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Health Care’s Paper Chase


When George C. Halvorson thought he had a bone spur in his shoulder, he went to Kaiser Permanente for an X-ray€¦quot;after all, he’s the company’s CEO. The experience was IT-driven: The radiology department transmitted the X-ray directly to an exam-room screen. A diagnosis was made (it was not a bone spur) and a list of recommended exercises, along with a neat diagram, were printed out for Halvorson to take home.

Kaiser, which is based in Oakland, Calif., and some other leading-edge health care providers are finding that information technology can help the medical industry get a grip on costs. Instead of complaints and runaway expenses, these corporations are significantly improving patient results and satisfaction while at the same time slashing waste. “What this is really about is giving physicians computerized tools to improve the practice of medicine,” Halvorson says. Think of it as human quality control: Do the right thing the first time and it costs less.

Yet the overall pace at which providers are adopting technological solutions is painfully slow. Doctors, hospitals, labs and insurance companies could save tens of billions of dollars in unnecessary costs if they moved more aggressively toward keeping comprehensive, standardized electronic medical records. But the upfront costs are big and privacy worries, however unfounded, loom large. Features such as best-practice notifications, error flagging and immediate access to patient data are possible only when the information is on computers, and with few exceptions, the industry still uses paper.

What CEOs Can Do
  • Negotiate smart. Don’t make health care purely a bottom-line buy. Better quality might cost an extra dollar today but save $10 down the line.

  • Look for the walk, not the talk. Provider reps will talk endlessly about caring for the patients. Make them prove it with data, and demand strategies, based on real information, to contain long-term costs.
  • Go step by step. Changing health care providers and insurers is difficult, so aim for one improvement at a time.

  • Create a Chinese wall. Many people are worried that detailed medical data will harm their careers. Devise a mechanism for keeping employee health records in the hands of providers and out of yours. Otherwise, resistance might sink your initiatives.

  • Form partnerships with other companies. This will increase your leverage with providers and insurers. The Leapfrog Group ( works with 160 of the largest public and private organizations. Smaller companies can check with the National Business Coalition on Health (

  • Start now. Creation of electronic health care records will take eight to 10 years. Meanwhile, health care isn’t getting any cheaper. So don’t delay plans hoping someone else will make miracles happen.
  • Creating such a system raises the expensive prospect of, at best, fixing legacy computer systems and, more likely, creating a new IT infrastructure, then overhauling archaic business and clinical processes. Providers and insurance companies cry poor, and virtually everyone in the industry looks to the Medicare gorilla to get things rolling. Yet if things do not change soon, the 15 percent of U.S. gross domestic product consumed by health care costs will keep growing out of control. (See “The U.S. Health Care Crisis,” page 54.) So concerned CEOs, working in groups as well as on their own, are trying to drag the industry kicking and screaming into the 21st century.

    The fundamental problem facing health care is that it has remained a cottage industry dominated by independent businesses€¦quot;doctors, hospitals and labs€¦quot;that must communicate with one another to provide effective service. Unfortunately, the paper-based systems have kept processes firmly rooted in the 1800s. Doctors, hospitals, labs and pharmacies all use phone, fax and surface mail to exchange 90 percent of their critical information, according to the Center for Information Technology Leadership. The organization estimated last year that standardized electronic information exchange in health care would pay for itself within five years and afterwards save $86.8 billion a year.

    That’s just the beginning, when you consider the inefficiencies that haunt the health care system. “If a piece of paper gets lost or misfiled, it’s not billed properly,” says Glenn A. Fosdick, president and CEO of the Nebraska Medical Center in Omaha. A patient can enter an emergency room and receive tests, he says, and then eight hours later when the patient is moved to a regular floor, a second doctor will order the same set of tests, unaware of the first round.

    For outpatient treatment, things are just as bad. “You’re playing a game of Go Fish, trying to get a patient’s medical record,” says Dr. Patricia Raymond, a Virginia gastroenterologist, author and consultant. “The patient had a procedure for their stomach. When you call for the records, you might get an upper GI series, you might get an ultrasound, you might get some blood work. But you’re really not certain.”

    Finding the Savings
    Not only does the paper chase potentially endanger patients, it also wastes time and money. According to Halvorson, administrative overhead can run 15 to 30 percent of total costs. “I’ve seen as high as 40 percent,” he says. “Those numbers, in an optimal world, can be brought under 10 percent, and in a well-designed system, pure administrative costs could drop below five.”

    When health records are put into a computable form, software can analyze them and control their flow. The results can be eye-opening. Kaiser hospitals used to give priority to emergency patients for test results. After them, it was first come, first serve. Then new IT systems showed that one out of every four patients spent an extra day in the hospital because tests were not back in time for doctors’ afternoon rounds. No test results? No discharge. Cutting costly hospital stays was as easy as sorting a database.

    Want big-scale change? The Veterans Health Administration put electronic health records into place starting in 1995. By the end of 2003, the agency doubled the number of patients seen by the system while shrinking staff by 6 percent. Electronically entered prescriptions through the agency’s mail-out drug centers reached an accuracy of seven errors in 10,000 orders, compared with average prescription error rates of 20 percent. Patient satisfaction and outcome statistics increased. The electronic system made the necessary changes possible, but only after years of installing core systems to automate laboratories, the pharmacy and the radiology, scheduling and admission functions, says Dr. Robert Kolodner, acting chief health informatics officer and acting deputy CIO for health at the Department of Veterans Affairs in Washington.

