Digital technology has helped transform every industry, except for health care, which remains slow-moving, costly and inefficient. Legendary performance management and strategy execution expert Robert S. Kaplan, co-developer of both the balanced scorecard and activity-based costing, has been working to implement accurate costing and improved performance management approaches to health care organizations. Recently he examined what inhibits digital innovation in health care. With Derek Haas of Avant-garde Health and Michael S. Jellinek of Harvard Medical School, Kaplan analyzed the roadblocks and developed solutions. They published their findings in a recent article for Harvard Business Review, “Hospital Budget Systems Are Holding Back Innovation,” a guide to reforming hospital financial structures to invest in unlocking the transformative power of technology.

According to Kaplan and his co-authors, hospital budgeting prevents technological investment in three main ways:

  • Budgeting units are fragmented and not integrated with each other, forcing a unit that wants to modernize its care to pay for IT investments out of its operating budget even when the benefits are realized in other organizational units. They must either stretch their budgets too far or seek help from other departments – a difficult task to say the least
  • Annual budget limits are too rigid, and do not consider the future- period, long-term pay-offs from investments in digital technology
  • Operating and capital expenses are separated in hospital budgets, resulting in neither allocation being sufficient to fund substantial investment
“Hospital budgeting systems have arguably performed well for decades. But they were not designed for contemporary, digital technology solutions whose benefits cross budgetary units and accrue over time.”Click To Tweet

Among the possible solutions to these barriers, the authors suggest a “central innovation budget” – an allocation of funds separate from normal departmental budgets – which “would be used to acquire technology solutions whose benefits get realized in multiple organizational units.” By administering innovation funds at a hospital-wide level, the organization can transcend the short-term focus of individual departments, and take a more long-term view of where to invest. “A central innovation budget would help to alleviate today’s severe sub-optimization problem,” the authors write.

But the core argument remains that reform is imperative. “Hospital budgeting systems have arguably performed well for decades. But they were not designed for contemporary, digital technology solutions whose benefits cross budgetary units and accrue over time.” As with every industry, health care needs a concerted effort to digitalize, modernize and deliver superior results at lower cost. Robert S. Kaplan provides organizations with concrete strategies for modernizing their approaches to investments in innovative digital technologies.