An Analysis of Adoption of Digital Health Records under Switching Costs

Transcription

1 1 An Analysis of Adopion of Digial Healh Records under Swiching Coss November 2010 ZAFER D. OZDEMIR a JOHN M. BARRON b SUBHAJYOTI BANDYOPADHYAY c ozdemir@muohio.edu; barron@purdue.edu; shubho.bandyopadhyay@warringon.ufl.edu a Farmer School of Business, Miami Universiy, Oxford, OH b Kranner School of Managemen, Purdue Universiy, Wes Lafayee, IN c Warringon College of Business Adminisraion, Universiy of Florida, Gainesville, FL Absrac We invesigae he incenive issues ha surround he adopion and sharing of elecronic healh records (EHR) and he poenial role of a personal healh record (PHR) plaform in faciliaing daa sharing. Through our analysis, we find evidence ha healh care providers may no have an incenive o share paiens records elecronically even hough EHR sysems will increase consumer surplus, especially in he presence of provider heerogeneiy and myopic consumers. In his conex, we find ha an independen PHR plaform can creae incenives for he providers o share heir paiens records elecronically wih oher providers by selecively subsidizing hem. In a pluralisic healh care sysem like ha in he Unied Saes, where healh care providers have varying incenives o implemen elecronic healh records, an online PHR plaform can provide a proxy for a naional healh informaion nework wherein consumers can freely exchange heir healh records among compeing providers. Keywords: elecronic healh records, personal healh records, swiching coss, naional healh informaion nework, echnology adopion

2 1. Inroducion The adopion and sharing of elecronic healh records (EHR) by healh care providers can grealy faciliae he availabiliy of complee paien healh informaion a he poin of care delivery. Togeher wih clinical decision suppor sysems such as hose for medicaion order enry, his can preven many errors and adverse evens (injuries caused by medical managemen raher han by he underlying disease or condiion of he paien) (Baes, e al. 1998, Baes, e al. 1999). Despie he poenial benefis of shared elecronic healh records, he Unied Saes has lagged several of is counerpars in OECD counries in he use of EHR (Harris Ineracive 2001). A 2001 Harris Ineracive sudy conends ha one of he main reasons for he low level of EHR adopion in he U.S. is he prevailing marke srucure and he misaligned incenives. In Europe s single payer sysems, he payer can (and ofen does) dicae wha healh providers mus do. In conras, each provider in he U.S. pluralisic sysem makes is own decision of wheher o digiize and share is medical records. Such decisions ake ino accoun he reurn on such capial invesmens, including he effec of sharing records on a provider's compeiive posiion (Bender, e al. 2006, Markle Foundaion 2004). Sensing an opporuniy, echnology gians Google and Microsof have recenly enered his domain wih heir personal healh record (PHR) soluions (Knowledge@Wharon 2007, Lohr 2008, McBride 2008). PHR is an elecronic healh record on an individual ha can be drawn from muliple sources, while being managed, shared, and conrolled by he individual. Google has parnered wih he Cleveland Clinic o pilo is PHR dubbed Google Healh, while Microsof is piloing is own sysem, called Healh Vaul, wih he Mayo Clinic. PHRs come wih applicaion inerfaces ha faciliae inegraion wih providers clinical elecronic records, so ha 1

3 paiens can send personal informaion, a he individual s discreion, ino he EHR or pull informaion from he EHR ino he PHR. One of he main criicisms of he EHRs implemened o dae is ha hese sysems do no communicae wih each oher and are herefore islands of informaion. Consequenly, paiens find i exremely difficul o share heir daa wih oher providers. Expers in he field have long noed ha in he absence of a naional healh informaion exchange and a willingness by medical providers o share heir closely guarded paien informaion, he rue poenial of EHR would never maerialize. However, he recen inroducion of PHR ools wih sandard inerfaces and daa srucures sand o change he saus quo as hey empower he paiens in building a digial hisory of heir healh and easily sharing hose records wih he relaed paries as hey see fi. These developmens lead us o ask he following research quesions. Can social surplus increase wih shared EHR, ye providers no adop i? Given heerogeneous providers ha compee wih each oher, which ype of provider (in erms of size or qualiy) would gain from join elecronic sharing of healh records? Wha role can a Web-based PHR plaform (such as hose by Microsof and Google) play in his environmen, and wha would be he incenive of he PHR plaform in providing such a service? We develop and analyze a sylized model ha provides answers o hese quesions. In deermining he opimal EHR/PHR adopion sraegies, providers consider improvemens in care and value provided o heir paiens and subscripion fees (if any) on he one hand and echnology implemenaion coss and reduced swiching coss for exising paiens on he oher. A key feaure ha can limi adopion of he PHR plaforms by he providers is ha adopion can lower he coss of paiens swiching o alernaive providers. We characerize he online plaform as an eniy ha can leverage, hrough appropriae pricing (which can someimes 2

