The HIE: Part 2

For 2013, healthcare spending in the United States was estimated at about $3 trillion and is projected to grow to $5 trillion by 2020.

Those numbers are mind-bogglingly large.

By comparison, the annual U.S. GDP was about $16 trillion in 2013. Healthcare represents about 18% of the total. Only China, Japan, and Germany have a national GDP greater than U.S. spending on healthcare. The U.S. is far in the lead in per capita healthcare spending as well, 30% ahead of comparable wealthy, developed nations.

That’s how big it is.

Among other Obama administration initiatives, the adoption of health information technology (HIT) and health information exchange (HIE) is expected to increase quality and efficiency in the healthcare system.

We’ve focused in the past on HIE insights from our own experiences. But what do the numbers have to say about the potential economic impact of HIE?

The Rand Corporation estimated in 2005 that full implementation of health IT systems could produce savings as great as $77 billion per year after a 15-year adoption period. That $77 billion would represent 1.5% of total healthcare spending by 2020. That’s for full implementation of HIT, including exchange.

The ongoing Oregon Study is an excellent source of information about healthcare, healthcare utilization, and healthcare information exchange. For Oregon, the estimated annual current-day savings for HIE was estimated between $177 and $250 million. With a per capita spending of $6,580 and a population of 3.9 million that represents a healthcare cost savings of between .7% and 1%.

Using the Oregon estimated savings rate would mean between $21 and $30 billion of annual savings from HIE. Over the next decade the present day value of HIE could be estimated at $240 billion.

At the same time, the bill for health information exchange has hit $542M and is climbing. And yet, there still isn’t clear evidence that public exchanges have hit upon a viable business model. It isn’t clear how, in practice, health information exchange will improve the quality or efficiency of clinical care.

That $500 million is (very roughly) 1/500th the present value of potential healthcare savings from HIE.

A Deep Breath for Reality

The first section was a lot of numbers. Again, they are mind-bogglingly large numbers.

It’s time to take a deep breath and look at the reality behind the numbers, to infuse the economics with intuition.

How do you achieve a 1% gain in efficiency?

First realize that clinical care accounts for only about half of healthcare expense. The remainder is administrative cost along with research. That fact should give pause for a moment or two.

The administrative cost of healthcare is staggering. It is about 1/3rd of U.S. healthcare expense. 1/3rd. Physicians? Their net pay accounts for only 10%.

So what is the intuition here?

Clinical HIE can improve efficiency, but the biggest benefit will be improving clinical efficiency while eliminating administrative overhead.

Long-term, that will be the test for whether HIE is viable. Can the exchange of data be used to supplant administrative tasks? Can the provider-payer be simplified by automated exchange of data, creating simplified reimbursement patterns?

The 1% alone doesn’t justify the investment in HIE. The requirements are too specific, too tactical, and too process-driven. But the availability of robust HIE should lead to the development of better, more cost-effective administration.

The ACA forced the issue by establishing administrative maximums for insurers. Of course, this doesn’t  address the potential increased burden on providers of administrative overhead. However, the promise is that as HIT and HIE systems become more robust, the need for extensive administrative overhead should lessen. We may even begin to realize some of the anticipated cost savings that researchers have been projecting all these years. In theory it adds up, but we have yet to see it in practice.