Observing a physician recording procedure data and interpretations of radiology/oncology pictures in the digital system while the patient is being transported out of the operating room is an impressive sight. At the completion of the physician’s assessment, these pictures and interpretations were transmitted to the referring physician many miles away. These observations occurred during a series of 1998 site visits where the ancillary departments did not have any advance notice of the research team’s visit to see the picture archiving and communications system (PACS).

The information technology’s capabilities in the various sites equipped with PACS were all different. One leading edge medical center was the hub of a health care system that was part of a larger health care network with a dominant marketplace presence. Over the past 30 months, the chief information officer (CIO) had successfully enticed physicians to directly interact with the information systems and networks. The CIO also daily monitored physician interactions with electronic capabilities to see utilization by features, options, and special activities and to identify potential problem areas. This site visit was intellectually stimulating; the research team observed a high level of physician interaction with an enhanced electronic medical record (EMR) containing order management capabilities and access to PACS files. There was a positive, caring attitude among physicians, nurses, technicians, and other professionals. In addition, the health care system had excellent financial returns to net operating revenue.

A very different observation was made during a site visit to another academic medical center containing PACS. The radiology information system (RIS) was not fully integrated into the hospital information system (HIS). Several medical devices were not interfaced with the HIS. The medical center’s enhanced EMR was not really operational. Physicians receiving transmissions from PACS did not have any enterprise-wide capability for coordinating the follow-up patient encounters. A physician complained to the research team about the inability to access patient information across departments. This academic medical center is geographically located where there is limited competition; thus, the financial returns to net operating revenue were excellent.

Site visits to other academic medical centers were similar to the first scenario, except their CIOs were not as successful in obtaining strong physician support for direct interaction with the integrated systems and networks. The financial returns for some of the other centers, however, were not as strong as those in the first scenario. In fact, some of the health care facilities were financially distressed.


The chief executive officer (CEO) at most of the sites visited had a vision for improving the quality of care that was supported by HIS, PACS, enhanced EMR, and improved data, voice, and image transmissions for all areas of the enterprise. In some cases, Y2K issues required the CEO to use a 36-to-48-month horizon for achieving those objectives. At a few of the sites, the chief medical officer (CMO), chief financial officer (CFO), chief operating officer (COO), and CIO had visions that differed from that of the CEO. In other cases, the CMO, CFO, COO, and CIO might share the CEO’s vision, but they did not appear to be committed to achieving those objectives. The lack of a shared vision tended to coincide with the financial status of the health care entity.

Two contributing factors to the lack of a shared vision among CEO, CMO, CFO, COO, and CIO were executive turnover and merger activities. Several executives had been employed by the participating health care entity for less than 6 months when they were interviewed; others had been promoted to their current position during the past 6 months. One of the facilities acquired another hospital during the site visit; several other participating health care entities had made acquisitions during 1998. These two contributing factors are indicative of the national trends where 18.4% of CEOs changed jobs in 1998 and 13.6% of hospitals were merged in the same year (1,2).

The goal of the research team was to examine the decision-making factors used by CEOs, CMOs, CFOs, COOs, and CIOs of hospitals and health systems in getting value from information technology investments. The 1998 sponsored study focused on 44 health care entities from eight census regions scattered throughout the country and containing 576 hospitals (3). After submitting the final project report, the research team augmented the survey responses and interview notes with financial and operational data on the 44 health care entities from Northwestern University and the Merritt System? (4). There was also a follow-up survey instrument administered to selected CIOs.

CEOs, CMOs, CFOs, COOs, and CIOs were asked in the initial survey instruments and interviews for their priorities in information systems projects. Site visits, structured interviews, email correspondence, and telephone inquiries were used in gaining an overview of information systems activities in each of the 44 participating health care entities.


The 4-year average cash-flow-to-net-patient-revenue was used in classifying the 44 entities into distressed, struggling, implementing, and proactive groups. There were changes in the format and contents of cash flow statements between 1996 and 1997; the simple financial measure of excess of revenue over expenses plus depreciation and amortization expense represented cash flow in this study (5).

Depreciation and amortization expense represents about 6% of a community hospital’s operating expenses. A return of 6% on net operating revenue is a minimum base for supporting strategic planning. Adding these two cash flow components and relating them to net patient revenue constitute the 12.32% minimum for inclusion in the implementing group.

Distressed hospitals have cash flow to net patient revenue of 9.55% or less (see Figure 1); about 31% of community hospitals are classified as distressed by this measure. 6 Community hospitals with cash flow to net patient revenue of 9.56% to 12.31% are classified as struggling, 12.32% to 15.58% as implementing, and 15.59% or more as proactive. In a national distribution report on community hospitals, 25% are classified as struggling, 26% as implementing, and 18% as proactive (6).

