Health Information Technology and Its Effects on Hospital Costs, Outcomes, and Patient Safety

By Encinosa, William E.; Bae, Jaeyong | Inquiry, Winter 2011 | Go to article overview

Health Information Technology and Its Effects on Hospital Costs, Outcomes, and Patient Safety


Encinosa, William E., Bae, Jaeyong, Inquiry


Underlying many reforms in the Patient Protection and Affordable Care Act (A CA) is the use of electronic medical records (EMRs) to help contain costs. We use MarketScan[R] claims data and American Hospital Association information technology (IT) data to examine whether EMRs can contain costs in the ACA's reforms to reduce patient safety events. We find EMRs do not reduce the rate of patient safety events. However, once an event occurs, EMRs reduce death by 34%, readmissions by 39%, and spending by $4,850 (16%), a cost offset of $1.75 per $1 spent on IT capital. Thus, EMRs contain costs by better coordinating care to rescue patients from medical errors once they occur.

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Amidst the perfect storm of ever-increasing health care costs, rising underinsurance, and diminishing access to quality care, President Obama signed into law the Patient Protection and Affordable Care Act (ACA) on March 23, 2010 (U.S. Congress 2010). Controlling spending is a particular goal of this landmark legislation. However, controlling costs without reducing quality is an inherent challenge within any such endeavor. Yet, many of the reforms in the ACA do indeed strive to improve quality while reducing costs. An example of this is the ACA's reforms to reduce hospital-acquired conditions (HACs), such as medical errors and preventable patient safety events (sections 2702 and 3008, U.S. Congress 2010).

HACs are medical mistakes and complications that never should occur when patients are receiving care meant to help them. To create incentives for hospitals to prevent HACs, beginning in October 2014, the ACA calls for a reduction in Medicare payments to hospitals whose rates of HACs are much higher than average. While Medicare already has a "no-payment policy" for HAC cases, this ACA policy will further penalize a hospital with high HAC rates by reducing by 1% payments to that hospital for all diagnosis-related groups (DRGs). The secretary of the Department of Health and Human Services (DHHS) will publicly report on the Hospital Compare website the measures used for each hospital's payment adjustment. (1) The ACA also will extend Medicare's no-payment policy for HACs to the states' Medicaid programs (Berwick 2010; Federal Register 2011).

HACs can be costly. Encinosa and Hellinger (2008) found that patient safety events can increase spending by up to $28,000 (2002 dollars), or 52%, per incident. Overall, Encinosa and Hellinger estimate that 2% of all private insurance spending on surgery patients is due to adverse events, while the DHHS' Office of Inspector General (OIG) estimates that 3.5% of Medicare inpatient hospital spending is due to adverse events (U.S. DHHS OIG 2010). The Centers for Disease Control and Prevention estimate that reducing the subset of HACs known as healthcare-associated infections (HAIs) alone will decrease spending annually by $45 billion (2007 dollars) (U.S. Centers for Disease Control and Prevention 2009). Reducing HACs not only results in large cost savings, but also improves the quality of care. In particular, Encinosa and Hellinger found that 11% of all privately insured surgery deaths were due to HACs, while the OIG found that a third of Medicare hospital deaths involved HACs. For HAIs, the inpatient death rate is six times higher than for patients without HAIs (Lucado et al. 2010).

This emphasis on the benefits of reducing patient safety events began in 1998, when the Committee on the Quality of Health Care in America was established by the Institute of Medicine (IOM). Its first report estimated that between 44,000 and 98,000 Americans die each year as a result of medical mistakes, with an associated cost of $17 billion to $29 billion (see To Err is Human: Building a Safer Health Care System, Kohn, Corrigan, and Donaldson 1999); this was based on older cost studies from small samples in three states (Johnson et al. 1992; Thomas et al. 1999; Thomas et al. 2000). It is now more than 10 years since the IOM report and patient safety event rates across the country remain high despite modest improvements in overall quality. …

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