Fit For EMR White Paper

Analysis Series 2008

Measuring the Financial Impact of
Electronic Medical Records
Vertex Healthcare Consulting’s Financial Impact Tool for EMR’s

Copyright 2008 Vertex Healthcare Consulting, LLC

All rights reserved. No part of this paper may be reproduced or transmitted in any form or by any
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Vertex Healthcare Consulting, LLC, 2825 E. Cottonwood Parkway, Suite 500, Salt Lake City, UT 84121
Telephone: 801.207.8220, E-Mail: info@vertexhealthcare.com, or visit our website at
www.vertexhealthcare.com

1 FIT for EMR: A Model for Measuring the Financial Impact of an EMR

Executive Summary

Electronic Medical Record (EMR) systems are inevitable in the future of healthcare. Most healthcare
professionals acknowledge that EMRs will play a significant role long-term, but because these systems
are complex and capital intensive many managers and executives struggle to justify their
implementation.

From a clinical and operations perspective, many of the benefits of an EMR are extremely difficult to tie
directly to financial measurements. It is unreasonable to expect the approval of the capital budget
necessary to purchase an EMR on the assumption alone that some or all of these benefits may be
realized. The question still remains, “Do the benefits outweigh the costs of implementing and
maintaining an EMR system?”

Vertex Healthcare Consulting responded to the challenge of measuring the financial impact of an EMR.
We began with a review of relevant industry articles, studies, and financial models. We then combined
the results of our research with our experience and expertise to produce a Financial Impact Tool for
Electronic Medical Records (FIT for EMR). This tool calculates the “hard” benefits of an EMR; benefits
that can be financially measured, quantified, and defined.

The development of the FIT for EMR model was a four-step process. First, we defined relevant financial
terms. Second, we developed the line-item detail to reflect the implementation and management costs
of an EMR. Third, we developed the line-item detail for EMR benefits, backed by industry sources and
clinical data. Finally, we applied financial modeling adjustments to appropriately represent costs and
benefits over time.

The result of our efforts was the FIT for EMR model. This model is a dynamic, Excel-based tool that
calculates the financial impact of EMR system. An executive or manager can use it to demonstrate the
financial impact of an EMR on his or her organization. The model produces a comprehensive financial
impact summary report that includes four key financial metrics, a five-year financial pro forma and
supporting documentation.

Managers and executives in the healthcare community will always face the challenge of financially
justifying the use of an EMR to improve the delivery of care. The FIT for EMR model is a tool that offers
a solution that substantiates the benefits of an EMR through a process that is measurable, transparent,
and defensible. With this tool, executives can have a high level of confidence when calculating the
financials benefits of implementing an EMR.


FIT for EMR: A Model for Measuring the Financial Impact of an EMR 2

The Challenge

For the manager or executive that is championing the adoption of an Electronic Medical Record (EMR),
the biggest obstacle that must be overcome is measuring the true financial impact of the EMR on the
organization. There is little argument that an EMR, properly implemented, provides numerous benefits;
including: improved patient safety, increased quality, patient and clinician satisfaction, costs savings,
and revenue increases. The question remains, “Do the benefits outweigh the costs of implementing and
maintaining the EMR system?”

From a clinical and operations perspective, the benefits that appear to be the most persuasive reasons
for adopting an EMR, quality, safety, and satisfaction, happen to be the benefits that are extremely
difficult to tie directly to financial measurements.

It is unreasonable to expect executives or boards to approve the capital budget necessary to purchase
an EMR on the assumption alone that these “soft” benefits may be realized. A “soft benefit” by
definition is difficult to measure in financial terms and is usually described as intangible or qualitative.

Meeting the challenge of measuring the financial impact of an EMR necessitates using only “hard
benefits”, in other words, benefits that can be quantified, defined, and associated with specific financial
measures. These “hard” benefits include: cost savings for supplies, staff, and services; as well as
revenue increases.

