Cost control and production performance enhancement by IT investment and regulation changes: evidence from the healthcare industry

Abstract

By using panel data spanning a period of 18 years and by estimating a general cost function in a cost minimization setting, we conducted an analysis of information technology (IT) investments and production performance in the healthcare industry. The span of years from 1976 to 1994 in the healthcare industry is characterized by major regulatory changes and several organizational changes such as technological (IT and medical) advances and structural changes (multi-hospital systems [MHSs], vertical integration, etc.). This offers a unique setting to study the effect of regulation on the performance of the entire hospital and also of each input factor used in the production of services in the hospital. The cost function approach and the panel data technique allow us to test various hypotheses regarding technical change, substitution, and complementarity effects between IT investments, medical capital investments and labor expenses, and the role of regulation on the cost structure of hospitals. We find that while IT labor expense rose at an increasing rate due to regulatory effects, hospitals were moving in the right direction towards cost containment. 2 2 We are grateful to Leslie Eldenburg at the University of Arizona for sharing the healthcare data with us.