Squeezing Costs Through Technology

Healthcare leaders are not just spending money on technology but using the tools to help control costs.

All areas of healthcare are being challenged to control or reduce costs, but providers are starting to think creatively not only to reduce technology costs but also to seek greater returns on investment and to squeeze out costs in general via new technology throughout healthcare.

Marin General Hospital recently became the third U.S. health system to enter into an unusual partnership with its technology provider, Philips, to reduce its capital expenditures on new diagnostic imaging equipment, patient monitoring, and related monitoring services by entering a $90 million, 15-year managed services contract.

"This is absolutely about cost," says Mark Zielazinski, chief information and technology integration officer at the Greenbrae, California, hospital, which is licensed for 235 beds, and employs 1,600 employees and 500 active physicians. In 2010, Marin General broke away from parent Sutter Health.

When Zielazinski arrived in 2012, "the divorce was over but the pains were still there," he says. At the time of the split, the hospital had eight days' cash on hand, but by 2012 had managed to increase that to 28 days. In 2013, the Marin Healthcare District, which owns the hospital, went to the voters of the district governing it with plans for a new hospital building.

Voters approved a tax to fund slightly less than $400 million of the needed $600 million, Zielazinski says. "Part of that is that the new building is going to cost us some $30 million in medical equipment." In addition, some equipment had to be purchased before 2020, when the new building opens, he adds.

In 2018, Marin General plans to sell $200 million in revenue bonds to fund the remaining capital. "Eighteen months ago, we were looking at finding ways to preserve our cash," Zielazinski says.

The 15-year agreement with Philips allows Marin General to even out its capital expenditures in a stair-step fashion rising from the initial year, and to bring on needed equipment now under the managed services Philips will provide. For example, in 2016 the contract will permit Marin General to replace its fleet of C arms, portable x-ray fluoroscopy devices employed by orthopedic surgeons. "To buy all that stuff would have been a chunk of change," Zielazinski says.

Under the Philips managed services contract, "I'm actually spending even less than what I intended to start spending in 2020. So I get to preserve my cash and prepare for going for that revenue bond," he says. And as of the start of 2016, when the Philips contract was announced, Marin General had increased its cash on hand to 100 days—an important metric that Philips will continue to boost as it approaches the revenue bond sale.

Of course, in calculating the money saved by going the managed services route, Zielazinski is considering more than just the equipment cost. The Philips managed services deal includes maintenance and consulting aspects as well. "If I had added employees to do this, or bought consulting services, I would be paying a premium for that," he says. "Because I know Philips has the right resources I need in these areas, I'll get that at a reduced price."

A provision in the agreement also gives Marin General the option of purchasing non-Philips diagnostic imaging equipment, such as tomosynthesis imaging, a form of digital mammography–important flexibility given that Philips does not make such a device. However, the equipment will still be managed by Philips under the terms of the contract, Zielazinski says. The incentive is for Philips to supply the lion's share of the imaging equipment under the contract with Marin General. "Our savings are better the higher our commitment is," he says.

Already, early in year one of the 15-year contract, "we're starting to see the impact operationally," Zielazinski says. "I would say by the end of the second year, we'll really start to see a dramatic improvement in our current diagnostic imaging services and the addition of services we don't currently provide."

At UPMC, the Pittsburgh-based system that operates more than 20 hospitals and more than 500 doctors' offices and outpatient sites, and has a 2.8-million-member health insurance division, a different kind of vendor-provider partnership recently launched to commercialize UPMC's cost-management software tool, originally championed by Robert Hernandez, former CFO of USX Corporation and now chairperson of the finance committee of UPMC's board of directors.

With that prior manufacturing experience background, Hernandez was "aware of activity-based costing and knowing every dollar you spend has to be accounted for," says Robert A. DeMichiei, executive vice president and chief financial officer of UPMC.

Six years ago, UPMC realized it needed to know what its costs were, like any other industry, says DeMichiei. "What does it cost to do a knee? What does it cost to do a hip? Are we being efficient?" UPMC executives at the time, including DeMichiei, a former General Electric executive, admitted they did not know.

"The revenue cycle solutions were the old solutions," he says. "They're based on reimbursement. They're not based on what every other company in every other industry thinks about, which is, 'How do I become more efficient?' I have customers that are very price-sensitive." Four years ago, UPMC kicked off its cost initiative with an eye to building service lines, as healthcare pivots from volume to value, he adds.

UPMC's tool assigns costs to specific activities, such as use of the operating room, initially developed using a tool customized within Oracle's Hyperion Profitability and Cost Management software, although the recently announced vendor partnership will see the tool migrated over to the Health Catalyst data warehouse platform for commercialization.

"We started with Oracle's infrastructure framework, but we built all the cost-management activity-based healthcare algorithms. So all the relationships, all the activity drivers, all the subsystems feeding in—we built that ourselves," DeMichiei says.

