Journal of Undergraduate Research
Volume 7, Issue 2 - January/February 2006

The Electronic Medical Record: Economic and Managerial Implications for the Health Care Organization

David J. Tarabocchia

INTRODUCTION

On March 4, 2003, addressing the American Medical Association, President Bush remarked, “Right now, as you all know better than most, health care records are kept in different formats – believe it or not, a lot of times on paper.” The need to advance to a national health information infrastructure including electronic medical records is no longer a matter for leisurely debates. It is fast becoming a matter of public safety. Moving health care into the information age is both national issue and an institutional issue (Kloss 2003).

An electronic medical record (EMR) is a total computer-based medical record that does not rely on paper charts, transcription, or dictation, yet includes all doctors’ notes and prescription orders (Rogoski 2002). The functionality of the system can include patient accounting/patient management, advanced clinical documentation, document imaging, patient scheduling, radiology and pharmacy information management, a lifetime clinical record, and a decision-support data warehouse (Kinyon 2003).

This aim of this paper is twofold. The concepts of how the innovation of EMR is subject to economic principles and forces will be presented. In addition, that discussion will involve the qualitative and quantitative costs and benefits to the implementation of an EMR. First, a macro overview of the health care landscape will be presented and along with a background to the problems associated with paper records. Second, the paper will explore the perceived benefits and costs of EMRs. Emphasis will be placed on important managerial and organizational considerations in implementation and how those considerations relate to applied economics concepts.

NATIONAL INSTITUTIONAL CHANGES

Institutional change is anything that changes the social rules used to facilitate coordination among people. Institutional change is caused by a disparity between institutional rents and economic rents. That disparity is often a result of a disconnection between what a technology can do and what the institution will allow. In the framework of the EMR, the institutional change that occurred was the impetus of the Department of Health and Human Services to develop a National Health Information Infrastructure. The system would allow a doctor or other health care provider to access an always-up-to-date electronic health record for a patient who has authorized it, regardless of when and where the patient receives care. The system would not be a database, but rather a set of standards and secure networks that would allow a doctor or hospital to immediately gather relevant information by computer network to best treat an individual patient (HHS 2004).

The reason behind the push to develop the National Health Information Infrastructure is threefold. First, health care costs are spiraling upward as national demand exceeds national supply due to an inefficient amount of consumption of health care as a result of insurance and due to the aging population. Second, in the past few years the viable technology of EMR has been introduced to reduce costs and increase quality at health care organizations. This technology has economic rents that exceed what our current health infrastructure utilizes. Finally, politicians and bureaucrats, the producers of institutional change, have taken notice of these opportunities and new threats, such as bioterrorism and want to act upon them to increase social benefit.

President Bush has established a national goal of assuring that most Americans have electronic health records within 10 years. He also has ordered the creation of a central office at HHS to oversee this complex effort. Once widely implemented, such a system is expected to dramatically improve the quality of patient care and reduce the nation's health care costs by

Making the patient's up-to-date medical record instantly available whenever and wherever it is needed and authorized;
Avoiding costly duplicate tests and unnecessary hospitalizations;
Providing health professionals with the best and latest treatment options for the patient's needs;
Helping eliminate medical errors;
Streamlining the reporting of public health information for early detection and response to disease outbreaks and potential bioterrorism;
Creating opportunities to gather non-identifiable information about health outcomes for research to identify the most effective treatment options;
Providing better, more current medical records at lower costs; and
Protecting privacy (HHS 2004).

The push from HHS began the momentum behind clinical information technology and EMRs in early spring and through the summer of 2003. Obstacles to sharing health care information, such as lack of standards for providers’ computer systems, were getting the thrust needed to propel them toward a solution. This impetus was spreading from leaders in the government to health care IT vendors and trade associations (Morrissey 2003).

THE PROBLEMS WITH PAPER

Fundamentally, the concept of the EMR was borne from inefficiencies related to the alternative existing system at most health providers: paper records. Paper records impede optimal information management and adversely affect productivity and quality. For starters, paper records are often unavailable, missing important information, or illegible. Beyond that, paper records can only be in one place at one time. If the information needs to be delivered to multiple sites, that means multiple copies. Physically, paper records are expensive to buy, maintain, and store. In addition, considerable money is spent on staff resources to manage the paper records (Darr 1998).

