Dick Escue, chief information officer of Colorado’s Valley View Hospital, says in Hospital Impact that because health-information technology costs nonprofit hospitals and health systems billions, driving down the credit score of some of them, they should look to the for-profit sector for guidance in curbing costs and getting more reliable service.
“I have observed shocking discrepancies in financial approaches to IT decision-making. Non-profits treat IT as an asset or fixed cost–a ‘one-and-done’ investment which depreciates, and whose initial cost is amortized across the many departments and patients it serves. This is the standard total cost of ownership (TCO) framework used for asset-based investments, and most of the time, it works beautifully.
“The notion of health IT as an asset, however, is misguided. Any tool that requires a complex web of support personnel to extract results is, by definition, central to hospitals’ operating model. A simple TCO analysis can’t forecast all of the operational costs necessary to increase margin under this model. That’s because operating costs are variable, subject to fluctuation over time. In the case of enterprise software, operating costs have an insidious way of inching up, not down. Years after their initial TCO analyses, many non-profits on software find themselves carrying costs far beyond what they predicted.
“By comparison, for-profit health systems tend to favor a cloud-based service model over hosted software, effectively shifting their IT expenses into the variable operating cost category. For-profits’ rules for purchasing technology are simple: increase operating margin through efficiency and reduced overhead. One of the most efficient and most effective ways to get those returns, as well as accurately predict costs, is to buy cloud-based services. This model reflects the full value of an always-on network, continuous free updates, and an army of service workers behind the scenes. Thanks to the cloud’s economies of scale, the total cost to generate results is less than the army of IT workers and support staff powering a traditional software-backed approach. And unlike software, whose operating costs fluctuate unpredictably, cloud-based services are charged as a fixed percentage. ”
“Cloud computing converts fixed costs into variable costs and has proven to be a nimble tool with better returns than even the most pedigreed software.”