Profit Complementarities in the Adoption of Electronic Medical Records by U.S. Hospitals∗

A $35 billion program was passed by the federal government to promote the adoption of Electronic Medical Records (EMR). However, billions of incentive payments were flowing out without clear evidence of effective implementation. This paper tries to understand hospitals’ adoption choice of EMR vendors, particularly to evaluate choosing the locally market-leading vendor. Hospitals benefit from using the market-leading technology due to profit complementarities, but also worry about losing patients to competitors that share the same vendor. I construct a dynamic oligopoly model of technology adoption to assess the value of selecting the leading vendor. Using a nationwide sample of U.S. hospitals from 2006 to 2010, I apply the methodology developed by Aguirregabiria and Mira (2007) to recover the model primitives. The primary finding is that, on average, the per-period profit from choosing the locally market-leading vendor is increased by almost 51% as opposed to that from using any other technology. However, the impact moderates as compared with the sunk cost of implementation. From the counterfactual analysis I find if hospitals were incentivized to choose the locally market-leading vendor, it would help improve the market coordination. Moreover, subsidizing small hospitals is more effective in achieving market integration than supporting large hospitals. ∗I am deeply indebted to Gautam Gowrisankaran for the continuous guidance and support. I have benefited from conversations with Keith Joiner, Mo Xiao, Ashley Langer, Mauricio Varela, Tiemen Woutersen and Benjamin Sperisen. I also thank the workshop and seminar participants for valuable suggestions and comments. I acknowledge HIMSS Analytics for providing the data used in this study. All the errors are my own. †Department of Economics, Tulane University. Email: [email protected].