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1. Please READ INSTRUCTIONS CAREFULLY for this slideshow assignment.
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Instructions as an attachment. Chapters 16, 19, 20 &29 (mini case study-4 in Ch 29) is also attached, if needed (CHAPTERS provided
are not required)
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slideshow attachment
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HCA/270r3 Read Me First
Read Me First
HCA/270
Week Nine
Introduction
Over the past 8 weeks, you have learned about financial management from the health care manager’s role. In this role, you have performed data analysis and used it to formulate responses regarding staffing allowances, budgeting, valuation, and contractual allowances based on revenue sources. We have reviewed the benefits and limitations of financial statements. In this last week, you will utilize these new skills to develop a presentation on the financial aspects of implementing an electronic medical record (EMR) for a physician group practice. As a health care manager, knowing how to evaluate an organization’s financial status is necessary to determine the feasibility of implementing new technology. Capital budgeting is another concept that is important in completing this task.
This week in relationship to the course and the program
This week, your readings focus on capital budgeting. Long-term investments are worthy of special attention, because they frequently require large initial investments. In addition, it is important to note that the cash expenditure needed often precedes the receipt of any profits by a considerable period of time. In such cases, we must calculate the profitability of the investment, such as implementing an EMR. We want to be sure that the profits from implementing an EMR are greater than what we could have received from alternative investments or uses of our money. Basically, it is evaluating opportunity cost. All of these elements are essential management activities that assist the organization in running smoothly.
HINTS FOR A READING STRATEGY OF THE ASSIGNED MATERIALS
During this final week, take time to review any material you are having difficulty understanding. You will work on your final project and the capstone discussion question, so a clear understanding of the concepts and material covered over the course is essential. Prepare any questions to ask your fellow students or the facilitator about which you need clarification.
Some questions to ask as you hone your critical thinking
As you read the material, ask yourself Why and What questions that assist you in applying the concepts. Ask yourself the following questions:
1
. What is capital budgeting? How is it important to the overall stability of an organization?
2. What evaluation methods are needed to determine the organization’s ability to afford a large capital purchase?
3. How does the reliability of revenue sources affect capital budgeting?
4. What are the organization’s financial goals? How does this capital expenditure fit in with the organizational strategy?
5. As a financial manager, what financial management skills are necessary to undertake the evaluation of a capital expenditure?
SUMMARY
After this week, you will have the basic tools needed to understand the importance of capital budgeting, even for future organizational strategies. The final project focuses on how managers can evaluate long-term projects and determine whether the expected return from the projects is great enough to justify taking the risks that are inherent in long-term investments. Several different approaches to capital budgeting have been discussed throughout the course. These are the payback method, the net present value method, and the internal rate of return method.
The financial data needed for investment or project analysis is cash flow information for each year of the investment’s life. However, we cannot be certain about the total cost of the project or how much revenue the project will generate. There is no perfect solution, so we must make estimates. We must be cognizant of the fact that our estimate may not be completely accurate; there is an element of risk. Project analysis must assess whether the expected return can compensate for the risks we are taking. To adequately evaluate projects, discounted cash flow techniques should be utilized. Considering the time value of money is an essential calculation.
In summary, financial managers use a formalized approach to evaluate the time value of money. This approach is necessary to evaluate the problems we face in capital budgeting. Capital budgeting represents one of the most important areas of financial management. If projects are implemented and they do not generate adequate revenue to sustain the investment, it will have serious long-term consequences on facilities’ ability to remain viable.
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Post assignment as slideshow ONLY. Chapters (included if needed). No plagiarism. *** Cite work, ***First slide- Title Page. ***Last slide- Reference page from work cited. *** Use foot notes in each slide as much as possible.
Information technology has enhanced operational activities throughout the health care industry. Much has been discussed in financial analysis, price, and acquisition discrepancies. The decision to acquire and implement technology, and justify the cost has perplexed physicians and health care facilities.
Assignment Scenario:
Assume you are an office manager in a physician’s group practice. As the office manager, you have been asked to review and explain the financial implications of implementing electronic medical records (EMR). You will address potential areas of financial concern and provide your recommendation to the physician’s group on whether or not to implement EMR.
Create a 12- to 15-slide Microsoft® PowerPoint® in which you outline the following areas of financial concern and conclude with your decision on whether you would recommend EMRs to the stakeholders. Format presentation consistent with APA guidelines:
1. Title slide
2. Introductory or overview slide
3. Slides presenting the information required for the assignment
4. Detailed speaker notes with in-text citations
5. Recommendation or summary slide
6. Reference slide
7. Post project as an Attachment Include detailed speaker notes.
8. Cite at least three outside sources and your textbook.
Discuss the following areas with the focus on the financial aspects:
#1 Implementation process; This should be your introductory slide.
· Why implement?
· What is involved?
#2. Financing technology; Choose at least five.
· Capital expenditures
· Opportunity costs
· Budgeting, cash flow
· Depreciation
· Present value
· Payback
· Projected revenue
· Overall costs
#3. Costs not considered in the implementation process; Choose at least two.
· Threat of litigation
· Layout of facility
· Life expectancy and value of the equipment
· Maintenance
· Increase in operational costs
#4. Financial incentives for implementing new forms of technology: Choose at least one.
· Government, as in Medicare reimbursement
· Health care professional societies
· Health plans, as in pay-for-performance programs
· Quality improvement agencies that may offer financial incentives, such as the National Committee for Quality Assurance, the Utilization Review Accreditation Committee, or the Joint Commission
· Advantages and disadvantages
· Final recommendation
177
Capital
E xpenditure
Budgets 16
C H A P T E R
OVERVIEW
Capital expenditures involve the acquisition of assets that
are long lasting, such as equipment, buildings, and land.
Therefore, capital expenditure budgets are usually in-
tended to plan, monitor, and control long-term financial
issues. Decisions must be made about the future use of
funds in order to complete these types of budgets.
Operations budgets, on the other hand, generally deal
with actual short-term revenues and expenses necessary
to operate the facility. For example, the Great Shores
Health System’s operations budgets may usually be cre-
ated to cover the next year only (a 12-month period),
while Great Shores1 capital expenditure budgets may be
created to cover a five-year span (a 60-month period) or
even a ten-year span.
It is also important to note that the budget for capital
expenditures is usually part of an overall, or compre-
hensive, financial budget. Responsibility for the compre-
hensive financial budget always rests with upper-level
financial officers of the organization and is beyond the
scope of this chapter.
CREATING THE CAPITAL EXPENDITURE
BUDGET
The capital expenditure budget, which may sometimes
be identified by another name, such as “capital spending
plan,” usually consists of two parts. The first part of the
budget represents spending for capital assets that have al-
ready been acquired and are in place. This spending pro-
tects an existing asset; you are essentially spending in
After completing this chapter,
you should be able to
1. Recognize the reason that a
capital expenditure budget is
necessary.
2. Review the cash flow and the
startup cost concept.
3. Understand differences
between cash flow reporting
methods.
4. Recognize types of capital
expenditure budget proposals.
5. Understand about evaluating
capital expenditure proposals.
P r o g r e s s N o t e s
order to protect that which you already have. The second part of the budget represents
spending for new capital assets. In this case, you will be expending capital funds to acquire
new assets such as equipment, buildings, and land.
The “existing asset” part of the budget forces planning questions about whether existing
equipment and buildings should be kept in their present condition (which can involve re-
pair and maintenance expenses), renovated, or replaced. Renovating equipment or build-
ings implies a large expenditure that would be capitalized. (To be capitalized means the
expenditure would be placed on the balance sheet as an additional capital cost that is rec-
ognized as an asset.)
The “new capital asset” part of the budget forces more planning questions. In this case,
the questions are about new assets. The reasons for new asset spending may involve:
• Expansion of capacity in a department or program
• Creation of a new facility, department, or program
• New equipment to improve productivity
• New equipment or space to comply with federal or state requirements
It should also be noted that acquiring new assets results in additional capital costs that
will be placed on the balance sheet as assets. For more information, refer to Chapter 3.
BUDGET CONSTRUCTION TOOLS
How the capital expenditure budget is constructed may be predetermined by requirements
of the organization. Your facility or practice may have a template that must be used. This
takes the decision out of your hands. Otherwise, you will have to decide which tool will be
most effective to build your capital expenditure budget.
One important tool is net cash flow reporting. The concept of cash flow analysis, usually
an important part of the capital expenditure budget, is described later. But how will the
cash flow be reported? Four methods are discussed in this section.
Cash Flow Concept
As its title implies, a cash flow analysis illustrates how the project’s cash is expected to move
over a period of time. Many analyses concentrate only on the cash expenditure for the
equipment. (This is, after all, a “capital expenditure” budget.) Other analyses, however, will
also take revenue earned into account.
In any case, it is always important to report the net cash flow. While most line items will
usually be expenditures, called cash outflow, sometimes there will also be cash receipts,
called cash inflow. For example, if a new piece of equipment will replace an old one, and
the old replaced equipment will be sold for cash, the cash received from the sale will repre-
sent a cash receipt.
Cash flow must also be reported as cumulative. This means the accumulated effect of cash
inflows and cash outflows must be added and/or subtracted to show the overall net accumu-
lated result. In our example mentioned previously: where the old equipment might be sold, the
cumulative cash flow is illustrated in Table 16-1. As you can see, the initial expenditure or cash
spent (outflow) is decreased by the cash received (inflow) to produce a net cumulative result.
178 CHAPTER 16 Capital Expenditure Budgets
Budget Construction Tools 179
Cash Flow Reporting Methods
Cash flow is typically reported using one of four methods. They include:
• Payback method
• Accounting rate of return
• Net present value
• Internal rate of return
A previous chapter of this book has explained and illustrated each of the four methods.
Their advantages and disadvantages, for purposes of capital expenditure budgeting, are
summarized later.
Payback Method
The payback method is based on cash flow. This method recognizes the cash flows that are
necessary to recover the initial cash invested. The payback method is advantageous because
it is easy to understand and highlights risks. However, it does not take either profitability or
the time value of money into account.
Accounting Rate of Return
The accounting rate of return is based on profitability. However, it does not take the time
value of money into account.
Net Present Value
Net present value, or NPV, is a discounted cash flow method. It is based on cash flows in that
it takes all the cash (incoming and outgoing) into account over the life of the equipment
(or, if applicable, over the life of the relevant project). Although the NPV is based on cash
flows, it also takes profitability and the time value of money into account.
Internal Rate of Return
Internal rate of return, or IRR, is also a discounted cash flow method that takes all incom-
ing and outgoing cash into account over the life of the equipment (or the project). It also
takes profitability and the time value of money into account.
The use of net present value, the internal rate of return, and so forth, is the vocabulary
of capital budgeting. It is also an important part of the language of finance. Therefore, it is
Table 16–1 lllustration of Cumulative Cash Flow
Line XCash Spent Cash Received Cumulative
Number (Outflow) (Inflow) Cash Flow
1 Buy new equipment (50,000) — (50,000)
2 Sell old equipment that is being
replaced — + 6,000 (44,000)
180 CHAPTER 16 Capital Expenditure Budgets
important to understand the differences between the four methods. Review Chapter 12 for
more detail. Appendix 16-A presents a step-by-step method for net present value computa-
tion that assists in this understanding.
Budget Inputs
Capital expenditure budget inputs may have to be taken into consideration if the operat-
ing budget requires additional capital equipment or space renovations. Figure 16-1 illus-
trates these potential inputs.
Startup Cost Concept
If the proposal for capital expenditures incorporates operational expenses, the concept of
startup costs must also be taken into consideration. In these cases, management believes
the cost of starting up a new service line or a new program should be included as part of the
original investment. Although such operational costs do not fall into a strict definition of
capital expenditure budgeting, the requirement is common enough to warrant discussion.
