Seeking Sustainable RHIO Forest; View Obscured by Non-profit Trees

Martin_jensen_2Health Affairs just published a study by a team of Harvard researchers that has cast a pall on the
sustainability of Regional Health Information Organizations (also referred to as Health Information Exchanges). The report, The State Of Regional Health Information Organizations: Current Activities And Financing, by Julia Adler-Milstein, Andrew P. McAfee, David W. Bates, and Ashish K. Jha, seems to imply that the maladies suffered by RHIO efforts around the country might be fatal, at least if you read the many news stories and blogs that are talking about it.  I say “seems to” because our analysis suggests that the industry echosphere is still missing quite a bit of the big picture.  Let’s take this step by step, starting with the Harvard study and moving into the invisible economy and the nature of the RHIO challenge.

First, the “scary facts” presented by the researchers:

  • 25% of previously-listed RHIOs seem to be “defunct”
  • Only 20% of the remainder reported exchanging significant volumes of clinical data
  • Most of the data they were exchanging falls into the categories of lab results, inpatient data and medication history
  • A majority reported receiving in-kind donations, about half reported grants or financial contributions and slightly less than half reported no financial contributions

You might look at these factoids and come to the conclusion that the current generation of RHIOs are unsustainable.  The quote lifted from the report that has been frequently cited to support this conclusion says: “if RHIOs are to succeed as small businesses, they must be built around sustainable business models, which requires both profitability and value creation for participants.”

Pointy-Headed Analysis
Let’s take on these points one-by-one, then address some of the implicit assumptions in that conclusion.

First, it must be understood that the RHIO phenomenon is a grand experiment in a new technology.  In the world of technology startups, a 25% failure rate is considered the norm, or at least no indication of unsustainability of the market as a whole.

The 20% exchange rate needs to take into context the maturity of the 102 entities they surveyed and the reasons certain organizations were excluded (relative size, organizational affiliations and non-response to survey). HIEs currently focusing on administrative, rather than clinical data, appear not to be included in this cohort.

As for the content, the kinds of clinical exchanges they do report are commonly referred to as “low-hanging fruit” — those transactions which offer a clearly measurable benefit to participants.  Just like electric car windows, we start with Cadillacs, then move on to Chevettes once we work out the engineering.

In terms of funding, it’s not clear whether the 45% who did not receive grants were commercial entities (and therefore would have turned to private investment rather than donated funds) or if they were nonprofits who simply didn’t know how to ask.  Our own 2007 survey indicated that 79% of RHIOs are structured as nonprofits, which suggests that both phenomena may be at work. More of the media focus seems to be directed toward the half (in the Harvard study) who did rely on grants for a significant portion of their revenue (our own 2007 survey suggest the actual number may be higher.  For
Production Stage RHIOs, we found 34% of revenues (not numbers of organizations) came from contributions.  Further, that 40% of those RHIOs who considered themselves to be “self-sustaining” planned to continue applying for grants.)

Non-profit Capitalism
That final point offers a key to a common misperception within the HIT community.  Commercial startups rely on private capital and sweat equity of the principals to get off the ground; nascent nonprofit organizations (NPOs), which can offer neither investors nor employees a piece of equity pie, rely on donated funds and in-kind contributions of labor, supplies and capital.  And while this NPO business model appears “unsustainable” from a commercial perspective, it represents a $1.4 trillion sector of the US economy — and that’s after you exclude religious organizations.

It’s easy to see how the IT-focused folks among us could miss this invisible economy.  Even our non-profit hospital systems rely primarily on earned revenue, rather than the mix of contributions and service fees of the typical NPO.  But I have to admit that for the Harvard folks to miss it (“must be built around sustainable business models, which requires…profitability”), they must not be looking very close to home.

I’m Sorry, Ms. Barton, But I Don’t Think People Will Pay for That
But NPOs do not necessarily want to operate on grants and donations. More often, large contributions are leveraged to create capacity for services: capital.  Operational funding tends to be underwritten by a combination of service fees, contracts with public and private entities, and ongoing fundraising efforts and membership campaigns.

Is this a sustainable business model?  Ask the YMCA (founded in 1844: $5.6B annual revenue; $933M contributed).  Ask the Red Cross (founded in 1881: $6B annual revenue; $3.2B contributed).

Where There’s a Will, There’s a Way
And there’s plenty more where that came from. Cynics have suggested that the best thing we Baby Boomers could do for healthcare is to die off. This may not be too far from the truth. The NPO sector is just on the leading edge of the largest intergenerational transfer of wealth in human history. Philanthropy is a growth industry.

Does this mean that the way to fund a RHIO is to hold out a really big tin cup? Not at all. But it does give the lie to the “sustainability-equals-profitability” argument.

Business Models are Like Opinions — Everybody’s Got One
Still, that only means that the NPO is “a” business model.  Does that mean it’s the right business model for RHIO?  No.  But other things suggest that it might be.

