Performing a reliable cost benefit analysis for RFID

NEWS
Performing a reliable cost benefit
analysis for RFID
Second in a multipart series
by Rick Dana Barlow
Radiofrequency identification (RFID) technology and its emerging cousin real-time location system {RTLS) technology may be
perched near the top of many healthcare facility wish lists but a much smaller number
actually have progressed to the next level.
Those facilities have figured out how to
develop an effective business case for evaluating, adopting and implementing an RFID
or RTLS package for a variety of functions,
such as tracking equipment, people,
workflow and location-specific content. The
key element of that business case, of course,
conducting a reliable cost benefit analysis
so that few, if any surprises, emerge once
the facility decides to move forward.
What constitutes a valid and reliable costbenefit analysis may vary by facility but only
in the specific details. Common threads exist - primarily in philosophies, strategies and
structures.
Healthcare Purchasing News Senior Editor
Rick Dana Barlow asked key executives at
a variety of organizations involved in RFID
and RTLS, ranging from software manufacturers to consulting firms, to offer advice that
would help healthcare facilities develop a
convincing business case for adopting and
implementing RFID. In the second part of
this multipart series, RFID and RTLS experts highlighted how to determine the key
elements needed for a comprehensive costbenefit analysis. In subsequent parts, RFID
and RTLS experts will explore where
implementation makes the most sense, initially and ultimately, what materials
management's role should be in the process,
as well as what pitfalls to avoid.
Our panel of experts includes:
• Mike Braatz, vice president, marketing,
PanGo Networks, www.pangonetworks.com
• Ned Simpson, senior industry specialist,
global health solutions practice, Computer
Sciences Corp. (CSC), www.csc.com
• Rich Schaeffer, CIO and vice president, technology, St. Clair Hospital
• Andrew McGratfupnxluct manager, RFID,
Manhattan Associates, www.manh.com
20
• Jamie Wyatt, vice president, health industries, Oracle Inc., www.oracle.com
• Suneil Mandava, president and CEO,
Mobile Aspects Inc., www,mobile
aspects.com
• Gary York, Ph.D., founder and chairman, Awarix Inc., www.awarix.com
• John Wass, CEO, WaveMark, www.
wavemark.net
• Mark Schmidt, executive vice president,
strategic initiatives, Metrologic Instruments Inc., www.metrologic.com
• Jeff Schou, director, healthcare industry
solutions group. Symbol Technologies,
www.symbol.com
• Chris Click, vice president, marketing, InnerWireless Inc., www.inner
wireless.com
• Gabi Daniely, vice president, marketing
and product development, AeroScout
Inc., www.aeroscout.com
• Sam Adams, CEO, St. Croix Systems,
www.stcroixsystems.com
• James W. Hermann, vice president,
business development, RF Technologies
Inc., www.pinpointco.com
• Debbie Murphy, global practice leader,
healthcare. Zebra Technologies,
www.zebra.com
• Bill Arnold, chief strategist, Omron
RFID, www.omronrfid.com
fore you can tag it and make sure you don't
lose it, you have to know you own
it! Moreover, owning it means capturing
every bit of data about that asset during its
lifecycle of use within the hospital - location is one element of this lifecycle.
Other costs include looking at the overall
total-cost of ownership, i.e., battery life,
number of readers required, IT support,
ability to utilize existing infrastructure versus investing in a proprietary infrastructure,
integration with other hospital infonnation
systems and what can be leveraged to further calculate ROI. These items also must
go into the business case but often times the
investment, cost is not broken out to this
level of detail and true costs are not realized
until well after implementation.
Mike Braatz, vice
president, marketing,
PanGo Networks
Key elements in a costbenefit analysis inelude:
HPN: What are some common elements that must be included in the
cost-benefit analysis for RFID and
why do these particular elements
matter?
Take a total cost of ownership approach to
developing a cost-benefit analysis. The total
Sam Adams, CEO, St Croix Systems
The most referred to cost-benefit is tracking equipment and minimizing loss or
hoarding. In reality, the bigger issue is hospitals not knowing they even own the
equipment. For example, we just had a client that came onto our software and after
doing a physical inventory found over
3,000 pieces of equipment for which they
did not have an item of record. Thus, be-
November 2006 • HEALTHCARE P u r c h a s i r ^ HEWS.• www.hpnonline.com
* Identify and prioritize
Ihe specific process issues
that can be addressed with RFID. R F I D
technologies can be applied to address
many issues and it is important to understand where the solution makes the most
sense today, while keeping an eye on future expansion opportunities.
solution costs and benefits over its projected lifetime are critical to finding the
right approach. Avoid getting too focused
on the cost of a single element of the solution - e.g., tags - versus the entire solution and the ROI it can deliver.
