A case study in IT innovation in a small, rural community hospital.

ABSTRACT

The United States healthcare industry is one of the most clinically sophisticated and innovative in the world, but has been slow to adopt and innovate in the area of administrative and integrative technology. Enterprise Resource Planning (ERP) systems integrate and coordinate an organization's information systems and its business processes, but healthcare has been slow to install such systems. Because research suggests that innovation develops slowly in rural areas and is negatively correlated with size, the adoption and successful use of ERP systems in small to medium sized hospitals is considered to be truly innovative. A brief overview of innovation theory is followed by a more in-depth discussion of the recent literature addressing healthcare and information technology (IT) innovation. The research methodology is then presented followed by the case study, "ERP Innovation at Inter Mountain Regional Medical Center," which presents the case of a small, rural community hospital that has successfully implemented a sophisticated ERP system.

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The United States healthcare industry is arguably the largest and most complex industry in our nation. It is also one of the most clinically sophisticated and innovative in the world. In contrast to the clinical side, our healthcare industry has been slow to adopt and innovate in the area of administrative and integrative technology. The case in point is Enterprise Resource Planning (ERP) systems that unify an organization's information systems and reengineer its business processes (Rajagopal, 2002) and have been in existence since the 1970s. ERPs, however, are uncommon in healthcare; thus, the purchase and implementation of ERP systems in healthcare organizations is innovative. Healthcare innovation is driven by market conditions; thus it unfolds differently, perhaps more slowly, in rural markets Mueller et al., 1999). Kimberly and Evanisko (1981) find a positive relationship between technology innovation and specialized, decentralized structure, and size. Hence, the adoption and successful use of ERP systems in small to medium hospitals is considered to be quite innovative.

This paper will proceed as follows: a brief overview of innovation theory will be followed by a more in-depth discussion of the recent literature addressing healthcare and information technology (IT) innovation. "ERP Innovation at Inter Mountain Regional Medical Center" (IMRMC) presents the case of a small, rural, community hospital in the intermountain west that has successfully implemented a sophisticated ERP system (all names are pseudonyms). The case will be concluded with the case's salient aspects apropos to innovation.

INNOVATION

Despite the fact that innovation is key to organizational success, survival, competitive advantage, and market and industry development (Hamel et al., 1999; Porter, 1985; Schumpeter, 1975), there are no sure-fire blueprints or proven theories for success. However, some common themes emerge in the literature. The majority of innovation studies attend to two themes--what situational factors predispose an organization or its members to create or embrace an innovation, and what conditions and processes influence the spread and institutionalization of this innovation (e.g., Daft, 1984; Damanpour, 1991; Tushman & Moore, 1988).

Drazin and Schoonhoven (1996) extend prior thinking about organizational innovation to extra-organizational factors in the industry and organizational population. They offer a multi-level framework that integrates industry, organizational, and individual explanations of innovation. IT research shows that the organization and its environment, technology itself, the specific technology application, and technology users all affect innovation success (Kwon & Zmud, 1987). Collectively, these studies indicate that aspects of the organizational community, the organization, the innovation, and individual managers and employees support or impede organizational innovation. They also point out that institutional and organizational factors are stronger predictors of innovation than individual characteristics.

Recent research recognizes that an organization's competitive environment consists of other organizations, and ties to other actors' effects on the organization's awareness of innovations, learning, and likelihood of adoption (Nohira & Eccles, 1992). Goes and Park (1997) address the cooperative relationship among distinct yet related organizations that leads to enhanced innovation. Despite the importance of interorganization factors, innovation in organizations is primarily an organization-level phenomenon and unlikely to represent the solo actions of one individual (Scott, 1990). Certain features of the organization and its context that support or impede innovation have been extensively studied and well documented. Damanpour (1991) found significant positive relationships between innovative activity and the following factors: specialization, functional differentiation, professionalism, centralization, management attitude towards change, technical knowledge resources, and resource slack. According to Hage (1999), complexity of the division of labor is a critical variable stimulating innovation because it leads to adaptation and flexibility. Furthermore, he argues that organic structures facilitate implementation by allowing for activation of employee knowledge and skill.

