THE RAND JOURNAL OF ECONOMICS

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Obama signed the Health Information Technology for Economic and Clinical Health (HITECH).
Act which allocates an estimated $27 billion in incentive payments for hospitals and health
professionals to adopt and effectively use certified electronic health records (ARRA, 2009).1
Furthermore, hospitals that fail to achieve the “meaningful use” of health IT by 2015 will face
reductions in Medicare payments.
The significant role the federal government plays in promoting the adoption and diffusion of
health IT suggests a divergence between private incentives and social benefits from adopting these
technologies. Despite the widespread belief that health IT can address many of the health care
system ailments and many studies in the medical and health services research literature, there is
little consensus regarding the impact of health IT on provider costs and revenues or the quality of
care patients receive.2 This literature also points to the difficult IT investment decisions hospitals
face because of the significant costs associated with large-scale health IT implementation and a prioriuncertainty over the returns hospitals can expect from implementing health IT. In other
contexts, IT adoption has been shown to improve health outcomes (Athey and Stern, 2002). We
provide evidence on the impact of IT investments on hospital productivity to assess the private
benefits from hospitals’ adoption of health IT.
Even if hospital IT significantly increases the quality of patient care, hospitals will not capture these social gains unless they can translate clinical improvements into higher profits throughincreased prices, lower operating costs, or higher patient volumes. Hospitals face several challenges in transforming quality improvements into profits. Evidence from the introduction of
hospital report cards suggest that patient preferences are weakly related to measurable quality
and, therefore, hospital patient volumes are not likely to be affected by health IT utilization
(Culter, Huckman, and Landrum, 2004). Typically, half of hospital revenues are from publicly
insured patients where hospitals are reimbursed according to a fixed, administered fee schedule.
These fee schedules limit hospitals’ ability to charge higher prices for improved quality of care.
Quality improvements may, however, reduce lengths of stay which, in turn, could reduce costs.
Hospitals’ inability to profit from IT-driven quality improvements may lead to inefficiently low
IT investments.3
Hospitals’ IT investments may affect productivity through a variety of mechanisms. Hospitals
may benefit from similar information systems employed in other service industries. Applications
such as supply chain management, accounting, and billing would, for example, reduce transaction
costs and improve resource allocation. Most, if not all, of the returns from these applications should
be internalized by hospitals.4 The consequences of clinical systems, such as electronic medical
records (EMRs), are more complicated. Although these systems may improve resource allocation