Why healthcare overpays for technology

Healthcare organizations pay an average of 17 percent more for information technology than other industries, according to a report authored by Net(net), a consulting firm specializing in IT optimization, which sampled 30 total industries.

Healthcare spends 33 percent more than food service, the industry with the lowest average IT costs, the Net(net) report says.

The tendency for healthcare to overpay spans the gamut of IT, including financial applications, desktop productivity licenses, networking equipment, servers, storage – even vertical applications designed specifically for healthcare, the report explains.

"The breadth of scope of this 'healthcare premium' indicates that this is not an industry-specific difference for one type of technology unique to healthcare, but rather a general premium that applies to all technology,” the authors add.

Here are Net(net)'s top 12 reasons for the healthcare IT premium.

1. Healthcare organizations focus on patient care and safety.
 Unlike many other industries, in healthcare lives are on the line – and that demands “extremely high performance and reliability” of IT. What’s more, the authors note “the total costs of these initiatives often pale in comparison to the potential liability of a wrongful death lawsuit.”

2. Health entities lack a profit motive. 
Private, public or non-profit, most healthcare providers concentrate on driving revenue in the traditional quarterly business cycle. Even still, “when technology costs go up, healthcare providers usually just factor increases in technology costs into the total costs of service without much of an awareness of other, less costly methods to achieve the same result,” the report explains. While CFOs in other realms focus on profit to drive up stock prices and market capitalization, that happens “much less so in healthcare.”

3. Health systems are often inefficient, tough to automate. 
By nature, healthcare delivery tends to be subjective and at the same time highly regulated, which makes both automation and process implementation more difficult. On top of that, the processes often require more technology, according to the report. “Healthcare processes are often more intense due to the necessary verification and re-verification of data and the multiple departments involved. “Most healthcare organizations see technology as a means to an end and do not always have a good handle on their technology spending,” the authors explain. “In some cases, they do not know what they are spending where and for what reason.”

4. Healthcare organizations don’t always negotiate diligently.
The culture of trusting experts to decide on a solution, systemic in the delivery of care, extends to IT. “Healthcare organizations view costs largely as a product of the solution, and added in to the total consideration without so much as a second thought,” the authors add. “They do not have the knowledge of other configurations or optimizations to produce an equal or greater organizational value proposition at a significantly lower cost.”

5. The harsh reality of vendor lock-in.
“Once healthcare organizations lock in to a vertically integrated technology supplier, they must deal with a supplier that now has monopolistic pricing controls,” the authors note, continuing that there is a significant markup due to the supplier’s certification of these technologies that fall into three categories: not truly required, not fair to the customer, and not justified for the premium associated with the certification.

“Technology suppliers understand this and fully leverage that added power to incrementally drive up prices, capture greater wallet and market share in other areas of the organization, and otherwise exploit the added account control in ways that enhance their own objectives,” the report says.

6. Single-purpose purchasing.
The approach of buying total solutions including hardware, software and services for a specific purpose enables IT vendors “to ‘hide’ margin that would otherwise be more identifiable,” the report states. “The technologies that healthcare organizations purchase for a specific need are not able to be multi-purposed for greater economies of scale. As a result, the actual utilization rates on infrastructure components like servers, storage and networking equipment are extremely low in healthcare.” And in healthcare, much like the federal government, funding is often allocated for single projects, meaning that each specialty has its own infrastructure, which only drives spending upward.

7. Industry-specific supplier programs.
 Healthcare entities are by no means alone in paying higher-prices for technologies designed specifically for their needs than for cross-industry products. But are they even worth it? “When our healthcare clients conducted detailed studies of the actual differences between industry-specific offerings versus non-healthcare-specific commercially available offerings,” the report continues, “they found that a shockingly high percentage of the mark-up was due to nothing more than marketing.”

8. Lack of strategic sourcing.
The same purchasing consortiums that make financial sense for commodities such as cotton balls are not so easily applicable to IT. “Technology is just too specialized and complex to be addressed on a commodity basis,” Net(net) writes. “When it comes to IT, healthcare providers can purchase very few things as commodities, and therefore strategic sourcing capabilities are highly recommended.

9. Industry centricity.
 Whereas other realms are already participating in cross-industry collaboration on complex technologies to support analytics, data mining, decision support and the like, the report finds that all too many healthcare professionals network only within the health fray, if only because it's hard to relate to challenges in other industries. But “when they do collaborate, they realize that their peers in retail, manufacturing, transportation and other industries pay considerably less than they do, often times, for the very same technologies.”

10. Increased government regulation. Consider the current situation: With federal funding incentivizing new health IT projects, if a provider is eligible to receive, say $2 million in reimbursements and a vendor happens to sell a product for that same $2 million, then everyone goes home happy. “What if the actual cost of that technology was half that amount? If the government does not align healthcare organizations’ incentives with cost-effective remedies, healthcare organizations will continue to overpay for solutions, and will do so without so much as a second thought, especially when the investment does not really cost them anything,” the authors write. “Organizations would benefit greatly from a 360-degree perspective to determine the optimum value point of their IT investments.”

11. Unprecedented change, mandate for financial sustainability.
 Health organizations need to make “significant investments” to both achieve compliance and create a sustainable business; that means maximizing capital expenditure. Net(net) recommends freeing up capital from IT suppliers so it can be redirected to strategic initiatives, focusing on opportunities to earn reimbursement or shared savings, namely meaningful use and accountable care organization programs, as well as broad tactics including identifying new lines of business and revenue streams.

12. Healthcare IT is oversimplified.
 Health IT is, perhaps, among the most complex facets of information technology – and in healthcare “operational integration across the enterprise is elusive,” the report finds. And so the healthcare IT quandary: Organizations spend too much on IT and the staff to support it, yet due to inefficiencies typically have more IT professionals and lack efficiently automated processes.

“We do expect an information-intensive industry like healthcare to demand considerably more technological investments in order to power critical patient care as well as manage organizational decisions,” the report authors write. “We do not, however, expect the difference at this level or at this scope."