FUNDING REQUESTS
This section discusses the process of requesting capital expenditure funds and the types of
proposals that might be submitted for consideration.
The Process of Requesting Capital Expenditure Funds
Different departments or divisions often have to compete for capital expenditure funding.
The hospital’s radiology department director may want new equipment, but so does the
Additional
Equipment
Required
Additional
Space or
Renovation of
Existing Space
Required
Operating Revenue Forecast
&
Staffing
Plan
&
Capacity Level Checkpoint
No
Estimated
Capital $
Required
Capital
Expenditures
Plan
Preliminary
Capital
Expenditures
Budget
Estimated
Capital $
Required
Yes
No Yes
Figure 16–1 Capital Expenditures Budget Inputs.
surgery department director, and so on. The various requests for funding are often col-
lected and subjected to a review process in order to make decisions about where, and to
whom, the available capital expenditure funds will go. While the upper levels of manage-
ment make overall decisions about future use of funds, the departmental funding requests
represent the first step in the overall process.
The process involved for capital expenditure funding requests varies according to the or-
ganization. Size plays a part. Due to its sheer size, we would expect a giant hospital to have
a more complex process than, say, a two-physician practice. The corporate culture of the or-
ganization plays a part, too. Some organizations are extremely structured, while others are
more flexible in their management principles. And in some facilities, politics may also play
a part in the process of making and reviewing funding requests.
Types of Capital Expenditure Proposals
The type of proposal affects its size and scope. Proposal types commonly include the follow-
ing types of requests:
• Acquiring new equipment
• Upgrading existing equipment
• Replacing existing equipment with new equipment
• Funding new programs
• Funding expansion of existing programs
• Acquiring capital assets for future use
Certain of these types may sometimes be paired as either/or choices in capital expendi-
ture proposals. All six types of proposals are discussed in this section.
Acquiring New Equipment
The reason why new equipment is needed must be clearly stated. The acquisition cost must
be a reasonable figure that contains all appropriate specifications. The number of years of
useful life that can be reasonably expected from the equipment is also an important
assumption.
Upgrading Existing Equipment
The reason why an upgrade is necessary must be clearly stated. What is the impact? What
will the outcomes be from the upgrade? The upgrade costs must be a reasonable figure that
also contains all appropriate specifications. Will the upgrade extend the useful life of the
equipment? If so, by how long?
Replacing Existing Equipment with New Equipment
The rationale for replacing existing equipment with new equipment must be clearly stated.
Often a comparison may be made between upgrading and replacement in order to make a
more compelling argument. The usual arguments in these comparisons revolve around im-
provements in technology in the new equipment that are more advanced than available up-
grades to the old equipment. A favorite argument in favor of the new equipment is
increased productivity and/or outcomes.
Funding Requests 181
182 CHAPTER 16 Capital Expenditure Budgets
Funding New Pro g r a m s
A proposal for new program capital expenditures must take startup costs into account. This
type of proposal will generally be more extensive than a straightforward equipment re-
placement proposal because it involves a new venture without a previous history or proven
outcomes.
Funding Expansion of Existing Pro g r a m s
A proposal for expansion of an existing program is generally easier to prepare than a pro-
posal for a new program. You will have statistics available from the existing program with
which to make your arguments. In addition, any startup costs should be negligible for the
existing program. The most difficult selling point may be comparison with other depart-
ments’ funding requests.
Acquiring Capital Assets for Future Use
This type of proposal may be the most difficult to accomplish. Capital expenditures for fu-
ture long-term use are often postponed by decision makers in cash-strapped organizations
who must first fulfill immediate demands for funding. Consider, for example, a metropoli-
tan hospital that is hemmed in on all sides by privately owned property. The hospital will
clearly need expansion space in the future. An adjacent privately owned property comes on
the market at a price less than its appraised value. Even though the expansion is not sched-
uled until several years in the future, it would be wise to seriously consider this acquisition
of a capital asset for future use.
EVALUATING CAPITAL EXPENDITURE PROPOSALS
Management planning must involve the allocation of available financial resources for proj-
ects that promise to reap returns in the future. This applies to both for-profit and not-for-
profit organizations.
Hard Choices: Rationing Available Capital
Most businesses, including those providing healthcare services and products, have only a
limited amount of capital available for purposes of capital expenditure. It usually becomes
necessary, then, to ration the available capital funds. Different organizations approach the
rationing process in different ways. However, most organizations will consider the following
factors in some fashion or other:
• Necessity for the request
• Cost of capital to the organization
• Return that could be realized on alternative investments
These three factors will probably be considered in a descending sequence of decision
making. The overriding question is necessity. Necessity for the request pertains to the criti-
cality of the need. What are the basic reasons for contemplating the capital expenditure?
Are these reasons necessary? If so, how necessary?
Information Checkpoint 183
While necessity is an overarching consideration, the cost of capital to the organization
for the proposed capital expenditure is a computation of the sort we have previously dis-
cussed in this section. Although the answer to “what is the cost of capital” is provided in the
form of a computation, the amount of the answer depends on the method selected to illus-
trate this cost.
The third element in management’s decision-making sequence is what return could be
realized on alternative investments of the available capital. This concept is known as “op-
portunity cost.” The term is appropriate. Assume a rationing situation where unlimited
funds are not available. Thus, when a choice is made to expend funds on capital project A,
an opportunity is lost to expend those same funds on project B or project C. The choice of
A thus costs the opportunity to gain benefits from B or C.
To summarize, the decision makers must apply judgment in making all these choices. Thus,
the rationing of available capital becomes somewhat of a management art as well as a science.
The Review and Evaluation Process
The degree of attention paid to evaluation and the level of management responsible for
making the decisions may be dictated by the overall availability of capital funding and by
the amount of funds requested. Evaluation of capital expenditure budget proposals may be
objective or subjective. An impartial review process is most desirable.
An objective method usually involves scoring and/or ranking the competing proposals.
In scoring, the basic approach generally focuses on a single proposal and evaluates it on a
fixed set of criteria. In ranking, the proposal is compared with other proposals and ranked
in accordance with a looser set of criteria.
The objective review and evaluation may actually first involve scoring to eliminate the
very low-scoring proposals. The remaining higher scoring proposals may then be ranked in
accordance with still another set of criteria.
The criteria may, in turn, contain quantitative items such as outcomes and/or productiv-
ity and may also contain qualitative items such as whether the proposal is in accordance
with the organization’s core mission.
Finally, some authorities believe the source of financing the project (whether it is inter-
nal or external, for example) should not be relevant to the investment decision. Real-world
management, however, has a different view. How the project will be financed may be their
first question in the review and evaluation process.
INFORMATION CHECKPOINT
What Is Needed? An example of an entire capital expenditure budget or a
capital expenditure proposal for a particular project or a
specific piece of equipment.
Where Is It Found? Probably with your manager or the director of your depart-
ment or, depending on the dollar amount proposed, per-
haps with someone in the finance department.
How Is It Used? The use would probably be one time. Can you tell if this is so?
184 CHAPTER 16 Capital Expenditure Budgets
KEY TERMS
Accounting Rate of Return
Capital Budget
Capitalized Asset
Cash Flow Analysis
Cumulative Cash Flow
Internal Rate of Return
Net Present Value
Operations Budget
Opportunity Cost
Payback Method
Unadjusted Rate of Return
DISCUSSION QUESTIONS
1. Have you ever been involved in helping to create any part of a capital expenditure
budget?
2. If so, which type of proposal was it? Was the proposal successful?
3. Do you recall whether any of the four cash flow reporting methods were used? If so,
which one? Do you now think that was the best choice for the particular proposal?
4. If you were assigned to prepare a capital expenditure budget request, what two peo-
ple would you most want to have on your team? Why? How would you expect to use
them?
185
This appendix presents a further discussion of the four methods of capital budgeting com-
putations presented in Chapter 16.
ASSUMPTIONS
Item: Assume the purchase of a new piece of laboratory equipment is proposed.
Cost: The laboratory equipment will cost $70,000.
Useful life: It will last five years.
Remaining value (salvage value): The lab equipment will be sold for $10,000 (its salvage
value) at the end of the five years.
Cost of capital: The estimated cost of capital for the hospital is 10 percent.
Cash flow: The addition of this new piece of equipment is expected to generate additional
revenue. In fact, the increase of revenue over expenses is expected to amount to $20,000
per year for the five years. The cash flow is therefore expected to be as follows: Year 0 �
($70,000); year 1 � $20,000; year 2 � $20,000; year 3 � $20,000; year 4 � $20,000; year 5 �
$20,000. Note that year 0 is a negative figure and years 1 through 5 are positive figures.
PAYBACK METHOD
The payback method calculates how many
periods are needed to recover the equip-
ment’s initial investment of $70,000. In this
case, the periods to be counted are years;
thus, there are five years, or five periods as
shown in Table 16-A-1.
The investment of $70,000 is recovered
half-way between year 3 and year 4, when the
remaining balance to be recovered equals
zero. Therefore, the payback period is three
and one half years, expressed as 3.5 years.
Table 16–A-1 Payback Method Input
Year Cash Flow Balance
0 (70,000) (70,000)
1 20,000 (50,000)
2 20,000 (30,000)
3 20,000 (10,000)
4 20,000 10,000
5 20,000 30,000
A Further
Discussion of
Capital Budgeting
M e t h o d s
16-A
A P P E N D I X
186 CHAPTER 16 Capital Expenditure Budgets
Commentary: The payback method recognizes the cash flows that are necessary to recover
the initial cash invested. The payback method is advantageous because it is easy to under-
stand and highlights risks. However, it does not take either profitability or the time value of
money into account.
UNADJUSTED RATE OF RETURN (AKA ACCOUNTANT’S RATE OF RETURN)
The unadjusted, or accountant’s, rate of return is based on averages. The average
accounting income is divided by the average level of investment to arrive at the account-
ing rate of return. Step 1 computes the average accounting income; step 2 computes the
average level of investment, and step 3 then calculates the accounting rate of return.
Step 1: In this example, the average accounting income is calculated by deducting depreci-
ation (a non-cash amount) from the annual cash flow.
Step 1.1 First, we must calculate the annual depreciation amount. In this example the de-
preciation is computed on a straight-line basis, which means the total amount of deprecia-
tion will equal the equipment’s cost minus its salvage value.
The equipment’s cost is $70,000 and its salvage value at the end of its five-year life is esti-
mated to be $10,000. Therefore, the total amount to be depreciated is the difference, or
$60,000. To arrive at annual depreciation, the $60,000 is divided by the number of years of
useful life, which is five years in this example. Therefore, the annual amount of deprecia-
tion is $60,000 divided by five years, or $12,000 per year.
Step 1.2 Next, we must use the depreciation amount to calculate the accounting income
per year. In this example, the accounting income represents the cash flow per year of
$20,000 as previously computed less the depreciation expense per year of $12,000. The re-
maining balance net of depreciation is $8,000 as shown in Table 16-A-2.
Step 2: In this example, the average level of investment is determined by calculating the av-
erage investment represented by the equipment. We determine the average investment by
computing its mid-point as follows:
Step 2.1 Determine the total investment by adding the initial investment of $70,000 and the
salvage value of $10,000, for a total of $80,000.
Step 2.2 Now divide the total investment of
$80,000 by 2. The answer of $40,000 indi-
cates the mid-point of the investment and is
considered the average investment over the
five-year period of its useful life.
