Health and Human Services' Estimate of Health Care Cost Savings  
Resulting from the Use of Information Technology (17-FEB-05,	 
GAO-05-309R).							 
                                                                 
According to the Institute of Medicine and others, the U.S.	 
health care delivery system is an information-intensive industry 
that is complex, inefficient, and highly fragmented, with	 
estimated spending of $1.7 trillion in 2003. The Institute of	 
Medicine has called for transformational change in the health	 
care industry through the use of health information technology	 
(IT) to improve the efficiency and quality of medical care. As a 
regulator, purchaser, health care provider, and sponsor of	 
research, the Department of Health and Human Services (HHS) has  
also been working over the years to promote the use of IT in	 
public and private health care settings. We are currently working
to provide Congress with an overview of HHS's efforts to develop 
a national health IT strategy, identify lessons learned from the 
Departments of Veterans Affairs and Defense regarding their use  
of electronic health records (EHR), and identify lessons learned 
from international efforts to modernize national health IT	 
infrastructures. As part of this ongoing work, Congress asked us 
to review how a recent HHS estimate of cost savings from the	 
adoption of IT was derived and what portion of these savings are 
projected for the federal government.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-309R					        
    ACCNO:   A17860						        
  TITLE:     Health and Human Services' Estimate of Health Care Cost  
Savings Resulting from the Use of Information Technology	 
     DATE:   02/17/2005 
  SUBJECT:   Electronic forms					 
	     Health care cost control				 
	     Health care services				 
	     Information technology				 
	     Lessons learned					 
	     Medical records					 
	     Quality control					 
	     Strategic planning 				 
	     Cost analysis					 
	     Audit reports					 
	     Quality-of-care					 
	     Savings estimates					 
	     Medicare Program					 

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GAO-05-309R

United States Government Accountability Office Washington, DC 20548

February 16, 2005

The Honorable Jim Nussle
Chairman
Committee on the Budget
House of Representatives

Subject: Health and Human Services' Estimate of Health Care Cost Savings
Resulting
from the Use of Information Technology

Dear Mr. Chairman:

According to the Institute of Medicine and others, the U.S. health care
delivery
system is an information-intensive industry that is complex, inefficient,
and highly
fragmented, with estimated spending of $1.7 trillion in 2003. The
Institute of Medicine
has called for transformational change in the health care industry through
the use of
health information technology (IT) to improve the efficiency and quality
of medical
care. 1 As a regulator, purchaser, health care provider, and sponsor of
research, the
Department of Health and Human Services (HHS) has also been working over
the
years to promote the use of IT in public and private health care settings.

As you requested, we are currently working to provide you with an overview
of HHS's
efforts to develop a national health IT strategy, identify lessons learned
from the
Departments of Veterans Affairs and Defense regarding their use of
electronic health
records (EHR),2 and identify lessons learned from international efforts to
modernize
national health IT infrastructures. As part of this ongoing work, you
asked us to
review how a recent HHS estimate of cost savings from the adoption of IT
was
derived and what portion of these savings are projected for the federal
government.
To develop this correspondence, we reviewed supporting documentation,
interviewed HHS officials on potential cost estimates, and reviewed the
methodology
used to develop projected cost savings and other benefits. We performed
our work in
January 2005, in accordance with generally accepted government auditing
standards.

1 Institute of Medicine, To Err Is Human: Building a Safer Health System
(Washington, DC:
November 1999) and Crossing the Quality Chasm: A New Health System for the
21st Century
(Washington, D.C.: March 2001).
2 There is a lack of consensus on what constitutes an EHR, and thus
multiple definitions and names
exist for EHRs, depending on the functions included. An EHR generally
includes (1) a longitudinal
collection of electronic health information about the health of an
individual or the care provided,
(2) immediate electronic access to patient- and population-level
information by authorized users,
(3) decision support to enhance the quality, safety, and efficiency of
patient care, and (4) support of
efficient processes for health care delivery.