    Too bad so few health care companies have followed suit. The industry is almost perfectly suboptimized. Each hospital, doctor, testing facility and insurance company looks to its own interests first, not those of the entire system€¦quot;which no one can monitor anyway. For the most part, even when a facility has software for automating operations, few if any of the legacy software packages communicate, so adding electronic health records would be like putting a Formula 1 engine into a go-cart.

    Worsening the situation is the industry’s archaic financial structure: It’s an entire system that rewards inefficient behavior. Providers receive payment for rigidly defined procedures undertaken at specific points in time, not for long-term management of health. The system, taken as a whole, simply cannot monitor long-term treatment results. “You can’t do that with paper, period,” says Dr. Glenn D. Steele, president and CEO of Geisinger Health System in Danville, Pa. Payment for transactions rather than results gives providers, ironically, an incentive for unnecessary procedures, duplication of work and errors.

    So providers and payers wrestle, rather than cooperate, for each dollar. “If I have health plan providers working with me and we [share] data back and forth, I can improve my performance and their performance,” says Van R. Johnson, president and CEO of Sutter Health, a Sacramento, Calif.-based nonprofit health care provider. “When I ask, I hear, €˜I can’t give that to you.'” But to be fair, the reply shows the contention: “If I show you my data, I can’t beat you up in negotiations.”

    The technology itself offers its own adoption challenges. A full electronic health care record system is so complex that it can make a messy enterprise resource planning implementation look like a simple spreadsheet model. Not only must every contingency and specialty be part of the design, but data must stretch through time. Neal Patterson, chairman and CEO of the health care software vendor Cerner of Kansas City, Mo., talks of a friend who was diagnosed with lung cancer. He went for treatment at a major hospital and just before it was to begin, doctors and patients crowded around a series of X-rays that had been taken over the years. The man’s wife noticed something on an old X-ray and blurted out, “Hey, don’t you have a calcium deposit there?” She was right. That tidbit of information spared the man from completely unwarranted cancer treatment.

    Even when data is available, it may be impossible to understand. Although there are some newly emerging standards for computerizing clinical information, the existing information quality can be wild and woolly. Different facilities use different names for the same thing, with no way of knowing blood work. But you’re really not certain.”

    The Cost of Change
    Then there’s the question of money. Kaiser Permanente has earmarked $3.2 billion and 11 years to put its health records into electronic form. Even a single good-sized hospital of 650 beds can spend tens of millions, says Harold Scott, CIO at MCG Health Systems in Augusta, Ga. “You have to have all those core foundations in place in a setting like ours to get all the information into an electronic medical record repository,” he says. Software, networking, infrastructure and hardware carry a heavy tab.

    Major technology companies obviously sense a huge opportunity to sell their wares if only health care providers could walk away from their ancient systems. “It’s a legacy problem,” says Thomas M. Jones, vice president and chief medical officer at the software giant Oracle. “People have not been sufficiently motivated to advance to another standard because there are billions of dollars of legacy systems sitting around.”

    Providers and insurers are largely waiting for someone to make the first move, but it’s not as though one side has all the money. “We don’t have [a sector] other than pharmaceuticals that is getting rich at the expense of another,” says Scott Serota, president and CEO of the Blue Cross and Blue Shield Association based in Chicago. According to the financial Web site, for-profit health insurance companies have average operating margins of 8 percent and hospitals have just below 4 percent€¦quot;decent profits, in each case, but no cornucopia of cash.

    Still, providers say that insurers should pony up for efficiencies that will greatly benefit them. And for an insurance company, “you think you’re already paying for this and it’s something the providers should do,” says Jeffrey Rideout, vice president of Cisco System’s health care consulting organization and a former CEO of Blue Shield of California.

    Medicare, the biggest health care payer, hired David Brailer, a doctor and economist, as national coordinator for health information technology, fanning industry hopes that the organization would provide incentives for adopting electronic health records. But Congress dumped only $50 million into pilot-program seed money, raising the question of whether the political will to take this on exists. No news here. “It’s been going on for 20 years,” says Ward Keever, executive director for executive services at Cincinnati-based CTG Healthcare Solutions.

    Instead of a national solution, perhaps a regional approach can work. On that scale, adoption issues are easier and such a concentration of effort and patients can allow CEOs to act on their own. “For a health plan to change the way it does business, it needs to see that there’s a demand for that change,” says Suzanne F. Delbanco, CEO of the Leapfrog Group, a business association pushing for more efficient health care.

    CEOs can use corporate health care spending as a carrot for change. In New York, self-insured companies such as IBM, Pepsi, Verizon and Xerox pay more to hospitals with electronic prescription ordering capabilities because that provides safer care€¦quot;and saves an average of $14 per patient day. CEOs can take their supply-chain knowledge and apply it to health care, treating those vendors as they do most others.

    The results can be significant. Cisco, for example, self-funds its health care and seeks to reduce the rate of cost increases by half. Companies too small to be self-insured can join coalitions to push for change while jointly negotiating better premium rates.

    This approach is still unusual. “If I ask CEOs outside of my own industry if they ever receive information about how to improve the health care standing of their own employees, their eyes glaze over,” says Johnson. “They focus on price, not the improvement of the health care.”

    But avoiding the issue may no longer be an affordable luxury. Even with willing participants, the shift to electronic records could take eight to 10 years. To get there, things have to start now. If corporations are going to make available an important benefit that helps attract the best employees, they have to know that Band-Aid measures aren’t going to work. It’s time for tough medicine, and CEOs are just the ones to administer it.


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