4 ake he form of a subsidy), eiher of heir clienele (paiens on one side and healhcare providers on he oher) o ensure he paricipaion of he oher in maximizing heir profis. To he bes of our knowledge, his is he firs sudy ha analyically invesigaes how he wo mos cied barriers o he widespread adopion of EHR (i.e., sizable coss and misaligned incenives) can be overcome in a pluralisic healh care sysem such as he one in he Unied Saes. There are several key findings of his research. We firs show ha compeing (heerogeneous) providers in many cases will no have he incenive o implemen EHR sysems or share heir daa elecronically due o compeiive concerns. In such siuaions, an online personal healh records plaform like Microsof HealhVaul or Google Healh can serve hree purposes. Firs, given he side-benefis from he raffic generaed, such eniies may be willing o absorb some of he coss o ransform previously non-ineroperable EHR sysems ino sysems ha alk o each oher hrough he middleware of he PHR plaform. 1 In addiion, as he PHR plaform derives rens from he consumers ha paricipae, i can selecively compensae providers for he impac of he reducion in he swiching cos for consumers who may now be more willing o swich healh care providers. In oher words, he PHR plaform can subsidize he healhcare providers in order o induce hem o join he plaform. Third, and perhaps mos imporanly, he PHR plaform can acily enforce a binding agreemen among compeing providers o elecronically share heir records wih one anoher. Thus, by is very naure, a PHR plaform is well-posiioned o solve he issue of misaligned incenives. I can ac as he 1 While heoreically any hird-pary could esablish a PHR plaform, he full exracion of he gains o doing so may be limied o eniies wih a large web presence. Furhermore, implemenaion of he IT infrasrucure and sysems is likely o be a lo less cosly for a sofware gian such as Google or Microsof han an associaion of hospials (due o availabiliy of skilled personnel, experience in managing large sofware projecs, ec.). This phenomenon can be observed in oher areas of he economy. For example, he digiizaion of healh records bears some semblance o he digiizaion of books in ha, while a grand alliance of research libraries suppored by a coaliion of foundaions could have creaed an online reposiory of books (as noed by he indusry observer Nicholas Carr in a recen blog pos ( hp:// archives/2009/01/ he_grea_libra.php)), a privae enerprise (Google) is creaing and, o a large exen, will conrol such a reposiory. 3

5 underlying ineroperable framework ha can lead o increased sharing of medical records among compeing healh care providers, and faciliae he adopion and use of elecronic healh records in a pluralisic healh care sysem. From he sandpoin of he relevan economics lieraure, we build on and conribue o he research sream on swiching coss. In paricular, because digial sharing of healh records makes i easy for consumers o change providers, echnology adopion decisions endogenously deermine swiching coss in our seing, whereas in he swiching cos lieraure such coss are reaed exogenously. This resuls in a much more nuanced and complex analysis han can be found in he exan lieraure. Our oher conribuions include allowing for (i) seller heerogeneiy, (ii) a se of experienced consumers for each seller a he ouse, and (iii) differences in swiching coss depending on he direcion of he swich. These feaures are needed o accuraely model he adopion of EHR in he healh care indusry, and each play an imporan role in he analysis. The res of he paper is arranged as follows. In he nex secion, we se up an economic model ha incorporaes swiching coss o explain he naure of he compeiion beween healh care providers. We hen expand his discussion o include he possibiliy of adoping EHR sysems in Secion 3, he elecronic sharing of medical records in Secion 4, and he poenial impac of a PHR plaform in Secion 5. The final secion concludes wih a discussion of he resuls and heir implicaions. 2. Provider Compeiion under Swiching Coss In his secion, we presen a model of a marke wih heerogeneous healh care providers. Our seing involves a varian of a differeniaed produc framework ha allows us o examine he opimal EHR and PHR adopion sraegies in a compeiive equilibrium. A key feaure of he 4