Throughout the healthcare industry there have been many attempts to define and set forth these
measurable financial benefits through cost studies, research, sampling, and industry statistics. As a
result, there are numerous models that attempt to measure the financial impact of an EMR, in terms of
returns, costs, benefits, and break-even. With all of the alternatives available, it is challenging for a
manager or executive to determine what should be used to evaluate the financial impact of an EMR on
his or her organization.

Our Approach

Vertex Healthcare Consulting has combined many industry resources with our experience to produce a
comprehensive “Financial Impact Tool for Electronic Medical Records” (FIT for EMR).

The development of the FIT for EMR model began with a review of relevant industry articles and
previous studies. Next, it included the evaluation of several existing ROI models. We compiled the
results of our research and testing and then augmented these with actual client data as well as clinical
observations and cost study outcomes. With this body of knowledge we then applied a four-step
methodology for the development of the FIT for EMR model.



Our research included articles from the American Journal of Medicine, the Healthcare Financial
Management Association, the American College of Surgeons, and the American Academy of Family
Physicians; we also reviewed national publications from the American Medical Association, the
American College of Healthcare Executives, and HCPro, Inc. From these sources we compiled the
specific components of our model and evaluated the different methodologies of calculating financial
impact. Additionally, we tested and analyzed many “ROI” models available from EMR vendors, national
associations and consulting groups. We evaluated the look and feel of each model, outlined its
assumptions and calculations, and verified the data sources. The values from these models were also
used to calibrate and reconcile those gathered from our industry research and client observations.

There were several critical areas where specific costs and benefits were not sufficiently defined within
the publications researched. In these instances, we turned to our own internal resources consisting of:
actual client project results, compiled internal benchmarks, and the expertise of licensed clinical
professionals.

The four-step methodology for developing the FIT for EMR model began with a clear definition of
relevant financial terms. The second and third steps consisted of developing specific and measurable
details for both EMR “costs” and EMR “benefits”. Finally, financial modeling adjustments were applied
to appropriately represent the financial costs and benefits over time.

The result of our approach was the creation of a dynamic, Excel based, tool that calculates the financial
impact of an EMR system. The FIT for EMR model was designed for an executive or manager to use to
demonstrate the financial impact of an EMR on his or her organization. The following section describes
the FIT for EMR development process.

Developing the FIT for EMR Model

Step 1 - Definition of Financial Terms:

As a result of the research conducted, it became apparent that the term ROI, was used as a blanket term
to indicate financial impact and project costs when discussing EMR systems. ROI stands for “Return on
Investment”, and in strict financial terms means, a return on a past or current investment, or the
estimated return on a future investment. ROI is usually represented as a percent rather than decimal
value. However, the term “ROI” is often used in place of or synonymous with other financial metrics
such as: break-even, net present value, internal rate of return, profit & loss or cost and benefit
statements.

When considering an EMR system, each of these metrics provides a slightly different view of the
financial impact of the EMR on the healthcare organization. For this reason, the FIT for EMR model
produces more than just an ROI percentage. The model actually calculates the following four financial
metrics and produces a 5-year financial pro forma:



Project Break-Even: Economically speaking, the break-even point is the point at which
cumulative costs and benefits are equal. At this point the project has no net loss or gain, and is
stated as, break-even. Relative to an EMR implementation, the “break-even” occurs after the
system “Go-live” at the point when cumulative benefits equal all cumulative costs, including
initial capital (start-up costs) and incurred ongoing operating costs.

Project Net Present Value: NPV for a project is the present value of the project benefits minus
(-) the present value of the project investment. Present value is the value today of future costs
or benefits, discounted to reflect the time value of money. Present value calculations are widely
used in financial modeling to compare cash flows at different times on a meaningful like to like
basis.

Project 5-Year Return on Investment: ROI is the ratio of the benefit gained on a project relative
to the cost of the investment. ROI indicates cash flow from an investment over a specific period
of time, in this case 5 years. It measures investment profitability, not investment size. Return
on Investment is a percentage return based on capital invested. In general, the higher the
investment risk, the greater the potential investment return, and the greater the potential
investment loss.