CEOs in the proactive health care entities participating in this study stated that they were not interested in acquiring other hospitals. These CEOs instead wanted to expand their health care outreach through clinics, physician offices, outpatient facilities, and other community services. These other services include patient screening services in major, upscale department stores, and wellness services in local health care clubs. Through these other investments, the CEOs are building brand identification for their facilities while gaining some nominal revenues (7).

Many community hospitals have wide fluctuations in cash flow to net patient revenue from one year to the next. Use of the 4-year average avoids the timing issue associated with a single year’s measure. To illustrate the importance of a 4-year average, one of the distressed health care entities in this study had sufficient return in 1997 to be classified as struggling. A close examination of the 1997 certified financial statement indicated that the return came from two sources — a large donation and a significant gain from the sale of investments. If it had not been for these two transactions, the health care entity would have been at the break-even point for 1997. In 1998, there were no more investments to sell and a large donation did not arrive; after the deficit was reported, the professional press simultaneously announced a downgrading of long-term debt by the bond-rating services and changes in the senior executive management team.


The academic medical center discussed as scenario two has sufficient returns to be classified as proactive, but the information systems, including PACS, at this medical center were not representative of other proactive facilities. The research study found that in most proactive facilities, the medical devices were interfaced with the HIS and the EMR encompassed all application modules. A common person identifier for the enterprise (hospitals, clinics, outpatient facilities, surgical centers, and medical offices) had been installed by December 1997 in proactive health care entities. An enhanced EMR with order management capabilities was in operation for most proactive facilities; others were installing the enhanced EMR in 1999.

A distressed health care facility in the study had recently received federal and state grants to significantly upgrade the HIS. With these financial resources, the distressed facility was interfacing all application modules and devices into an EMR. It would be premature in this health care setting to discuss an enhanced EMR. Physicians, nurses, technicians, administrative staff, and other professionals must first gain experience with an EMR. In addition, Y2K issues with each of the medical devices had not been addressed by October 1998; it is expected that some of the government funds will have to be spent in remediation of these devices.


A medical technology index has been created to serve as a benchmark in the strategic planning of community hospitals. This index provides a framework for assessing six components — case-mix index for Medicare inpatients, facility and medical services in-house at the hospital, facility and medical services from other health care providers, average age of plant and equipment, medical school affiliation, and membership in the Council of Teaching Hospitals(8).

Empirical validation of this index had been accomplished by using it as a single factor in predicting hospital bond ratings, with significant findings and an adjusted R2 = .304. The medical technology index had also been used with eight other factors in projecting returns on operating revenue for a 4-year sample of 490 hospitals based on certified financial statements (7).

Radiology department, cardiac catheterization laboratory, and other ancillary areas making primary use of radiology equipment represent more than 31% of the facility and service codes in the medical technology index. Patients in the other key medical areas (such as transplant, neonatal intensive care, open heart surgery, angioplasty, and cardiac intensive care) are also significant users of radiology equipment. If the RIS was not appropriately interfaced with the HIS, then the research team would direct their inquiries during the site visit to the status of the EMR.


CIOs in several distressed and struggling health care entities were still taking an inventory of medical devices in September 1998, and had not begun remediation. A few CIOs stated that their health care entities were not interfacing any medical devices with the HIS until after March 2000. These CIOs in distressed and struggling facilities explained that with limited resources they would wait for other hospitals to address Y2K issues in various medical devices. How they were going to get the Y2K fixes from other hospitals for their unique set of medical devices was not thoroughly explained. Fixes for an isolated medical device may not be compatible with a unique cluster of interactive devices and application modules in a given health care entity.

Proactive medical centers had invested $20 to $35 million in addressing Y2K issues. New medical technology had been acquired to replace dated equipment with problems. Interfaces had been tested with each upgrade, modification, and enhancement of software or application modules; a continuous monitoring task force had been established for the testing. A few CIOs expressed frustration with some vendors who failed to address Y2K issues in new upgrades after installing Y2K fixes for previous releases.

Most implementing health care entities were 3 to 6 months behind proactive facilities in addressing Y2K issues; they had been working on these issues since 1997 and were scheduled to complete all of their studies by March 1999. Major investments in medical technology to replace medical devices and equipment were made in 1998, and other items were included in the 1999 budget of these implementing health care entities. Continuous testing of new releases, modifications, and enhancements of software and application modules was recognized as a responsibility of the CIO’s staff in most implementing health care entities.