Paper records represent a level of rudimentary technology in the spectrum of health care advancement. They cannot provide reminders about preventative services or disease-state monitoring. They cannot provide decision support, test ordering, drug prescribing, drug interactions, or encounter documentation. In the end, paper records inhibit quality assurance and quality improvement because collecting data is costly and difficult (Darr 1998). In fact, according to a report by the Institute of Medicine, medical errors are thought to be responsible for more than a million injuries and up to 98,000 deaths in the U.S. each year (Connelly 2004). There is no doubt that a large portion of those injuries and deaths are directly related to the use and application of paper records.

One of the greatest promises of EMRs is the reduction in paper use and the associated labor costs. From an economic standpoint, the paper records represent an increased cost in both factor prices of labor and capital. The capital is the expense of the paper itself as well as its storage and retrieval systems. The labor is represented by all of the health care professionals who interact with paper records and documentation, especially the medical records staff. The EMR promises to be both a capital augmenting technology and labor augmenting technology by improving the productivity of both factors. Economic theory tells us that firms will welcome improvements in either factor if available.

ENTREPRENEURIAL OPPORTUNITY

Despite entrepreneurship and innovation being at an all-time high in the U.S. economy, hospitals are sleepy compared to other sectors of the economy. There was a flurry of activity in that sector in the late 1980s and early 1990s with integrated delivery systems, physician practice management, and health care information systems. However, now there is a conventional wisdom that hospital executives are focused on hunkering down by cutting costs and implementing existing game plans. With EMRs on the horizon, that conventional wisdom is about to change, driven by the increasing power of consumers, the Internet, health care systems’ investment in information technology, genetic research, new drugs, advances in medical technology, and related innovations in marketing and management (Moore and Coddington 1999).

Entrepreneurs are in the business of causing change and most successful entrepreneurs begin with, feed off and exploit the other changes that are occurring around them. Each change produces opportunities for entrepreneurial initiatives, which in turn produce still more opportunities (Moore and Coddington 1999). This movement towards new opportunities represents the concept of path dependence. Technical change is path dependent in the sense that it evolves from earlier technological development, but more importantly, the increasing returns to scale due to path dependence can be a source of lock-in which drives the process into developing a technology that has an inferior long-run potential (Ruttan 2001). In other words, the innovations of entrepreneurs are based on previous opportunities developed around them. Those opportunities are not always the most efficient starting points.

The basic process of entrepreneurship is best described by the cumulative synthesis approach where innovation occurs through four steps: perception of the problem, setting the stage, the act of insight, and critical revision. For all technologies related to the EMR, the perception of the problem has been the inefficiencies and drawbacks with paper records and the quality enhancing and cost saving abilities of EMR systems. There is also an element of demand pull related to the development of EMRs which gives support to the mechanistic view of entrepreneurship. This demand pull manifests itself in savvy consumers who will choose health care from technologically superior organizations and some physicians who are demanding a technological patient care environment. It is safe to say that entrepreneurs will have tremendous opportunities in the next decade to enhance aspects of EMR systems.

QUALITATIVE BENEFITS OF EMRS

Qualitative benefits to EMRs are much easier to describe than quantitative benefits because of the difficulty involved in obtaining systematic and quantifiable data about various factors influenced by the implementation of EMRs. Qualitative benefits can be financial and non-financial in nature and span four main categories: productivity enhancements, quality of care improvements, improved customer service and satisfaction, and increased professional satisfaction.

Among the productivity enhancements that can be expected with EMR systems is that scheduling resources will become more efficient. There will also be less time spent copying filing, faxing, and transmitting data resulting in lower supply costs. Fewer lab results will be lost and there will be less of a need for repeat tests. Aggregate patient data will improve financial forecasting and risk management. Finally, there would be an automation of the referral process and a more appropriate use of specialists (Renner 1996).

Intangible financial benefits to improving the quality of care include a reduction in medical errors and a reduction in adverse drug interactions. There will also be improved primary and preventative care through automated reminders, protocols, and alerts that will reduce disease management costs. The availability of the chart will be vastly improved with the ability to remotely access patient charts. An EMR would provide improved data analysis, outcomes measurement, and population-based care. Finally, summary screens will help prevent overlooked patient information and help specialists with care. Non-financial benefits include improved quality of documentation and legibility, improved outcomes reporting (Renner 1996).

