Measuring the ROI of Your Medical Practice's EHR

May 21, 2012

An EHR's impact on practice productivity can render meaningful use incentive payments irrelevant.

The EHR incentives provided for in the HITECH Act of 2009 do not represent "free money." Their purpose is to mitigate the costs of implementing an EHR system, i.e., reduce but not eliminate the financial pain. In an effective EHR implementation, the incentives are helpful to cover initial expenses, but the gains in productivity are far more valuable. In an ineffective EHR implementation, reduced revenues resulting from productivity issues will swamp the incentive dollars.

Return on investment (ROI) is the classic way to evaluate prospective capital expenditures. The simplest expression of ROI is

ROI = $ Gain on Investment – $ Cost of Investment
$ Cost of Investment

Of several options, the most financially attractive investment is the one with the largest ROI. An investment with a negative ROI is not rationally pursued unless there are compelling non-financial arguments in its favor.

There are two primary challenges to calculating the ROI of a project:
• Identifying all significant costs and benefits
• Evaluating those costs and benefits over an appropriate time horizon

The tendency is to include only "hard dollar" costs and benefits, those represented by checks issued and received. A typical EHR ROI calculation for a web-based EHR for a practice eligible for the Medicare incentives (up to $44,000*) looks like this:

ROI = $44,000 – (60 Months X Monthly Fee)
60 Months X Monthly Fee

Some available calculators express the incentive more precisely as 75 percent of estimated Medicare allowable charges for covered services furnished by the EP, subject to annual maximums. Including the anticipated Medicare allowable charges for the reporting periods sets the equation up to extend the period and consider as gain the penalties avoided beginning in 2015.

The calculation can get more involved and include the square footage of office space saved by eliminating paper charts, as well as the costs associated with abstracting existing patient records and converting existing charts to electronic documents. Any number of gains and costs can be included in the calculation, and deciding which to include can be more art than science.

The one ROI factor - in addition to actual dollars out and in - that must be considered is the impact on practice productivity. A simplified ROI would include the factor in this way:

ROI = $44,000 + Productivity Gains – (60 Months X Monthly Fee) – Productivity Losses
60 Months X Monthly Fee – Productivity Losses

For the sake of simplicity, assume the Monthly Fee is zero. The consequence is that a positive ROI requires:

Productivity Losses – Productivity Gains < $44,000 over the first 5 years

(If you do not see how I got here, please get in touch and I will be glad to walk you through it.)

Further assume annual gross revenue of $1 million. A net productivity loss of 1 percent over five years yields:

(1%) X ($1,000,000) X 5 years = $50,000 > $44,000

ROI < zero; not a good investment

Consider the common estimate of a 10 percent reduction in productivity for the first six months, and no subsequent gains in productivity:

(10%) X (6 X $1,000,000/12) = $50,000 > $44,000

ROI < zero; not a good investment,
especially since $50,000 is lost in the first six months
and it takes sixty months to earn the $44,000

What about a 10 percent reduction in productivity for the first six months followed by a 5% gain in productivity through the rest of the period?

(10% X [6 X $1,000,000/12]) - (5% X [54 X $1,000,000/12]) =
$50,000 - $225,000 = - $175,000 < $44,000
ROI > zero

The value and advisability of implementing an EHR is almost completely a function of the implementation's effect on practice productivity. Small gains or losses in productivity render the meaningful use incentive payments relatively irrelevant.

*Incentives / timeframes for the Medicare / Medicaid EHR Incentive Program vary. For more information, please see "Medicare/Medicaid EHR Incentives and Some of the Details."

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