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entitled 'Health and Human Services' Estimate of Health Care Cost 
Savings Resulting from the Use of Information Technology' which was 
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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. 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),[Footnote 1] 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.

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.[Footnote 2] 
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 throughout the department that cover a 
broad range of activities and participants.[Footnote 3] 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."[Footnote 4] 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 National Coordinator for Health IT moves forward with this 
framework, it will be essential to have continued leadership, clear 
direction, measurable goals, and mechanisms to monitor 
progress.[Footnote 5]

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.

[End of table]

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).[Footnote 6],[Footnote 7] 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.[Footnote 8] 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 studies reported savings based on (1) 
electronically sharing health care data between providers and 
stakeholders,[Footnote 9] 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: Ambulatory electronic health records[A]; 
Potential cost savings: $78 billion.

Category of IT adopted: Ambulatory computerized provider order entry[D, 
B]; Potential cost savings: $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.

[D] Computerized provider order entry is a software application that 
supports the ordering of medications, diagnostic tests, interventions, 
and referrals by outpatient providers.

[End of table]

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 Medicare-funded 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[Footnote 10] 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 practices[Footnote 11] and 19 
percent of hospitals[Footnote 12] use fully operational EHRs. According 
to a 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.[Footnote 
13]

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:

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

* What actions can be taken to improve IT adoption?

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

* 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 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 pownerd@gao.gov or sanchezm@gao.gov.

Sincerely yours,

Signed by: 

David A. Powner:

Director, Information Technology Management Issues:

Enclosure:

DEPARTMENT OF HEALTH & HUMAN SERVICES: Office of Inspector General:
Washington, D.C. 20201:

FEB 11 2005:

Mr. David A. Powner: 
Director:
Information Technology Management Issues: U.S. Government 
Accountability Office: Washington, DC 20548:

Dear Mr. Powner:

Enclosed are the Department's comments on the U.S. Government 
Accountability Office's (GAO's) draft correspondence entitled, "Health 
and Human Services' Estimate of Health Care Cost Savings Resulting From 
the Use of Information Technology (GAO-05-309R). The comments represent 
the tentative position of the Department and are subject to 
reevaluation when the final version of this report is received.

The Department provided several technical comments directly to your 
staff.

The Department appreciates the opportunity to comment on this draft 
correspondence before its publication.

Sincerely,

Signed by: 

Daniel R. Levinson: 
Acting Inspector General:

Enclosure:

The Office of Inspector General (OIG) is transmitting the Department's 
response to this draft report in our capacity as the Department's 
designated focal point and coordinator for U.S. Government 
Accountability Office reports. OIG has not conducted an independent 
assessment of these comments and therefore expresses no opinion on them.

COMMENTS BY THE U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES ON THE 
U.S. GOVERNMENT ACCOUNTABILITY OFFICE'S (GAO's) DRAFT CORRESPONDENCE 
ENTITLED "HEALTH AND HUMAN SERVICES' ESTIMATE OF HEALTH CARE COST 
SAVINGS RESULTING FROM THE USE OF INFORMATION TECHNOLOGY (GAO-05-309R):

The Department of Health and Human Services (HHS) appreciates the 
opportunity to review the draft correspondence to the Committee on the 
Budget, House of Representatives, entitled "Health and Human Services' 
Estimate of Health Care Cost Savings Resulting from the Use of 
Information Technology" (GAO-05-309R). The GAO draft correspondence 
focuses on estimates of potential savings to the health system and 
Federal Government programs through widespread adoption of electronic 
health records (EHRs), as well as implementation rates and savings 
assumptions. The draft correspondence is part of a broader, ongoing GAO 
study involving an overview of HHS efforts to develop a national health 
information technology (HIT) strategy, lessons learned from the 
Department of Defense and Veterans Administration efforts, and the 
experience of other countries in their HIT efforts.

Because the focus of the draft correspondence report is on cost 
savings, our major comments relate to that issue. We emphasize that the 
costs, benefits, and net savings are genuinely difficult to quantify. 
In fact, there are several studies in related areas that demonstrate 
the potential to achieve a wide range of savings. Moreover, we note 
that consideration is not given in the report to the broader benefits 
of HIT in areas such as quality improvement, patient satisfaction, 
public health, and clinical research.

MAJOR COMMENTS:

Medicare Savings:

At this time HHS is unable to quantify reliably the Medicare savings. 
Accordingly, all references to Medicare savings or cost estimates that 
are attributable to HHS should be removed from the draft 
correspondence. While HHS is presently unable to quantify specific 
savings, we are actively working to determine what the savings will be 
and expect them to be substantial.

Basis For Nationwide Savings:

There are many studies that estimate the potential for nationwide 
savings as a result of the adoption of HIT. The draft correspondence 
cites only two such studies conducted by the Center for Information 
Technology Leadership. To provide additional resources, excerpts from 
other studies are detailed below.