6 analysis is o characerize he adopion of EHR sysems by providers, as well as he enry of a PHR plaform, no only in erms of he changes such adopions imply for healh care services and coss of delivery, bu also in erms of he changes in he coss consumers face o swich providers. Inroducing swiching coss requires a dynamic seing such as ha suggesed by Klemperer (1987). In such a dynamic seing, consumers ake ino accoun he reducion in value o paronizing a healh care provider if ha provider has high swiching coss, as high swiching coss no only can limi he freedom o change providers if circumsances change and he paien has a higher value for a differen provider in he fuure bu also can increase anicipaed prices in fuure periods. The basic framework of he model is as follows. There are wo ypes of economic acors in he marke: providers and consumers. To simplify he analysis o follow, we consider he case of only wo providers, A and B. The coss o provider i ( i= AB, ) producing oupu q i in period wih he ameniy level a i ( a 0,) include boh a fixed cos componen ki ( a i ) and a consan marginal cos componen ca ( i ). Toal coss are given by: i ( ) C q, a = k ( a ) + c( a ) q. i i i i i i This represenaion allows for he possibiliy ha fixed and/or variable coss depend on he level of ameniies. A lis of he noaion used in he ex is shown in Table 1 in he Appendix. We assume he wo providers in he healh care marke compee in erms of boh prices and ameniies or services. To simplify he discussion, le a consumer s uiliy funcion be linear in price and ameniies (decreasing in price, increasing in ameniies) and le a provider's marginal coss be linear in ameniies, such ha ca ( ) = θ + a. Then, compeiion beween he wo i i 5

7 providers can be expressed in erms of prices ne of ameniies, wih he "ne" price for provider k defined by p = p a, where g i i i g p i is he gross price for provider i ha does no accoun for he value o he consumer of he ameniies offered. A lower price can be inerpreed as a provider eiher lowering is gross price or increasing ameniies o arac addiional consumers, wih eiher acion cosly o he provider as i reduces he provider s ne revenues per uni sold. We assume ha each consumer j, j = 1, L, purchases one uni of healh care services each period and is in he marke for a mos wo periods. Klemperer (1987, 1995) and Marinoso (2001), among ohers, have noed he poenial imporance of swiching coss for consumers in characerizing marke compeiion. Such swiching coss likely play an imporan role in he healh care secor: paiens ofen sick o a healhcare provider simply because swiching o anoher provider can be exremely difficul, even if he laer migh be a beer fi. Wih swiching coss, consumers each period fall ino wo disinc caegories: new consumers who are enering he healh care marke for he firs ime and experienced consumers who purchased healh care services from a paricular provider in he prior period. Define η as he proporion of consumers new o he marke in period. A new consumer j s gain o purchasing from provider i a ne price p i in period is defined by he uiliy: uji = ri pi ε ji, where ε ji 0 is he mach loss for consumer j purchasing from provider i in period, and r i is he ime invarian gain o purchasing healh care services from provider i. The lossε ji 0 can be viewed as indicaive of he coss of visiing a paricular provider, a loss ha varies for a paricular consumer across providers and over ime. Such a loss could reflec ransporaion coss or losses associaed wih he exen of misalignmen beween he specific services sough and he 6

8 experise of each of he providers. In he subsequen discussion, we assume ha consumers' gains o purchasing from eiher provider r i, are sufficienly high ha all consumers are acive buyers. The proporion ( 1 η ) of consumers in period are experienced consumers. Following Klemperer (1987), experienced consumers can be divided ino wo disinc groups. The proporion µ of consumers in period are experienced consumers wih new loss values who consider alernaive providers in period +1. The proporion ( 1 η µ ) of consumers in period are experienced consumers who are assumed o be locked-in o heir prior provider, and do no consider swiching providers. An experienced consumer no "locked-in" o her prior provider receives a new loss value and decides wheher o remain a he prior provider or swich o he alernaive provider. In he healh care provider marke, such a consumer has esablished a provider-paien relaionship ha involves a complee medical hisory sored by ha provider, and hus faces "swiching coss" when changing providers. These coss can include re-esablishing a medical hisory hrough requesing copies of records from he previous provider and delivering hem o he new provider, filling ou forms a he new provider s office, as well as repeaing cerain ess in case previous es resuls are missing, incomplee, or simply deemed uninformaive or unaccepable by he new provider. Experienced consumers who consider receiving care from a new provider weigh he uiliy gain from swiching o a preferred provider on he one hand and he associaed cos of he process on he oher. An experienced consumer j who previously purchased from provider i will reap a ne uiliy from purchasing from he oher provider k in period equal o: u = r p ε s jk i k jk ik, 7

