Unbiased Analysis of Today's Healthcare Issues

Will Medical IT increase cost? Is slow adoption better?

Written By: Jason Shafrin - May• 22•07

Why is it taking so long for the medical industry to adopt information and communication technology?  Is it a good thing that it is taking so long?  This is the question addressed by an interesting and non-technical NBER working paper by Michael Christensen and Dahlia Remler (“ICT in Chronic Disease Care“)

What is Information and Communication Technology (ICT)

Christensen and Remler divide ICT into 4 categories:

  1. Technologies that support patient self care and education: These include  websites (such as Medco Health) to help people with chronic conditions.
  2. Patient-provider and provider-provider communication: Email, targeted educational emails, etc.
  3. Electronic data storage and sharing: EMR
  4. Technologies that combine all of the above: Examples of this include clinical algorithm engines such as Aetna’s MedQuery.

Will ICT increase health costs?

The answer to this question is not clear.  The authors note “In general, while technological improvement can allow us to provide the same level of health at a lower cost, it can potentially also make it worthwhile to spend even more resources on health care to greatly improve health.”  Thus, ICT can result in significant efficiency gains to the health care sector without reducing the overall cost.

Why is it so difficult to adopt ICT?

There are many reasons why ICT adoption has been so slow:

  1. Network Externalities:  Items such as EMR have this issue.  An investment in EMR increases in value as the number of users increases.  Since EMR usage is so fragmented at this point, the positive network externalities in this market are not yet accruing to those who have invested.
  2. Switching Costs: If a provider (or health plan) chooses a EMR system, and they choose one that becomes a non-dominant system, they may be forced to switch to a new network.  Thus, all the fixed costs invested in the original EMR system will have been wasted.  A provider can instead decide to wait before purchasing an EMR system in order to see which system emerges as the market leader.  Thus, while not adopting EMR early on may cause short term losses, in the long run, it may be a wise decision in the presence of switching costs and thus slow adoption may be an optimal strategy. This issue is treated more thoroughly in the real option pricing theory.
  3. Consumer Responses Blunted: In regular markets, consumers receive higher quality at lower prices by ‘voting with their feet’ and purchasing only high value items.  In the health care sector things are not so simple.  There are 4 interlinked markets: health care services, health care insurance, the labor market and political economy.  “economy). The result of all these complicated linkages is that market forces from consumers to the health care providers are far more indirect and blunter than are the market forces in most industries. The forces must be transmitted through each stage and each stage brings its own transaction costs.”  One example the authors use is trying to persuade doctors to use email.  Employers have motivation to demand that doctors supply this service to their employees to make their employees happier.  Employees, however, value their job much more than whether their doctor has email or not, so direct employee pressure, while it exists, is likely a weak agent of change in the health care market.

The authors conclude the paper making the following wise pronouncement: “A tradeoff therefore exists between seeking more standardization to allow for greater adoption and less standardization to allow for greater product differentiation.”

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  1. The authors do an excellent job of framing the issues.

    However, the pronouncement that “A tradeoff therefore exists between seeking more standardization to allow for greater adoption and less standardization to allow for greater product differentiation.â€?

    is NOT wise.

    This is a classic example arguing that we need to have perfect standards and complete agreement before taking a step; this is what’s been holding back HCIT adoption for the past 20 years.

    The Continuity of Care Record (CCR) http://www.medrecinst.com/pages/about.asp?id=54 is an example of looking at this issue from the other end of the telescope — using Pareto principles to identify the 80% of value that can be gleaned by achieving agreement on 20% of the relevant patient data.

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  6. Jack says:

    Great article and nice blog.