Improved customer satisfaction can be achieved through a lessened need for repeat lab testing and increased speed in getting medication refills authorized. There will also be less paperwork in general as the patient moves through the health care system. Patients will have confidence that physicians are using the best information technology available and communication with patients will improve through pre-formatted letters and educational handouts (Renner 1996).

An EMR will result in increased professional satisfaction through a reduction in paperwork and improved communication by having less time consumed with routine information exchange. There will also be increased satisfaction with availability and documentation of records. Finally, the ease of covering for other providers patients and the ease of tracking referred patients should improve (Renner 1996).

QUANTITATIVE BENEFITS OF EMRS

Almost all of the literature available on the topic of EMRs is quick to point out the difficulty in calculating a return on investment for EMR systems. Demonstrating financial returns on an EMR often is regarded as an inexact science at best, which has caused many health care executives to avoid adopting the technology (Schmitt and Wofford 2002). In fact, according to Waegemann (2004), the main reason that 95% of providers do not use full EMR is because there is a lack of ROI to the individual provider to implement those systems.

A useful starting point in developing quantitative benefits to an EMR is with a discussion of tangible financial benefits. While each of these benefits does not, in itself, provide an ROI, they do provide some way of measuring the performance of a given EMR system in a quantifiable manner. Among the tangible productivity enhancements is a reduction in chart pulls that lowers labor cost in the medical records department. Automated inferences reduce labor costs for personnel involved in coding, billing, manually retrieving lab results, and referral coordination. Transcription costs will be lowered dramatically. Malpractice premiums should also be lower. There will be less dictation time and faster documentation of encounters. There will be improved charge capture. There should also be a reduction in nurse intake time. Finally, faster billing reduces the cash cycle and cuts receivable days and document storage space costs are reduced (Renner 1996).

Quantitative improvements in quality of care include automated protocols to reduce expensive variations in patient treatment and a reduction in time needed to search through records for relevant patient information. There will also be a decrease in lost lab reports that will lower the need for repeat lab tests. Finally, there will be more time to spend with patients (Renner 1996).

Aside from describing quantifiable improvements to EMRs, there is a fair amount of case analysis on the cost reductions incurred with the implementation of EMRs at different health care organizations. Nationally, an estimate of savings from interoperable electronic infrastructure connecting health systems was put at $80 billion. That infrastructure could also reduce the cost of medical errors, estimated between $38 billion and $50 billion annually, with $17 to $29 billion attributable to preventable adverse events (IT Health Care Strategist 2002). At the hospital-specific level, in one instance, a 1,951-bed teaching hospital saved $8.6 million annually by implementing an EMR (Health Management Technology 2003). Reid Hospital, a 240-bed not-for-profit, gained $200,000 in annual savings from a reduction in forms, $185,000 in annual savings in records storage and microfilm costs, and $150,000 in annual savings from not filling two IT database administrator positions (Kinyon 2003).

In summary, a recent survey by Capgemini showed that 71% of health care executives believe electronic health record systems will have a positive long-term financial impact on their organizations, despite costs and other barriers to adoption. The capital investment required for EMRs was estimated at $50 million to $100 million for a health care operation with two or three hospitals participating. Despite the challenges, 88% of the executives said their organizations have already begun addressing the adoption of digital health records or expect to do so within six months (McGee 2004).

CALCULATING RETURNS OF INVESTMENT

Case studies can be useful, especially if one organization can study the implementation of EMR at a similarly sized and structured organization. However, there is no one-size-fits-all method of measuring value because each organization has its own objectives and structure. The benefits are subjective, even if they are quantifiable, because it all depends on what the priorities are. If productivity decreases but charge capture increases, is that a positive return overall or a negative one? It depends on what the initial goals were.

Another issue complicating a measure of costs and benefits is social benefit, or benefit to society that exceeds the private benefit received by the firm in the way of profits. If social benefit exceeds private benefit but not private cost, does the firm undertake the implementation? If it is a private firm, it would not, from a purely economic standpoint. What about a not-for-profit health care organization? Do they have an obligation to consider social benefits, which might include positive externalities to an EMR implementation? Unfortunately, there are no clear-cut answers to that, and it is one more reason ROI is hard to quantify—it all begins with the framing of what the costs and benefits are going to be.