9 where i = A, B, k = A, B, and i k. The erm s 0 denoes he cos o he consumer of swiching from provider i o provider k. ik To simplify he model s soluions, we assume ha each period he consumers who experience a new mach loss value draw from he ime-invarian uniform disribuion H ( ε ) wih lower and upper bounds of 0 and 1, respecively. 2 As is sandard in he swiching coss lieraure, we adop he Hoelling-like assumpion of negaively correlaed mach losses for each consumer across he wo providers, such ha ε = 1 ε. jb The probabiliy an experienced consumer who purchased from provider A in he prior period and draws a new mach loss value, ε A, remains wih provider A in period, ja y, is he probabiliy ha ra pa ε A exceeds r p (1 ε ) s B B A AB, or: (1) y s = ρ + 2 AB where [ r p r p ] ρ = 1 + ( ) /2. Similarly, he probabiliy an experienced consumer wih a A A B B new mach loss value, who previously purchased from provider B, swiches o provider A in period, x, is he probabiliy ha ra pa ε A s AB exceeds rb pb (1 ε A), or:3 (2) x s = ρ 2 BA For period, le α 1 denoe he inheried proporion of experienced consumers in period who purchased from provider A in he prior period -1. Looking forward and assuming experienced consumers in period +1 are randomly drawn from new consumers of healh 2 This assumpion is like ha made by Weizsacker (1984), Klemperer (1987), and Gehrig and Senbacka (2004). 3 Given he upper bound on ε A is one, we resric our analysis o parameers such ha a he equilibrium se of prices, 1> y > 0 and 1 > x > 0. 8

10 services in period, he probabiliy an experienced consumer in period +1 purchased from provider A in period, α, equals he probabiliy ha r A p A ε A + β c V A r p (1 ε ) β V B B A c B exceeds, where V A ( V B ) denoes he expeced value associaed wih period +1 purchases of medical services condiional on being a consumer of provider A (B) in period, and β is he consumers discoun facor, wih 0 < β c 1. Thus, he probabiliy α ha a new c consumer buys from provider A raher han provider B in period is given by: βc (3) α = ρ + ( VA VB ) 2 Inroducing he superscrip e o denoe new consumers expecaions regarding key variables in he nex period, he erm ( V V ) in (3) can be expressed as: 4 A B (4) ( ) 21 µ + 1 η + 1 e e µ + 1 e ( sba sab ) VA VB = ρ+ 1+ α 1 + ( sab + sba ) ρ η η Raional expecaions on he par of consumers means ha new consumers accuraely forecas e e fuure prices and marke shares, such ha ρ 1 = ρ 1 and α = α. Assuming raional expecaions, + + we can subsiue (4) ino (3) and solve for he proporion of new consumers who purchase from provider A in period, α. The likelihood a consumer purchases from provider A in he curren period is given by: ( 1 ) ( 1 ) q = ηα + µ α y + α x + η µ α A Similarly, he likelihood a consumer purchases from provider A in he following period is given by: 4 A formal derivaion of equaion (4) is provided in he mahemaical supplemen. 9

11 ( 1 ) ( 1 ) qa+ 1 = η+ 1α + 1+ µ + 1 α y + 1+ α x η + 1 µ + 1 α where α + 1 is he proporion of new consumers in he following period who choose o purchase from provider A. Similar expressions hold for provider B, wih q ( 1 q B A ) q ( 1 qa ) =. B = and To simplify he analysis, we consider a wo-period ime horizon. For consumers, his means ha we do no consider forward looking behavior by new consumers in he second period, such ha α ( ) 1 + ra pa+ 1 rb p B+ 1 = ρ =. 5 2 For providers, his means considering profis only for he periods and +1. Expeced profis for Providers A and B are hen given by: (5) ( ) + 1 ( + 1 ) π = q L p θ + βq L p θ k βk A A A A A A A and (6) ( 1 ) ( ) ( 1 + 1) ( + 1 ) π = q L p θ + β q L p θ k βk B A B A B B B where β denoes providers common discoun facor, wih 0 < β 1. Benchmark Case: No EHR or PHR The prices in a sequenial Nash equilibrium are deermined as follows. Firs, one obains he firs-order condiions characerizing he opimal price for each of he wo providers in he second period, period +1. These firs-order condiions for prices in he second period are solved for he se of fuure (second-period) equilibrium prices. These equilibrium prices are subsiued ino he wo-period profi expressions (5) and (6). Then, one obains he firs-order 5 Klemperer (1987) makes a similar assumpion in he characerizaion of new consumers in he second period. Noe ha in Klemperer s wo-period analysis, new consumers in he second period replace a fracion of experienced consumers who exi he marke. In conras, in our overlapping-generaions framework, all new consumers in he firs period remain in he marke in he second period as experienced consumers. These experienced consumers are joined by a cohor of new consumers. 10

