Continuing with "competition" and federal "incentives." A Meaningful Market failure?

Regardless of the merits of EMR or the cause of the lack of widespread adoption to date, it is not immediately clear that HITECH subsidies would materially affect the investment decisions of private firms. Prior research suggests that, despite their intentions, such subsidies may not actually stimulate private investment. Peltzman (1973) introduces the notion that government subsidies might crowd-out private investment, and provides evidence of dollar-for-dollar crowd out in investments in higher education. Most of the subsequent research evidence also casts doubt on effectiveness of government subsidies for promoting aggregate private investment.

From

INVESTMENT SUBSIDIES AND THE ADOPTION OF ELECTRONIC MEDICAL
RECORDS IN HOSPITALS
 

David Dranove
Craig Garthwaite
Bingyang Li
Christopher Ody
Working Paper 20553
www.nber.org/papers/w20553

Interesting paper (If you don't have a NBER account, the paper costs $5).

1. Introduction
Critics of the United States health sector have long pointed to its combination of high costs and poor outcomes, such as a high rate of medical errors (IOM, 2001). An often discussed source of these problems is the relative low utilization of information technology compared to other industries (Gartner, 2010). Many health policy analysts and academics suggest that the widespread adoption of Electronic Medical Records (EMR) will transform the US healthcare system, simultaneously reducing costs and improving outcomes (Hillestad et al., 2005; Buntin and Cutler, 2009). Several studies suggest that increasing the use of EMR will increase efficiency and either decrease health care expenditures, increase quality, or ideally both (McCullough et al., 2010; Miller and Tucker, 2011; Freedman et al., 2014). Summarizing this literature, Buntin et al. (2011) found that over 90 percent of studies found positive outcomes from EMR.

Despite these purported benefits, EMR adoption has, until recently, been largely confined to large healthcare systems; smaller and independent hospitals, as well as other medical providers, have remained on the sidelines. This suggests that either (a) there is a meaningful market failure that creates a separation between the private and social benefits of EMR, or (b) many providers are unconvinced about the benefits of EMR and have taken a “wait-and-see” approach to this investment decision.

Several unique features of the health market could cause a market failure with respect to EMR adoption. For example, hospitals have found that being a high quality provider has a relatively weak relationship to patient volume (Cutler, Huckman, and Landrum, 2004). The lack of a strong volume response limits the potential profits from investments in quality. In addition, the existing reimbursement system for most hospitals means much of the lower costs resulting from more efficient care or better health outcomes flows to other entities. Absent an increased use of bundled payments or more effective shared savings programs, hospitals are unable to fully capture the value created by their spending on EMR. Instead, these benefits are split across a wide variety of public and private payers, none of which individually has the incentive to increase reimbursement rates to the level necessary to cover the costs of EMR.

Given the potential collective action problem, there could be a case for taxpayer subsidies for EMR. This would alter the benefit/cost calculus for potential adopters, leading more providers to conclude that benefits outweigh the (now subsidized) costs. This may be a justification for the United States government’s heavy involvement in promoting the adoption of these benefits. These efforts culminated in the 2009 passage of the Health Information Technology for Economic and Clinical Health Act (henceforth, simply HITECH). HITECH provides up to $27 billion to promote adoption of EMR [emphasis mine] and encourage the adoption and what regulators have described as the “meaningful use” of these systems by hospitals and physicians. HITECH also specifies future cuts to Medicare reimbursement rates for hospitals that do not maintain meaningful use standards (ARRA, 2009).

Of course, a large number of providers failing to adopt EMR is not conclusive evidence of a market failure. Many hospitals may have remained on the EMR sidelines because adoption costs are high and they are not convinced that these systems will deliver the promised benefits. Indeed, while many studies have found positive effects from EMR, the magnitude of the cost savings are, at best, modest in comparison to the large installation costs (Agha, 2014; Lee et al., 2014; Himmelstein et al., 2010)...

"Up to $27 billion." Well, what have we gotten for our money, given that we've doled out nearly all of it by now? (~93% by these end-of-August numbers relative to the $27 billion cited -- although ONC will insist that there is no upper disbursement limit in HITECH.)

From the CMS.gov "latest monthly Payment and registration Summary Report" (pdf). I screen-scraped the stuff off into an Excel sheet so I could tabulate the relative payout percentages. ~60% of MU money has gone to hospitals.*

* There's no deeper drill-down within these CMS reports as to how much disbursed Medicaid MU incentive money was "A/I/U" -- simply "Adopt, Implement, or Upgrade" to an ONC Certified EHR in first year participation, without having to comply with any individual core or menu criteria.

From the Dranove et al paper:

So, we're getting maybe an estimated ~10% (transient?) near-term lift for all the MU money spent on the inpatient side (the focus of this paper)? Have we, in the ever-juicy words of athenahealth CEO Jonathan Bush, simply served to "schimulate a bunch of losers"?

How much of this acute setting money went to Epic? (Our latest HIT whipping boy in the current EHRbola dustup.)