Also important are the manner in which individual and group attitudes and behaviors affect the extent and speed of innovation adoption. Two different streams of research show that a host of individual characteristics may affect innovation. First, the "upper echelons" approach treats innovation as a function of top managers' values and preferences (Hambrick & Mason, 1984). Firms where CEOs and top management teams have functional experience in marketing, R&D, and engineering are more committed to and allocate more organizational resources to research and development (Barker & Mueller, 2002; Daellenbach et al., 1999).

The second individual attributes approach describes social cues from others, intra-organizational relations, occupational membership, prior experience with the innovation, perceived consequences, education, and tolerance for ambiguity (Rice & Aydin, 1991). A study of top management teams in hospitals found that team composition affected innovation quality and that social interaction processes affected innovation levels (West & Anderson, 1996).

Both the characteristics of the innovation and the process used to implement it affect the degree of organizational innovation and IT innovation success. Different types of innovations (e.g., technical, administrative, product or service) require different conditions and diffusion processes to succeed (Damanpour, 1991; Swanson, 1994). Specific characteristics and perceived benefits of the innovation motivate the decision to innovate because of the expectation of filling an organizational need or solving a problem (Frambach & Schillewaert, 2002).

In regard to such research as cited above, some researchers (Denis et al., 2002; Maguire, 2002) caution awareness regarding common, flawed assumptions upon which much of the extant literature on innovation is based.

HEALTHCARE AND IT INNOVATION

Much of the healthcare literature addressing innovation focuses on the advancement and innovation of clinical process and is not relevant to this research study. Regarding the ability to implement and maintain innovation, Mueller et al. (1999), posit three barriers/enablers: leadership, resources to support change, and the community's capacity to support new systems. In a similar vein, Savitz, Kaluzny, and Silver (2000) discuss these essential elements: organization commitment and preparedness/receptivity for change. These researchers also identify the top three barriers or enablers of innovation in healthcare as: organization structure, staffing adequacy, and physician leadership (Savitz et al., 2000). Indeed, these authors assert that clinical innovation must be a grassroots effort: "I have never seen a successful organizational-learning program rolled out from the top" (p. 372). Finally, Burke, Wang, Wan & Diana (2002) find that "hospitals with higher overall IT adoption adopt strategic IT most often. Hospitals with lower IT adoption adopt administrative IT most often" (p. 349). Some authors suggest that healthcare innovation comes more slowly to rural areas. Mueller et al. (1999) write that healthcare innovation is driven by market conditions and thus it unfolds differently in rural vs. urban areas. "The underlying market conditions necessary for change have not always been sufficient in rural areas to motivate local providers and systems to do so" (p. 486). A case in point is participation in managed care plans. Bowman and Wiggins (1999) assessed rural medical group practices' readiness for managed care and concluded that because these groups perceive no threat from managed care in their rural environment, they have no interest in, and thus have no readiness for, the arrival of managed care and its techniques.

The network development so vital to rural areas, is slowed, or perhaps blocked, by the scarcity of technological resources in rural areas (RUPRI, 1996). Indeed, few empirical studies exist addressing the state or amount of IT in rural areas or rural health organizations' purchase decisions and implementation of information technology. Employing a qualitative critical success factors approach, Trimmer, Pumphrey & Wiggins (2002), found the following reasons and outcome expectations for investment in information systems such as ERPs among rural providers: operational and compliance improvements; strategic, customer, and system functionality issues; and costs and other bottom line concerns.

Regardless of the decision factors and expected benefits of IT innovation, to be considered innovative, the thing in question must be new to the adopter (Rogers, 1995; Tomatzky & Fleischer, 1990). This argument extends to a variety of information technologies such as personal computers (PCs), decision support systems, and the internet (Van Slyke et al., 2002). Although technologies such as PCs had been in existence for some time, it took their diffusion throughout society and their adoption by most organizations, including small to medium sized enterprises (SMEs), for the PC to cease to become innovative.

What then are the characteristics of a technology innovation? Rogers contends that technology innovations fall into clusters wherein "one or more distinguishable elements of technology ... are perceived as being closely related" (Rogers, 1995, p. 15). Technology clusters can take different forms, such as being complementary to each other, having similar functions, using a common platform, or being contingent on adopting another technology (Van Slyke et al., 2002). One of these forms of technology innovation, common platforms, can be utilized to consider the innovation inherent in ERPs.