Project Internal Rate of Return: The internal rate of return (IRR) is a capital budgeting metric
used to decide whether an investment should be made. It is an indicator of the efficiency of an
investment. The IRR is the annualized effective compounded return rate which can be earned
on the invested capital. A project is a good investment if its IRR is greater than the rate of return
that could be earned by alternate investments.

Project Pro Forma Financials: A pro forma document is provided in advance of an actual
project. This document serves as a model for the anticipated financial outcomes of the actual
project. The pro forma financials provide the basis from which the other financial metrics are
calculated, by projecting in detail the line item costs and benefits of the project over time.

Step 2 – Development of Cost Detail:

The development of the cost detail was the first of two foundational sections in the FIT for EMR model.
In simplest terms, the model measures the difference between EMR costs and EMR benefits. The model
is structured on detailed line items that represent comprehensive costs associated with purchasing,
implementing, and maintaining an EMR system.

The model utilizes annual organizational costs. Annual costs are used rather than per patient or per
provider calculations to ensure usability for a variety of organizations. Developing the cost detail
required categorizing costs, defining the “go-live” timeframe, identifying “other” cost factors, and
specifying all cost line items.



Categorizing Costs: The FIT for EMR model assigns costs to two major groups. The first group is
“Capital Costs”. The model places all costs incurred by an organization associated with the
procurement and implementation of an EMR system into this category. Another way of
describing these costs would be to call them “Start-up Costs”. An organization may or may not
choose to treat all of these costs as “capital”; however, for the purpose of the model they are
identified as such.

The second group is “Ongoing Operating Costs”. These costs consist of all items and services
required to operate and maintain an EMR on an ongoing basis. The model only includes costs in
this category that occur after the “Go-live” of the EMR system.

Project “Go-live”: The term “Go-live” is almost exclusively associated with a software
implementation. Simply put, it is the day on which the system is put into productive use. The
“Go-live” date in the FIT for EMR model is used to clearly define the difference between Capital
and Ongoing Costs.

The “Go-live” date is also used as the starting point for the break-even calculation. The “Pre Go-
live” periods for organizations can be substantially different. Some EMR systems may be
implemented in as little as 90 days, while others may require several years. For this reason, the
FIT for EMR model calculates break-even from the “Go-live” date forward.

“Other” Cost factors: There are miscellaneous costs associated with an EMR. The FIT for EMR
model includes an estimate for hardware replacement costs and accommodates other
miscellaneous costs by providing the user with an “other” category for additional, organization
specific, Capital and Ongoing Costs.

To reflect the economic realities that organizations face, the model allows for annual cost
adjustments for contracted software maintenance and support. Additionally, annual
adjustments for staffing and other operating cost increases can be included to account for
inflation.

Cost Line Item Detail: As described above, the line item costs are grouped into two categories,
Capital and Ongoing Operating Costs. The FIT for EMR model intends that the line item costs
included must be directly attributed to the purchase, implementation, and management of the
EMR system. These costs will generally be found in the Vendor Bid/Estimate or the EMR System
Contract documents. Some of these costs will need to be estimates for use of internal resources
and for other acquired professional or consulting services.