Step 3: The unadjusted or accounting rate of
return is now calculated by dividing the aver-
age income (step 1) by the average invest-
ment (step 2). In this example, the
unadjusted or accounting rate of return
Table 16–A-2 Accounting Income Input
Less Balance Net of
Year Cash Flow Depreciation Depreciation
1 20,000 12,000 8,000
2 20,000 12,000 8,000
3 20,000 12,000 8,000
4 20,000 12,000 8,000
5 20,000 12,000 8,000
amounts to $80,000 average income divided by $40,000 average investment, or a 20% rate of
return.
Commentar y: While the accounting rate of return is based on profitability, it does not
take the time value of money into account. That is why it is known as the “unadjusted”
rate of return. This method is used by many capital expenditure budget decision makers.
NET PRESENT VALUE
Net present value, or NPV, is a discounted cash flow method. It is based on cash flows in that
it takes all the cash (incoming and outgoing) into account over the life of the equipment.
Table 16-A-3 shows the individual steps involved in the computation as follows:
Step 1: Enter the net cash flow on the table. (For this example, the net cash flow has already
been calculated; see the middle column of Table 16-A-1. Also enter the salvage value.)
Step 2: Determine the cost of capital (which is 10% in this example). Look up the present value
factor for 10% for each period. Also, include the present value factor for the salvage value.
Step 3: Multiply the present value factor for each period times the period’s net cash flow.
Step 4: Compute the net present value by first adding the present value answers for each op-
erating period (Years 1 through 5 plus the salvage value) and then by subtracting the initial
cash expenditure of $70,000 in Year 0 from the sum of the present value computations. In
this example, 70,000 is subtracted from a total of 81,980 to arrive at the net present value of
$11,980 as shown in Table 16-A-3.
Commentary: Net present value takes all the cash (incoming and outgoing) into account
over the life of the equipment. Even though the net present value is based on cash flow, it
also takes profitability and the time value of money into account.
INTERNAL RATE OF RETURN
Internal rate of return, or IRR, computes the actual rate of return that is expected, or as-
sumed, from an investment. The internal rate of return reflects the discount rate at which
the investment’s net present value equals zero.
Internal Rate of Return 187
Table 16–A-3 Net Present Value Computations
Salvage
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Value
Net Cash Flow (70,000) 20,000 20,000 20,000 20,000 20,000 10,000
Present value factor
(10% cost of capital) n/a 0.909 0.826 0.751 0.683 0.620 0.620
Present value answers (70,000) 18,180 16,520 15,020 13,660 12,400 6,200
Net present value = 11,980
188 CHAPTER 16 Capital Expenditure Budgets
The IRR computation will be compared against the cost of capital. In our example the
cost of capital is 10%, as set out in our initial assumptions.
The internal rate of return, or IRR, seeks the rate of return that allows the net present
value of the project to equal zero. The IRR expresses the rate of return that the organization
can expect to earn when investing in the equipment (or the project, as the case may be).
The actual rate of return is determined by trial and error. The authorities say to “guess”
and work forward from your initial guess. An easier method to arrive at IRR is to use a busi-
ness calculator or a computer program and let it perform the computation for you. It is
cumbersome, but possible, to arrive at the appropriate IRR by hand. An example follows.
This example solves for an initial investment of 70,000 and a positive cash flow of 20,000
per year for five years. Because the annual amount of 20,000 is the same for each of the five
years, we can use the “Present Value of an Annuity of $1” presented in Appendix 12-C for
this purpose.
The computation is approached in two steps as follows:
Step 1: Initial investment (70,000) divided by the annual net cash inflow (20,000) equals
the annuity present value (PV) factor for five periods. We compute 70,000 divided by 20,000
and arrive at a PV factor of 3.5.
Step 2: Now we refer to Appendix 12-C, the “Present Value of an Annuity of $1.” We look
across the “5” row (because that is the number of periods in our example). We are looking
for the column that most closely resembles our PV factor of 3.5. On our table we find 3.605
in the 12% column and 3.433 in the 14% column. Obviously 3.5 will fall somewhere be-
tween these amounts. To find what 15% would be, we add the 3.605 to the 3.433 and divide
by 2. The answer is 3.519 (3.605 � 3.433 � 7.038; 7.038 divided by 2 � 3.519). Thus we have
found, by trial and error, that the rate of return in our example is approximately 15%.
As we have previously stated, an easier method to arrive at IRR is to use a business calcu-
lator or a computer program and let it perform the computation for you. The business cal-
culator or computer program will quickly give you a precise answer.
Many capital expenditure budget proposals also compare the rate of return to the orga-
nization’s cost of capital. In our example, the cost of capital is 10%, so the 15% IRR is
clearly greater.
Commentary: Internal rate of return, or IRR, is also a discounted cash flow method that
takes all incoming and outgoing cash into account over the life of the equipment (or the
project). It, too, takes profitability and the time value of money into account.
P A R T
Technology as a
Financial Tool
VIII
217
Electronic Records:
Financial
Management Too l s
and Decisions
19
C H A P T E R
INTRODUCTION
While this chapter has a lot of technical terms and foot-
notes, you need to pay close attention. Why? Because this
chapter describes a major revolution that is occurring
in health care systems right now. And if you are working
in health care, you too will almost surely be affected in
some way.
ELECTRONIC HEALTH RECORDS ADOPTION:
WHY NOW?
This section contains an overview of electronic health
records (EHRs) and why compliance requirements may
force change.
Definitions
A qualified electronic health record, according to the Ameri-
can Recovery and Reinvestment Act of 2009 (ARRA), is
“an electronic record of health-related information on
an individual that:
(A) includes patient demographic and clinical health
information, such as medical history and problem
lists; and
(B) has the capacity
i. to provide clinical decision support;
ii. to support physician order entry;
iii. to capture and query information relevant to
health care quality; and
iv. to exchange electronic health information
with, and integrate such information from,
other sources.”1
After completing this chapter,
you should be able to
1. Define a qualified electronic
health record.
2. Define health information
technology (HIT).
3. Recognize ARRA incentive
opportunities for hospitals and
physicians.
4. Identify three compliance
requirements that may force
information systems change.
5. Identify three types of ICD-10
adoption costs.
6. Identify the four components
of a SWOT analysis.
P r o g r e s s N o t e s
218 CHAPTER 19 Electronic Records: Financial Management Tools and Decisions
Health information technology means “hardware, software, integrated technologies or re-
lated licenses, intellectual property, upgrades, or packaged solutions sold as services that
are designed for, or support the use by, health care entities or patients for the electronic
creation, maintenance, access, or exchange of health information.”2
Historically Slow Adoption Rate
A study published in 2009 revealed that only 1.5% of U.S. hospitals have a comprehensive
electronic-records system (defined as a system that is present in all clinical units), and only
an additional 7.6% of U.S. hospitals have a basic system (defined as a system that is present
in at least one clinical unit). Furthermore, only 17% of hospitals have a computerized
provider-order entry system for medications. The authors state that: “A policy strategy fo-
cused on financial support, interoperability, and training of technical support staff may be
necessary to spur adoption of electronic-records systems in U.S. hospitals.”3 The authors re-
port that they surveyed “all acute care hospitals that are members of the American Hospital
Association for the presence of specific electronic-record functionalities”4 and achieved a
63.1% response rate.
Three Compliance Requirements May Force Change
Healthcare organizations in the United States are now required to comply with a series of
adoption rates for electronic health records. These requirements are driven by a series of fi-
nancial incentives and penalties. Figure 19-1 illustrates three such compliance require-
ments for adoption of
• Electronic health records (initiated by the American Recovery and Reinvestment Act
of 2009)
• ICD-10-CM and ICD-10-PCS codes
• Electronic prescribing for physicians and other prescribing professionals
Adoption of Electronic Health Records Initiated by the American Recovery and
Reinvestment Act of 2009
The American Recovery and Reinvestment Act of 2009 (ARRA) allows a range of transition
dates for inpatient hospital service paid incentives. The transition dates range from Octo-
ber 1, 2011, to 2015. The last year that physicians can adopt electronic health records under
ARRA without financial penalty is 2014.5
Adoption of ICD-10-CM and ICD-10-PCS Codes
The final compliance date for adoption of ICD-10-CM and ICD-10-PCS codes is October 1,
2013.6
Adoption of Electronic Prescribing for Physicians and Other
Prescribing Professionals
The last year for physicians to adopt e-prescribing without a financial penalty is calendar
year 2012.7
Compliance dates were set to allow for transition periods, and extensions may occur in
the future. Compliance requirements are further described and discussed within this chap-
ter and the following chapter.
AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009 (ARRA)
INCENTIVES FOR HEALTH INFORMATION TECHNOLOGY ADOPTION
The American Recovery and Reinvestment Act of 2009 (ARRA) that was signed into law on
February 17, 2009, includes a program to promote the adoption and use of health infor-
mation technology (HIT) and electronic health records (EHRs).8 Federal policymakers are
working toward the “development of a nationwide health information technology infra-
structure that allows for the electronic use and exchange of information” and an appointed
National Coordinator (of the Office of the National Coordinator for Health Information
Technology) is instructed to work toward this goal.9 The program provides approximately
17 billion dollars in incentives for hospitals and physicians. A brief description of the ARRA
incentives follows. This description is for general information only; consult the legislation
for pertinent details.
Hospital Incentives under ARRA
Hospital incentives are based upon inpatient hospital services, and the hospital must be a
“meaningful electronic health records (EHR) user” to be eligible for payment. In general,
an eligible hospital can receive a $2,000,000 base amount payment plus discharge-related
payments that span a four-year period. (The discharge-related amounts are paid for 1,150
through 23,000 discharges. Thus, the first through the 1,149th discharges receive no
American Recovery and Reinvestment Act of 2009 (ARRA) 219
ICD-10-CM
and
ICD-10-PCS
(final compliance date)
October 1, 2013
Electronic Health
Records for I/P
Hospital Services
Under ARRA
(transition date with
incentives)
October 1, 2011–2015
E-Prescribing
for Physicians
(last dates to adopt
without penalty)
CY 2012 CY 2014
Electronic Health
Records for
Physicians
under ARRA
(last dates to adopt
without penalty)
Dates to Adopt Information System Changes*
*Date may subsequently move forward.
Figure 19–1 Compliance Dates to Adopt Information System Changes.
Source: 74 Federal Register 3328 (January 16, 2009); 73 Federal Register 69847 (November 19, 2008); American Recov-
ery and Reinvestment Act of 2009 (ARRA) Title IV Section 4101.
?/Ed: RH too long ok as set?
220 CHAPTER 19 Electronic Records: Financial Management Tools and Decisions
payment, and likewise, discharges over 23,000 receive no payment.) The eligible discharge-
related amounts are paid at 100% for year one; at 75% for year two; at 50% for year three;
at 25% for year four; and nothing thereafter. Payment years may begin for the fiscal year
beginning October 1, 2011. If a hospital has not adopted by 2015 it will face financial
penalties.10
The ARRA also requires that the names of hospitals who are “meaningful electronic
health records users” will be posted on the CMS Web site. “Meaningful electronic health
records user” means the hospital is:
• Using certified EHR in a meaningful manner.
• Is connected in a manner that provides for the electronic exchange of health infor-
mation to improve the quality of health care, such as promoting care coordination.
• Submits information on clinical quality measures and other measures not yet deter-
mined.11
Physician Incentives under ARRA
These “eligible professional” incentives under ARRA are paid only to physicians as defined
by law who are “meaningful EHR users.” It is important to note that these incentive pay-
ments will not be made to hospital-based eligible professionals who might be otherwise eli-
gible. (The determination is made on the basis of site of service.)12
The maximum amount a physician can receive decreases year by year as follows:
Year 1 � $15,000; except if the first year is 2011 or 2012, then the year 1 payment is
$18,000
Year 2 � $12,000
Year 3 � $ 8,000
Year 4 � $ 4,000
Year 5 � $ 2,000
Subsequent years � $-0- (no incentive payments after 2016)13
If the first payment year (year 1) is after 2014, no incentive dollars will be paid. If adop-
tion has not occurred by 2015, the physician’s fee schedule amount will be reduced by a
percentage.14
The ARRA also requires that the names of physicians who are “meaningful EHR users”
will be posted on the CMS Web site. “Meaningful electronic health records user” means the
physician is:
• Using certified EHR in a meaningful manner.
