**Connecting for Health**

**ACHIEVING ELECTRONIC**

**CONNECTIVITY IN HEATLHCARE**

Working Group on Financial, Organizational, and Legal Sustainability of
Health Information

**Summary of Financial Incentives**

**Recommendations**

July, 2004

Markle Foundation

10 Rockefeller Plaza

New York, NY 10020

www.connectingforhealth.org

## Summary of Financial Incentives Recommendations

Physicians and hospitals are not adopting clinical information
technology at a rapid rate due to the poor financial case, difficult
modifications of clinical workflow and decision-making processes,
perceived legal barriers to sharing information among disparate
organizations and limited capacity of health care organizations to
organize regionally: factors that make a risky implementation even
riskier. The promise of EHRs and other clinical information technology
remains, however, as studies demonstrate that they can advance the
quality and efficiency of care, resulting in reduced medical errors,
reduced utilization, improved ability to manage chronic disease,
improved longevity and health status, among other potential benefits.
This gap between the potential of clinical information technology and
the willingness to adopt these technologies raises the question of
whether the market appropriately supports technology purchasers in
society's efforts to realize value.

From February through July 2004, within the framework of Phase II of
Connecting for Health, the **Working Group on Financial, Organizational
and Legal Sustainability of Health Information Exchange** performed an
analysis of the legal and organizational issues and barriers to health
information exchange as well as a high-level qualitative financial
analysis of health care IT application adoption. The Working Group
focused on health information exchange for the ambulatory care physician
practice. The goal of the analysis was to clarify and improve the
understanding of barriers and opportunities to achieving sustainable
adoption of health information technology and information exchange for
the purchaser/implementer of a specific type of clinical information
system application. Furthermore, we hoped to identify starting points
and near-term opportunities for physician practices and inpatient
providers to adopt health care information technology with the goal of
health information exchange.

The nine (9) members of the Working Group represented health care
informatics researchers, physicians, health system executives and legal
professionals. The Working Group also created an External Review Panel
consisting of experts on the topic from a variety of perspectives and
representatives specifically from employers, health plans, vendors and
the federal government that will review the results of the full report.
There is a dearth of data to work with concerning the financial impact
of IT on the ambulatory practice as well as a dearth of strong
experience base to draw out legal and organizational issues resulting
from health information exchange among health care organizations.
Working Group and staff conducted literature reviews, interviewed
industry experts, developed an analysis methodology and utilized the
expertise of the Working Group to develop the framework and analyses
during a series of conference calls, in-person meetings and sub-group
working sessions.

**Preliminary Recommendations**

Ambulatory care practices are on the front line for the treatment of
patients in the United States today, specifically the chronically ill.
These physicians have the lowest adoption rates, in the United States,
of health care IT among the provider sector; an estimated 6% to 13% of
practices have implemented an EHR in 2001 (JHIM, 2004). In addition, we
chose to focus the majority of our analysis on the small to medium-sized
physician practices in the ambulatory care setting; these practices
account for more than 50% of the physicians in the US.

Our analysis had two major orientations. First, we examined the
financial and support mechanisms necessary to significantly increase EHR
adoption by the small to medium-sized practice. Extensive regional and
national interoperability will not be possible unless there is extensive
EHR adoption in this critical segment of the industry. Second, we
analyzed other legal and organizational barriers that need to be
addressed to further regional and national interoperability. Extensive
EHR adoption by all providers does not inherently result in clinical
data exchange between providers.

In our qualitative financial analysis, we analyzed small and
medium-sized physician practices in order to derive an incentive to
equip this specific subset of the industry with clinical application
technologies. We developed an **incentive** that we believe would
**cause "tilt" in the adoption** **of clinical applications** among
clinicians and not for the application with complete interoperability or
as part of participating in a community-based interoperable
infrastructure. We do not intend to derive an incentive to attract
clinicians to adopt complete interoperability since there is a
significant dearth of data on which to base the cost of participating in
a fully interoperable infrastructure. We analyzed some cases from the
physician practice perspective. In two cases, we analyzed the inpatient
provider perspective. The inpatient analyses are in progress and have
not been factored into our recommendations.

**We** **did not include other societal or stakeholder benefits related
to health information sharing**. We also have not, at this time, studied
the incentives for CPOE in hospitals, for labs or for any other
potential stakeholder.

