The Great Cost Debate

The cost of the switch to ICD-10-CM (and its counterpart ICD-10 Procedure Coding System or ICD-10-PCS) is a subject of vigorous debate.

Prior to the proposed rule for mandating the switch, there were two studies that looked at the cost (RAND and Nolan) and a third analysis that examined the two studies (Hay). The proposed rule performs a detailed impact analysis of the costs and benefits of the switch (including drawing on both of the two prior studies), devoting 100 of 162 pages to it. This impact analysis examines all three of the prior analyses.

The first study (warning: pdf) was performed by RAND. The National Committee on Vital and Health Statistics commissioned RAND to perform this study.

Per the authors of the study, their charge was solely to evaluate the costs and benefits of switching to ICD-10-CM for diagnoses and to ICD-10-PCS for procedures: …we are asking not whether ICD-10 is the best coding system to switch to…

The RAND report states …our best guess is that the cost of conversion will run $425 million to $1,150 million in one-time costs plus somewhere between $5 million and $40 million a year in lost productivity.

The RAND report estimates the benefits of switching to be in the range of $700 million to $7.7 billion.

However, the estimate of benefits comes with a key assumption the authors admit does not hold today with ICD-9-CM: However, to realize those benefits, providers must use the full codes, use them correctly, and use them in a fashion that is neutral to the reimbursement system. ICD-9-CM is by no means always completely, correctly, or neutrally exploited.

Thus in the worst-case scenario, RAND estimates a net loss of $450 million, and in the best-case scenario, RAND estimates a net benefit of $7.275 billion.

The second study (warning: pdf) was performed by the Robert E. Nolan Company. The Nolan report, as it is known, only studied the costs of the switch and did not estimate benefits. The Blue Cross and Blue Shield Association commissioned the Nolan report.

The Nolan report states …Our estimate concludes that key segments of the health care industry would incur significant expenditure of between $6 to nearly $14 billion during a two- to three-year implementation period.

However, it did not consider costs that would be incurred by some significant segments of the health care industry, including nursing homes, clinical labs, durable medical equipment vendors, and several types of payer organizations such as third-party administrators, clearinghouses, and many small-to-medium-sized insurers.

Nolan also compared the switch to other recent, major upheavals in health care information technology: Y2K and compliance with the Health Insurance Portability and Accountability Act (HIPAA). The American Hospital Association estimated that Y2K cost hospitals alone $8 billion, as cited in Nolan. Although fewer information systems manage ICD codes than dates, and although systems that do manage ICD codes have fewer ICD fields in the database than date fields, ICD code sets are much more complex to convert and test. Furthermore, the $8 billion affected hospitals alone, not physicians, payers, and so on.

The Hay report summarized RAND and Nolan to derive yet a third estimate of the costs of the switch. America's Health Insurance Plans commissioned the Hay report.

The Hay report concludes that A reasonable preliminary estimate of the total cost to the healthcare system would be $3.2 to $8.3 billion.

Finally, we come to the proposed rule, which takes all three analyses and comes up with yet a fourth estimate, which we described in our last post: $849 million to $3 billion with a “primary estimate” of $1.64 billion.

The proposed rule also estimates benefits, and under its more optimistic estimate of costs (relative to Nolan and Hay), even it does not see any benefit accruing to the health care system until 2018 (that is, it estimates that the net cumulative benefit will not exceed the net cumulative cost until 2018, 7 years after the switch takes place).

This table summarizes the reports and their cost estimates (in millions of dollars):

	RAND	Nolan	Hay	NPRM
Low	425	5,700	3,200	849
High	1,150	13,900	8,300	3,000
Primary estimate				1,640

Regardless of the strengths and weaknesses of any of these given estimates, the fact is that the estimates vary wildly, and they are just that, estimates. No one has a reliable prediction that can be trusted to within plus or minus a few hundred million dollars. The cost of switching is high.

To put these estimates in perspective, the health care industry spent $1.1 billion on electronic health records (EHRs) in 2005, with a projected growth to $4.8 billion by 2015. Given limited resources, will the ICD-10 switch impede EHR adoption, just as Y2K and HIPAA did?