Coopetition: First, the concept of clinical exchange requires that participants who are competitors (the different hospitals, clinics and practices that support a given community) meet together in shared interest.  There are two principle models for this: one is called the non-profit model; the other is called collusion.  Certainly, some exchanges are developed between two or more institutions based on carefully-drawn “partnership” agreements, but if that were doing the trick, we wouldn’t be talking about RHIOs, now would we?

Trust: We keep seeing the “convening” process with which virtually all RHIO efforts begin as a sort of necessary evil — something to get out of the way before the “real business” of data exchange begins.  I’d rather think of it as a necessary good. There is a lot to be gained in face-to-face meetings between decision-makers, and anecdotes suggest that RHIOs are already yielding benefits to participants in spinoff activities that require no technological infrastructure.  Regardless, the data doesn’t go anywhere until both parties agree to connect. That’s why “hands-free” technological solutions are non-starters.

Clout: Once participating parties join forces for the common good, it’s easier to get the attention of policymakers and community leaders.  A lot of RHIOs have learned that their efforts require enabling legislation (i.e. for privacy purposes, limitations of liability, etc.) or are greatly assisted by buy-in (financial and otherwise) from large employers.

Ubiquity: The goal of an HIE is to make patient information available at the point of care from anywhere it may lie. It’s what economists refer to as a natural monopoly. The fundamental principle behind the Health Data Bank concept, on the other hand, suggests that there will be multiple — perhaps dozens — of private repositories competing to house the records of patients in a particular community.  Okay.  I got a disease.  I see seven doctors, three clinics and I’ve been admitted to four different ERs in the past five years.  How many banks does your hospital have to go to for a withdrawl of my records?  Even if private Health Data Banks make a transition to reality, you would need something a lot like an NPO RHIO to connect them. (NOTE: Other HDB models seek to address this, but in doing so create other problems beyond the scope of the current discussion.)

Transparency: Nonprofit organizations are perhaps the most transparent in the entire economy.  Donors insist upon it, as do taxpayers.  Remember, the other synonym for “non-profit” is “tax-exempt.”  When NPOs betray their community benefit promises, they lose that status — and a lot more. What commercial enterprise is going to disclose as much about their financing and operations as appears on an NPO’s 990?

Patients: Remember patients?  We’re supposed to be looking out for them. In an NPO, the patients are represented at the board level by government officials, large donors and volunteers. Our 2006 and 2007 surveys noted a lack of same in RHIO boards — they tended to be heavy on participants to the exchange, light on community foundations and non-provider philanthropists.  This not only helps explain their fundraising challenges, it also suggests why a number of them have reached impasses that threaten their survival: There’s no check-waving referee to settle the inevitable institutional squabbles that break out between hospitals.

Some Participants Are More Equal Than Others
That’s where we need to re-examine that second assumption about sustainability requiring “value creation for participants.” Unlike commercial enterprises, NPOs are about value creation for non-participants: Not just hospitals, clinics and physicians, but patients, families and communities. Or, more to the point, when you have the support of taxpayers, community foundations and volunteer leaders, patients are participants.  Not just beneficiaries, but stakeholders.

Killing the Goose That’s Building the Golden Nest
Finally, it’s important to understand both the nature and the magnitude of the task at hand.  RHIOs are not just building an infrastructure, they are building a network infrastructure.  The value of a network infrastructure is non-linear — it has to expand to a certain number of nodes or participants before it begins to accrete positive value for the aggregate membership, a phenomenon explained by the network effect.

A rush to self-sustenance (for instance, by penalizing early adopters with steep membership fees) will tend to have the effect of dampening the growth of the network. It may actually put at risk the viability of the entire effort, or at the very least, its scale.

My Network vs. Your Network vs. Our Network
Back in the ’80s, I used to belong to Compuserve when it competed with other private networks like GENie and an upstart called America Online.  I soon gave it up.  What good is email when you can only send it to people on the same system?  Then, when the internet came around, I was working for a software firm.  The question we kept asking was, “sure it’s cool, but how is anybody going to make any money by being on the internet?”

The first internet “products” to make money were actually the companies that made up the most convincing answers to that question.  Pop! went the bubble, and a thousand grandiose business models deflated overnight.

Almost immediately, though, the question became, “how can you expect to make money when you aren’t on the internet?” The debate about the “ROI of the internet” was subsumed by the immense, incontrovertible value of the network itself.

The World’s Largest Copy Machine
And the internet/RHIO metaphor doesn’t just apply to the network effect. It also applies to the thousands of interconnected laboratories that experimented with that value creation question: “How can we use this?”  Most of them failed, but the effort as a whole was an unprecedented success.

So it may not matter how many RHIOs fail, but what the ones that thrive have to teach us.  RHIO veteran and thought leader Mark Frisse, MD, puts it this way:

Somewhere out there are groups of people who will find better ways of doing this. The failure rate may be high, but the need for innovation is essential and the potential benefits incalculable….

Most of us don’t want any more patients harmed by our health care system. The appalling rate of error and inequity is sufficient, thank you. But we do want to believe in an opportunity where every one of us may somehow benefit from the innovators who didn’t listen to the rhetoric and stayed focused on building approaches more suitable to the times and the need.

Frisse’s MidSouth eHealth Alliance might be a good place to start.

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