Identify existing standards-based technology
and infrastructure elements that can be leveraged for implementing RFID. Leverag-
ing an existing Wi-Fi network, for
example, remains the most cost-effective
and IT-friendly approach, rather than
adding a single purpose non-standard
overlay network.
NEWS
Mark Schmidt, executive vice president, strategic initiatives, Metrologic
Instruments Inc.
Purchasing emerging
technology comes with
certain risks. There's a
fine line between being on the leading edge
and being on the bleeding edge. The hospital
has to make sure the RFID system it's purchasing today is flexible enough to incorporate tomorrow's enhancements.
Hospitals also have to evaluate the cost of
the RFID system (tags, middleware, readers,
training and network upgrades) to see if a
cheaper, yet equally effective alternative, like
bar codes, is available.
Another consideration is how many years it
will take for the system to pay for itself. How
much will this system save the hospital annually in terms of shrinkage and litigation arising
from medication errors?
Ned Simpson, senior industry specialist,
global health solutions practice. Computer Sciences Corp. (CSC)
RFID cost benefits are about the same as any
technology based cost benefit. Typical expenditures will include antennas and the infrastructure to connect them back to the application
server, RFID tags, RFID middle ware and
application software; plus the people to develop, operate and support the applications.
Avoidance of capital expense, operating cost
savings, improved throughput or capacity
translated into new revenue and patient safety
factors are the most common benefits.
Rich Schaeffer, CIO
and vice president,
technology, St Clair
Hospital
Projecting ROI for a
RFID project related to
patient safety is very different from calculating
ROI for a RFID project
related to asset tracking. The benefits of RFID
can be easily calculated for asset tracking by
simply measuring the reduction in inventory
shrinkage or measuring the reduced level of
equipment necessary to meet the needs of the
organization. Despite the fact that these numbers can be very tangible, they do not compare
in magnitude to the benefits associated with an
RFID project aimed at medication error reduction. The benefits of med eiTor reduction are
less tangible because they are associated with
liability and risk avoidance, which are more
difficult to assign a dollar value to.
Today, numerous studies have shown that
expenditures it can be easy to justify the inmedication errors occur at alarming rates. The
vestment.
results of the iOM study released injuly 20()()
Second, we see demonstrated increases in
showed that on average, a hospital patient is
revenue to many hospitals. If the revenue can
subject to at least one medication error per day.
be increased due to improvements in patient
This leads to the question of how to quantify
flow - without increasing variable expenses the value of not committing those errors, avoidthen we see an improvement in margin for
ing the harm that the patient could incur,
the hospital. Top and bottom line improveavoiding the costs associated with increased
ments are what most CFOs are looking for.
length of stay and avoiding the liability that
For clinical sialf, we see substantial softer
any of those errors could present.
benefits. Improvements in patient satisfaction
The following calculations show how the
have long-term community benefits. Improvesavings associated with med error reduction
ments in staff productivity can give caregivers
were calculated using data collected at St Clair
more time at (he bedside and lead to improveHospital:
ments in the quality of care or allow doctors to
• (Annual Admissions) X (Preventable Adsee more patients.
verse Drug Events or PADE rate) X (PADE
John Wass, CEO,
cost) = Savings
WaveMark
• Annual Admissions at SL Clair Hospital (fisOnce the problem and
cal year ended June 30,2005) = 15,()4fj
the proposed solution
• PADE Rate ranged from 0.63 to 2.43 per
are clearly identified, a
100 admissions. The low end of the range
detailed analysis of the
was used. {SouYce:Joumal of American Heallhbenefits should be crecare Association, vol. 277, number 4)
ated by the team that has
• CostofPADE-$6,400 (Source://M/iAc<z«
responsibility for the area. Benefits should inQuarterly, vol. S, number 3)
clude cost savings (e.g., reduced inventory,
• Result: Up to $630,(X)0 in annual savings
fewer capital replacements), revenue increases
The other element of cost benefit analysis
(RFID can enhance point-of-service charge
that often gets overlooked is that RFID-encapture), avoided costs (e.g., shorter hospital
abled systems have a significant impact on user
stays), and the soft benefits (staff satisfaction)
adoption of the system. For example, to
should also be identified to help create the toachieve reductions in med error rates, it is imtal picture of the solution. Hospitals should
perative that nurses scan IV solution bags to
identify the total cost of the solution (e.g., upperform the 5 Rights of medication adminisfront capital, ongoing operating costs, startup
tration. An rV bag that is RFID t^ged is vastly
costs, interface costs and productivity losses
easier to scan than a bag that is bar coded.
during the implementation.)
