NPV Analysis of eCube EMR System for Healthcare Compliance

Stakeholder Criteria for Acceptability

There are several criteria by which a company can establish acceptability for the eCube system of electronic medical records (EMR) available from Fresenius. The first stakeholder group consists of patients, who will benefit from the enhanced functionality the eCube system provides — in particular, the superior health outcomes that come from having accurate medical histories available to physicians and other practitioners while they are working with the patient. Management must strike a balance between business objectives and patient outcomes, and therefore multiple acceptability measures are possible, based on both profit and patient outcomes. Management will also want to know that the system is relatively easy to install, that the vendor provides staff training, and that full vendor support is available if problems arise.

Another stakeholder group consists of the owners and shareholders of the healthcare provider. For them, the primary measure of acceptability is financial. The net present value (NPV) calculation is the tool most commonly used. The NPV calculation takes several factors into account, primarily future cash flows and the company's cost of capital. The incremental future cash flows relevant to this decision include the cost of equipment, installation and training, and the savings that will accrue from having the system in place. There are two types of savings to consider. The first are internal savings from increased efficiency once the software and staff are fully operational. The second are external savings: without electronic medical records, the facility would be subject to government fines. The cost of the EMR system must therefore be weighed in part against the avoidance of those fines.

There are also risk and compliance issues that factor into the measures of acceptability. Purchasing the eCube or a similar system will reduce compliance risk, because the organization will not be subject to fines under the Affordable Care Act. The system also reduces broader operational risk. As Jena et al. (2011) note, there is significant risk attached to errors in medical practice. This risk varies by specialty and patient, but average payments for successful malpractice claims exceed $500,000, and malpractice insurance is an increasing cost factor for healthcare providers as a result. The eCube system can reduce risk by providing accurate information in a timely manner, including at the bedside (Kalathil, 2011).

With respect to quantitative risk assessment, sensitivity analysis is the standard approach. For example, the normal time to purchase and implement the eCube system might be six months, but if problems arise with the software or with user adoption, the timeline could extend to nine months. Likewise, the cost savings projected at the time of purchase could fail to materialize. Sensitivity analysis addresses these possibilities by providing figures for "best case," "normal case," and "worst case" scenarios. With proper financial analysis prior to the decision, risk can be anticipated and managed.

Risk, Compliance, and Change Management

Another way to reduce risk is to place responsibility on management to ensure a smooth implementation. This is easier said than done, as there are many risks inherent in implementing electronic medical records. Physicians in particular have resisted this kind of change. While the precise reasons remain unclear, that resistance must be overcome for the eCube effort to succeed. Organizational change has been studied extensively, and a large number of strategies have proven effective at managing resistance — especially resistance to technological change. Management should learn from the experiences of peer organizations to make this implementation work, and should proactively anticipate potential problems and have mitigation strategies in place before implementation begins (Self & Schraeder, 2009).

Another strategy for reducing implementation risk is to engage key stakeholders in the change process. This may actually be less difficult than it might otherwise be, given that the change is being mandated by law. Even so, management needs to embrace and lead the change. It is management's role to ensure that every part of the organization is aligned with the transition. There should also be structured opportunities for stakeholders — especially those most directly affected — to contribute their input to the process.

With respect to compliance, several roles must be considered. The first is understanding the nature of the changes demanded by the Affordable Care Act. Compliance depends on operating within the full scope of the law, which means understanding not only the ACA but also HIPAA and any other laws applicable to electronic medical records. The CEO and CIO in particular must understand these requirements more thoroughly than anyone else, since ultimate responsibility for compliance rests with them.

Beyond understanding the legal environment, senior management must also understand the product itself. Vendors of competing systems will all seek the opportunity to present their solutions, but management should go further — working directly with the system or consulting peers who have used it. Just as travelers now routinely research hotels before booking, it makes no sense to enter into a major EMR purchase agreement without extensive due diligence. This research process should ideally take months and should include interviews with executives at organizations that have already navigated this decision. Understanding how different systems perform in practice is essential to mitigating risk.

Once a system has been selected — in this case, eCube from Fresenius — additional compliance-related issues must be addressed. Training is a joint responsibility of the IT and HR departments, to ensure that all users can operate the system in accordance with applicable laws. The IT department is also responsible for managing implementation timelines. The CEO bears ultimate responsibility for compliance and, during the initial implementation phase, may wish to designate a compliance officer to ensure that the organization's handling of electronic medical records is consistent with all relevant requirements.

Finally, all senior executives are responsible for shaping the organizational culture around electronic medical records and compliance. They set the policies and structures through which compliance is achieved, and they establish the ethical tone of the company through their own conduct. Every executive must treat compliance with the law as a top organizational priority — particularly with respect to how electronic medical records are used. Compliance is most likely to be sustained where it is culturally expected, and while that expectation already comes from patients and regulators, it must also come from the highest levels of the organization.

Financial Analysis and NPV Calculation

The cost of the project is to be negotiated with Fresenius based on the specific parameters of the system — an off-the-shelf EMR solution is not recommended. The cost is expected to fall within the $150,000 range for license, installation, and training, plus an ongoing annual license fee of $25,000. The projected cost benefits include $20,000 per year in efficiency savings (growing at 10% annually), $15,000 per year in reduced liability costs, $10,000 in avoided compliance fines in the first year, and $20,000 per year in fine avoidance from the second year onward. The company's cost of capital is estimated at 10%, and the system has an anticipated shelf life of ten years.

Using this data, the net present value of the eCube system is calculated as follows:

This analysis shows that the project is economically feasible. However, this assessment rests on several factors. The first is that the cost comes in on budget. There is some leeway with respect to the price of the eCube, so it is unlikely that any cost overrun would be large enough to negate the clear benefits.

The second assumption embedded in this model is that cost savings from efficiency and reduced liability will materialize. The efficiency figure is a rough estimate based on the ability to transmit information more quickly, which would allow the organization to admit more patients annually. Additionally, the facility may attract more patients on the basis of having modern information technology. The liability benefit is an estimate that would need to be confirmed by the organization's insurer. Only 1.7% of physicians per year face a malpractice judgment, so it is unlikely that any given year will produce a judgment. Moreover, no longitudinal studies yet exist that specifically demonstrate whether the eCube reduces the frequency of adverse judgments, and insurers remain uncertain about the program's effect on rates pending further investigation.