Guide

Financing the Cloud: Considerations for Switching CapEx for OpEx

Although high-tech capital expenditures (CapEx) have traditionally been a source of pride and innovation among healthcare organizations, the storage requirements of today’s data-rich environments are making those investments harder and harder to manage. The question is no longer if a healthcare organization will run out of storage and processing capacity; it’s when. Add in a list of growing regulatory and compliance requirements, and the amount of resources required to fully safeguard an IT infrastructure from outages, breaches, and non-compliance is massive.

Enter the public cloud. As a growing number of healthcare organizations are finding, shifting IT infrastructure costs over to the cloud and treating them as operating expenses (OpEx) can offer significant benefits.

In fact, according to Black Book’s 2018 Healthcare IT Trends survey, 57 percent of hospitals with more than 200 beds are ready to make the shift from CapEx to OpEx.[1]

This trend will likely pick up speed as the growth of the cloud services industry continues to skyrocket.

A recent report from Global Market Insight projects that the global healthcare cloud computing market will achieve a 15 percent compound annual growth rate, exceeding $55 billion by 2025.[2]

Of course, that’s not to say that a major overhaul of IT expenditures should be taken lightly. Like any strategic decision, switching CapEx for OpEx requires business leaders to look closely at the short-term and long-term needs of their healthcare organization and weigh their options. This guide aims to help healthcare executives understand all the implications of financing IT in the cloud as an operating expense—the options, the benefits, and trade-offs.

OpEx Options

Selecting CapEx or OpEx is not always an either/or situation. Healthcare organizations simply need to assess their goals and decide which areas they want to bucket under CapEx and which areas they want to bucket under OpEx. The following are a few ways companies can divide up their IT spending.

Conservative model

In recent years, the vast majority of healthcare organizations have allocated for some OpEx within their IT budgets. The most common method has been to bucket all of their hardware and equipment under CapEx, and bucket maintenance agreements and software licensing under OpEx. In some cases, an organization might end up putting maintenance agreements under CapEx since it extends the lifetime and usefulness of the equipment.

A large number of healthcare organizations currently use this model with success. In fact, it is not uncommon to find EMRs running on Parallel Random-Access Machines (PRAM) inside of a hospital or healthcare facility. However, this machine-based technology, which allows multiple processors to share memory, was introduced in the late 1970s. Organizations that have long-term goals to innovate, optimize their IT spending, and want to stay ahead of rising security threats and compliance requirements, may want to consider a more competitive model.

Infrastructure as a Service (IaaS)

Although many healthcare organizations are familiar with software as a service (SaaS), the next step is to shift their infrastructure to a service-based model. IaaS allows an organization to run virtual machines or compute inside of the public cloud as an OpEx. This eliminates large capital outlays for equipment and puts the maintenance and upgrade responsibilities on the public cloud service provider or associated managed service partner.

Containerization

Another OpEx option is to containerize IT costs so companies only pay for what they use when they use it. For example, a healthcare provider whose office is closed on the weekends could spin down all of its excess IT resources or capacity during off hours and then spin them back up at peak periods. So, instead of paying to run their assets in a 24/7 environment, organizations “pay as they go.” While this takes coordination through schedule tasks and automation, this can reduce operating costs dramatically over time.

Server-less or Everything as a Service (XaaS) Model

Some leading-edge healthcare organizations have taken the full leap to OpEx and adopted a server-less or Everything as a Service (XaaS) model. This not only frees up capital and other IT resources, but it also gives healthcare organizations the ability to pay only for the code they are running at times when a query was made. For example, when a provider or payer pulls a patient record, they might only have to pay a fraction of a cent inside of that public cloud to pull that query. Considerations here on the cost side include security tooling to monitor vunlerabilities within the code itself, as there is no longer infrastructure to scan, but instead code.

Hybrid Models

Although it is less common, there are some large healthcare organizations using both CapEx and OpEx strategically now to achieve their long-term goals of moving to OpEx. In these cases, the organization is running its primary data centers and primary facilities in a CapEx model, but bucketing its disaster recovery or burstability at peak periods into an OpEx model inside of the public cloud. The goal, however, is to move all of its PHI to the public cloud over time. By making a gradual shift, the organization doesn’t have to buy new capital gear once that CapEx or those assets are fully depreciated, and it doesn’t have to continue to build out data center capacity as more data is acquired.  Cost savings is realized as OpEX driven maintenance on the software that is powering the data center equipment is not renewed.