• Connected in a manner that provides for the electronic exchange of health informa-
tion to improve the quality of health care, such as promoting care coordination.
• Reports on measures using EHR.15
In conclusion, we expect interpretations of the ARRA, along with supporting rules and
regulations, to emerge over a considerable period of years. (For example, the legislation
says to expect more stringent measures of meaningful use over time.)
ICD-10 E-RECORDS OVERVIEW AND IMPACT
This section provides an ICD-10 overview and describes the ICD-10 electronic records
impact.
Overview of ICD-10
The International Classification of Diseases, 10th Revision (ICD-10) is designed to “pro-
mote international comparability in the collection, processing classification and presenta-
tion of mortality statistics.”16 The ICD is the international standard diagnostic classification
for all general epidemiological, many health management purposes, and clinical use.17
This classification system has been developed in collaboration between the World Health
Organization (WHO) and ten international centers. Other countries that have already
adopted ICD-10 during the period 1995 to 2001 include Australia, Canada, France, Ger-
many, and the United Kingdom.18
ICD-10-CM AND ICD-10-PCS
The National Center for Health Statistics (NCHS) is one of the ten international centers
collaborating with the WHO in the development and revisions of the ICD. The NCHS is an
agency within the Centers for Disease Control and Prevention (CDC). As such, NCHS is the
federal agency that is responsible for use of the ICD-10 in the United States.
WHO owns the ICD-10 copyright and has “authorized the development of an adaptation
of ICD-10 for use in the United States for U.S. government purposes.”19 The NCHS, under
the CDC, has developed a clinical modification of the ICD-10, termed “ICD-10-CM.” The
ICD-10-CM is slated to replace the ICD-9-CM. The ICD-10-CM diagnosis classification system
has been developed for use in all types of healthcare treatment settings in the United States.20
Meanwhile, the Centers for Medicare and Medicaid Services (CMS) has developed a pro-
cedure classification system, termed the “ICD-10-PCS.” The ICD-10-PCS is for use in inpa-
tient hospital settings only within the United States.21 (Note this difference: ICD-10-CM is
for use in all types of healthcare treatment settings, while ICD-10-PCS is for use in inpatient
hospital settings only.)
ICD-10 Impact in the United States
The change from ICD-9 to ICD-10 has a ripple effect that impacts nearly every corner of the
healthcare industry in the United States.
Related Electronic Transaction Standards in the United States
Electronic records will only reach their maximum potential when such records can be
transmitted back and forth between entities. In order to allow such transmission, we must
have standards that assure electronic compatibility (or, in governmentese, “electronic in-
tercompatibility”). Accordingly, the Health Insurance Portability and Accountability Act of
1996 (HIPAA) Public Law 104-191 mandated adopting such standards for “electronically
ICD-10-CM and ICD-10-PCS 221
222 CHAPTER 19 Electronic Records: Financial Management Tools and Decisions
conducting certain health care administrative transactions between certain entities.”22
HIPPA requires these standards to be adopted and used to “facilitate the electronic trans-
mission of certain health information and the conduct of certain business transactions.”23
The phrase most used to describe these requirements is thus “electronic transactions
standards.”
A whole array of sequential rules and regulations has evolved since 1996 to create these
electronic transaction standards and to require their adoption—and a description of such
rules and regulations is well beyond the scope of this book. However, two particular items
are of interest to us in the context of the ICD-10 transition.
1. It was necessary to update many electronic transaction standards in order to accom-
modate the new ICD-10 codes. The groups, or sets, of codes (termed “standard med-
ical data code sets”)24 to be used in those electronic transactions also had to be
updated. (Note that at the time of this writing, the current standard to be adopted is
Version 5010, although new versions will inevitably be introduced in the near
future.)25
2. When the Centers for Medicare and Medicaid Services (CMS) staff compute transi-
tion costs, they divide some of these costs between the updating of transaction stan-
dards such as Version 5010 (which they argue would have to occur anyway) versus the
cost of adopting and implementing the ICD-10 codes. We will be referring to this
cost-splitting within a later discussion of implementation costs.
Changes in electronic transaction standards directly impact providers, health plans, and
others as illustrated in Figure 19-2. Providers affected include, at a minimum, hospitals,
physicians, dentists, and pharmacies. Health plans affected include commercial health
plans, the Blue Cross/Blue Shield plans, and all government plans such as Medicare and
Providers
• Hospitals
• Physicians
• Dentists
• Pharmacies
Others
• Clearinghouses
• Vendors
Health Plans
• Commercial Health Plans
• Blue Cross/Blue Shield Plans
• Government Plans:
Medicare & Medicaid
Healthcare Industry Segments Directly Affected by the Adoption of Updated
(Version 5010) Electronic Transaction Standards
Figure 19–2 Electronic Transaction Standards Impact.
Source: 73 Federal Register 49761 (August 22, 2008).
Medicaid. Other healthcare organizations that are affected include the electronic infor-
mation clearinghouses and the vendors who provide hardware and software to the health-
care industry.
Providers and Suppliers Impacted by the ICD-10 Transition
The companies and organizations impacted by the ICD-10 transition include inpatient
providers, outpatient providers, and an array of other support services and suppliers.
Figure 19-3 illustrates the entities that are affected by the ICD-10 transition. Inpatient
providers impacted include both hospitals and nursing facilities. Outpatient providers
include, at a minimum, physician offices, outpatient care centers, medical diagnostic
and imaging services, home health services, other ambulatory care services, and durable
medical equipment providers. Support services and suppliers include health insurance
carriers and third-party administrators, along with the vendors who provide computer sys-
tem design and related services.26 Note that pharmacies (both chain and independent
pharmacies) are substantially impacted by the required electronic transaction standards
updates for pharmacies, while ICD-10 adoption is generally more of a peripheral issue for
pharmacies.
ICD-10 BENEFITS AND COSTS
The ICD-10 transition process will require management decisions that take both costs and
benefits in account. A brief summary follows.
ICD-10 Benefits and Costs 223
Inpatient Providers
• Hospitals
• Nursing Facilities
Others
• Health Insurance Carriers &
Third Party Administrators
• Computer System Design &
Related Services
Outpatient Providers
• Physician Offices
• Outpatient Care Centers
• Medical Diagnostic &
Imaging Services
• Home Health Services
• Other Ambulatory Care Services
• Durable Medical Equipment
Inpatient and Outpatient Providers and Suppliers
Impacted by ICD-10 Transition
Costs
Figure 19–3 ICD-10 Transition Costs Impact.
Source: 74 Federal Register 3357 (January 16, 2009).
224 CHAPTER 19 Electronic Records: Financial Management Tools and Decisions
Benefits
Management will need to account for what their own organization will realize in conversion
savings as benefits. CMS identified six benefits of transitioning to ICD-10, including:
• More accurate payments for new procedures
• Fewer rejected claims
• Fewer improper claims
• Improved disease management
• Better understanding of health conditions and healthcare outcomes
• Harmonization of disease monitoring and reporting world-wide27
In regard to recognition of other benefits, see our comment about cost-splitting in a previ-
ous paragraph, as the same concept applies to splitting benefits. Thus, the systems conver-
sion to Version 5010 also recognizes three types of benefits, including operational savings
(better standards); cost savings (increase in electronic claims transactions); and opera-
tional savings (increase in use of auxiliary transactions).28
Management should also decide what potential governmental financial assistance might
be available to their own organization. The ARRA legislation previously described in this
chapter provides financial incentives for the timely adoption of electronic health records.
The ICD-10 conversion is, of course, part (but not all) of this adoption process. It is there-
fore logical for management to consider part of the financial incentives offered as relating
to this system conversion when analyzing benefits.
Costs
Management must make decisions about major costs incurred in the ICD-10 transition, in-
cluding direct adoption costs and cash flow disruption costs. Some costs will be one-time
costs, while other costs will become recurring costs, and this factor must also be considered
in the decision-making process.29
Three Types of ICD-10 Adoption Costs
CMS acknowledges that transition costs from ICD-9-CM to ICD-10 code sets are unavoid-
able and are incurred in addition to the Version 5010 standards conversion costs.30 Three
recognized types of ICD-10 adoption costs include:
1. System
changes
2. Training costs
3. Productivity losses
CMS believes that large providers and institutions will most likely need to make system
changes and software upgrades. However, CMS also believes small providers may only need
software upgrades.31 This belief is based upon findings that the majority of small providers
have simplistic systems.32
Details about training costs and productivity losses are addressed in the following chap-
ter. As a final note, also see our comment about cost-splitting in a prior paragraph. Thus,
systems conversion to Version 5010 recognizes two similar types of cost: system implemen-
tation costs and transition costs.33
Cash Flow Disruption Costs
Code set transition has a learning curve for all users. Thus, it is to be expected that a greater
proportion of claims will be rejected during this learning curve. Rejected claims lead to
cash flow disruption, and should be taken into account when decisions are made about im-
plementation costs and benefits.
If certain contracts contain stipulations as to ICD-9 codes, these contracts may have to be
renegotiated. The much greater specificity of the ICD-10 codes may make such renegotiation
necessary in certain cases, and cash flow from contracts may be disrupted in the interim.
SYSTEM IMPLEMENTATION PLANNING
System implementation on this scale requires multiple planning cycles.
Scope of Management Decisions
The financial impact of a misstep in the purchase and installation of hardware and/or soft-
ware can be pervasive. Thus, the management may focus primarily on purchase and instal-
lation, bypassing the importance of other aspects such as assessing documentation trails
and creating training plans. The scope of management decisions for system implementa-
tion should thus be extremely broad in the initial phases.
Implementation Planning
CMS recommends that healthcare organizations plan for implementation of ICD-10-
CM/PCS by developing a three-step organizational plan that includes:
• Step 1: Situational Analysis
• Step 2: Strategic Implementation/
Organizing
• Step 3: Planning for Strategic Control34
Figure 19-4 illustrates these steps. We believe that development of a timeline and a map of
individual responsibilities should also be an important part of this planning process.
1. Situational Analysis: Situational analysis is defined and discussed in the following
section.
2. Strategic Implementation and Organizing: The strategic implementation and orga-
nizing planning step includes acquiring the resources to implement the plan and evalu-
ating the financial impact of the plan. In actual fact, these two steps should be reversed,
as the scope of the financial impact should be considered before resources are acquired.
3. Planning for Strategic Control: Developing objectives should, of course, be the first
step in planning for strategic control. The remaining planning recommendations are
action steps. They include planning measurement tools, evaluation strategies, and ac-
tions to implement.35
System Implementation Planning 225
226 CHAPTER 19 Electronic Records: Financial Management Tools and Decisions
SITUATIONAL ANALYSIS
This section contains both a definition and recommendations for a situational analysis.
Definition
A situational analysis does two things. It reviews the organization’s internal operations for
strengths and weaknesses and it explores the organization’s external environment for op-
portunities and threats. (Thus SWOT: strengths-weaknesses-opportunities-threats.)
A situational analysis allows management to, literally, analyze the organization’s situa-
tion. Situational analysis is particularly appropriate for the analysis of electronic records sys-
tems implementation because such implementation requires the collaboration of multiple
knowledge areas. A meeting of the minds can better occur with the discipline that a situa-
tional analysis can impose. It is a powerful tool when properly applied.
