Healthcare IT and the Sunk Cost Fallacy

Healthcare IT and the Sunk Cost Fallacy

Recognizing the Sunk Cost Fallacy in Healthcare IT

Mike Bomstad
Vice President, Strategic Accounts

During a recent conversation with a hospital executive, I was told, “we have made a significant investment in our (product name omitted) system in the past couple of years, and we just couldn’t consider a change to something different.”

While seemingly benign, the comment was made in light of the fact that numerous department leaders had already told this executive that the IT system in question simply did not work.  In fact, less than 10% of the intended users, with little success, were trying to use the aforementioned system.

How does this happen?  How does an accomplished executive fall into what behavioral economists call the Sunk Cost Fallacy, or what I like to call the Sunk Cost Trap?

The Sunk Cost Trap in Healthcare IT

For those of you who went to business school, this is probably old news.  Sunk Costs are simply those resources we have already invested, in this case, in an IT system. These include the time spent, the funds and the other resources we have already paid to implement and train on a new system.  The costs are “sunk” because no matter what we do, we can’t get them back – they are permanently lost.  In economics, we are therefore taught that “sunk costs,” those resources we can’t get back, should never be considered in future decisions.

Therefore, from a purely practical and financially prudent perspective, at any given point in time, a Hospital should be willing to consider alternatives to any IT investment it has made. Especially if there is evidence that a change would lead to a substantially better outcome for the Hospital, its staff or its patients.

As a real-life example in our personal lives, how many of us have gone to a nice restaurant and ordered too much food?  Half-way through dinner, you realize you are full – too full (and for some reason, we can’t box it and take it home).  We know that if we finish what is on our plate, we will possibly feel sick to our stomach, and we will feel guilty for over-eating – both of which will overshadow any pleasure we gain by the taste of the food.  But wait a minute: “I am finishing this because I paid for it, and I am going to get my money’s worth.”  Sound familiar?  If so, you have fallen victim to the Sunk Cost Trap.  You know the cost of your dinner won’t change regardless of how much you eat – the cost is “sunk.”  However, once you are full, each additional bite only worsens your personal outcome.

For those of you that have been in healthcare for a while, you can also think back 15 years when hospitals were buying the first surgical robots.  In some hospitals, these became “million-dollar coat-racks” because the hospital staff realized that in many cases, patient outcomes worsened with the use of these early robots. They understood the $1 million price tag was a sunk cost, but did not fall into the Sunk Cost Trap. They did not continue to use the device just because a large investment was made.  However, that wasn’t the case with all hospitals.  In a 2011 study published by the Robert Wood Johnson Foundation

“The researchers found that when hospitals bought a surgical robot, patients were more likely to be treated with surgery than they would have been before the acquisition of the robot…..They cite recent studies suggesting that robotic surgery might be associated with a higher incidence of post-surgical complications than traditional “open” surgery, raising concerns that patients may be choosing—or being steered toward—robotic surgery on the basis of false assumptions or incomplete information, or because hospitals guided them toward that approach for reasons that might have included helping recoup the costs of buying and maintaining the $1.7 million robot.”

In the Healthcare IT world, it is no different.  As an example, let’s say a hospital just spent a year and $5 million installing a client-server application that was expected to deliver a $2 million return each year for over 5 years, or a total of $10 million (nice!).

Now let’s say that after only 9 months of use, the Hospital identifies a new SaaS product that will require a comparatively low investment of $1 million. It is expected to return at least $20 million over the next 4 years, and can be implemented in 90 days.  What should the hospital do?

When falling into the Sunk Cost Trap, executives may say, “we just spent $5 million – we are not going to throw away our $5 million investment, and the year we spent implementing it!”  The Hospital’s own analysis shows the new IT project will deliver an additional $11 million to the hospital, yet the executive refuses to even look at the new system when every rational metric tells him he must consider an alternative.

It Can Get Worse

This same Sunk Cost Trap manifests itself in continuing commitments to failing projects.  How many of us, realizing at dinner that we are completely full, would then order dessert because it’s “only an extra $1?”, or “it’s free”?  We eat dessert, even though our personal outcome worsens.

The same holds true for Healthcare IT.  In the example above, it is not uncommon for the executives to not only continue to pursue the current project that is suboptimal, but to make additional investments in the original system, or in add-on products. These additions, by their own analysis, could never achieve the same return as the alternative.

What Can be Done to Avoid this in Healthcare?

The first step, as with any problem, is to acknowledge there is one.  For more information on the Sunk Cost Fallacy, Status Quo Bias, and other behavioral economics topics, check out behavioraleconomics.com

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