OpEx Benefits

Once business leaders know their options, they need to weigh the benefits and possibilities. Although each company has its own reasons for making the switch to OpEx, the following are the main benefits it can offer healthcare organizations.

Financial Savings

Perhaps the most significant reason healthcare companies are moving to OpEx is the cost savings. As technology continues to advance at lightning speeds and the demands on IT infrastructures rise, it is getting harder and harder for healthcare organizations to keep their hardware and software up to date. Most companies outrun their 3- to 5-year capitalizations, and even if a company is able to stay within its projections and get a full return on their CapEx investments, refreshing those assets requires a huge capital outlay.

With an OpEx model, however, healthcare organizations have ongoing access to current technologies, unlimited storage, and the ability to scale easily according to their business needs. Instead of shelling out large upfront costs for equipment that is only going to depreciate, companies essentially “rent” their IT infrastructure for a consolidated OpEx cost. This monthly, “pay as you use” model is not only easier to budget when tools to measure public cloud cost optimization are in place, it also allows healthcare organizations to avoid overspending and frees up resources typically used to maintain CapEx investments. Also, because upgrading and maintaining the infrastructure falls on the service provider, healthcare companies avoid unforeseen costs like server downtime or network constraints and, instead, can spend their resources on core competencies.

Robust Security

Because healthcare organizations deal with extremely sensitive data, they can benefit especially from the enhanced security benefits that can come with an OpEx model. In CapEx, IT staff members spend an enormous amount of time and resources constantly patching their environments to protect them from vulnerabilities like malware, ransomware, and zero-day exploits. This doesn’t just include patching the operating system inside of a hospital, for example, but also includes patching the hardware within the data center itself. And even then, there is no guarantee that the infrastructure is secure. According to one PwC study, 95 percent of provider executives think their practice is secure against cybersecurity threats; however, just 36 percent of providers and payers have access management policies in place, and only 34 percent have a cybersecurity audit process in place.[3]

In an OpEx model, however, service providers with extensive security knowledge can be responsible for updating, protecting, and backing up the infrastructure. This layer of protection not only reduces risk for healthcare organizations, but it also frees up IT personnel to focus on other tasks.

Enhanced Compliance

Healthcare companies can also use OpEx to both guarantee and even exceed compliance. With standards like the EU’s General Data Protection Regulation (GDPR) and now U.S. state regulations changing and evolving, an OpEx model can make it easier for healthcare organizations to remain compliant. For example, GDPR’s Right to Be Forgotten requires healthcare organizations to have a programmatic way to delete a patient record upon request. In a traditional CapEx model, this can be an extremely cumbersome and time-consuming as IT tries to locate every trace of a patient’s PHI and then delete each of those traces. In an OpEx model, however, organizations would have access to native public cloud technologies that allow users to search for specific types of data through the use of tagging, as well as native public cloud machine learning tooling, whether it is PHI or non-PHI, so that they can be extracted and removed from the database architecture.

Many healthcare organizations are easing their compliance load further by working with specialized service providers that offer tools and services that guarantee compliance. Having access to this type of expertise—and the assurance that data meets HIPAA, GDPR, and other regulatory requirements—can relieve an enormous burden from healthcare organizations by fully protecting its assets.

Business Continuity and Disaster Recovery

Another huge benefit for healthcare organizations is reliability. By moving from a CapEx to OpEx model, business leaders are de-risking themselves over time because they can use newer technologies like the public cloud to build out disaster recovery plans without having to outlay additional cash for CapEx. This allows healthcare companies to be more efficient in their spending and use of technology resources, and it can speed up recovery time if an outage or disaster occurs. Instead of frantically trying to get systems back up and running and determining how much data may have been lost in an EMR system, healthcare organizations can work with a service provider to handle the situation and resume routine business operations with little to no downtime.  Many organizations that are taking advantage of this model are building redundancy across public cloud geographies at the architecture level, to meet both business objectives but insulate themselves from any larger outage event, while keeping their cost down by using the second geography as a standby (or warm) site.

Ability to Innovate and Grow

Although healthcare is known for its vertical integration and medical advancements, it has traditionally struggled with horizontal innovation. OpEx drastically improves the ability for healthcare organizations to embrace new technology without the risk or large upfront costs. Providers, payers, and other healthcare organizations are no longer stuck in 3- or 5-year agreements with the same capital gear inside of their facilities. With OpEx, healthcare organizations can upgrade as needed and take a look at more transformative innovations. So, for example, if a provider wanted to experiment with permissioned blockchain technology to help secure PHI, an OpEx model would provide that opportunity.

