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Short Takes

Q: If electronic health records could save billions of dollars in health care spending, could those savings be used to help expand coverage to people who lack health insurance?

The competitiveness of the market determines who splits the booty from the gains electronic health records produce. In a competitive market, prices get compressed to the competitive level, or the "Goldilocks" price, not too high and not too low. If a price is too high, there is room for competitors to offer a lower price, taking away business from those charging higher prices. Any price below the competitive price isn't sustainable over time, as you'll go out of business because you can't meet your costs.

If electronic health records work as promoted, health care providers will invest in computers and software. In return, they will experience increased productivity. For example, physicians will not order duplicative tests and hospitals will avoid costs attributed to longer stays that result from drug errors. This increased productivity results in decreased costs for our health care system.

If health care markets were perfectly competitive, these savings would be passed from one purchaser to the next and finally to consumers as lower prices, either for individual services or health insurance premiums. (Prices might go up for other reasons, but not as much as they otherwise would.) But health care is not a purely competitive market, resulting in little likelihood that all savings would be passed to consumers. For example, it's easy to enter and exit a competitive market. But in the hospital services market, it takes time and a lot of capital to build and run a hospital. Because the market isn't fully competitive, market forces won't pressure hospitals to give savings gained from electronic health records to those who buy hospital services. Given the structure of health care markets, some savings won't move onward.

So it's unlikely that savings from electronic health records would go to pay for health insurance for the uninsured without government intervention. The government could "redirect" savings to pay for coverage for the uninsured through a tax or reduced Medicare payments to providers after they invest in information technology. Providers would likely call this a "payment cut" rather than "redirecting efficiency gains."

Bottom Line: Only if the federal government takes specific action to redirect the savings. Because health care markets are not competitive, savings would end up in the hands of stakeholders in the medical marketplace, such as doctors, hospitals, insurance companies, employers who buy health insurance for their employees, and those who already have coverage.

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Funded by The Robert Wood Johnson Foundation, ERIU is a five-year program shedding new light on the causes and consequences of lack of coverage, and the crucial role that health insurance plays in shaping the U.S. labor market.