In general, ERPs utilize a common data model in addition to a consistent user view of screens and reports. More complex ERP systems can operate in a heterogeneous hardware and software environment, yet still retain the appearance of a single, homogeneous system due to a common interface. Although ERPs reflect the manufacturing perspective from the progression of material requirements planning systems (MRP and MRPII), they are inherently an integrated set of computer programs by design. In the healthcare environment, an ERP or integrated system provides seamless connectivity between admissions, pharmacy, laboratory, billing, payroll, purchasing, physical plant, maintenance, accounting/finance, and other reporting systems.

Although ERPs have been in existence for nearly 30 years, their adoption by organizations, both large and small, has accelerated over the past decade. For instance, minimal ERPs such as Microsoft's QulckBooks[TM] are common today in many small to medium sized organizations, whereas such applications were quite unusual in these organizations prior to the year 2000. Specific to small and medium hospitals, information technology was, and often remains, limited to a particular department (i.e. lab, pharmacy) or to a specific function (admitting, billing, insurance submission). The integration of clinical and administrative functions remains minimal throughout the healthcare industry (Wholey et al., 2000). The introduction and successful use of an ERP system, as presented in the case study below, is an excellent illustration of innovation in a small, rural, community hospital.

METHODOLOGY

"The use of case studies as research methodology has grown in recent years because of the rapid changes in the health system today and the inability of traditional data sources to answer important questions," (Kohn, 1996, p. 1) Although case study research provides valuable information, users of the information are generally concerned about interpreting the data because of the small number of cases. Case studies are often used by researchers to explore new areas and issues where little theory is available. Although case study methodology is typically associated with exploratory research, Yin (1994) suggests the methodology may actually be more powerful for explanatory purposes because of its ability to answer questions of how and why. Although there exists a body of knowledge relevant to innovation in larger organizations, little work has been done specifically in the area of innovation in small, rural hospitals. Innovation research lends itself to a case study approach because it permits the researches to address an area about which little is known and because it permits the researchers to specifically address the questions of how and why (Yin, 1994).

The IMRMC was selected because the researchers were aware that this hospital had adopted a sophisticated ERP system. Hospitals have been quick to adopt new clinical technology, but slow to adopt technology that has administrative applications (Wholey et al, 2000). The ERP system adopted by IMRMC has both administrative and clinical capabilities. IMRMC is a small community hospital in a very rural area. The research question is: Why was this hospital so innovative, when the majority of rural hospitals have been slow to innovate or adopt new technology?

Interviews were conducted with hospital personnel who were in a position to explain the process leading up to the adoption of the ERP system. Some personnel had been associated with the hospital prior to the adoption of the ERP system while others became associated with the hospital early in the implementation process. Their "institutional knowledge" was valuable to the researchers exploring the question of why this hospital, in a rural area of a rural state, was on the leading edge of technology.

This paper presents the results of the first stage of an ongoing project to develop a theoretical base to explain innovation in small, rural hospitals.

ERP INNOVATION AT IMRMC Hospital Background

The hospital in this case study is located in the seventh most sparsely populated state in the US. The state has the lowest physician-to-population ratio in the nation (114 physicians per 100,000 people vs. national average 184 per 100,000) (State Department. of Health). The state has a total population of 1,293,953 (US Census Bureau, 2000) of which 162,397 (US Census Bureau, 2000) live in the Mountain Valley. The Valley, composed of eight counties, has a population density of 15.6 people per square mile (ppsm), compared to the national average of 79.6 ppsm. In this rural environment, one would expect innovation to come slowly to the healthcare industry (Mueller et al., 1999). Within this very rural environment, healthcare resources are scarce and access is difficult. This is a condition not uncommon in much of America, but because this state has an inadequate supply of physicians and resources, this condition is exacerbated.

Valley City, population 34,469 (US Census Bureau, 2000), is the largest town in this eight-county region, and the city is home to the two largest hospitals in Mountain Valley. One of the hospitals, the Valley City Clinic (a privately-owned hospital) with a 44-bed capacity, recently entered into a management contract with IMRMC, a not-for-profit, ounty-owned hospital that serves as a secondary care institution for the eight-county region. IMRMC was previously managed by Quorum Health Resources, and before Quorum, by HCA. IMRMC, licensed to operate 230 beds, operates at approximately 70 percent capacity. In 2001 IMRMC had patient service revenues of $73.7 million. Small hospitals such as IMRMC are expected to be slow to adopt technology innovation (Kimberly & Evanisko, 1981). IMRMC's patient population is made up of 40 percent Medicare patients, 11 percent Medicaid patients, 23 percent private insurance patients and the balance (26 percent) are self-pay patients. There are a few smaller, rural hospitals located within this region; they are staffed by family practitioners and all are under different ownership and funding.