Starting in 2011, DeMichiei says UPMC proved the tool's value at successively larger UPMC hospitals, starting with UPMC Mercy in Pittsburgh, then moving on to the rest of the UPMC hospitals in Allegheny County. A larger test in 2014 resulted in UPMC being able to reduce the number of "open" hysterectomies, versus vaginal or minimally invasive versions of the surgery, by showing that the latter methods reduced complications, lengths of stay, readmissions, and costs. "For some reason we were still doing them open—generally because the specific physician had always done them that way," DeMichiei says.

Today, UPMC's activity-based costing technology is close to paying for itself, after employing the labor of "a skunkworks team of about 12 people for four years who worked on this 100% of the time. If we haven't gotten the 100% payback, we will very shortly, and I think moving forward, it's infinite," DeMichiei says. "There isn't a surgical procedure that you can't measure and do this clinical variation exercise with, so just as a UPMC tool, the ROI will be exponential." Among the procedures on the short list for cost optimization next: spine surgery, knee replacement, and in the cardiac service line, valves and stents.

"This is this treasure chest of information that we've just opened up. We just open it up and see this gold shining at us. And we have years and years to mine our own gold."

In addition to the healthcare savings, UPMC Enterprises, the commercialization arm of UPMC, now stands to benefit from the revenues the UPMC tool will generate under an agreement with Health Catalyst to license the technology, content, and analytics innovations developed by UPMC.

Finally, the tool can also be used to internally benchmark individual UPMC operating units such as ICUs, pathology, or labs against each other. "This is this treasure chest of information that we've just opened up," DeMichiei says. "We just open it up and see this gold shining at us. And we have years and years to mine our own gold."

Reducing EHR costs
Health IT in general, and the EHR in particular, is also becoming the focus of new cost-cutting efforts. The University of Toledo Medical Center, a 267-staffed-bed hospital and associated clinics with 250 practicing physicians in Ohio, recently signed an agreement to expand its use of the cloud-based athenahealth EHR from ambulatory to inpatient settings.

As part of the agreement, UTMC will partner with athenahealth to develop athenaClinicals for Hospitals & Health Systems, an extension of the vendor's existing EHR, athenaClinicals. The University of Toledo Physician Group has used athenahealth's ambulatory EHR since 2014.

In doing so, UTMC will retire its use of an inpatient McKesson-based EHR. McKesson is in the process of migrating all customers of that EHR to McKesson's newer offering, which is certified for meaningful use, unlike the older offering.

"Their new EHR is sufficiently different from their old one so that it wasn't just a tweak or an upgrade," says UTMC CEO David Morlock. "Now is a good time to go look at all of our options, so we kicked the tires on a variety of options and landed on athenahealth, because I think it's the best combination of our mindset and outlook coupled with patient care quality aspects like low cap-ex, low op-ex, interoperability—all of those key elements."

The inpatient athenahealth technology in question is just finding its footing in the commercial marketplace. It represents the marriage of athenahealth's ambulatory software with webOMR, inpatient software acquired in 2015 from Beth Israel Deaconess Medical Center—which continues to use the software as it is commercialized—as well as software acquired along with the cloud-based EHR assets of RazorInsights.

The UTMC/athenahealth joint effort will focus on creating a seamless physician and nurse user experience for academic medical centers. Research will focus on acute care workflows to identify areas for operational improvement, and then design and build service capabilities to support those workflows. UTMC kicked off its planning process in January 2016, and hopes to be live with the athenahealth product by mid-2017.

While Morlock declined to give specific numbers for the cost savings, he says he expects that by going to the cloud-based athenahealth product—versus continuing with a traditional EHR such as McKesson, Epic, or Cerner—represents a difference of multiple millions of dollars.

"I do know the numbers," he says. "The implementation of a robust electronic health record actually is about patient quality, patient safety, patient care, those elements. But I reject the notion that you have to completely trade off financial common sense in exchange for the patient care aspects of the electronic health record. I just don't buy the business case that dropping a nine-figure investment and strain on the income statement for a few years postimplementation is a necessary part of the equation."

While he acknowledges that athenahealth is still building out its inpatient EHR, Morlock contends that "healthcare is fraught with a lot of groupthink around some of these decisions. The idea that athenahealth couldn't deliver in a new space just doesn't make any sense to me. As a publicly traded company, there is plenty of pressure on athenahealth to make this happen. We will know well ahead of go-live whether there are any problems or not."

The other way Morlock expects to save money is through athenahealth's interoperability components. "You can't just draw a box around your system and say we've got all the medical and health information that we need on a patient, because your patients are being seen potentially in somebody else's primary care clinic, in retail settings, a local nursing home, or pharmacies. You've got to bridge the gaps across all those disparate systems. I used to work at another academic medical center where we bought the more traditional EHR and implemented it, so this is another reason why I'm interested in the athenahealth approach, because I've been down the other road. I don't want to go down that road again."