Situational Analysis Recommendations for ICD-10
CMS recommends six steps for an ICD-10 adoption situational analysis. We believe the six steps
should be divided into two parts. The first part contains strategic steps that must be addressed
at the beginning of the project. The second part of the analysis contains developmental steps
that we believe can only be properly accomplished after the strategic steps have been com-
pleted. (That said, however, we must also acknowledge that sometimes immovable deadlines
and/or lack of sufficient planning resources do not allow the ideal two-part process.) Figure
19-5 illustrates the CMS situational analysis recommendations for ICD-10 adoption.
Strategic Steps
The strategic steps that CMS recommends include three steps discussed as follows:
Situational
Analysis
See
Figure 19.5
Strategic
Implementation/
Organizing
• Acquire resources
to implement
• Evaluate financial
impact
System Implementation Planning Recommendations
Planning for
Strategic
Control
• Develop objectives
• Plan measurement tools
• Plan evaluation strategies
• Plan actions to implement
Figure 19–4 System Implementation Planning.
Source: Centers for Medicare & Medicaid Services (CMS) ICD-10 Fact Sheet.
1. Stakeholders: Step number one is to
identify stakeholders. This traditional
first step is an important beginning
point for the analysis. The array of
stakeholders will vary depending upon
the size and nature of the healthcare
organization. Payers should always be
one of the stakeholders. Regulatory
agencies may also be recognized as
stakeholders.
2. Impacts: Step number two involves as-
sessing the impact of the ICD-10 tran-
sition. Impacts on all aspects of the
organization should be recognized.
As with stakeholders, the transition’s
impact will also vary significantly de-
pending upon the size and type of
healthcare organization.
3. Strategies and Goals: Step number
three involves formulating strategies
and identifying goals. The larger the
organization the more likely there will
be competing strategies and goals.
Compromises may have to be negoti-
ated. Tight deadlines and/or lack of
planning resources may work to short-
change this component of the situa-
tional analysis.36
Developmental Steps
The developmental steps that CMS recommends also include three steps, discussed as fol-
lows. Note that different knowledge areas are required for these different steps.
1. Training Plans: Training plans must be developed for employees at all levels. The cost of
training for ICD-10-CM/PCS implementation is discussed and illustrated in the follow-
ing chapter.
2. Systems Change Implementation Plan: Information systems and/or technology sys-
tems “change implementation plans” must be developed. These plans must include
timelines and individual responsibilities. The timelines should leave sufficient time
for testing. (Insufficient testing time is a common pitfall.) A “go live” date is another
important part of this plan. If hardware and/or software vendors are involved in a fa-
cility’s implementation plan, all timelines and the final “go live” date must also be co-
ordinated closely with the vendor.
3. Documentation Change Plan: The documentation change plan will hopefully cover
all areas of the organization where documents exist that will reflect ICD-10-CM/PCS
Situational Analysis 227
Identify
stakeholders
Assess
impact
Formulate
strategies
and
identify
goals
Develop education/
training plans for
employees at all levels
Plan for
documentation
changes
Develop information
systems/technology
systems change
implementation plan
that includes testing
and “go live” date
Situational Analysis Recommendations
Figure 19–5 Situational Analysis Recommendations.
Source: Centers for Medicare & Medicaid Services (CMS)
ICD-10 Fact Sheet.
228 CHAPTER 19 Electronic Records: Financial Management Tools and Decisions
changes. A document inventory is the ideal beginning point for a documentation
change plan. The inventory allows for a full and complete change plan, but lack of
resources often means completing the full document inventory is not possible.37
SWOT ANALYSIS AS A TOOL
A SWOT analysis, properly performed, can be an excellent strategic tool. The four compo-
nents of a SWOT analysis include:
• Strengths
•
Weaknesses
• Opportunities
• Threats
The SWOT analysis format is illustrated in Figure 19-6. Here we see that the “Strengths” and
“Weaknesses” sectors of the matrix are labeled “Internal,” while the “Opportunities” and
“Threats” sectors are labeled “External.”
As to the internal components, the SWOT team or task force needs to evaluate resources
and thus identify those that should belong in the strengths and weaknesses sectors of the
SWOT matrix. For example, for an Information Technology (I.T.) analysis such as the
ICD-10 adoption issue, the team might enter “Financial Resources” as a main heading and
“Capital Resources Available” as one of the Financial Resources subheadings in the
strengths and weaknesses categories.
The team might also enter “Information Technology” as a main heading. Because this is an
I.T. project, some of the subheadings in the strengths and weaknesses categories might include:
• I.T. Hardware Resources
• I.T. Software Resources
• I.T. Storage Capacity
• I.T. Staffing Capacity
• I.T. Staffing Knowledge Levels
• And so on
Understand that the SWOT matrix is built as these resources are evaluated. As to the ex-
ternal components, the SWOT team or task force would likewise evaluate the external op-
portunities and threats as a parallel exercise.
In an Information Technology (IT) analysis
such as the ICD-10 adoption issue, the team
might logically enter the government’s in-
centive payment as an external opportunity
(potential dollars received) and an external
threat (compliance requirements to be met).
The four-part SWOT matrix is built as the
key internal resources, both strengths and
weaknesses, are evaluated, and the key ex-
ternal opportunities and threats are identi-
fied and evaluated.
StrengthsInternal
External
Weaknesses
Opportunities Threats
Figure 19–6 SWOT Analysis.
We can tie the CMS recommendations to this discussion of the SWOT matrix as follows.
Identifying stakeholders and commencing to assess impacts of the ICD-10 adoption are
considered part of building the SWOT matrix. Formulating strategies and identifying goals
would most likely come after building the initial matrix, because these actions would be in-
fluenced and should naturally carry forward from the evaluations performed as part of the
SWOT matrix-building process. Finally, the remaining three developmental steps, each of
which involves creating a plan, should all come as final steps in the situational analysis
process.
We should also acknowledge that there are a variety of approaches to performing a situ-
ational analysis, and this brief discussion features only a single approach. No matter what
approach is utilized, the results of the situational analysis are what count.
TECHNOLOGY IN HEALTHCARE MINI-CASE STUDY
Even simple technological changes can improve workflow and increase efficiency. This fact
is borne out by Mini-Case Study 4, entitled “Technology in Health Care: Automating Ad-
missions Processes.” Electronic records are powerful financial management tools that can
bring about measurable results, as this case study proves.
INFORMATION CHECKPOINT
What Is Needed? Some description of health information technology (HIT)
as defined in the first part of this chapter. This could be
a description of HIT within your place of work, or it
could be advertising materials attempting to sell HIT
hardware and/or software.
Where Is It Found? Possibly in the information technology or administration
offices at your place of work. There are many varied
sources for HIT advertising materials.
How Is It Used? The HIT description could be used to evaluate or assess
current HIT status at your place of work; or such a de-
scription could be within a manual (but be careful about
proprietary use if that is the case). The advertising ma-
terials, of course, are trying to sell the product.
KEY TERMS
Electronic Health Record (EHR)
Electronic Prescribing (E-Prescribing)
Health Information Technology (HIT)
Situational Analysis
SWOT Analysis
Key Terms 229
230 CHAPTER 19 Electronic Records: Financial Management Tools and Decisions
DISCUSSION QUESTIONS
1. Do you use electronic health records in your own work? If so, how do you use them?
2. Do you know of a healthcare organization that is either initially installing or upgrad-
ing its electronic health information technology? If so, will you describe how this or-
ganization is going about it?
3. Do you think posting the names of the “meaningful health electronic record users”
publicly on the CMS Web site is a good idea? If so, why? If not, why not?
4. Why do you think the federal policymakers decided to make the names public on a
government Web site?
231
Information
Systems Changes:
The Manager’s
Challenge
20
C H A P T E R
OVERVIEW: THE MANAGER’S CHALLENGE
Information systems changes are both a challenge and
an opportunity for the manager. Chapter 19 described
the overall healthcare system changes that are occurring
right now. This chapter follows up by discussing the tech-
nical aspects of both ICD-10, e-prescribing, and what you
need to know about implementing them. These changes
are expected to transition over a period of years (see Fig-
ure 19-1 in the preceding chapter for an overview of
compliance dates). During this transition period a man-
ager who understands the underlying technology issues
can develop and/or strengthen needed skills. Then, he
or she is in a position to support the implementation
plan and work to assist change within the organization.
SYSTEMS AND APPLICATIONS AFFECTED BY
THE ICD-10 CHANGE
The ICD-10 technology changes that we will discuss in
the following section impact a broad variety of systems
and applications. It is important for the manager to fully
understand the breadth and depth of change that is re-
quired by the technological transition from ICD-9 to
ICD-10. Figure 20-1 illustrates the types of systems and
applications that must change.
Twenty-five different examples of various systems and
applications are contained in Figure 20-1, divided into
three categories as follows:
1. Necessary revisions to vendor software and systems
2. Systems used to model or calculate that are impacted
3. Specifications that will need to be revised1
After completing this chapter,
you should be able to
1. Understand why the change to
ICD-10 codes is a technology
problem.
2. Compute ICD-10 training
costs.
3. Define lost productivity costs.
4. Understand the three
categories of “eligible
professionals” within the
e-prescribing incentive
program.
5. Understand the five
requirements for a qualified
e-prescribing system.
6. Understand why claim form
inputs are required to receive
e-prescribing incentive
payments.
P r o g r e s s N o t e s
ICD-10 TECHNOLOGY CHANGE
DETAILS
Examining the details of ICD-10 code set
changes will help you more fully understand
the technological problems that manage-
ment will face in this transition.
Understand Technology Issues and
Problems
The scope of change is illustrated in the
next three exhibits as follows.
Comparison of ICD-9-CM and
ICD-10-CM Diagnosis Codes
There were approximately 13,000 ICD-9-CM
diagnosis codes; now ICD-10-CM has ap-
proximately 68,000 diagnosis codes, or
more than a five hundred percent increase.
ICD-9-CM diagnosis codes had three to five
characters in length, while ICD-10-CM’s
characters are three to seven characters in
length. This generally means input fields
have to be lengthened in order to accom-
modate seven characters. In addition, ICD-
9-CM’s first digit may be alpha (E or V) or
numeric, and digits two to five are numeric,
while ICD-10-CM’s first digit is alpha, digits
two and three are numeric, and digits four
to seven are either alpha or numeric. This
change means reprogramming will be re-
quired for many applications. Exhibit 20-1
sets out a comparison of ICD-9-CM versus
ICD-10-CM diagnosis codes. The exhibit in-
cludes six benefits of the new code set in ad-
dition to the three differentials previously
discussed in this paragraph.
Comparison of ICD-9-CM and
ICD-10-CM Procedure Codes
There were approximately 3,000 ICD-9-CM
procedure codes; now ICD-10-CM has ap-
proximately 87,000 available procedure codes, or 29 times as many available codes. ICD-9-
CM procedure codes had three to four numbers in length, while ICD-10-CM’s characters
232 CHAPTER 20 Information Systems Changes: The Manager’s Challenge
Necessary Revisions to Vendor
Software and Systems for Transition
from ICD-9 to ICD-10 include:
Ambulatory systems
Billing systems
Patient accounting systems
Physician office systems
Practice management systems
Quality measurement systems
Emergency department software
Contract management programs
Reimbursement modeling programs
Financial functions such as-
Code assignment
Medical records abstraction
Claims submission
Other financial functions
Systems used to model or calculate are
also impacted by the use of ICD-10
code sets:
Acuity systems
Decision support systems and content
Patient care systems
Patient risk systems
Staffing needs systems
Selection criteria within electronic medical
records
Presentation of clinical content for support of
plans of care
Specifications that will need to be revised
for ICD-10 use include specifications for:
Data file extracts
Reporting programs and external interfaces
Analytic software that performs business analysis
Analytic software that provides decision support
analytics for financial and clinical management
Business rules guided by patient condition or
procedure
Figure 20–1 Systems and Applications Affected by
the ICD-10 Change.