Capital (Initial) Costs

• Software Licenses: This includes initial licensing fees for the EMR system as well as any
additional 3rd Party software (such as servers, scanning, security, fax & e-mail) required to
support the installation.
• Hardware & IT Installation: This line item consists of all equipment required for the EMR. It will
include PC’s, laptops, scanners, printers, back-up storage, networking devices, etc. Also, this cost
item includes all labor and support services required for configuring and installing the necessary
hardware and software.
• Hardware Replacement Cycle: Within the model, the user can specify the number of years
before replacement is necessary and the estimated percentage of the replacement cost.
Generally, a replacement cycle of 3 years and 50% cost of the original installation are used.
• Training & Travel Related Expenses: These costs are usually stipulated in the EMR Vendor
contract and will include training time as well as travel expenses associated with trainers coming
on-site. This is one area where costs included in Capital may actually occur after “Go-live”,
should the contract include hours for post “Go-live” support during the first several weeks of
operation.
• Project Management & Onsite Support: An effective EMR implementation almost always
requires dedicated project management resources. This line item should include costs associated
with project management whether contracted to an outside firm or provided by in-house
resources. Also, this item should include other onsite support services, not included in the
training item above.
• Data Migration: If moving from a paper-based medical record to and EMR, this cost item will
include scanning and data entry costs for historical records being loaded into the new system. If
an organization is moving from one computer-based system to another, customize “migration”
programming is almost always required. All costs for the migration process should be included in
this line item.
• Additional Customized Programming: If an organization is simply installing the EMR System “off
the shelf”, then no customized programming costs should be included. However, more often
than not, some customization will be required. If the Vendor contract specifies the costs for
these services separately, they will be included in this cost line item.
• Other Capital Costs: Item is for miscellaneous, organization-specific capital costs.

Ongoing Operating Costs (Annual)

• Software Maintenance & Support: Costs making up this line item include annual software
maintenance and support fees incurred post “Go-live”. These costs may be stipulated in the EMR
Contract with an annual percentage increase. The model allows for the inclusion of this annual
adjustment.
• EMR Support Staff (Salary & Benefits): An EMR system requires ongoing management and
database administration services. These are usually provided by in-house personnel. This line
item accounts for their salary and benefits as a component cost of maintaining the EMR.
• Other Operating Costs: Item is for miscellaneous, organization-specific ongoing operating costs.



Step 3 – Development of Benefit Detail:

The development of the benefit detail was the most involved of the two foundational sections in the FIT
for EMR model. The challenge of measuring the financial impact of an EMR necessitates using only
“hard benefits”, in other words, benefits that can be quantified, defined, and associated with specific
financial measures.

In order to identify these “hard” benefits we combined our research, client data, clinical observations,
and cost studies to create a defensible list of measurable financial EMR benefits. These benefits include:
cost savings for supplies, staff, and services; as well as revenue increases associated with the proper
implementation and utilization of an EMR.

Categorizing Benefits: The FIT for EMR model assigns benefits to two major groups. The first
group is “Cost Savings”. The model places all benefits associated with the EMR system that
result in reduced costs to the organization in this category.

The second benefits group is “Revenue Increases”. In a clinical setting, it is proven that an EMR
improves both charge capture and coding accuracy. Each of these generates additional
revenues for the organization. In a correctional setting, an EMR provides a means for tracking
inmate utilization of healthcare services in a more timely and accurate manner. In institutions
where inmate co-pays are charged, an EMR greatly increases the likelihood of collecting these
payments.

Benefits Line Item Detail: As described above, the line item benefits are grouped into two
categories Cost Savings and Revenue Increases. Line items described below will include the
following: a narrative description; a Value Range that provides conservative, moderate and
aggressive values; an explanation of calculation used to determine benefit amount; and a reference
for the source of the benefit data.

Cost Saving: Benefits include supply, staff, and services savings.

• New Chart Supplies: Includes medical record folder, dividers, labels, forms and supply shelving.

Value Range: $2.00, $3.00, $4.41 per New Patient Encounter.
Original cost of $3.00 in 1997 adjusted annually for medical inflation
through 2007 at an average rate of 3.95% per year.
Calculation: Value x New Patient Encounters = Chart Supply Savings
Data Source: Healthcare Financial Management, Sept. 1997, “Computerized Patient
Records Benefit Physician Offices” by A. Bingham.



• New Chart Build: Staff minutes required to gather patient data and assemble new patient chart.

Value Range: 3 minutes, 5 minutes, 7 minutes per New Patient Encounter
Calculation: Value x New Encounters x Staff Cost per minute = Staff Savings
Data Source: Vertex Healthcare Consulting 2005-2007 client data gathered from
clinical workload staffing studies.

• Existing Chart Management: Minutes required by medical records staff to manage existing
patient records, excluding initial chart pull and re-filing. This line item accounts for loose paper
filing and general record storage management activities.