In 1987, the Board of IMRMC revised their vision statement to read, "IMRMC will be a standard of excellence and cooperation in making Mountain Valley the healthiest place in America." Carl Johnson, hospital administrator at IMRMC has been credited with introducing a new approach to healthcare administration in order to achieve this vision (Shaffer, 1993). Mr. Johnson believed that improving the hospital's IT was one way to improve the delivery of healthcare services to the residents of the Mountain Valley. He was driven by three questions: Why do we do what we do? How do we know that what we do works? How can we make what we do better?

About the same time that the Board adopted their new mission statement, the Board changed the way the hospital was managed. The hospital changed from a process of hiring an outside firm to manage the hospital to using full-time hospital employees. At this same time, Carl Johnson became the Board-employed hospital administrator. Mr. Johnson's vision of using an integrated IT system as a means of improving healthcare delivery in the Mountain Valley area was not necessarily shared by the Board. Mr. Johnson wanted to go forward, but the Board did not. Under the leadership of Carl Johnson, the Board eventually understood the importance of IT in improving healthcare delivery.

Eventually the Board of IMRMC and Mr. Johnson created an atmosphere that embraced technology innovation. Mr. Johnson and Mr. Smith, CIO, actively supported expanded use of technology. The importance of having the medical community support this vision was not overlooked by the administration. Soon, Dr. Pete Miller was actively embracing the use of integrated IT. His support was vital in getting the medical community to support the IT efforts of the hospital. One would not expect such active support for the development of an integrated IT system in a small, rural, community hospital. In its rural environment IMRMC interacted little with entities that had implemented ERP systems, yet prior research has found that an organization's ties to other organizations affects an entity's awareness of innovation (Nohira & Eccles, 1992).

The importance of one individual, Carl Johnson, in fostering an environment receptive to IT innovation appears to contradict some prior research that found that innovation in organizations is primarily an organization-level phenomenon and unlikely to represent the solo actions of an individual (Scott, 1990), while supporting other prior findings that management attitude toward change is important in innovation (Damanpour 1991).

The importance of the Mountain Valley community culture enabled the innovation at IMRMC accordingly to the interviewees. Mountain Valley is a conservative community, but the culture in that area fosters growth and acceptance of innovation. The relationship of community culture to innovation adoption does not seem to have been addressed by research.

Information Systems Background

There have been three CEOs at the hospital since 1991. All have supported the investment in IT. Expenditures for IT were approximately one-third of all capital acquisitions during the past two years.

IMRMC initially acquired software from their current vendor in 1991. The software was used for financial functions, and has been integrated across all fiscal areas of the facility, excluding laboratory services. The proprietary applications and operating system are highly reliable. According to both the Chief Financial Officer, and the Chief Information Officer of IMRMC, "[The system] doesn't go down." This reliability has allowed the IT staff to spend their time growing and expanding the system instead of maintaining and running it. IMRMC has a full-time staff of 20 information systems workers headed by the CIO. The CIO referred to her predecessor, Mr. Smith, who had been in the role from 1978 to 1993 and had focused on the integration of the system in 1991, as a "visionary." The commitment of the top management team (the Board, the CEO, and the CIO) to the use of IT to accomplish the 1988 IMRMC vision statement appears to support prior research findings that the decision to innovate is related to the expectation of filling an organization need (Frambach & Schillewaert, 2002) and the "upper echelons" approach (Hambrick & Mason, 1984) The hospital is currently in the process of converting to a filmless environment, adding radiology (Digital Imaging Picture Archiving Communication Systems) to MRI, Ultrasound, Nuclear Medicine, and CT. IMRMC's goal is to be completely digitized within three years. Use of a filmless environment will allow test results to be reviewed by physicians at computer terminals, either in the hospital or in the physicians' offices. IMRMC is currently planning the conversion to a paperless system (commonly called Electronic Medical Records), with on-line documentation for labor and delivery expected to become "live" within the next six weeks, and the physician's offices within four months. Although some physicians, such as radiologists, "love new toys," both the CFO and CIO anticipate cultural challenges in converting first the physicians, then the nurses, to a paperless system.

