The effect of Health IT Investments on Regional Health Care Costs

This paper analyzes the relationship between health IT investments and regional health care costs. We focus on the regional level effects, which take into account externalities that arise from patient mobility. We find that the relationship between health IT and costs are stronger at a regional level than hospital level, confirming the presence of externality of health IT investments. This finding has important implications: it suggests that hospital level analysis underestimates the benefits of health IT investments and can lead to suboptimal investment decision from the society’s point of view. We also find that cost reduction impacts of health IT investment are higher over the long term. We present evidence that advanced IT applications that enable within hospital communication are more beneficial in more urban areas. Higher software integration among the adopting hospitals further decreases the health care costs in the area by enabling electronic medical record sharing. In addition, we show that not all hospitals have to make same level of IT investment to obtain optimal reductions in health care costs. Instead, having some leading hospitals in health IT investments can be more beneficial.