Source: 74 Federal Register 3348-9 (January 16, 2009).
are alpha-numeric and seven characters in length. This generally means input fields have
to be lengthened in order to accommodate seven characters and possibly reprogrammed
to accept alpha characters. Exhibit 20-2 sets out a comparison of ICD-9-CM versus ICD-10-
CM procedure codes. The exhibit includes seven benefits of the new code set in addition
to the two differentials previously discussed in this paragraph.
An Example: Comparison of Old and New Angioplasty Codes
Exhibit 20-3 sets out one example of the proliferation of codes. In the ICD-9-CM, angio-
plasty had one code (39.50). In the ICD-10-PCS, angioplasty has 1,170 codes.2 The Wall
Street Journal even used this example in a headline: “Why We Need 1,170 Angioplasty
Codes.”3
The Manager’s Role
You the manager need to identify tasks required during the transition period and perform
them. These tasks could involve aspects of planning, creating, evaluating, testing, or even
ICD-10 Technology Change Details 233
Exhibit 20–1 Comparison of ICD-9-CM and ICD-10-CM Diagnosis Codes
ICD-9-CM Diagnosis Codes ICD-10-CM Diagnosis Codes
3-5 characters in length
Approximately 13,000 codes
First digit may be alpha (E or V) or
numeric; digits 2-5 are numeric
Limited space for adding new codes
Lacks detail
Lacks laterality
Difficult to analyze data due to
non-specific codes
Codes are non-specific and do not
adequately define diagnoses needed
for medical research
Does not support interoperability because
it is not used by other countries
Source: 73 Federal Register 49803 (August 22, 2008).
3-7 characters in length
Approximately 68,000 available codes
Digit 1 is alpha; digits 2 and 3 are
numeric; digits 4-7 are alpha or
numeric
Flexible for adding new codes
Very specific
Has laterality
Specificity improves coding accuracy and
richness of data for analysis
Detail improves the accuracy of data used
for medical research
Supports interoperability and the
exchange of health data between other
countries and the United States
234 CHAPTER 20 Information Systems Changes: The Manager’s Challenge
all of the above. In other words, you as an observant manager can work to support aspects
of the implementation plan that fall within your areas of responsibility, whether it involves,
for example, information technology or the training plans.
ICD-10 TRAINING AND LOST PRODUCTIVITY COSTS
This section describes training and lost productivity costs for the ICD-10 transition.
Who Gets Trained on ICD-10?
CMS identified three types of individuals who would require varying levels of training on
ICD-10. These included coders, code users, and physicians.
Coders
It is vital that coders receive adequate training on the ICD-10 coding changes. CMS, there-
fore, estimated training costs for both full-time and part-time coders. In producing cost es-
Exhibit 20–2 Comparison of ICD-9-CM and ICD-10-CM Procedure Codes
ICD-9-CM Procedure Codes ICD-10-CM Procedure Codes
3-4 numbers in length
Approximately 3,000 codes
Based upon outdated technology
Limited space for adding new codes
Lacks detail
Lacks laterality
Generic terms for body parts
Lacks description of methodology and
approach for procedures
Limits DRG assignment
Lacks precision to adequately define
procedures
Source: 73 Federal Register 49803 (August 22, 2008).
7 alpha-numeric characters in length
Approximately 87,000 available codes
Reflects current usage of medical
terminology and devices
Flexible for adding new codes
Very specific
Has laterality
Detailed descriptions for body parts
Provides detailed descriptions of
methodology and approach for
procedures
Allows DRG definitions to better
recognize new technologies and
devices
Precisely defines procedures with
detail regarding body part,
approach, any device used, and
qualifying information
timates, CMS assumed that full-time coders were primarily dedicated to hospital inpatient
coding and that part-time coders worked in outpatient ambulatory settings. The difference
is based on the job setting for a reason. CMS further assumed that all coders will need to
learn ICD-10-CM, while the coders who work in the hospital inpatient job setting will also
need to learn ICD-10-PCS.4
Code Users
CMS refers to the American Health Information Management Association (AHIMA) defi-
nition of code users as “anyone who needs to have some level of understanding of the cod-
ing system, because they review coded data, rely on reports that contain coded data, etc.,
but are not people who actually assign codes.”5 These users can be people who are outside
of healthcare facilities: individuals such as researchers, consultants, or auditors, for exam-
ple. Or these users might actually be inside the healthcare facility but are not coders. Such
facility users might include upper-level management, business office and accounting per-
sonnel, clinicians and clinical departments, or corporate compliance personnel.6
ICD-10 Training and Lost Productivity Costs 235
Exhibit 20–3 Comparison of Old and New Angioplasty Codes
Old Code:
ICD-9-CM
Angioplasty
1 code (39.50)
New Code:
ICD-10-PCS
Angioplasty Codes
1,170 codes
Specifying body part, approach, and device, including:
047K04Z Dilation of right femoral artery with drug-eluting intraluminal
device, open approach
047KODZ Dilation of right femoral artery with intraluminal device, open
approach
047KOZZ Dilation of right femoral artery, open approach
047K24Z Dilation of right femoral artery with drug-eluting intraluminal
device, open endoscopic approach
047K2DZ Dilation of right femoral artery with intraluminal device, open
endoscopic approach
Source: Centers for Medicare & Medicaid Services (CMS) ICD-10 Fact Sheet
236 CHAPTER 20 Information Systems Changes: The Manager’s Challenge
P h y s i c i a n s
CMS believed that the majority of physicians did not work with codes and thus would not
need training. The initial assumption was that only one-in-ten physicians would require such
knowledge. (CMS also believed that physicians would probably obtain the needed training
through continuing professional education courses that they would attend anyway.)7
Costs of Training
ICD-10 training costs were estimated for each category described above: coders, code users,
and physicians.
Coder Training Costs
CMS initially assumed the following:
1. There were 50,000 full-time hospital coders that would need 40 hours of training
apiece on both ICD-10-CM and ICD-10-PCS. The 40 hours of training was estimated
to cost $2,750 apiece, including lost work time of $2,200, plus $550 for the expenses
of training, for a total of $2,750 per coder.
2. Training of full-time coders would start the year before ICD-10 implementation. It
was further assumed that 15% of training costs would be expended in this initial year;
75% would be expended in the year of implementation; and the remaining 15%
would be expended in the year after implementation.
3. There were approximately 179,000 part-time coders who would require training only
on ICD-10-CM (and not on ICD-10-PCS). The part-time coders’ training expense
would amount to $110 for the expenses of training, plus $440 for lost work time, for
a total of $550.8
Code Users Training Costs
CMS estimated there were approximately 250,000 code users, of which 150,000 would work
directly with codes. Each code user was estimated to need eight hours of training at $31.50
per hour or approximately $250 apiece.9
Physician Training Costs
CMS estimated there were approximately 1.5 million physicians in the United States, of
which one in ten would require training. Each physician was estimated to need four hours
of training at $137 per hour or approximately $548 apiece.10
Costs of Lost Productivity
CMS used a productivity loss definition as follows: “The cost resulting from a slow-down in
coding bills and claims because of the need to learn the new coding systems.”11 Thus, the
productivity loss slow-down reflects the extra staff hours that are needed to code the same
number of claims per hour as prior to the ICD-10 conversion. (For instance, Jane normally
codes x claims per hour; during the first month learning the new system, she slows down to
xx claims per hour.)
CMS estimated that inpatient coders would incur productivity losses for the first six
months after ICD-10 implementation; and further, that productivity would increase (and
losses thus decrease) month by month over the initial six-month period until by the end of
six months, productivity has returned to its former level. It was estimated that inpatient
coders would take an extra 1.7 minutes per inpatient claim in the first month. At $50 per
hour, 1.7 minutes equates to $1.41 per claim.12 ($50.00 per hour divided by 60 minutes
equals $0.8333 per minute times 1.7 minutes equals $1.41 per claim.)
CMS assumed the same six-month productivity loss period for outpatient coders. CMS
further assumed that outpatient claims require much less time to code. In fact, the initial
assumption was that outpatient claims would take one hundredth of the time for a hospital
inpatient claim. Thus, one hundredth of the inpatient 1.7 minute productivity loss equals
0.017 minutes. At the same $50 per hour, one hundredth of the $1.41 inpatient loss equals
0.014 per claim, or about one and one half cents.13 (To compute one hundredth of $1.41,
move the decimal to the left two places. Thus $1.41 becomes $0.014.) The reasoning for
this small amount of coding time per claim is that physician offices “may use preprinted
forms or touch-screens that require virtually no time to code.”14
E-PRESCRIBING FOR PHYSICIANS: OVERVIEW
This overview contains e-prescribing definitions and commentary about the traditionally
low adoption rate.
Definitions
In the definitions that follow, be aware that over time the precise wording of such defini-
tions may shift and/or expand for regulatory purposes.
• E-prescribing means “the transmission, using electronic media, of a prescription or
prescription-related information, between a prescriber, dispenser, PBM, or health
plan, either directly or through an intermediary, including an e-prescribing network.”
• Prescriber means “a physician, dentist, or other person licensed, registered, or other-
wise permitted by the U.S. or the jurisdiction in which he or she practices, to issue pre-
scriptions for drugs for human use.”
• Dispenser means “a person, or other legal entity, licensed, registered, or otherwise per-
mitted by the jurisdiction in which the person practices or the entity is located, to pro-
vide drug products for human use on prescription in the course of professional
practice.”15
Generally speaking, transactions recognized as part of e-prescribing include:
• New prescription transaction
• Prescription refill request and response
• Prescription change request and response
E-Prescribing for Physicians: Overview 237
238 CHAPTER 20 Information Systems Changes: The Manager’s Challenge
• Cancel prescription request and response
• Ancillary messaging and administrative transactions16
As to the definition for “prescriber” above, CMS has commented elsewhere about other
individuals who “are permitted to issue prescriptions for drugs for human use. These non-
physician providers could include certified registered nurse anesthetists (CRNAs), nurse
practitioners, and others.”17 (Naturally, these individuals would have to be properly li-
censed or registered in order to be a prescriber.)
Also note that this discussion is limited to the impact of e-prescribing on physicians and
other eligible professionals who prescribe, because the technical aspects of other applica-
tions of e-prescribing (such as the impact on pharmacies as dispensers) are not within the
scope of this book.
Traditionally Low Adoption Rate
Electronic prescribing among physicians and other professionals who prescribe has tradi-
tionally been low. A study published a few years ago estimated only five to eighteen percent
of providers used e-prescribing at that time.18
As to a real-life example of the low adoption rate, several years ago a Massachusetts col-
laborative project was partially funding the adoption of e-prescribing by physicians. While
this project offered the technology to 21,000 physicians, it reported that only about 2,700,
or thirteen percent, of the targeted physicians had adopted the technology.19
E-PRESCRIBING BENEFITS AND COSTS
This section describes both benefit and costs of e-prescribing.