The flexibility of the OpEx model also enables healthcare organizations to be more agile. If the need to grow ever arises, companies have the flexibility to scale instantly both horizontally and vertically without having to invest in expensive equipment or services.

Improved Speed to Market

The speed to market is significantly greater in an OpEx model. Let’s say, for example, a healthcare provider is looking to deploy new facilities. Using a traditional CapEx model, it could take anywhere from 6 to 9 months to go through the entire process of getting the IT infrastructure in place: negotiating the capital spend; picking the vendors that align with the security requirements for healthcare data; ordering the gear; negotiating a business associate agreement with each hardware vendor that may store, process, or transmit PHI; setting up power and network in data center; and finally, installing and provisioning the gear and providing access to the right people. However, if the provider decided to use an OpEx model, it would eliminate all of the equipment and set-up, cutting the whole process down to mere weeks.

Faster time to market can play out in everyday use cases as well. In a public cloud OpEx model, for example, a healthcare organization can save time by using reference architectures or blueprints that other organizations have successfully used to deploy a secure and compliant infrastructure. Depending on the application, this could cut deployment down to minutes, hours, or in a worst-case scenario, a few days.

OpEx Tradeoffs

Of course, a number of business leaders have their reservations about moving to a cloud-based OpEx model. While there are always some trade-offs when taking a new approach, the key is weighing business needs and goals against risks. The following are a few of the common arguments against switching CapEx for OpEx.

Lack of control.

Many healthcare organizations prefer having full control over their data and equipment. Plenty of IT leaders have spent a lot of time and money building a protected, secure infrastructure. The problem is that in today’s market, it is extremely hard for companies outside of the tech space to keep up with the pace of innovation, rising security threats, and evolving compliance requirements. The reality is that CapEx equipment in any environment now runs the risk of being outdated and vulnerable on a daily basis.

Put simply: It would be extremely rare to find a healthcare provider or payer that could build security tooling inside of its own data center faster or better than Amazon, Microsoft, or Google. In the end, healthcare organizations that move to an OpEx model with experienced service providers will actually have more control over their infrastructure because they will have the assurance it is updated, secure, and compliant.

Inability to capitalize hardware.

As any executive understands, the whole reason for positioning items as CapEx is the return on investment. CapEx provides predictable tax deductions and usually benefits gross margins. OpEx expenses, on the other hand, don’t necessarily pay for themselves and are often known for causing business debt.

In general, these arguments are accurate; however, when it comes to aging IT equipment and unpredictable storage needs, CapEx falls short. OpEx not only provides more value from a scalability point of view, but it can also benefit the bottom line. OpEx items can be fully tax deductible and can be subtracted from revenue when calculating profits and loss, all of which generally increases profit margin. So while a move to OpEx will impact gross margin and change the financial economic model, it isn’t necessarily a negative change. Costs are just falling below the capital line and hitting a different bucket on the financial balance sheet.

Cost Containment.

Another key argument against OpEx is cost containment. This is a valid concern. In cloud-based OpEx models, users are essentially given the ability to log into a virtual portal or virtual appliance and spin up unlimited assets, unlimited servers, and unlimited resources. This can be hard to control and can quickly become a real issue for IT budgets. As a result, healthcare organizations need to be diligent and put tools and controls in place to help manage IT spending. This includes implementing internal controls like training and policies, as well as external controls like Cloud Checker, Cloud Health, or other software tools that can provide alerts when a budget is maxed out or exceeded.

Financing the Future

Looking at a new financial model for IT spending is a big decision—one that should be more about business needs and goals and less about bandwagons and buzzwords. However, a growing number of healthcare organizations are finding that with the right partners and expert resources in place, switching IT spending from CapEx to OpEx can enhance security, drive innovation, and improve the bottom line. By understanding the benefits and trade-offs of OpEx, business leaders can find a solution that meets the current needs of their organizations while also positioning their business for future success.

 

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[1] Sullivan, T. “Solving cloud computing’s CapEx vs. OpEx conundrum once and for all,” Healthcare IT News, 28 November 2017.

https://www.healthcareitnews.com/news/solving-cloud-computings-capex-vs-opex-conundrum-once-and-all

[2] “Healthcare Cloud Computing Market to Hit $55 Billion by 2025,” Global Market Insights Inc., 29 April 2019.

https://www.prnewswire.com/news-releases/healthcare-cloud-computing-market-to-hit-55-billion-by-2025-global-market-insights-inc-300839513.html

[3] “Top health industry issues of 2018: A year for resilience amid uncertainty,” PwC Health Research Institute, 2017.

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