5. Discussions and Conclusions
Many prior studies find that government subsidies fully crowd out private investments. In contrast, we find that HITECH increased the cumulative adoption of advanced EMR among independent hospitals by 10 percentage points in a short period of time. Given that slightly over half of independent hospitals had advanced EMR by 2008, this implies that HITECH accelerated EMR adoption by more than one in five non-adopters. This is not surprising. Based on the limited pricing information that is available, the cost of installing and operating an EMR system by an average-sized hospital is at least $10 million and could be much higher. The average non-adopter as of 2008 could have expected to receive $2.1 million in HITECH subsidies for the first year and $5.3 million in total. If adopters were at the high end of the subsidy spectrum, then incentive payments could be higher than $10 million – though it should be noted that many of these hospitals may also face higher costs of adopting advanced EMR. Thus, HITECH incentives represented a sizable percentage of total adoption costs.

It is tempting to interpret these results as an unmitigated success, i.e. HITECH spurred adoption while only paying a fraction of the cost of these new systems... However, there are two reasons to take a more skeptical view of the merits of HITECH.

First, it may have been politically impractical to dedicate HITECH funds to these marginal adopters, both because this may have been seen as unfair to early adopters and also because HITECH incentives are also used to promote meaningful use. As a result, total HITECH payments dwarfed the subsidies to marginal adopters. It is instructive to compute the total HITECH subsidies per adopting hospital. We estimate that 67 percent of hospitals would have adopted by 2011 without HITECH and that 10 percent of hospitals adopted because of HITECH...

Second, these HITECH funds may have simply accelerated an ongoing trend, and therefore the rate of adoption realized by 2011 would have been achieved soon thereafter – by 2013 according to our estimates – without HITECH funds. Again notwithstanding meaningful use, the expenditures of HITECH appear to have simply provided two additional years of EMR use at facilities that may have been unsure about the product’s ultimate value. Given that hospitals are still trying to figure out how to systematically use HIT to boost quality and reduce costs, briefly accelerating adoption at this juncture is not obviously desirable. Thus, it may be better to ultimately judge HITECH on the impact of meaningful use requirements on outcomes such as costs and quality, something that has yet to be determined. And if meaningful use is the ultimate goal, it seems quite possible that this could have been achieved at a much lower cost...

Interesting indeed. So, where do we go from here? One structural problem with assessing large, expensive national initiatives (in this instance ARRA/HITECH) is the lack of a control group. You don't invade half of Iraq and see how things turn out relative to the control. And, speculating that government HIT subsidies might "crowd out private investment" is mostly just that -- speculation, conjecture that would be rather difficult to confirm or refute empirically. Nonetheless, I found Peltzman 1973:

A bit of apples-to-oranges in that paper, as it was about higher education subsidies 40-some years ago. Nonetheless, there do appear to be some applicable cautionary theoretical assertions, though I rather doubt that anyone can argue that HITECH reduced Health IT deployment. Maybe an unevenly effective type of EHR deployment (regarding which myriad critics would likely nod in agreement).

Again, JD Kleinke:

Given what is at stake, health care should be the most IT-enabled of all our industries, not one of the least. Nonetheless, the “technologies” used to collect, manage, and distribute most of our medical information remain the pen, paper, telephone, fax, and Post-It note.

Meanwhile, thousands of small organizations chew around the edges of the problem, spending hundreds of millions of dollars per year on proprietary clinical IT products that barely work and do not talk to each other. Health care organizations do not relish the problem, most vilify it, many are spending vast sums on proprietary products that do not coalesce into a systemwide solution, and the investment community has poured nearly a half-trillion dollars into failed HIT ventures that once claimed to be that solution. Nonetheless, no single health care organization or HIT venture has attained anything close to the critical mass necessary to effect such a fix.

This is the textbook definition of a market failure. All but the most zealous free-market ideologues recognize that some markets simply do not work. Indeed, reasoned free-market champions often deconstruct specific market failures to elucidate normal market functioning.

That was written in 2005. Nine years later, proposals regarding proper and effective means of incentivization toward the laudable national goal of universal, interoperable Health IT deployment remain controversial. It's difficult to see just how unfettered free market mechanisms will get us there.

Opacity (plus barriers to entry) still = Margin. And, getting profitably past "first mover disadvantage" remains a tough proposition.
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UPDATE

The Free Market, the Unrestrained Consumer, and Jonathan Bush’s Solution to Healthcare costs
By ANDY ORAM

Many observers have lamented the lack of a true market in health care, and tomes have been written about the rampant distortions in the system. Large provider networks battle large insurers in a game of chicken to set prices. Patients don’t have enough information to make good choices. Costs are hidden from patients by a cascade of employer, insurer, and provider policies. And the US government ultimately provides most of the money.

One of the most prominent advocates for a health care market is Jonathan Bush, a regular speaker at health conferences and author of the recent book Where Does It Hurt? To achieve the potent mix he envisions of innovative entrepreneurship, rich data sets, and long-term care for chronic conditions, he calls for a light regulatory hand and for smashing the current oligopoly in health care.

I see these two goals as somewhat opposed...

I see it as an absurd proposition. Maybe Jonathan Shoot-the-RECs Bush has the financial means to be an "unrestrained consumer," but his is a rarified air upper perch in the wealth distribution.

"Many observers have lamented the lack of a true market in health care"

OK, what, precisely, comprises a "true market?" One wherein there is no government?

Preposterous.
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More to come...