Our analysis is modeled for a "typical", outpatient physician practice
of five physicians in a primary care practice and a cardiology specialty
practice. Although there is great variation in size, specialty and
geography across ambulatory care practices, we believe that the
conclusions from analysis of the "typical" practice can be broadly
extended across the majority of small and medium-sized ambulatory care
practices due to the similar set of implementation and infrastructure
issues. We specifically analyzed use cases 1, 2, 3 and 4 which relate to
EHR, eRX and on-line chronic care management tool adoption in the
ambulatory care setting. We analyzed a comprehensive list of costs of
adoption as well as benefits realized by the physician practice over a
three-year period to account for capital costs and improved
efficiencies.

The recommendations below should be interpreted with the following
notes:

-   For analysis purposes, we defined a "typical" practice. Although the
    general lessons are thought to be applicable to a variety of small
    to medium-sized practices, these should not be interpreted as the
    exact net benefit for all ambulatory practices. Many factors
    influence IT costs and benefits including practice size, specialty
    and geography. In addition, the variation in practice operational
    efficiency, hospital affiliation, degree of IT support mechanisms in
    place and the variety of current incentive mechanisms in the market
    cause us to exercise caution when extrapolating our analysis to
    other ambulatory settings.

-   There is a dearth of data to work with concerning the financial
    impact of IT on the ambulatory practice. We relied heavily on
    qualitative research and the expertise of our Working Group to
    develop the basis for the financial analysis framework. Hence, these
    are initial estimates that need to be improved upon for practical
    application.

-   The financial **incentive estimates are starting points only**,
    thought to be sufficient incentives to provide adoption momentum in
    the market. We recognize that there are a number of other factors
    that contribute to the successful and sustainable adoption of health
    care IT toward the goal of information sharing as well as realizing
    the value of interoperability. These estimates **do not cover** a
    physician practices' ability to participate in **full** **regional
    and national interoperability** due to the lack of complete data on
    these costs. However, the success factors and additional
    opportunities will be presented in the Working Group's Final Paper
    and should be considered essential to accompany this financial
    incentive estimate.

1.  **Financial incentives need to be realigned to promote quality care
    improvement via IT adoption, connectivity, and information exchange
    among all health care providers.**

2.  **Financial incentives of the approximate range of \$3 to \$6 per
    patient visit or \$0.50 to \$1.00 per member per month, based on
    4,000 patient visits per year or a 2,000 patient panel, over at
    least a three-year period appear to be a sufficient starting point
    to encourage and sustain wide-spread adoption of basic EHR
    technologies by small, ambulatory primary care practices.** Estimate
    represents approximately \$7 - \$14 billion per year for three years
    or 1.2% to 2.4% of total amount spent on ambulatory care in 2003 on
    an annual basis. Industry is experimenting with incentive models and
    will gradually migrate to incentives to encourage adoption as well
    as additional incentives that will be necessary on an on-going basis
    to encourage more extensive use of EHR technologies, e.g.,
    coordinated care or advanced chronic disease management.

3.  **The qualitative analysis supports a business case that is better
    for some "incremental applications" than others. These incremental
    applications can be implemented as steps toward the full
    implementation of an EHR.** Applications with smaller investment or
    a very high net beneficial business case could be considered as
    candidates for initial implementation as long as they are not
    dead-end applications.

4.  **Small and medium-sized practices have greater potential to benefit
    from information exchange, but will require greater attention and
    support in order t achieve sustainability.**

**Findings**

1.  **Financial incentives will be necessary to promote quality care
    improvement via IT adoption and connectivity and information
    exchange among all health care providers.**

-   Our analysis of physician practices providing ambulatory care
    confirms what several recent studies have found; the **business
    case** for IT adoption among physician practices is **not
    sufficient** and **incentives are misaligned**, specifically for the
    small to medium ambulatory care practice modeled as the purchaser.

-   Currently, providers bear the expense of clinical application
    technology adoption, but a significant portion of value attained
    from improved quality of care and more appropriate utilization of
    services accrue to organizations and groups other than physician or
    provider purchaser. This "value imbalance" leaves the physician
    exposed to a likelihood of a poor financial business case for EHR
    adoption. A positive business case must be in place to make clinical
    IT adoption work among physician purchasers.

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-   **Financial incentives for both IT adoption and interoperability**
    among health care providers **are an essential contributor** to
    achieving widespread gains in improved healthcare that can result
    from IT. Adoption of most types of technology in the absence of
    financial incentives for interoperability interventions, results in
    a net cost to the physician practice purchaser in at least the first
    three years.