In brief, IT can improve the efficiency and quality of medical care and
result in costs savings. Although estimated nationwide savings are
primarily based on studies with methodological limitations and are
contingent on much higher IT adoption rates than are currently estimated,
the potential for substantial savings is promising.

Background

In October 2003, we reported on cost savings achieved by health care
delivery organizations and insurers resulting from the use of IT,
including reduction of costs associated with medication errors,
communication and documentation of clinical care and test results,
staffing and paper storage, and processing of information.3 IT also
contributed to other reported benefits, such as shorter hospital stays,
faster communication of test results, improved management of chronic
disease, more accurate and complete medical documentation, improved
accuracy in capturing charges associated with diagnostic and procedure
codes, and improved communications among providers that enabled them to
respond more quickly to patients' needs.

Over the past year, federal efforts to encourage the use of health IT have
accelerated. As we reported in August 2004, HHS has a number of major
health IT initiatives

4

throughout the department that cover a broad range of activities and
participants. For example, in April 2004, President Bush established a
goal that health records for most Americans should be electronic within 10
years and issued an executive order to "provide leadership for the
development and nationwide implementation of an interoperable health
information technology infrastructure to improve the quality and
efficiency of health care."5 As part of this effort, the President tasked
the Secretary of HHS to appoint a National Coordinator for Health
Information Technology-which he subsequently did 1 week later. At that
time, the Secretary stated that IT could save the nation $140 billion
annually in health care spending. The executive order also called for the
Coordinator to develop a strategic plan to guide the implementation of
interoperable health IT in the public and private health care sectors.

Since his appointment, the Coordinator has taken a number of actions to
encourage the nationwide adoption of IT. In July 2004, HHS issued a
document entitled The Decade of Health Information Technology: Delivering
Consumer-centric and Information-rich Health Care. This framework outlines
an approach to achieving interoperability across the U.S. health care
delivery system and establishes four major goals and 12 strategies, listed
in table 1. To build upon the framework, in November 2004, the Office of
the National Coordinator for Health IT issued a request for information
seeking public comment by January 18, 2005, on how interoperability of
health information technologies and information exchange can be achieved
as part of a national health information network. HHS is currently
evaluating over 500 submissions received during the comment period. As we
testified in July 2004, as the

3 GAO, Information Technology: Benefits Realized for Selected Health Care
Functions; GAO-04-224
(Washington, D.C.: Oct. 31, 2003).
4 GAO, HHS's Efforts to Promote Health Information Technology and Legal
Barriers to Its Adoption,
GAO-04-991R (Washington, D.C.: August 13, 2004).
5 Executive Order 13335, Incentives for the Use of Health Information
Technology and Establishing
the Position of the National Health Information Technology Coordinator
(Washington, D.C.: Apr. 27,
2004).

National Coordinator for Health IT moves forward with this framework, it
will be essential to have continued leadership, clear direction,
measurable goals, and

6

mechanisms to monitor progress.

Table 1: National Health IT Goals and Strategies

Goal 1: Inform clinical practice with the use of electronic health records

Provide incentives for electronic health record adoption

Reduce risk of electronic health record investment

Promote electronic health record diffusion in rural and underserved areas

Goal 2: Interconnect clinicians so that they can exchange health
information using advanced and secure electronic communication

Establish regional collaborations

                 Develop a national health information network

                 Coordinate federal health information systems

Goal 3: Personalize care with consumer-based health records and better
information for consumers

                 Encourage the use of electronic health records

Enhance informed consumer choice

Promote use of telehealth systems

Goal 4: Improve public health through advanced biosurveillance methods and
streamlined collection of data for quality measurement and research

Unify public health surveillance architectures

Streamline quality and health status monitoring

               Accelerate research and dissemination of evidence

Source: HHS.

