Information technology, policy  

Groundbreaking study shows hospital investment in IT does reduce costs

3 April 2007

New York, USA. A two-year long study of the use of information technology in 2000 US hospitals has found that the investment does pay for itself, given time.

A new report by PricewaterhouseCoopers on the relationship between health IT investment and hospital operating performance shows that more than 60 percent of hospitals in the U.S. have made significant enough investments in information technology to begin seeing reductions in operating costs.

The report, the culmination of two-years of research, provides the most comprehensive evidence that investment in information technology will improve hospital business performance and that IT capital investment can eventually pay for itself in the healthcare environment.

Entitled "The Economics of IT and Hospital Performance," the report includes analysis of performance data from nearly 2,000 US hospitals. The study was conducted by PricewaterhouseCoopers and Professor Lorin Hitt of the University of Pennsylvania, Wharton School of Business.

The researchers concluded that return on investment for health IT is a long-term promise that comes with caveats. IT investment must reach a tipping point before cost-reducing performance improvements occur, and until then hospitals experience increased operating costs with little near-term financial benefit.

With six in ten hospitals in the US at or nearing the tipping point, industry-wide costs, operational and quality improvements associated with IT investment may begin to be more widely apparent. However, PwC also found that hospitals are experiencing less dramatic return on IT investments than other industries that have realized productivity gains equal to five times the cost of IT investment. Moreover, some hospitals may not experience productivity increases at all, if they are starting from a low point of IT investment, according to PwC.

"Healthcare is typically described as lagging other industries in IT investments whereas the real culprit might be that hospitals have failed to take full advantage of IT by making more significant clinical and operational process changes," said David Levy, M.D., principal, PricewaterhouseCoopers LLP and Health Information Technology practice leader. "The business case for increased IT spending has been a foregone conclusion but it is based largely on untested claims and the experience of other industries. The lack of reliable, industry-specific empirical evidence has left hospital executives wondering whether IT investments will ever really pay off and unclear about the extent to which a transformation will occur. We can now retire this question and definitively say, 'Invest in IT; it works, but have patience."

There have been considerable efforts in the past to study healthcare IT benefits at the macroeconomic level, but research has been hampered by the complexity of healthcare and difficulty disentangling varying factors such as case mix, bed size, for-profit versus not-for-profit status, disproportionate share status, etc., which effect individual hospital performance.

PwC created a sophisticated economic model that accounts for 90%of these variances and interrelated key factors such as IT investments and labour costs, capital infrastructure cost, material costs and other inputs and outputs. In addition, PwC created a proprietary IT Capital Index scale to determine each hospital's healthcare IT application mix and the capital value of those applications.


  • Overall, hospitals making high levels of IT investments perform at a higher level of efficiency than hospitals with low levels of IT investments; however, hospitals with the lowest levels of investment in IT have lower overall operating costs than hospitals with moderate levels of IT investment.
  • Hospitals that are low on the IT Capital Index scale experience
    increases in total operating expenses as they bring more IT online and until they reach a threshold. Though these greater costs can be explained, hospitals in this situation face a daunting challenge if they must justify IT investments to stakeholders on the basis of near-term payback.
  • As hospitals move up the IT Capital Index scale, they showed costs eventually leveled off, which occurs regardless of the added costs of additional IT capital. This suggests that IT capital at some point pays for itself by displacing costs elsewhere in the organization such as improved quality.
  • As hospitals move into "high adopter" categories, there is strong evidence IT investments lead to cost-reduction as the organization gains skills in leveraging the technology. To fully realize the value from IT investments, organizations must also redesign clinical and business processes.

Relationship between IT capital, cost and quality

While PwC's analysis focused primarily on cost efficiency, the model used to analyze business performance metrics also was applied to quality metrics by focusing on a single outcome: hospital mortality rates adjusted for risk, case mix and state averages. The analysis revealed a statistically relevant correlation between hospital IT investment and mortality rates. Significant differences were found between hospitals at the low end versus the high end of PwC's IT Capital Index, and suggest that hospitals investing in IT can reduce mortality rates without a corresponding increase in operating costs.

"The importance of this finding is that if hospitals can demonstrate an ability to improve quality without increasing costs per bed, it may be more- than-sufficient justification for making IT investments," said Nick Beard MD, director, PricewaterhouseCoopers, LLP and principal author of the paper. "By using the economic model and IT Capital Index, PwC can gain an even deeper understanding of the relationship between IT and quality of care using other more relevant measures of clinical quality and to eventually look at hospital specific issues."

A summary of "The Economics of IT & Hospital Performance" and additional information about methodology can be found at 

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