Several studies report that EHR use by physicians results in 
substantial improvement in clinical processes. The effects of EHRs 
include reducing laboratory and radiology test ordering by 9 to 14% 
(Bates, 1999; Tierney, 1990; Tierney, 1987), lowering ancillary test 
charges by up to 8% (Tierney, 1988), reducing hospital admissions, 
costing an average of $17,000 each, by 2-3% (Jha, 2001), and reducing 
excess medication usage by 11% (Wang, 2003; Teich, 2000). A forthcoming 
study evaluating the impact of EHRs on resource utilization in two 
States demonstrates that physician visits decrease by 9% after EHR 
implementation. There is also evidence that EHRs can reduce 
administrative inefficiency and paper handling (Khoury, 1998). These 
studies are peer-reviewed, and their findings have been replicated 
using a variety of methodologies. [See Bibliography]

Adoption Rates:

HHS agrees that, "current (adoption) rates are low." The report cites 
adoption rates for fully operational EHRs as 31% for physician group 
practices and 19% for hospitals. However, surveys and analyses of 
adoption rates are varied at best. To illustrate, the estimate of 31 
adoption rate in physician group practices may be somewhat misleading 
because physician group practices represent only a small portion of 
physicians in the U.S., and the size of the group must be taken into 
account when considering such statistics. The majority of physicians in 
the U.S. practice as solo physicians or in small group practices, which 
have a significantly lower adoption rate for EHRs than larger group 
practices. According to a Commonwealth study, approximately 13% of solo 
physicians have adopted some form of an EHR whereas 57% of large group 
practices of 50 or more physicians have adopted an EHR. This study 
estimated that 35% of physicians in practices of 10 to 49 physicians 
have EHRs. Moreover, there can be significant variation in what is 
considered to be an EHR. Accordingly, we ask that the draft 
correspondence reflect the information provided above, including the 
lack of consensus on what constitutes an EHR.

Bibliography:

Bates D.W., G.J. Kuperman, E. Rittenberg, J.M. Teich, J. Fiskio, N. 
Ma'luf, A. Onderdonk, D. Wybenga, J. Winkelman, T.A. Brennan, A.L. 
Komaroff, M. Tanasijevic, "A randomized trial of a computer-based 
intervention to reduce utilization of redundant laboratory tests," Am. 
J. Med. 106(2), 144-50 (1999):

Jha, A.K., G.J. Kuperman, E. Rittenberg, J.M. Teich, D.W. Bates, 
"Identifying hospital admissions due to adverse drug events using a 
computer-based monitor," Pharmacoepidemiology and Drug Safety 10(2), 
113-19 (2001):

Khoury AT. Support of quality and business goals by an ambulatory 
automated medical record system in Kaiser Permanente of Ohio. Eff Clin 
Pract. 1998 Oct-Nov; 1(2):73-82.

Teich JM, Merchia PR, Schmiz JL, Kuperman GJ, Spurr CD, Bates DW. 
Effects of computerized physician order entry on prescribing practices. 
Arch Intern Med. 2000 Oct 9;160(18):2741-7.

Tierney WM, Miller ME, McDonald CJ. 1 The effect on test ordering of 
informing physicians of the charges for outpatient diagnostic tests. N 
Engl J Med. 1990 May 24;322(21):1499-504.

Tierney WM, McDonald CJ, Hui SL, Martin DK. Computer predictions of 
abnormal test results. Effects on outpatient testing. JAMA. 
1988;259:1194-8.

Tierney WM, McDonald CJ, Martin DK, Rogers MP. Computerized display of 
past test results. Effect on outpatient testing. Ann Intern Med. 1987 
Oct; 107(4):569-74.

Wang SJ, Middleton B, Prosser LA, Bardon CG, Spurr CD, Carchidi PI, 
Kittler AF, Goldszer RC, Fairchild DG, Sussman AJ, Kuperman GJ, Bates 
DW. A cost-benefit analysis of electronic medical records in primary 
care. Am J Med. 2003 Apr 1;114(5):397-403. 

FOOTNOTES

[1] 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. 

[2] GAO, Information Technology: Benefits Realized for Selected Health 
Care Functions; GAO-04-224 (Washington, D.C.: Oct. 31, 2003).

[3] GAO, HHS's Efforts to Promote Health Information Technology and 
Legal Barriers to Its Adoption, GAO-04-991R (Washington, D.C.: August 
13, 2004).

[4] 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).

[5] GAO, Health Care: National Strategy Needed to Accelerate the 
Implementation of Information Technology, GAO-04-947T (Washington, 
D.C.: July 14, 2004).

[6] Center 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).

[7] 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.

[8] Ambulatory 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.

[9] CITL defines providers as hospitals and medical group practices and 
stakeholders as independent laboratories, radiology centers, 
pharmacies, payers, and public health departments.

[10] 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.

[11] According to the Medical Group Management Association. 

[12] 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. 

[13] The Commonwealth Fund, Information Technologies: When Will They 
Make It Into Physicians' Black Bags? (New York: December 2004).