Luckily, there is a useful framework for health care organizations to develop their own ROI analyses created by MedicaLogic, First Consulting Group, and VHA, Inc. An organization identifies specific tangible costs such as training, hardware, and software as well as intangible costs such as labor and confidentiality. It then assigns a weight that reflects the importance of each cost and it rates the probability on a scale of 0 to 5 that the cost will be incurred. Multiplying the weight factor and the probability rating yields a figure known as the value rating score. Value rating scores are calculated under two scenarios: if the EMR is implemented and if it is not. The organization uses the process for tangible benefits and intangible benefits. Then it calculates the difference in value rating scores for costs and benefits (Sandrick 1998).

IMPLMENTING CLINICAL PROCESS INNOVATION

An important aspect to successful implementation of EMR systems from a managerial standpoint is to understand how to disseminate and ensure the use of clinical process innovations. The process is a dynamic one that is a function of individuals’ tolerance or willingness to change and organizational experience with innovation (Savitz et al. 2000). The life cycle model used is similar to the product life cycle model with product development, product maturation, and product standardization. The CPI model is also similar to the stages of diffusion of technical change which is marked by innovators, early adopters, early majority, late majority, and laggards.

The life cycle model of clinical process innovation is a function of the basic relationship between tolerance for change and experience with innovation over time. The progression across the life cycle follows the phases of emergence, growth, and maturity with the final phase of critical crossroads. The critical crossroads encompass the alternative responses of advance, maintain, or decline in the relationship between the staff tolerance to change and system experience with innovations (Savitz et al. 2000).

During the emergence phase there is a relatively low level of tolerance for change among providers and staff who have limited experience with the innovation. The cultural environment is in the beginning stages of its transition to a learning environment that tolerates experimentation (Savitz et al. 2000). In implementing an EMR, the emergence stage might include educating users about its benefits and asking for ways to find cost reducing uses for the new system. This stage would also be marked by the designation of a super user and perhaps a test system for the staff.

The growth phase is characterized by rapidly increasing levels of tolerance or willingness to change as the culture is energized by success when experience with the innovation accumulates and the tolerance of failure is observed (Savitz et al. 2000). This stage is marked by the rapid diffusion of an EMR system into the workgroup or department that might include the system go-live with the vast majority of users accepting the innovation. Maturity is reached when a sustained level of tolerance for change is achieved and visibility and reputation for numerous innovative efforts are attained (Savitz et al. 2000). This stage is likely marked by users who, through learning by doing, have become proficient with the new system.

The final stage of critical crossroads is where management is presented with an opportunity to intervene once again to promote advanced growth or continued maintenance to indefinitely forestall the decline (Savitz et al. 2000). This stage requires management support and reinforcement, quality assurance and troubleshooting support by IT, and continued physician leadership.

CHALLENGES

Despite all of the promise embodied by EMRs, there remain a number of obstacles that need to be overcome including integration issues and privacy concerns.

A major problem for implementing EMRs is that dozens of electronic data sources exist in a typical hospital. Both internal and external systems are rife with duplicate information, all of which is obtained and stored at significant cost to the organization and inconvenience and frustration to the consumer. Integrating these various clinical systems, especially the internal ones, is key to realizing the advantages of an EMR. A related problem is capturing physician information inexpensively in a coded or structured form so it is compatible with electronic storage (Darr 1998).

Privacy concerns have emerged front and center with the materialization of EMRs. This concern is heightened as patient health information from external sources is linked. This issue is much more of a public perception problem than a technical one. The fact is that while the EMR may allow access to the record by numerous providers from multiple locations, such systems demand the use of several levels of security, such as passwords or biometrics, while creating audit trails of all users entering the record. The same cannot be said about the security of a paper chart system that can be breached easily without any trace of who has accessed it (Silverman 1998). The bottom line is that an EMR system is far more controllable and customizable in terms of security than paper records.

CONCLUSION

During the next two years, reducing medical errors, improving patient safety, and developing electronic health records will be the key drivers of IT spending according to a survey of CIOs from the nation’s largest health care providers (Schwartz 2004). It has become quite evident that the electronic medical record is the most critical issue facing health care IT over the next 5 to 10 years and will radically change the way health care is delivered in the U.S.

Ultimately, the hope for electronic medical records is nothing short of saving lives. The journey toward that end will be rewarding but difficult because, as described by Machiavelli in The Prince, “There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things, because the innovator has for enemies all those who have done well under the old conditions and the lukewarm defender in those who may do well under the new.”

APPENDIX A

Clinical Life Cycle Model (Savitz et al. 2000)

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