Is digital transformation just code for inefficient healthcare spending?

October 8, 2019

The economic outlook is good for the life sciences sector, but spending may not be on par with the industry’s preparedness to adapt

Healthcare has a severe case of “digital transformation” fever. And that’s OK. Every industry seems to have the bug these days. The term has become a blanket euphemism for modernization, and includes everything from cloud computing, artificial intelligence, machine learning, and the wonderfully named “Internet of Things”.                                                                     

But it’s really simpler than that. The rudimentary definition of the term “digital transformation” refers to the process by which companies and organizations are reinventing themselves by replacing their antiquated, manual processes with digital technologies to make them more efficient. In healthcare, the start is even simpler: The first hurdle to clear is (and always has been) eliminating traditional paper records.

In that respect, the healthcare and life sciences sector has been way ahead of the game. You’ll find the first references to the term “digital transformation” in 2007. Just two years later, the Obama administration passed into law the HITECH Act, which included the ambitious goal of completely digitizing medical records (i.e. EHRs) within five years. As part of a bigger economic stand against a recession, it was an attempt to stimulate the healthcare industry and create better efficiencies in an industry known for inefficiency.

By 2017, the industry was closing in on that goal. The number of hospitals possessing electronic health records was nearing 100 percent adoption, according to the most recent government data. This transformation hasn’t been flawless, and there’s still a multitude of challenges, but the data suggests that the adoption of new “digital transformation” technology is indeed pointing toward economic health in the sector. The opportunity to create efficiency is undeniably a contributor to a healthier bottom line.

Economic indicators bear this out. In addition to a projected economy-best workforce growth, Deloitte projects global spending on healthcare to grow by 5.4 percent through 2022, culminating at an astounding estimate of more than $10 trillion. That’s more than the GDP of every country except for the United States and China.

Yet these forward-looking indicators predict an outcome that’s three years away. Decision-makers in the healthcare industry need more specific, nearer-term indicators to make smart investment decisions. In the short term, will the industry conditions be good enough to allow additional investment in technology? At Coupa, we’ve developed an early indicator of economic growth - the Coupa Business Spend Index (BSI). By analyzing more than $1.3 trillion of business spend decisions from hundreds of global companies, the Coupa BSI shows trends in business spend sentiment which serve as an early indicator of economic growth in the next 3-6 months. 

The Coupa BSI for Health & Life Sciences shows strong sentiment for Q3 2019. While it dipped slightly (1%) in Q2 2019, it grew 6.1% over Q4 2018. The Coupa BSI for Health & Life Sciences is the second highest of all sectors, behind only Retail. Despite a small drop in Q3 sentiment, the overall spending patterns of business decision-makers in Health & Life Sciences indicate a bullishness on the opportunity to realize returns as they spend capital. This sentiment serves as an early indicator for the next two quarters, signaling Health & Life Sciences as an above average sector through Q1 2020.

But this doesn’t tell the whole story. The ambitious goals of the HITECH Act are still not fully realized, even a decade after the legislation was passed. Although digital record-keeping is now the industry standard, the vision of a seamless solution with data shared between providers and able to be summoned in real time has proven elusive and even deadly, according to the recent findings in the bombshell investigation by Fortune and Kaiser Health News.

In addition, the industry is still facing some significant risks that threaten its basic economics. Operating margins at hospitals are on the decline, largely due to cost control challenges and reductions in top-line revenue growth. Meanwhile, consolidation in the industry is ongoing, with the size of the mergers and acquisitions increasing by 14 percent over the past decade. These mergers & acquisitions put struggling hospitals at risk and creates obvious challenges for patients without access to alternative facilities. Finally, wasteful spending remains an issue. Poor inventory management - such as disposing of new or next-to-new medical supplies - adds to an estimated $765 billion per year, according to a study by ProPublica.

Digital transformation is important, especially for hospitals and practices that still rely on legacy processes to do business. Any investment that is an opportunity to make the business more efficient - and more financially sustainable - is something that must be taken seriously. But catching the digital transformation bug shouldn’t come at the expense of the health of the business. Decision makers must ask themselves if adopting any given technology will help their business run smoother. Will it solve more problems than it creates?

If the answer to any of those questions is no, they lack a holistic view of their organization. And maybe it’s time to think twice about catching the digital transformation fever.

Saverio Ferme is a vice president of global operations at Coupa Software, a cloud-based business spend management platform.