IMRMC is also actively involved in developing a wireless system throughout the hospital. A wireless system permits such patient conveniences as bedside registration and permits physicians to use handheld devices (Personal Digital Assistants, PDAs, such as are commonly used in non-medical applications) for medical research without leaving the patient's bedside.

Implementations and updates of the IT system are performed on a department by department basis, with the IT staff and a consulting firm learning from past experiences. In initiating a project with a department, IT first finds an individual within the department, a "champion," to work with and train. This individual then trains the rest of the department on the new IT project. Many of the "champions" become part of the IT staff. Half of the IT staff members have backgrounds in non-IT areas such as pharmacy, medical technology, nursing, and hospital administration. Staff with IT functional education, that are difficult for the hospital to recruit, are used primarily in analysis and implementation roles. Therefore, the hospital has taken a more proactive human resource approach, and develops staff with business related knowledge.

Part of the successful implementation of IT at IMRMC can be credited to attitude. Everyone--administrators, employees, physicians--wants to improve the delivery of healthcare services and everyone works to see that such IT improvements occur.

IMRMC believes in providing connectivity to the regional network of physicians. This is facilitated by the hospital providing management services (such as billing, registration, recordkeeping) to five medical practices representing about 40 individual physicians. In addition to the physicians, the hospital recently assumed the operations of Valley City Clinic, partially due to IMRMC's ability to manage medical practices with the same software applications.

In the early 1990s the hospital received a planning grant for IT. This $1 million grant from the State Medical Information Network was intended for a demonstration project of IMRMC's IT plan for the region. Unfortunately, the hospital returned that grant unused. However, the advancement of the IT system at IMRMC today is based largely on the plans developed in that early grant.

IMRMC has invested heavily in IT over the past decade, yet the growth has been slow and steady. There has been no one, big year of growth. Part of the success in IT development has resulted from a continuity of leadership (only two CIOs in 12 years).

In summary, IMRMC has developed a culture of IT use and innovation, and has extended its innovative culture to the regional medical profession. Executive support,

CIO leadership, reliable technology, and trusting relationships with physicians have enabled unexpected and innovative use of IT in this organization, located in a rural area in a rural state.

CASE DISCUSSION

This case study portrays an innovative rural hospital and highlights some of the reasons for their success at IT innovation. For this hospital, innovation required the right mix of strategy, leadership, and learning capacity. This visionary strategy was potentially risky because the hospital committed itself to developing a new competency not commonly found in the region. However, the new strategy was designed to anticipate future client needs rather than respond to a specific marketplace challenge. The goals of improving access and quality of care may have served to inspire employees to embrace a risky strategy and make it work (Hage, 1999).

Linking regional healthcare providers with IT improved the delivery of care to patients. More important, the new technology strengthened the hospital's role in the delivery network. By positioning itself as a technological hub, the hospital eventually fashioned a "virtual" provider network without intrusive contracting. Although managed care was not an immediate threat, the network may serve to raise barriers that protect members from future competitive pressures. The new strategy was engineered by visionary, shared leadership, which is a second key to innovative success. The innovation was the joint product of a visibly innovative CEO, an equally visionary CIO, and has been sustained by successive CEOs. The leadership needed to innovate was shared and indicates a flexible, organic organization structure (Hage, 1999). The innovation process was institutionalized in champions who come from the operational ranks to promote and implement further innovation. By sharing responsibility for innovation across diverse functional specialties and professions, the hospital increased learning capacity and promoted the creativity needed to innovate. This also expanded the base of employees committed to innovation and fostered a culture of innovation.

This paper reports the findings from the first case study in a series. As further cases are studied, these ideas will be contrasted with findings in other hospitals. However, this study begins to fill a gap in our knowledge of innovation in rural hospitals. The findings suggest that because rural hospitals are widely distributed with fewer immediate competitors, innovation may occur for technological reasons rather than competitive reasons. This may be advantageous in that the leadership team can devote more energy to nurturing the innovation and improving the chances of success. The findings also support previous work suggesting that strategy, leadership among top managers, and organizational learning capacity enhance innovation.

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