Med error reduction can only be achieved if
Andrew McGrath, product manager,
the nurse is willing to use the handheld scanRFID, Manhattan Associates
ning technology with each med administraCosts for hardware maintenance and end-user
tion. If it is difficult to scan the bar code, the
training should not be overlooked. Without
nurse may feel the extra effort is unjustified.
adequate end user training on the technology
However, when the RFID t ^ is applied to
infrastructure, support costs can quickly add
the IV bag, the scanning process is effordess
up. Hardware often requires periodic mainteand the nurse becomes fully willing to adopt
nance for firmware upgrades which can usuthe technology. This then saves patient lives,
ally be completed quickly and cheaply if team
reduces liability, and reduces costs.
members are properly trained.
Gary York, Ph.D.,
Jamie Wyatt, vice
founder and chairpresident, health inman, Awarix Inc.
dustries, Oracle Inc
The RO I should be speElements of the cost bencific to the problem beefit analysis:
ing solved. Of course,
Cost elements h(Dspital executives are
Help to determine the
frequently interested in
cost of the solution
hard dollar benefits.
• Cost of IT InfrastrucFirst, expense reduction is valuable to any
ture improvements
organization. Ifyou can demonstrate how the
• Cost of RFID technology and application
technology will eliminate expenses through
• Cost of retrofitting facilities to accommodate
improvements in staff efficiency or equipment
IT Infrastructure or RFID technology
www.hpnonline.com • HEALTHCARE Purchasing
See RFID on page 22
November 2006 21
NEWS
RFID from page 21
• Cost increases in supplies or additional costs
associated with RFID tags
Staff cost implications - The savings and
business process changes that may impact staffing models and costs
• Determination ofhow and to whom RFID
tags will be affixed to the tracked equipment/supply/pharmaceutical/patieut/
staff member
• Determination of staff time-savings and reallocation of time/effort or staff reductions
• Reduction in time spent looking for equipment/supplies
• Increase in the cost of staff required to operate the technology in both IT and Materials
Management
Cost savings - Determining where shrinkage or rental charges will occur
• Potential asset shrinkage reduction rates for
lost equipment, computers and printers
• Potential rental equipment cost reductions
Revenue increases
• Revenue increase from more comprehensive and timely equipment cost charging
• Detennining the possibility of converting
existing supply/equipment storage space
into revenue generating space
Suneil Mandava,
president
and
CEO, MobUe Aspects Inc.
In evaluating any
given project, hospitals should identify
.iiid quantify the financial, care quality
and resource allocation benefits that systems can bring to beiu-.
Given healthcare's trying financial environment, most orgnniziitions see this as the most
tangible and practical area to evaluate and often have an expectation for a retum in 18
months or less. However, beyond those areas that mav have the most measurable, tangible implications such as hard dollar returns,
there are other benefits that provide value to
the organization.
For instance, improving the timeliness of
identiiying and removing inventory items
that may have been recalled by the manufacturer does not have an easily quantified
benefit, however clearly it aligns with an
orgiinization's commitment to providing high
quality care. Another example is having access to a detailed set of data that can create a
very accurate picture of the costs involved
with a procedure. In our case, with a very
robust set of data ai^ound device and supply
costs at the procedure level, the organization
22
can be well positioned to negotiate reimbursement levels with various payers.
On the cost side, the analysis should include the initial and ongoing costs of the
project. Specific to RFID, it seems some organizations underestimate the costs and time
required to implement the infrastructure to
support RFID-based tracking for systems
such as real-time location systems. Hopefully, most systems are virtually plug and
play, but this is not often the case. Another
cost area to examine is the initial and ongoing costs for system integration with disparate IT systems in the hospital. Lastly, but
certainly not least, although difficult to quantify, the impact on clinician workflow for any
new process or systems should be very well
understood. If achieving the desired benefits of the project is reaUzed through perceived 'costs' incurred by clinicians due to
changes in workflow or processes, it is extremely important to evaluate any impact
on their goals of providing the highest levels of care to the patient.
Jeff Schou, director,
healthcare industry
solutions group,
Symbol Technologies
Common cost items
that must be included
are deployment costs,
software, integration,
readers (mobile and/or fixed), tags, maintenance and training. Symbol is especially positioned well to reduce costs in deployments
since its strength in mobility lowers the cost
of the integration and the infrastructure
components.
The benefits include inventory management, speed of response, maintenance, automation of current manual process, patient
safety, greater utilization of capital assets,
charge capture, process automation.