-   Among incentive vehicles, financial incentives have the greatest
    impact and can be designed as either direct (e.g. direct payment for
    EHR or eRX use) or indirect (e.g., pay for performance for outcomes
    measures, care coordination, or chronic care management).

-   Incentives should include IT adoption with support of
    interoperability among data sources outside the physician practice.
    A recent study from the Center for Information Technology Leadership
    showed that the return on investment for IT use is significantly
    improved when interoperability of structured clinical information is
    present, as much of the operational and clinical gain can be more
    fully realized with patient-centric data transparency. Incentives
    that promote IT adoption without an emphasis on interoperability
    have the potential to fund IT approaches that fail to enable the
    full quality and efficiency gains that IT has to offer and result in
    a weaker business case.

-   The **greater the interoperability among IT systems**, the **better
    the business case** for the ambulatory care practice purchaser,
    which means that providing incentives to adopt piecemeal technology
    that cannot support increased levels of connectivity and information
    sharing will lead to insufficient progress.

-   In addition to policy actions that the federal government could take
    to improve the business case for provider-sector purchasers and
    realign market incentives, both health plans and self-insured
    employers must play a significant market intervention role by to
    accelerate provider adoption by participating in complementary
    incentive strategies. The entire health care industry faces an
    increased public health focus on medical errors, rising health care
    costs in Medicare and the private sector, and industry-wide
    productivity loss caused by the inefficiency of the health care
    system. Both policy and industry leaders recognize the importance of
    greater transparency to permit purchasers and consumers to select
    and reward high-quality care along with the implementation of tools
    that permit both providers and patients to make informed,
    cost-conscious decisions about their use of care resources across
    the continuum.

-   Health plans interviewed as part of this process have expressed
    concern about the size of the incentive range and its effectiveness.
    Increases in financial **incentives by payers and employers** are
    **likely to be** **incremental**. Many payers and providers are
    experimenting with incentive approaches but the utility of these
    approaches is still being learned. Many payers are struggling with
    their own margin pressures and are **hesitant to devote significant
    dollars to incentives until the evidence of care improvement is
    clearer**. Payers and employers also recognize that the small
    physician practice needs EHR selection and implementation support;
    the absence of such support elevates the risk of the investment
    failing. An increasing number of industry forums are forming to
    enable employers and health plans to share ideas and learn from
    their experiences. The Working Group understands the issues raised
    by health plans and believes that incentives must be sufficient and
    in substantial enough increments to enable appropriate investments
    and effective implementation in order for the technology to benefit
    all stakeholders.

2.  **Financial incentives of the approximate range of \$3 to \$6 per
    patient visit or \$0.50 to \$1.00 per member per month based on
    4,000 patient visits per year or a 2,000 patient panel, over at
    least a three-year period appear to be a sufficient starting point
    to encourage and sustain wide-spread adoption of basic EHR
    technologies by small, ambulatory primary care practices. Estimate
    represents approximately \$7 - \$14 billion**[^1] **per year for
    three years or 1.2% to 2.4% of total amount spent on ambulatory care
    in 2003 on an annual basis**[^2]**. Industry is experimenting with
    incentive models and will gradually migrate to incentives to
    encourage adoption as well as additional incentives that will be
    necessary on an on-going basis to encourage more extensive use of
    EHR technologies, e.g., coordinated care or advanced chronic disease
    management.**

-   The estimates of needed incentives should be interpreted as a point
    at which **large scale adoption** will occur, sufficient to cover
    the initial and three-year maintenance costs of an EHR application
    with very modest interoperability among providers (i.e. lab
    interfaces). Incentives of this magnitude may **not** **cover
    full-scale interoperability nor advanced EHR functions**. However,
    incentives of these ranges are likely to lead to a significant
    increase in IT adoption by ambulatory care providers that, with
    appropriate implementation and support assistance, will enable them
    to realize value and provide a foundation for greater practice
    efficiencies and care improvement.

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-   The estimates are based on full time primary care provider with* *a
    **patient panel of 2,000 or 4,000 patient visits per year**.
    Assuming that the fully functioning EHR capital and on-going costs
    amortized over at least a three-year period cost a physician
    approximately \$12 - 15,000 per year, an incentive of \$3 - \$6 per
    patient visit or \$0.50 - \$1.00 PMPM would result in \$12,000 -
    \$24,000 per year per physician.

