-software-helps-both-patients-

providers-save-money

Article discussing the financial benefits EHR software has for both patients

and health care providers. This is an extremely important factor to

consider financially. Organizations who can save money and then pass

these savings on to the stakeholders are truly improving a system. Not

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only is this good for the organizations financial records but it also makes a

strong positive impact on the community.

Monegain, B. (2017). EHR installs carry huge financial risks, Moody's says.

https://www.healthcarefinancenews.com/news/ehr-installs-carry-huge-financial-

risks-moodys-says

New article illustrating the risks involved, financially, with EHR systems.

Not all EHR projects will generate profits. There is a considerable amount

of risk that needs to be evaluated before a project is undertaken. This

article provides examples of some of the losses that may occur upon initial

EHR adoption. Downsides and risks need to be considered to determine if

EHR integration is financially feasible.

Wang, T., PhD, & Biedermann, S. E., MSHP, RHIA. (2010). Running the Numbers on

an EHR: Applying Cost-Benefit Analysis in EHR Adoption.

http://library.ahima.org/doc?oid=101607

A study on financial metrics that can be used to assess the profitability of

EHR integration. It is important to consider all project cash flows in order

to determine if the project will be profitable. There are many metrics that

can be used and steps to follow in determining profitability and return. The

correct application of these figures will allow organizations to assess risk

and return accurately.