Chris Click, vice
president, marketing, InnerWireless
Inc.
Decision makers
must demonstrate
the need for RFLS by
proving how much
the hospital spends
on excess equipment to make up for assets
that are lost or misplaced. Also, decision
makers need to show how the process of locating equipment without takes more manpower, which eventually costs the hospital
money because they have to hire more personnel to accommodate patients.
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Decision makers also shouid reiterate that
these issues can be remedied with RFLS because it will help the staff better utilize equipment by providing the location of assets
immediately. Knowing the exact location of
assets and de\'ices will provide a shrinkage reduction of the medical equipment
Also, the staif will become more productive
because less time will be spent looking for assets, so workflow will improve along with performance efficiency. RFLS also improves
patient safety by reducing delays in care, thus
increasing bedside attention.
Gabi Daniely, vice president, marketing and product development,
AeroScout Inc
It's very important that a hospital consider
total cost of ownership, including environmental/infrastructure changes and staffing requirements, not just the hardware and
software. From the benefits standpoint, asset
utilization is key for asset tracking and RFID.
Streamlining the amount and use of equipment in a hospital can be attained by having
accurate visibility ofhow equipment is being
used. Knowing how often an asset is used (or
not used) leads to better decision-making
about asset purchases, and if a hospital can
improve their utilization rate, they can cut
down on spending and even sell
underutilized equipment.
A secondary measurable benefit is staff
searching time - several stakeholder groups
within hospitals commonly waste much of
their day looking for a clean infusion pump,
or therighttype of bed, or a cart due for maintenance, for example.
James W. Hermann, vice president, business development, RF Technologies Inc
From an equipment and staff perspective the
common elements are:
• Equipment inventory shrinkage costs
• Equipment utilization
• Equipment rental costs
• Time that the entire staff spends looking for
equipment
• Inventory counts
• Late or missed preventive maintenance costs
Debbie Murphy,
global practice
leader, healthcare.
Zebra Technologies
When evaluating the
costs ofRFID, it is important to consider the
investment as a whole.
The costs of RFID
tags and readers have
fallen significantly in recent years, yet these are
See RFID on page 24
NEWS
RFID from page 22
onlv part of an organization's RFID investment
Other costs, such as implementing a wireless
infrastructure or purchasing hardware,
middleware and softwai^e, must also be considered to get a true picture of exactly how
much thefinancialoutlay will be. At this stage,
it is also important to compare the costs of
RFID with bar coding. In many cases, bar
coding may meet some or all of your needs
more cost effectively than RFID.
Healthcare organizations must also consider the cost of reengineering business processes to complement the use ofRFID. The
most successful applications ofRFID involve
process change, which requires users to develop strategies for revamping business procedures and internal workflow. For example,
RFID can provide an organization with significantly more data than it normally manages. To prevent information overload, the
organization will need to work with an experienced RFID integ!-ator who can demonstrate how to best manage the data.
When determining the potential benefits
of the technology, estimate how much RFID
will allow your organization to save both in
the short term and in the long term. For example, using RFID to improve asset tracking may allow you to redtice inventory losses,
like misplaced or lost wheelchairs. Or it may
help to increase productivity in the materials
management department by streamlining the
way supplies are re-ordered and re-stocked.
It's very important that a
hospital consider total cost
of ownership,
including
environ m entn l/i n fra structure changes and
staffing requirements, not
just the hardware and
software.
- Gabi Daniely, AeroScout
These benefits will likely be realized in the
short term while other applications of the
technology, such as monitoring elderly or
disoriented patients, represent long-term
benefits that can be difficult to quantify.
Based on the relative costs and benefits
of RFID, adoption of the technology is
likely to grow in those areas where the re-
turn on investment is greatest, including
asset and inventory management, trackand-trace and e-pedigree solutions. For
other applications, such as bedside medication administration, unit-dose labeling in
the pharmacy, specimen collection at the
patient bedside and specimen tracking and
management in the laboratory, many hospitals will find that bar coding continues to
offer a proven, efficient and cost-effective
method for capturing data.
Bill Arnold, chief strategist, Omron RFID
A few elements that have to be decided
would include such items as: 1) Will the
RFID tag be used as a 're-writable database' or simply as a 'license plate?' This
small decision has major implications for
which RFID technology (HF or UHF) is
most appropriate, what capabilities the software will need to have, and to what level
does the RFID total system need to be integrated into the hospital data management
system. This will have a ripple effect on
how much network traffic is sustainable,
how much network data storage is required
and what size budget will need to be approved to run the test case. HPN
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