Value Range: 1 minutes, 2 minutes, 3 minutes per Existing Patient Encounter
Calculation: Value x Existing Encounters x Staff Cost per minute = Staff Savings

• Chart Pulls: Average cost for medical records staff to retrieve and re-file a paper chart.

Value Range: 50%, 75%, 100% of $5.88 per Clinical Encounter
Original cost of $5.00 in 2003 adjusted annually for medical inflation
through 2007 at an average rate of 3.91% per year.
Calculation: Percent Value x $5.88 x Total Clinical Encounters = Staff Savings
Data Source: The American Journal of Medicine, April 1, 2003 A Cost-Benefit
Analysis of Electronic Medical Records in Primary Care, Wang, A.,
Middleton, B., et al.

• Medical Records Requests: Includes all time and material costs associated with the creation of a
duplicate chart in response to a medical records request from an outside party (e.g. patient,
other provider, attorney, etc.).

Value Range: 7 minutes, 12 minutes, 17 minutes per Medical Record Request
Includes Medical Records Request Minutes + New Chart Build Minutes + Existing
Chart Management Minutes
Calculation: Value x Total Record Requests x Staff Cost per minute = Staff Savings

• Transcription: Estimated percentage savings of annual transcription costs based on
organization’s process and utilization of medical transcription.

Value Range: 50%, 75%, 100% reduction of annual transcription cost
Calculation: Percent Value x Annual Transcription Cost = Transcription Savings



• Reusable Records Space: Cost per square foot of records storage space reclaimed for other
clinical or administrative uses.

Value Range: $1.25, $2.10, $3.00 per square foot per month.
Calculation: Value x Sq. Ft. of Reclaimed Space x 12 months = Annual Savings
Data Source: Estimated from national leasing data, will vary by geographic location.

• Prevention of Adverse Drug Events: Estimated percentage savings due to the reduction in
adverse drug events.

Value Range: 10%, 40%, 70% of $2.94 per Provider-Only Encounter.
Annual savings of $6,500 per provider divided by 2,500 provider-only
encounters = $2.60 savings per encounter. Original savings of $2.60 in 2003
adjusted annually for medical inflation through 2007 at an average rate of
3.91% per year.
Calculation: Percent Value x $2.94 x Provider-Only Encounters = Prevention Savings

• Medication Utilization & Compliance: Estimated percentage savings of annual medication costs
due to alternative drug suggestion reminders and improved formulary compliance.

Value Range: 5%, 15%, 25% of Annual Medication Costs.
Calculation: Percent Value x Annual Medication Costs = Medication Savings
Data Source: Healthcare Financial Management, Jan. 2002, “Financial Analysis
Projects Clear Returns from EMR”, Schmitt and Wofford.
The American Journal of Medicine, April 1, 2003 A Cost-Benefit

• Laboratory Order Entry Savings: Estimated percentage reduction of annual laboratory costs due
to improved decision support processes.

Value Range: 0%, 6.5%, 13% of Annual Laboratory Costs.
Calculation: Percent Value x Annual Laboratory Costs = Laboratory Savings

• Radiology Order Entry Savings: Estimated percentage reduction of annual radiology costs due to
improved decision support processes.

Value Range: 5%, 12%, 20% of Annual Radiology Costs.
Calculation: Percent Value x Annual Radiology Costs = Radiology Savings




• Outside Services Savings: Estimated percentage reduction of annual outside services costs due
to decreased utilization of emergency services; consistent scheduling of chronic care visits, and
leveraging of telemedicine services.

Value Range: 0%, 5%, 10% of Outside Services Costs.
Calculation: Percent Value x Annual Outside Service Costs = Annual Savings
correctional healthcare services assessments and financial turnaround
engagements.

Revenue Increases:

• Charge Capture Improvements: Estimated percentage of increased collections due to
computerizing the encounter form process, capturing procedures performed not previously
documented, and improving billing capture.