Potential Cost Savings from the Use of IT

According to the National Coordinator for Health IT, HHS's initial
estimate of potential nationwide savings resulting from the adoption of
health IT is based primarily on two studies conducted by the Center for
Information Technology Leadership (CITL).7, 8 He also stated that the
annual savings estimate is conservative and excludes clinical encounters
from other health care delivery settings, such as inpatient care, disease
surveillance, and clinical research trials. One of the CITL studies
identified $78 billion in annual savings, while the other study estimated
$44 billion from the widespread implementation of IT used in ambulatory
care settings. Both studies estimated savings based on the use of models
to project the value of net cost savings from the adoption of IT and
incorporated information from published studies, expert panels, and market
research. However, CITL and other health care experts acknowledge that
these estimates are based on a number of assumptions and inhibited by
limited data and therefore are not necessarily complete and precise. The

6GAO, Health Care: National Strategy Needed to Accelerate the
Implementation of Information
Technology, GAO-04-947T (Washington, D.C.: July 14, 2004).
7Center for Information Technology Leadership, The Value of Healthcare
Information Exchange and
Interoperability (Boston: 2004) and The Value of Computerized Provider
Order Entry in Ambulatory
Settings (Boston: 2003).
8 CITL was chartered in 2002 by Boston-based, nonprofit Partners
HealthCare System as a research
organization established to help guide the health care community in making
more informed strategic
IT investment decisions.
9Ambulatory care refers to health services provided on an outpatient basis
to those who visit a health
care facility or hospital and depart after treatment on the same day.

studies reported savings based on (1) electronically sharing health care
data between providers and stakeholders,10 which resulted in saving time
and avoiding duplicate tests, and (2) avoiding unnecessary outpatient
visits and hospital admissions, as well as more cost-effective medication,
radiology, and lab ordering. Net savings estimated nationwide are
summarized in table 2.

Table 2: Potential Annual Cost Savings from Nationwide Adoption of IT

Category of IT adopted Potential cost savings

a

Ambulatory electronic health records $78 billion

Ambulatory computerized provider order entryd, b $44 billion

Sources: CITL.
a Study limitations: (1) the analysis was focused on provider-centric
(i.e., no secondary transactions considered) and encounter
specific transactions between providers and their stakeholders; (2)
financial value was based on information exchange and
interoperability between entities, not within entities; (3) model does not
take into account the financial impact of avoided tests
and other changes in utilization that flow from improved information
exchange; (4) model does not address the costs of
developing relevant standards to support health care information exchange
and interoperability; and (5) estimate of cost
savings assumes widespread adoption of IT in order to achieve financial
savings within 10 years, with 50% of benefits accruing
in the first year of adoption and increasing by 10% each year.
b Study limitations: (1) projections are based on a small number of
studies, sometimes extrapolating to national figures from a
single data point; (2) CITL did not incorporate any assumptions about
volume pricing discounts; (3) CITL did not project any
savings for pharmacies, laboratories, or other affiliated providers who
would presumable benefit from improved efficiencies with
better orders; and (4) CITL makes projections for an "average" provider as
defined by available national statistics.
e Computerized provider order entry is a software application that
supports the ordering of medications, diagnostic tests,
interventions, and referrals by outpatient providers.

Although HHS had originally given us estimated annual federal savings of
$30 billion associated with the Medicare program, in its comments HHS
stated that it is unable to reliably quantify savings. HHS also stated
that it is actively working to determine what the savings will be and
expects them to be substantial. Although the available data make
estimating cost savings difficult, according to HHS Medicare would likely
save a proportionate amount from reduced utilization of services for
Medicarefunded office visits (because the program uses volume-based
payments for ambulatory and inpatient care) and from reduced use of
medications given inappropriately or unnecessarily.

