Cost versus Quality in Healthcare: The Role of IT

I read an interesting paper today by Matt Thatcher and Jim Oliver, "The Impact of Information Technology on Quality Improvement, Productivity and Profits: An Analytical Model of a Monopolist". This paper made an important distinction between the cost reduction and quality improvement in health care especially as it relates to the role of information technology.

Copyright: Government Technology

In many articles and in discussions, many people take for granted that in the long run, information technology would inevitably lead to the reduction of cost and ultimately also lead to quality increases. These especially came to the fore during the health care reform debates when it was argued that health information technology would have these two desirable effects (see link for detailed description) without actually explaining how this would be so. In line with its goal of ultimately reducing costs while improving quality in the health sector, the Obama administration appointed David Blumenthal to head the Office of the National Coordinator for Health Information Technology, which is tasked with ensuring the smooth adoption of health information technology.
Despite these noble intentions however, the authors of the paper argue that cost reduction and quality improvement do not always go together and that "product quality improvements might come at the expense of firm productivity"

What then is the distinction? The authors argued that cost reduction occurs when the adoption of IT enables a firm produce more with less resources, thus reducing the unit cost of each product while quality improvement on the other hand occurs when IT helps to increase the desire of consumers to purchase or consume more of the product, in the medical field, it might be to make a more accurate diagnosis, to treat a disease more effectively and so on. The authors designed a model that suggested that you might  have one effect but not both- productivity might be affected- depending on the type of technology implemented

There is a caveat however. This model was developed for a single-product monopolistic firm. This is not true of most medical firms today. The question is how well this model will hold-up in the face of real companies and with real data.

The quest to improve quality is unending. The ability to reduce costs might not be so infinite- basic economics tells us so. The question is, in the words of a popular song, "how low can you go?"