Some struggling health care entities were on a schedule for Y2K studies similar to that followed by implementing facilities. Others had employed consultants to study Y2K issues, but they had not established any institutional committees to address problem areas identified by the consultants.

The Y2K expenditures by participants at a few distressed and struggling health care entities were too low. Y2K expenditures of $2 million for a simple 300-bed facility is a minimum yardstick for a facility with relatively new medical devices; if the devices are old and obsolete, a larger expenditure will be required. A medical center may have 3,500 to 4,000 medical devices; a simple 300-bed facility may have only 2,500 devices. It is not cost-effective to create Y2K fixes for some old devices where the manufacturer is no longer required to support the equipment.

One distressed health care system had several thousand devices that would not be used in the year 2000. The health care entity did not have the financial resources for new medical technology investments; the devices will simply be turned off at the end of 1999. Another 5,000 devices in this distressed health care system will continue to be used in year 2000, but the date information will be incorrect. As resources permit, these 5,000 devices will be replaced over the next several years.

CIOs in some distressed health care entities indicated that Y2K issues were of such a magnitude that other types of information systems projects could not begin before the fourth quarter of 2000. The responses by these CIOs regarding priorities in information systems projects were not compatible with those from other participants from the same health care entity — CEO, CMO, CFO, and COO.


By focusing on Y2K issues with medical devices, the research team was trying to classify each health care entity’s HIS. Were all medical devices and application modules interfaced with EMR? Why were certain devices excluded from being connected to the HIS? A common person identifier for the enterprise is helpful after the EMR is based on interfaces with application modules and medical devices. The next level of advancement is for the HIS to include an enhanced EMR with order management capabilities.

Proactive and implementing health care entities are building on integrated HIS capabilities that include an enhanced EMR. Many of these facilities in the survey have installed or have budgeted in 1999 for physician-office-clinical connectivity. These initiatives are designed to improve the quality of care and strengthen the physician-medical center relationship.

Attitudes of physicians at site visits were different in those health care entities where these modules had been installed. Where physicians were directly interacting with the HIS through the keyboard in an environment with an enhanced EMR and access from the physician office, there was a happy marriage of professional training and experience applied to patient data for the purpose of improving care. The environment was intense as physicians studied the HIS patient data, but they shifted to a relaxed attitude before answering questions from the survey team during unscheduled clinic visits.

Proactive and implementing health care entities tended to separate with respect to physician-office-financial-and-administrative systems. Proactive facilities had installed these capabilities in medical offices in 1997 and 1998; others had them in the budget for 1999. Implementing facilities had recognized the importance of these modules for medical groups and had included them in the 1999 budget.

Projections of the impact of managed care on physician and clinical integration in hospitals have empirically proved that this impact is relatively modest (9). Some participating health care entities had acquired medical groups in the past 24 months, but this was not a general development. Instead, CEOs, CMOs, CFOs, CMOs, and CIOs participating in this survey were willing to invest in assisting physicians through information systems capabilities, such as physician-office financial and administrative systems. Because of fraud and abuse considerations, the delivery of this technical assistance was carefully managed so it complied with guidelines.

In summary, the HIS status of a community hospital can be quickly ascertained by the CEO’s answer to the following question: What special initiatives are you doing in 1999 to assist medical groups and physicians in various locations? If the health care entity does not have an enhanced EMR that is interfaced with all major medical devices and information systems modules, there is not much support the CEO can offer in the next 12 months. The research study’s findings tended to validate the various CEO responses.


Physicians are a significant component in assessing economic benefits from HIS investments, such as PACS, that can impact the enterprise. An operational EMR is a first step. CIOs in several distressed health care entities do not currently have an operational EMR that is interfaced with the key medical devices and HIS modules. Because of Y2K issues and the lack of a strategic plan for HIS investments, an enhanced EMR is not envisioned for 2000. In some marketplaces, other health care entities will probably be the beneficiaries of these ineffective activities.

Return on investment (ROI) calculations for medical technology should give careful attention to the HIS status of the health care entity. A 4-year payback period for ROI may not be applicable to many distressed and some struggling community hospitals. This research study suggests that the lack of a shared vision, Y2K issues, and the impact of the Balanced Budget Act of 1997 will double the rate of hospital closures over the next 60 months. It is expected that 160 distressed hospitals per year may merge and close between 2000 and 2005 (10).

Thomas R. Prince is professor of health services management and professor of accounting and information systems at the J. L. Kellogg Graduate School of Management, Northwestern University, Evanston, Ill. Catherine M. Martin was a research assistant on this sponsored project. Julie A. Sullivan is a June 1999 candidate for the master of management degree at the J. L. Kellogg Graduate School of Management and will join the Boston office of Deloitte & Touche upon graduation.