Value Range: 1.5%, 3.3%, 5.0% of Annual Collections.
Calculation: Percent Value x Annual Collections = Increased Collections Revenue
Healthcare Financial Management, Jan. 2002, “Financial Analysis Projects Clear
Returns from EMR”, Schmitt and Wofford.
The American College of Surgeons, Jul. 2007, “A Pilot Study to Document the
Return on Investment for Implementing an Ambulatory Electronic Health
Record at an Academic Medical Center”, Grieger, Cohen, and Krusch.
Family Practice Management, Nov. 2004, “Why It’s Time to Purchase an
Electronic Health Record System”, Adler.

• Coding Improvements: Estimated percentage of increased collections from better coding
accuracy due to automated prompts and required data fields; as well as improved administrative
and workflow functions.

Value Range: 3%, 9%, 15% of Annual Collections.
Calculation: Percent Value x Annual Collections = Increased Collections Revenue
Data Source: The Journal of Healthcare Information Management. Vol 17 No. 4 Fall
2003, “Analyzing Computer Based Patient Records: A Review of
Literature”, Erstad.



• Increased Inmate Co-pays: Estimated percentage increase in annual revenues from inmate co-
pay collections. In many correctional environments, institutional guidelines allow for the
collection of co-pays for inmate requested healthcare and prescriptions. An EMR facilitates
collection of these fees by automatically tracking utilization of services by type and request.

Value Range: 0%, 25%, 50% of $5.00 per Provider-Only Encounter.
Survey of correctional institutions inmate co-pays ranged from $2.00 to
$10.00 per encounter.
Calculation: Percent Value x $5.00 x Provider-Only Encounters = Increased Revenue
Data Source: Oklahoma Dept of Corrections Executive Budget 2004
Salt Lake County Jail Regulators Handbook Sept. 2003
Milwaukee Journal Sentinal June 6, 2004, Prisoners Health Costs Rise
500%, Marley

Step 4 – Financial Modeling Adjustments:

The final step in the FIT for EMR model development process was to establish an appropriate
financial modeling framework. The intent of the model is to forecast EMR performance with its
associated costs and benefits. Financial adjustments were applied to accurately represent cost
and benefit estimates over time and to reflect the cost of capital in today’s dollars.

Annual adjustments were applied to EMR “costs” to reflect the anticipated impact of inflation.
These adjustments were applied to Ongoing Operating Costs. The model allows the user to
input up to three different adjustment values to account for contracted rate increases, medical
inflation costs, and other annual adjustments.

To maintain consistency throughout the model, an annual adjustment is also applied to all EMR
“benefits”. The model allows the user to input a single benefit adjustment that is applied to all
benefit line items over a 5-year period. This benefit adjustment should mirror the adjustments
applied to costs; however the user can modify these adjustments to suit their specific
circumstances.

The final adjustment in the model is the application of a discount rate. The discount rate is the
rate used to discount future cash flows to their present values. The discount rate generally
equates to the organization’s cost of capital (cost of borrowing money).

The FIT for EMR model applies a discount rate to both the EMR costs and benefits in order to
calculate their Present Values. The default discount rate in the model is 7.5%; however, this
should be adjusted by the user to reflect their organization’s cost of capital.



The Solution

The FIT for EMR Model:

Vertex Healthcare Consulting combined many industry resources with our own client experience, actual
clinical studies, and EMR implementation expertise to produce the FIT for EMR model. This model is a
dynamic, Excel-based tool that calculates the financial impact of EMR system. The FIT for EMR model
was designed for an executive or manager to use to demonstrate the financial impact of an EMR on his
or her organization. The tool allows the user to input cost and benefit values specific to their
organization and EMR system. It then produces a comprehensive financial impact summary report that
includes four key financial metrics, a five-year financial pro forma and supporting documentation for
sources and calculations.

Managers and executives in the healthcare community will always face the challenge of financially
justifying the use of technology to improve the delivery of care. The FIT for EMR model is a tool that
offers a solution that substantiates the benefits of technology through a process that is measurable,
transparent, and defensible.


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