-   These **estimates should cover the technical basics** for a small
    physician practice including hardware, software and installation,
    but **may not be sufficient to cover the full costs** of
    implementation assistance, on-going personnel necessary to support
    the application, cost of additional modules or modifications to
    further productive use, initial practice productivity impacts
    related to adoption (productivity decrease can be significant and
    can last for several months), high degrees of community-wide
    connectivity, impacts of practice paradigm shifts or the significant
    risk of adoption failure.

-   The estimate range accounts for variability in implementation costs
    and practice size. Small practices will require greater attention
    and support to enable sustainable adoption.

-   The Bridges to Excellence (BTE) program conducted an extensive
    literature search on incentives for practice re-engineering, the
    summary of which can be found on its web site
    (<http://www.bridgestoexcellence.org/bte/bte_references.htm>). In
    2003, BTE founders published an article in the Journal of Clinical
    Outcomes Management that summarized the research. Findings from
    focus groups was later validated by the work done by Bailit et al.
    (Bailit M, Dyer MB. *Provider Incentive Models for Improving Quality
    of Care*. National Health Care Purchasing Institute, March 2002) on
    incentive programs. A consensus view is that rewards and
    **incentives have to be meaningful** enough to more than compensate
    for the **added cost associated to data collection and measurement
    of processes**, perceived to be fair and equitable, attainable,
    periodically reviewed, incremental, with small step increments, as
    opposed to a "cliff". Bailit's work and independent focus groups
    from BTE both concluded that "meaningful" was achieved when the
    bonus was equivalent to 5% to 10% of a physician's income, which
    translates to approximately \$10K to \$20K.

-   The estimates assume an **aggregation of at-risk payments** (i.e.
    direct reimbursement and/or pay-for-performance) with broad adoption
    by multiple financers in concert to cover the majority of the
    patient panel or patient visits for a physician practice. Incentives
    by a limited number of a practice's payers creates a first mover
    disadvantage for those payers and generates insufficient incentives
    to encourage technology adoption progress.

-   Wide spread adoption of incentives by payers will require **national
    standards** **for EHR technical capabilities and features as well as
    metrics for EHR use**, e.g, percent of prescriptions entered using
    the EHR. These standards and metrics can help ensure that payers
    have reasonable assurance that they are "buying" an acceptable EHR
    that is being used in an acceptable fashion.

3.  **The qualitative analysis supports a business case that is better
    for some "incremental applications" than others. These incremental
    applications can be implemented as steps toward the full
    implementation of an EHR.**

    -   EHR adoption experience has shown that many physicians are often
        **highly resistant** to full-scale **practice changes** required
        by EHR and very **few** have **recognized the value of health
        information exchange**. Hence, there is a strong hypothesis that
        the path to EHR adoption may occur via incremental technology
        adoption.

    -   Our qualitative financial analyses to-date shows that there are
        **certain applications** that could be **starting points to
        attract some clinicians to IT adoption and information
        sharing**. Different types of interoperability have differential
        business cases, supporting an additive business case across a
        pathway to full interoperability.

    -   Applications with a **smaller investment or a very high net
        beneficial business case** could be considered as candidates for
        initial implementation.

    -   **Incremental applications cannot be a dead-end** to other,
        highly important applications. They should both support practice
        workflow and provide the IT infrastructure improvements
        necessary to accommodate more comprehensive solution integration
        along the road to full interoperability.

    -   Our analysis shows that e-prescribing (eRx) and on-line tools
        for chronic disease management may be good starting points for
        building an information sharing pathway toward wide-scale EHR
        adoption. Although we did not specifically analyze the business
        case for other incremental application possibilities, the
        Working Group noted that applications such as disease registries
        and cross-organization information access may also provide
        strong starting points toward EHR adoption. However, these
        recommendations require some analyses before implementation in a
        specific physician practice. Some of our task force members
        believe that non-visit based care should not be done out of the
        full context of EHR. The essential role of the patient in
        helping the system achieve the full potential benefits in two
        areas -- medication management and chronic care management --
        highlight the importance of selecting incremental clinical
        applications that deliver high value quickly.

    -   **Incentive specifics** are likely to be very **local in
        character**, e.g., some regions have payer contracts that reward
        providers for using generic medications while other regions do
        not have such programs. eRx may have diminished physician
        acceptance if there are no fiscal incentives to switch
        medications to generics.

