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The Effect of IT Investments in Healthcare

According to Commonwealth Fund, a private foundation that aims to promote a high performing health care system, the U.S. healthcare industry lags in IT spending behind not only its competitors internationally, but also other industries domestically.

Preceding, but in line with the Patient Protection and Affordable Care Act (PPACA), commonly known as Obamacare, President Obama signed a stimulus bill in 2009 designating $19 billion for healthcare IT spending. A 2012 study by L.E.K. Consulting found that 57% of hospitals plan to increase their IT spending through 2016.

School of Business professors in the information systems and operations management area, Sid Das and Nirup Menon, along with Ulku Yaylacicegi at the University of North Carolina, Wilmington, investigated the impact of IT in the healthcare industry in order to make recommendations on how funds might be used most effectively in this arena.

Sid DasTheir research, "The Effect of Information Technology Investments in Healthcare: A Longitudinal Study of its Lag, Duration, and Economic Value," published in IEEE Transactions on Engineering Management, examined four distinct categories of IT in healthcare: investments in patient management IT (e.g., electronic medical records, pharmacy information systems, patient registration and billing), transactional support IT (e.g., payroll, supply chain management, benefits administration), communications IT (e.g., email, data repository, telemedicine systems), and administrative IT (e.g., nurse staffing systems, business intelligence, and outcome quality management).

"We looked at these four areas of IT because IT budgets are usually very limited in hospitals," explains Menon. "The primary goal of a hospital is taking care of patients, not implementing IT. There can be a tug of war within a hospital for IT resources. So they need to allocate their IT budget very carefully."

The authors used data from the Washington State Department of Health hospital database to evaluate 47 general medical and surgical hospitals. They limited their study to hospitals in only one state to remove biases from accounting practices and regulation that vary between states in the U.S. However, they believe their findings can be applied to any geographical area.

Their study revealed that investments in healthcare IT had the largest impact on improving medical labor productivity, followed by knowledge labor productivity, and with a minimal impact on operating cost reductions. Overall, investment in Transactional support IT had the broadest range of impact, followed by investments in Communications IT.

Their study also showed that investments in the four areas of IT resulted in different patterns in terms of impact and the duration of impact. Transactional support IT investments had an immediate effect on medical and administrative productivity and a long-term effect on operating costs. Communications IT investments had an immediate but short-term effect on medical and administrative productivity. Administrative IT capital had an immediate but short-term effect on medical productivity. Patient management IT capital increased operating costs that was immediate but short-term.

For patients, this means that the hospital's lower healthcare costs due to improvements in healthcare labor Nirup Menonproductivity (both medical labor, such as doctors and nurses, and administrative labor, such as healthcare managers and accountants) can be passed on in terms of lower prices for services.

"Though we found that patient management IT did not have a positive impact on cost, we believe that it has a positive and lasting impact on patient care quality," states Das. "However, if a hospital wants to improve their cost efficiency and productivity we recommend that they first focus on transactional support IT and communications IT."

Das and Menon also suggest that the healthcare provider focus on these areas of IT because of the importance of having an established technology infrastructure.

"It's necessary to build from the ground up," recommends Das.

Menon continues, "Directly implementing high level IT may not give you any benefits if your tech foundation is not strong enough."

The information systems and operations management professors also feel that the findings of their study can easily be applied to other healthcare organizations, such as HMOs as well as organizations that group together similar types of IT and seek both immediate and long-term effects of implementing IT.

Sidhartha (Sid) Das is an associate professor of information systems and operations management at George Mason University School of Business. His current research interests are primarily in Technology and Innovation Strategies, Information Systems for Healthcare Operations, Project Management, Management of Service Operations, and Entrepreneurship Processes in Technology Services Organizations. Click here for full bio.

Nirup Menon is an associate professor of information systems and operations management at George Mason University School of Business. He comes to Mason after teaching at the University of Texas at Dallas and Texas Tech University. He currently holds a visiting professorship at Instituto de Empresa Business School in Madrid, Spain. His teaching interests are enterprise resource planning systems, database systems, data warehouses, data mining, economics of information systems, and research methods in information systems. Click here for full bio.

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