NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Does Health Information Technology Reduce Costs?

Over time, complementary IT skills are expected to become more widely available, and the various components more widely deployed. If so, more hospitals will enjoy the benefits of EMR and it may yet fulfill its promise.

Some analysts have suggested that the adoption of electronic medical records (EMR) by hospitals could eventually reduce annual U.S. healthcare expenditures by one third or more. Others have been far less sanguine about such projections, arguing that adopting such information technologies may in fact increase costs.

In The Trillion Dollar Conundrum: Complementarities and Health Information Technology (NBER Working Paper No. 18281), David Dranove, Christopher Forman, Avi Goldfarb, and Shane Greenstein analyze data from 1996-2009 on thousands of U.S. hospitals and their use of EMR. They find that, on average, EMR adoption appears to be associated with higher costs. However, drawing on principles developed for the study of productivity in business computing, they show that adoption of EMR yields different outcomes over time, across locations, and across hospitals. For example, adoption of both basic and advanced EMR is initially associated with a rise in costs, but longer-term cost effects vary. After three years, hospitals in IT-intensive locations experience a 3.4 percent decrease in costs. Hospitals in other locations continue to experience an increase in costs, even after several years. Hospitals that had employed IT staff to work on older generations of software also enjoyed cost reductions relative to their less "IT-savvy" peers.

These results suggest that the principles for effective implementation of other types of business computing apply to the adoption on EMR: it takes time to be effective and it is most effective when implemented by people with prior experience with the technology. Moreover, as more and more communities become IT-rich and more hospitals become IT-savvy, EMR may generate greater savings.

The authors write: "While EMR's past mixed performance is no guarantee of a future result, the past experience also is no guarantee of future failure. Over time, complementary IT skills are expected to become more widely available, and the various components more widely deployed. If so, more hospitals will enjoy the benefits of EMR and it may yet fulfill its promise."

--Matt Nesvisky

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