4.  **Small and medium-sized practices have greater potential to benefit
    from information exchange, but will require greater attention and
    support in order to achieve sustainability.**

-   Small practices have greater interoperability needs since small
    practices are more dependent on patient data from external sources.
    Hence, for these practices, availability of patient information via
    an interoperable platform would be especially beneficial.

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-   Small to medium-sized ambulatory care practices will have greater
    challenges achieving sustainable implementation of interoperable
    health care IT due to the lack of a driving force for change and the
    management ability to effect change, as is present in many large
    groups or hospital-based physicians, and a dearth of resources
    available to dedicate to technical support, change management and
    implementation.

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-   In addition to business case development, consideration should be
    given to **establishing implementation support structures** for the
    small practice. Experimentation should be done to identify the most
    successful support models and these models may need financial
    support until the market for small practices matures.

-   There should be financial support for local and regional information
    sharing collaboratives. These collaboratives should provide
    technical assistance, including resources describing viable
    collaboration models, practical implementation considerations and
    processes for multi-institutional and practice-level adoption and
    interoperability.

-   While the small practice is in the greatest need of IT adoption and
    interoperability, a case can be made that adoption strategies should
    initially focus on the larger providers in the region. These larger
    providers may require lower incentives and generally have
    established internal IT support mechanisms. If several larger
    providers accelerate their adoption of interoperable IT, this may
    result in encouraging the smaller providers to follow suit.

To ensure sustainability and continued progress at the local level,
investments will be needed. A wide range of activities, education and
information will be necessary including rigorous financial analysis to
support the incentive structure, implementation methodologies for small
practices, change management approaches and implications, draft policies
and procedures for information sharing, case studies, product
certifications and comparisons with user surveys and feedback,
collaborative forums to continually refine practice implications and
directories or brokering services for technical assistance to
individuals and practices. Investments like these will create experience
and work products that can be broadly shared across communities and
support physicians in achieving improved healthcare through clinical IT
application adoption as well as interoperability among other key health
care providers.

Working Group on Financial, Organizational and Legal Sustainability of
Health Information Exchange

**Peter Basch, MD,** Medical Director, eHealth Initiatives, MedStar
Health

**David Bates, MD, MSC,** Chief of the Division of General Medicine at
Brigham and Women's Hospital and Medical Director of Clinical and
Quality Analysis for Partners HealthCare System

**David Brailer, MD, PhD, (Original Chair)**\*, National Health
Information Technology Coordinator, U.S. Department of Health and Human
Services; formerly Senior Fellow for Information Technology and Quality
of Care, Health Technology Center

**Lawrence Casalino, MD, PhD,** Department of Health Studies, University
of Chicago

**John Glaser, PhD, (Current Chair)**\*, Chief Information Officer,
Partners HealthCare Systems Inc

**Rich Grossi, MBA,** Vice President and Chief Financial Officer, Johns
Hopkins Medicine

**Nancy Lorenzi, PhD,** Professor of Biomedical Informatics and
Assistant Vice Chancellor for Health Affairs Vanderbilt University
Medical Center

**Robert Miller, PhD,** Associate Professor, Institute for Health &
Aging and Department of Social and Behavioral Sciences, University of
California, San Francisco

**Peter Swire, JD,** Moritz College of Law, Ohio State University, John
Glenn Scholar in Public Policy Research; formerly, Chief Counselor for
Privacy in the U.S. Office of Management and Budget

**Lori Evans, MPH, MPP,** (Ex Officio member), Office of the National
Health Care IT Coordinator, U.S. Department of Health and Human
Services; formerly Vice President and Program Director, Foundation for
eHealth

\* David Brailer initially chaired this Working Group. However, when HHS
Secretary Thompson appointed him the United States' first Health
Information Technology Coordinator on May 6, 2004, he was obliged to
resign as chair. Leadership of the group was graciously assumed by John
Glaser.

**STAFF:**

**Julie Vaughan Murchinson, MBA** Project Director, Consultant to the
Markle Foundation

##### 

##### Robin Omata, JD, PhD Legal Staff, Consultant to the Markle Foundation

[^1]: In 2004 dollars. This estimate is not a scientifically-derived nor
    should it be used for practical application.

[^2]: \$578B projected spending on ambulatory care in 2003, \"Health
    Spending Projections, \"  [Health Affairs]{.underline} W4-79, 2003.