SECA 7: Shared Health Cost Structure

Shared Health is an EHR vendor which provides services such as electronic clinical record systems to providers, physicians and patients. Since there is no factory production process involved in the operation, there are two main input costs – capital and labor. Both capital and labor have fixed and variable components. Shared Health pricing is mostly driven by its vendors and suppliers because it is based on revenue sharing, for example if Shared Health receives $1.50 for each patient lookup then each of the vendors get a share of 10-15 cents.

Capital invested is divided into two major categories – a) Fixed costs incurred on infrastructure, software licensing, terminologies and knowledge management and b) Variable costs incurred on services purchased from vendors. A big chunk of these fixed costs is incurred on maintaining and operating data center services. Till this year we were leasing the Data Center from IBM and we had no scope to create savings from operational efficiency or cost reduction. However faced by budget constraints and increasing cost of services from IBM, the management decided to build its own data center. Beginning the 3rd quarter of this year we are expecting to create savings of around $300,000 per month by hosting our own data center on virtualized servers from VMWare. The other part of our capital investment is on purchasing auxiliary services from other vendors like AllScripts, Initiate, and Oracle etc. As described earlier these services are mostly contracted on a revenue sharing basis and hence vary with the number of patient lookups in our system per month.

Shared Health operates in a knowledge driven market and provides services based on clinical decision support systems. We have a big technology team for data integration, data load and extraction, portal development, system maintenance and so on. More than 50% of the staff on Shared Health payroll comprises of people in different technical roles. In addition to full time employees Shared Health contracts a lot of resources on time and material projects. Most of these contractors have been working for more than a couple of years and some of them have also been absorbed into permanent positions. To that end I would consider hiring these resources as pseudo-fixed labor costs. Shared Health also contracts big consulting firms for annual development projects. These projects are fixed-price projects with appropriate clauses for time and resource over-run penalties. These consultants are paid for meeting their delivery dates on schedule and so these expenses constitute another component of the variable labor costs.

There are other operating expenses like marketing, administration, advertisement and sales promotions. I would assume they are run on predetermined budgets and can be controlled or reduced if needed. The marginal revenue on capital investment is almost zero because the existing infrastructure was built to accommodate the current system architecture. However the company could throttle labor costs by hiring more resources during peak development cycles to reduce turnover time and increase efficiency. A good mix of permanent and temporary hires could help keep the labor costs variable and under control.

Shared Health uses historical budgets from past projects to bid for new RFEs. It also applies best practices and learning from previous experiences to reduce costs and bid with competitive pricing for newer clients.