The annual cost savings shown above assumes fairly high IT adoption rates,
whereas the current rates are low. According to HHS documents, these
savings estimates are based on the assumption that more than half of all
physician practices 11 and hospitals would use EHRs that are connected to
a national health information network. Therefore, increasing the rates of
IT adoption is critical to achieving the benefits cited. However, the
results of the surveys and analyses of adoption rates are varied.
Respondents to two recent surveys reported that only 31 percent of
physician group practices12 and 19 percent of hospitals13 use fully
operational EHRs. According to a

10CITL defines providers as hospitals and medical group practices and
stakeholders as independent
laboratories, radiology centers, pharmacies, payers, and public health
departments.
11 According to CMS, in 1999, out of 763,519 physicians in the United
States, physicians in solo
practices represented 25 percent, group practices represented 33 percent,
and salaried physicians
represented 41 percent.
12 According to the Medical Group Management Association.
13 According to the 15th Annual Leadership Survey of the Healthcare
Information and Management
Systems Society. The respondents to this survey consisted of 86 percent
that worked for a hospital
organization and 14 percent that worked in other types of health care
delivery organizations.

14

study by the Commonwealth Fund, approximately 13 percent of solo
physicians have adopted some form of EHR, while 57 percent of large group
practices (50 or more physicians) have adopted an EHR.15

In summary, IT can improve the efficiency and quality of medical care and
result in costs savings. Although estimated nationwide savings are
primarily based on only two studies with known methodological limitations
and contingent on much higher IT adoption rates, the potential for
substantial savings is promising. The estimated overall cost savings
associated with the adoption of IT in the health care industry, the
federal government's portion of the savings, and information on current IT
adoption rates raise key questions, including the following:

o  	Can some savings be realized now given the limited adoption of health
IT, and at what rate will additional savings be realized?

o  What actions can be taken to improve IT adoption?

o  	What additional overall savings are there from other health care
delivery settings, such as inpatient care or public health?

o  	What savings are there from federal programs, including Medicare,
Medicaid, VA, and DOD?

Agency Comments

HHS's Acting Inspector General provided written comments on a draft of
this correspondence. These comments are reprinted in enclosure I. HHS
emphasized that costs, benefits, and net savings are difficult to
quantify. Concerning Medicare, HHS stated that the department is presently
unable to quantify specific savings, but it is actively working to
determine what the savings will be; we modified our report accordingly.
Regarding nationwide savings, HHS stated that there are many studies that
estimate the potential for nationwide savings as a result of the adoption
of health IT. We acknowledge that there are many published studies that
discuss cost and other benefits of IT, some of which we pointed out in our
October 2003 report, mentioned earlier in this correspondence. However,
according to the National Coordinator for Health IT, the initial estimate
was based primarily on the studies cited in our correspondence. In
addition, the studies referred to in the department's comments are based
on individual organizations and do not project nationwide savings. HHS
agreed that the current adoption rates are low and indicated that
estimates of rates are varied at best. The department provided additional
examples that illustrate this variation, which we incorporated. HHS also
provided technical comments, which we incorporated as appropriate.

We are sending copies of this report to the Secretary of Health and Human
Services and other interested officials. We will also provide copies to
others on request. In

14 The Commonwealth Fund is a private foundation that supports independent
research on health and social issues and makes grants to improve health
care practice and policy. 15 The Commonwealth Fund, Information
Technologies: When Will They Make It Into Physicians' Black Bags? (New
York: December 2004).

addition, the report will be available at no charge on the GAO Web site at
http://www.gao.gov. If you or your staff have any questions about this
report or need
additional information, please contact me at (202) 512-9286 or M. Yvonne
Sanchez,
Assistant Director, at (202) 512-6274. We can also be reached by e-mail at
[email protected] or [email protected].

Sincerely yours,

David A. Powner
Director, Information Technology Management Issues

Enclosure

                                   Enclosure

          Page 7 GAO-05-309R HHS's Estimate of Savings from Health IT

                                   Enclosure

          Page 8 GAO-05-309R HHS's Estimate of Savings from Health IT

                                   Enclosure

(310482)
Page 9 GAO-05-309R HHS's Estimate of Savings from Health IT

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