Benefits
The benefits of e-prescribing can be administrative, financial, and/or clinical. CMS has
listed the following benefits as potentially improving quality and efficiency, and reducing
costs:
• Speeds up the process of renewing medication
• Provides information about formulary-based drug coverage, including formulary al-
ternatives and co-pay information
• Actively promotes appropriate drug usage, such as following a medication regimen
for a specific condition
• Prevents medication errors, in that each prescription can be electronically checked at
the time of prescribing for dosage, interactions with other medications, and thera-
peutic duplication
• Provides instant connectivity between the healthcare provider, the pharmacy, health
plans/pharmacy benefit managers (PBMs), and other entities, improving the speed
and accuracy of prescription dispensing, pharmacy callbacks, renewal requests, eligi-
bility checks, and medication history20
Costs
The cost of implementation to a practice may vary widely, based on practice size, location,
and the degree of electronic adoption already under way within the office. However, three
types of costs associated with e-prescribing can be identified as follows:
1. The initial purchase of hardware and software
2. Costs associated with daily use and maintenance, including on-line connectivity
3. Education and training21
Because of the wide variability, no official estimate of e-prescribing costs exists at the time
of this writing. An older estimate of implementation costs has been published as follows. As
background, in the past some health plans have offered to install an e-prescribing system
for physicians that participate in their plan. In that regard, several years ago a health plan
responded with comments to a CMS proposed rule about e-prescribing. The health plan
stated that:
. . . it had spent three million dollars to equip 700 physicians with hardware and
installation, software and training in their e-prescribing initiative (an average of
almost $4,300 per physician). To boost participation, the health plan [was] piloting
a program to grant honoraria (between $600 and $2,000) to physicians who write
electronic prescriptions. The commenter believed that without the financial
hardware/software and support incentives, the average physicians’ practice would
incur costs up to $2,500 per physician to adopt e-prescribing.22
In conclusion, at the time of this writing, adoption of e-prescribing by physicians is vol-
untary. Therefore each physician can make an individual decision about the costs and ben-
efits of e-prescribing.
A View of the Future
We anticipate that the near future will bring a stream of information about implementation
costs as the e-prescribing incentives described later in this chapter begin to show results.
But we already have one view of the future. As of the date of this writing, the Wall Street Jour-
nal announced that Wal-Mart Stores, Inc. has formed a partnership with Dell, Inc. and a pri-
vately held software maker to sell a medical records system through its Sam’s Club
membership warehouse. According to the Journal story, a Wal-Mart spokesman stated
“Whether it is a single physician or a physician’s group, we can offer a system that enables
them to electronically prescribe medication, set appointments, track billings and keep
records.”23 Note that the system is more comprehensive than just e-prescribing, as it in-
cludes office and patient management and billing tracking. The Journal story quoted the
cost of the first installed system as $25,000, plus $10,000 for each additional system, plus
$4,000 to $5,000 a year in maintenance costs.24
The significance of this announcement is that a big-box store and a prominent computer
firm have joined forces to offer an electronic package that can be obtained, complete with
E-Prescribing Benefits and Costs 239
240 CHAPTER 20 Information Systems Changes: The Manager’s Challenge
installation and maintenance, from a membership warehouse. It seems to us that with this
announcement the adoption of electronic medical records, including e-prescribing, has en-
tered the commercial mainstream and may even shortly become commonplace.
E-PRESCRIBING IMPLEMENTATION
Implementation barriers and successes are described below.
Barriers
Barriers to physicians’ implementation and increased usage of e-prescribing include:
• costs of buying and installing a system
• training
• time and workflow impact
• lack of knowledge about the benefits related to quality care
• lack of reimbursement for costs and resources25
At least the “lack of reimbursement” barrier is lessening somewhat with the physician in-
centives that are now in place.
While the primary barrier to adoption of e-prescribing by physicians appears to be the
cost of buying and installing the system, change is also a significant barrier, since imple-
mentation of a new system involves at least three types of change:
1. changing the business practices of the physician’s office
2. changing record systems (from paper to electronic)
3. training staff for change26
Another change-related barrier is resistance to actually using the electronic system, both by
staff and by the physicians themselves.
Anecdotal Successes
Certain physician practices that have provided anecdotal evidence of successful e-prescrib-
ing implementation to CMS, are quoted as follows:
• A 53% reduction in calls to the pharmacy.
• Time savings of one hour per nurse and 30 minutes per file clerk per day by stream-
lining medication management processes.
• A large practice in Lexington, Kentucky, estimates that e-prescribing saves the group
$48,000 a year in decreased time spent handling prescription renewal requests.
• Before implementation of e-prescribing, a large practice in Kokomo, Indiana, with 20
providers and 134,000 annual patient office visits was receiving 370 daily phone calls,
206 of which were related to prescriptions. Of the 206 prescription-related calls, 97
were prescription renewal requests. The remainder consisted of clarification calls
from pharmacists or requests for new prescriptions. Staff time to process these calls in-
cluded 28 hours per day of nurse time and 4 hours per day of physician time. Chart
pulls were required in order to process half of the renewal requests. Implementation
of an e-prescribing system produced dramatic time savings that permitted reallocation
of nursing and chart room staff.27
E-PRESCRIBING INCENTIVES AND PENALTIES FOR PHYSICIANS AND
OTHER ELIGIBLE PRESCRIBERS
The E-Prescribing Incentive Program was authorized by the Medicare Improvements for
Patients and Providers Act (MIPPA) which was enacted on July 15, 2008. The incentive pro-
gram is for eligible professionals who are successful electronic prescribers (e-prescribers)
as defined by MIPPA. It is separate from, and is in addition to, the Physician Quality Re-
porting Initiative (PQRI).28 Only services paid under the Medicare Physician Fee Schedule
(MPFS) are included in the E-Prescribing Incentive Program.29
Note an important difference: the AARA incentives described in the previous Chapter
19 are paid only to “physicians,” as defined by law. The E-Prescribing Incentive Program de-
scribed in this section pays “eligible professionals,” which includes other eligible prescribers
in addition to physicians.
The E-Prescribing Incentives Program
Components of the program are briefly described below. This is a general description
for purposes of illustration only; for additional details refer to the relevant rules and
regulations.
Eligible Pro f e s s i o n a l
An “eligible professional” includes the following individuals, divided into three categories:
Medicare physicians, practitioners, and therapists.
1. Medicare physicians
• Doctor of Medicine
• Doctor of Osteopathy
• Doctor of Podiatric Medicine
• Doctor of Optometry
• Doctor of Oral Surgery
• Doctor of Dental Medicine
• Doctor of Chiropractic
2. Practitioners
• Physician Assistant
• Nurse Practitioner
• Clinical Nurse Specialist
• Certified Registered Nurse Anesthetist (and Anesthesiologist Assistant)
• Certified Nurse Midwife
• Clinical Social Worker
E-Prescribing Incentives and Penalties for Physicians and Other Eligible Prescribers 241
242 CHAPTER 20 Information Systems Changes: The Manager’s Challenge
• Clinical Psychologist
• Registered Dietician
• Nutrition Professional
• Audiologists
3. Therapists
• Physical Therapist
• Occupational Therapist
• Qualified Speech-Language Therapist30
Note that some professionals who would otherwise be eligible are excluded from the pro-
gram due to their billing methods.31 Also note that in order to participate, these individu-
als must be “authorized by his or her respective state laws to prescribe medication and
prescribing medications must fall within the individual eligible professional’s scope of
practice.”32
Qualified E-Prescribing System
According to the CMS ERxIncentive brochure, a qualified e-prescribing system must be
able to perform the following five tasks:
1. Generate a complete active medication list, using e-data received from applicable
pharmacies and pharmacy benefit managers (PBMs) (if available).
2. Allow eligible professionals to select medications, print prescriptions, transmit pre-
scriptions electronically, and conduct all alerts (including automated prompts).
3. Provide information on lower cost therapeutically appropriate alternatives, if any.
4. Provide information on formulary or tiered formulary medications, patient eligibil-
ity, and authorization requirements received electronically from the patient’s drug
plan (if available).
5. Meet specifications for messaging.33
Successful Electronic E-Prescriber
At the time of this writing an eligible professional was considered to be a “successful elec-
tronic e-prescriber” if “he or she reported the applicable e-prescribing quality measure in at
least 50% of the cases in which such measure is reportable by the eligible professional dur-
ing the reporting period.”34 (Note that this percentage may change over time.)
Program Incentives and Penalties
The program incentive payment for 2010 is 2% of “the total estimated allowed charges for
all such MPFS covered professional services”35 that are furnished during the calendar year
and received by CMS by February 28th of the following year. (The payment was also 2% in
2009.) The payments continue as follows: 1.0% for 2011 and for 2012, and 0.5% for 2013.36
Note, however, that the incentive does not apply if only a minimum percentage of covered
professional services are reported to which the measure applies (for example, this mini-
mum was 10% in 2009).37
If, however, the professional does not adopt e-prescribing, a percent reduction in the fee
schedule amount paid will be imposed as follows: minus 1.0% in 2012; minus 1.5% in 2013;
and minus 2.0% in 2014 and in each subsequent year.38 The program incentives and penal-
ties are illustrated in Exhibit 20-4.
Manner of Reporting
Because this is a claims-based reporting program, specific claim form inputs are required in
order to receive e-prescribing incentive payments. Quality data codes for the e-prescribing
measure are submitted through the Medicare claims processing system. Thus, there is no need
to enroll or register, because the entire program reporting is accomplished through the sub-
mission of the data codes.39 As a manager you need to remember this, because if the data code
isn’t entered properly (or isn’t there at all), then the opportunity for payment is lost.
Three G-codes represent the quality data codes that are used to report the e-prescribing
measure. One of these three codes should be entered on the claim:
1. Report G8443 if all of the prescriptions generated for this patient during this visit
were sent via a qualified e-prescribing system. (This code is used for the example on
Exhibit 20-5.)
2. Report G8445 if no prescriptions were generated for this patient during this visit.
3. Report G8446 if some or all of the prescriptions generated for this patient during this
visit were printed or phoned in as required by state or federal law or regulations, due
to patient request, or due to the pharmacy system being unable to receive electronic
transmission; or because they were for narcotics or other controlled substances.40
A particular array of 33 professional service CPT or HCPCS codes represents the permissi-
ble codes to enter on the claim form in order to qualify for the incentive.41 In other words,
E-Prescribing Incentives and Penalties for Physicians and Other Eligible Prescribers 243
Exhibit 20–4 E-Prescribing for Physicians and Other Eligible Prescribers: Incentives & Penalties
INCENTIVE PAYMENTS FINANCIAL PENALTIES
for e-prescribers for non-e-prescribers
Additional % of allowed charges paid % Reduction in fee schedule amount paid
2010 �2.0 2010 0
2011 �1.0 2011 0
2012 �1.0 2012 �1.0
2013 �0.5 2013 �1.5
2014 0 2014 �2.0
Each subsequent year 0 Each subsequent year �2.0
Source: 73 Federal Register 69847-8 (November 19, 2008).
244 CHAPTER 20 Information Systems Changes: The Manager’s Challenge
Exhibit 20–5 Prescribing Claim Form Input Example
Diagnoses for the encounter
are placed in Item 21
CMS-1500 Claim Form [adapted for Electronic Prescribing Example]
21 Diagnosis or Nature of Illness or Injury
1. 714.00
2. 250.00
24. A. Date(s) of Service 24.B. 24.D. F. I. J.
Place Procedures, Rendering
From To of Services or $ ID Provider
Service Supplies Charges Qual. #
CPT/
HCPCS
01 12 09 01 12 09 11 99202 45.00 NPI 0123456789
01 12 09 01 12 09 11 G8443 0.00* NPI 0123456789
99202 = 24.D. Line 1
Code for a
patient encounter
during the reporting
period shown in 24 A
G8443 = 24.D. Line 2
Code for “all
prescriptions generated
via qualified e-prescribing
system”
0.0 = 24.F. Line 2
Is the line item
indicator for the
quality measure*
24.I.
Indicates Type of
Physician ID # (NPI)
24.J.
Indicates the rendering
NPI number of the
individual EP who
performed the service
*The field for the quality measure cannot be left blank.
**A sole practitioner enters the NPI in a field not shown on this example.
Note: Item 24 Columns C, E, G, and H not shown on this example because they would be blank.
Source: Adopted from “Sample Electronic Prescribing Claim” available at
www.cms.hhs.gov/ERxIncentive.
two codes will be present on an acceptable claim form: one of the 33 professional service
codes, plus one of the three quality data codes (G8443, G8445, or G8446).
Remember, you are a successful electronic e-prescriber only if you report the quality data
codes (the “applicable e-prescribing quality measure”) in at least 50% of the applicable
cases (in other words, 50% of the claims where one of the 33 applicable professional service
codes are present). Therefore, CMS suggests reporting one of the three G codes on all of
the claims that contain one of the 33 applicable codes. That way you will be sure to meet the
50% reporting requirement.
E-PRESCRIBING TECHNICAL INPUT EXAMPLE
Exhibit 20-5 presents an example of the form input items for a claim that is eligible for the
e-prescribing incentive. Only applicable fields (“items”) of the CMS-1500 claim form are
shown in the exhibit. Inputs for an e-prescribing incentive encounter are described below
as illustrated on Exhibit 20-5:
1. Diagnoses for the encounter are placed in item 21.
2. Dates of service are entered in item 24.A, on both the first line where the professional
service code appears, and again on the second line where the quality data code for
the incentive program will appear.
3. The place of service code is entered on both lines in item 24.B.
4. The CPT code for the professional service is placed on the first line in item 24.D. A
particular array of 33 CPT or HCPCS codes representing professional services repre-
sent the permissible codes to enter on the claim form in order to qualify for the in-
centive. The example on Exhibit 20-5 uses 99202 for the professional service. CPT
code 99202 is one of the 33 acceptable codes.
5. The quality data code for the e-prescribing measure is entered on the second line.
The example on Exhibit 20-5 uses G8443, which indicates all of the prescriptions gen-
erated for this patient during this visit were sent via a qualified e-prescribing system.
6. The charge for the professional service is placed on the first line in item 24.F.
7. Zeroes (0.00) are placed on the second line in item 24.F. It is important to make sure
the zeroes are there, because the quality data measure will not be recognized if this
field (item) is left blank.
8. The acronym NPI (National Provider Identifier) is entered on both lines in item 24.I.
This acronym indicates what type of identifier will be present in the next column (in
item 24.J).
9. The National Provider Identifier (NPI) number of the individual eligible profes-
sional providing, or “rendering,” the service is entered on both lines in item 24.J.
(Item 24.J. is labeled “Rendering Provider #”). Note that if the eligible professional is
a sole practitioner, the NPI is entered in a different field (item 33) that is not shown
on this claim form example.
TECHNOLOGY IN HEALTHCARE MINI-CASE STUDY
Information systems changes are the manager’s challenge. But implementing such change
is made much easier if the change will visibly ease the staff’s workload. Such was the case
Technology in Healthcare Mini-Case Study 245
246 CHAPTER 20 Information Systems Changes: The Manager’s Challenge
described in Mini-Case Study 4, entitled “Technology in Health Care: Automating Admis-
sions Processes.” See the description of the mountains of paperwork in this case, and then
see the number of hours saved by implementing an automated solution. This type of
change to an information system is a win-win situation.
INFORMATION CHECKPOINT
What Is Needed? If possible, find an actual CMS-1500 claim form. (But be
extremely careful to have the provider completely mark
out or eliminate all privacy items.) You might have to
print one out from an electronic system. Or, as an alter-
native, locate a superbill that contains codes for profes-
sional services.
Where Is It Found? In the administrative offices of an “eligible professional”
How Is It Used? The claim form might be submitted, if eligible, to be counted
for the claim-based reporting of the e-prescribing incen-
tive program.
KEY TERMS
Code Users
Dispenser
Eligible Professional
Electronic Prescribing (E-Prescribing)
Prescriber
DISCUSSION QUESTIONS
1. Do you believe your place of work will be affected by the ICD-10 transition?
If so, how will your employer be affected? If not, why not?
2. Have you seen newsletters or other materials announcing ICD-10 training?
If so, where and what have you seen? Do you think the materials adequately explain
the necessity for the ICD-10 training?
3. Do you believe any individuals at your place of work are performing professional ser-
vices that are eligible for the e-prescribing incentive program?
If so, do you believe they are reporting the quality data measures?
4. Have you seen newsletters or other materials describing the e-prescribing incentive
program? If so, where and what have you seen? Do you think the materials adequately
explain how the incentive program works? (That is, that it is entirely claim-based
reporting?)
329
Mini-Case Study 4:
Technology in Health Care:
Automating Admissions
P rocesses*
Eric Christ
29
C H A P T E R
Alexander Bain was a clever fellow. He invented the electric clock and the first electric
printing telegraph. He also invented the fax machine, the device that many long-term care
providers rely on for patient referral and admissions communications. That was in 1843.
That’s right; the technology at the core of the referral and admissions process for many
continuing care providers is more than 150 years old.
Needless to say, a lot has changed since then. Providers can benefit from these changes
by looking at their patient intake processes and considering ways to use the Internet and
other technological advances to automate and accelerate admissions and referral
management.
ASSESS ADMISSIONS PROCESS
The first step for providers who are considering improved tools for patient intake is to assess
current processes. Here are some good questions to start with:
• How many referrals are received per day or per month?
• How many sources (hospitals, physicians, liaisons, other long-term care providers)
send referrals?
• How many pages of documents are associated with each referral?
• How are patient review and approval tasks assigned and tracked?
• How are referral and intake activities collected and reported?
Many providers do not realize what vast mountains of paper they manage. Results from
a 2007 survey of about 400 skilled nursing facilities and home health agencies indicate the
average provider receives four referrals per day, each with 22 pages of related documents.
That’s 1,460 referrals and 32,120 pages of documents per year—an eight-foot stack of paper
for the average provider to process, review, and manage.
In a study conducted by a Canadian health policy organization, nursing facility admis-
sions processes were found to involve 160 steps, including 69 handling steps, 36 forms to
*E. Christ, “Technology in Health Care: Automating Admissions Processes,” Provider Magazine (Oct. 2008):
81–84. Reprinted with permission from Provider Magazine.
330 CHAPTER 28 Mini-Case Study 4: Technology in Health Care
complete, four family trips to the facility that involved 53 steps and five staff members, and
nine forms.
AREAS TO AUTOMATE
Clearly, providers have many opportunities to streamline the admissions process. For ex-
ample, there are typically four to five steps between an initial inquiry and a response to
the referral source, after which insurance must be verified before a final decision to admit
is made.
Once a provider has identified the steps in its admissions process, it can evaluate ways to
apply messaging, management, and workflow technologies that can improve admissions in
the following areas: fax and document management, communications, referral tracking
and approval, and reporting.
FAX AND DOCUMENT MANAGEMENT
“Any solution that doesn’t address the fax challenges will typically fall short,” says Felicia
Wilson, a licensed nursing facility administrator and director of the human services pro-
gram at Shorter College in Rome, Georgia. “Experience has shown that providers must take
steps to minimize receipt and management of faxed paper documents to make referral
management more efficient.”
Providers also may not realize how frequently fax errors occur that could delay or block
inbound referrals. Typically, about eight percent of outbound faxes do not reach their in-
tended destination on the first try.
One option for providers is to convert faxed documents into an electronic format. Fax
servers can provide this capability at a reasonable cost.
Providers may also benefit from software that helps organize and manage those elec-
tronic documents, which helps facilitate a smooth transition away from paper-filing
processes.
It is important to note that providers should not let discussions about waiting for univer-
sal healthcare data standards for electronic medical records sidetrack attempts to automate.
Just storing and managing documents in a common electronic document format, such as
the ubiquitous PDF, is a huge incremental improvement over paper filing.
COMMUNICATION IS IMPORTANT
Both internal and external communications are critical to a responsive, efficient admis-
sions team. In the May 2008 Provider cover story, Donna Shaw, administrator of Woodbine
Rehabilitation Health Care in Alexandria, Virginia, summed up the critical need for re-
sponsive communications with referral sources: “Relationships with social workers and dis-
charge planners at the hospitals are key,” she said. “In an effort to move patients out quickly,
hospitals are now expediting their placing process, which, in many cases, means a patient is
referred to the facility that has the first available bed.”
That urgency means providers cannot afford to miss calls or play phone tag with referral
sources. Messaging and alerting systems can help providers know immediately when a re-
ferral comes in and send automated e-mails or faxes back to the referral source to update
the status.
There are also emerging technologies to instantly confirm patient information, such as
insurance verification—a step that typically requires multiple phone calls and can delay an
admissions decision.
Some hospitals have adopted e-referral solutions that facilitate faster exchange of refer-
ral communications. These e-referrals still represent a small percentage of inbound refer-
rals, however—about 6%—according to the 2007 admissions survey. About 80% of new
referral inquiries still arrive by fax or phone.
Providers should adopt tools and processes to effectively manage all inbound referrals,
from all sources or methods, and communicate instantly with those referral sources.
REFERRAL TRACKING AND APPROVAL
Referral tracking and approval often remains a decidedly low-tech operation. A hospital or
other source faxes in a referral request. The intake coordinator receives the fax, captures it
in a handwritten log book or spreadsheet, makes copies of the paper documents, and dis-
tributes them to the appropriate clinical and management staff for review, with sticky notes
affixed providing further instructions.
While this process may ultimately work, it is slow and inefficient. It also does not provide
any mechanism for viewing the status of multiple active referral cases.
Some providers have adopted workflow automation software that can enable the admis-
sions team to do several things:
• Notify staff when a new referral arrives
• Set review tasks for multiple staff members
• Capture and share notes related to the referrals
• Provide a quick update of referral status
“In an area where every second counts, workflow automation can make the difference be-
tween winning or losing a qualified patient referral,” says Wilson.
ANALYZING REFERRAL ACTIVITY
Admissions staff often must report referral activity to management weekly or even daily.
Much like the typical referral review process, this effort usually involves manually capturing
information from multiple sources and compiling it into a written report or spreadsheet.
These manual processes make it extremely difficult to analyze referral activity, capacities,
and win-loss data and create a particular challenge for multi-location providers that seek to
view and analyze referral activity across all locations. They struggle to identify and deliver
the services that are most in demand, prioritize and measure marketing programs, and
keep admissions at peak levels.
Analyzing Referral Activity 331
332 CHAPTER 28 Mini-Case Study 4: Technology in Health Care
One of the greatest advantages of automating admissions and referral processes is the
enhanced ability to see and analyze referral activity. If a provider adopts a system that helps
manage referral documents and workflows, by nature, that system will be capturing infor-
mation that can help the provider make more informed decisions related to the admissions
process.
There are several things a provider can expect to get a better view of with an automated
system, including wins and losses; referral sources, types, and methods; reasons for decline;
referral status and performance across locations; and acceptance rates.
Any provider considering solutions for automating admissions should evaluate up front
what data it wants to report.
HOURS SAVED
One six-location skilled nursing provider implemented a Web automation solution for cen-
tralized admissions and has seen the potential for tremendous gains in responsiveness and
efficiency. An analysis that examined the time the provider spent on daily referral manage-
ment processes revealed that the provider will save an estimated 1,175 hours, or 29.5 work
weeks per year, by expediting referral review and communications processes.
This helps the provider meet goals to improve responsiveness to referral sources and
maintain a competitive advantage in its marketplace.
The good news for providers seeking similar results is that many of the associated tech-
nologies are fairly simple, such as fax servers, e-mail messaging and alerting tools, and elec-
tronic document formats.
Providers may also benefit from Web-based subscription solutions. Accessing a program
through a Web portal that is utilized as a monthly or annual subscription can eliminate up-
front investments, such as software and hardware, as well as the need to install upgrades.
Providers simply need to assess their current admission processes and identify and apply
the right mix to make admissions faster, smarter, and more effective.