12 condiions for prices in he firs period, and hese firs-order condiions are solved for he se of curren (firs-period) equilibrium prices. Equilibrium prices depend on specific parameers, such as swiching coss ( s AB and s BA ), providers and consumers discoun facors ( β and β c ), he gross uiliies obained from he wo providers ( r A and r B ), he division of consumers across various caegories, including in paricular he proporion of experienced consumers who are locked in each period (i.e. (1 η µ ) and (1 η + 1 µ + 1) ), and he producion coss (θ ). The prices in each period also depend on he inheried proporion of curren consumers who previously purchased from provider A ( α 1). Proposiion 1 provides explici soluions for prices and profis for he benchmark symmeric case. Proposiion 1: Assume all consumers are new in period ( η = 1, µ = 0). In period +1, assume here are new consumers ( η + 1 > 0), experienced consumers who consider swiching µ + 1 >, and experienced consumers who are "locked-in" η + 1 µ + 1 ( 0) ( + < 1). Le consumers' values r A and r B be sufficienly high and he proporion (1 η + 1 µ + 1) of consumers locked in for period +1 be sufficienly low such ha consumers' values exceed equilibrium prices in boh periods. Le swiching coss s AB and s BA be posiive, bu sufficienly low such ha some consumers will swich from each provider in period +1. Finally, le here be symmery in he sense ha providers have idenical swiching coss ( s = s = s), idenical values o consumers ( r = r = r), and common fixed coss ( k = k = k). Then, assuming consumers and providers A B A B have a common discoun facor ( β = β c ), are forward-looking (0 < β 1), and have raional expecaions, equilibrium prices and wo-period profi are he same across providers and given by: p β = θ η sµ η + 1 µ η+ 1 ( + ) AB BA 2 ( 1+ 4s s ) ( ) µ (4η 1) + µ 2 11

13 1 p + 1 = θ + η + 1+ µ + 1 π = k(1 + β) + πo where 2 ( 1+ 4s s ) ( ) 1 µ β + 1 (4η + 1 1) + µ πo = + 3( η ) + 2sµ ( η + 1+ µ + 1) 1 η+ 1 denoes he wo-period operaing income of a provider. Deails of he proof of Proposiion 1 are available in he mahemaical supplemen. Noe ha if swiching coss were zero ( s = 0) and here were no locked-in consumers in he second period ( η + µ = 1), hen equilibrium prices simplify o p = p 1 = θ + 1. However, inroducing small posiive swiching coss given some experienced consumers ha consider swiching + ( µ + > 0) resuls in lower prices in he firs period as providers compee for new consumers who 1 in he subsequen period will face coss o changing providers. 3. Adopion of EHR Sysems wihou Daa Sharing According o a 2007 Harris Ineracive survey, 54 percen of he respondens said ha if hey were o choose beween wo docors, of whom only one used elecronic healh records, heir choices would be influenced by he availabiliy of his echnology a leas o some exen. In anoher phone survey of 2,000 aduls in easern Massachuses, 19 percen said hey would swich heir medical affiliaion if hey found a provider ha offered elecronic healh records (Goh 2008). In our model, such perceived benefis of EHR by consumers can be inerpreed as an increase in consumers gain o purchasing healh care services from he provider. In paricular, if provider A adops EHR, hen his would be refleced by an increase in he parameer 12

14 r by v > 0, and a resuling increase in equilibrium operaing profis > 0. Assuming such A π o an ameniy affecs a provider s fixed coss alone, accompanying provider A s adopion of EHR would be an increase in is fixed cos componen k by F > 0. A The model developed in Secion 2 allows us o examine he implicaions of he adopion of EHR by each provider. We firs presen a lemma which will help us characerize he providers equilibrium EHR adopion sraegies. Lemma 1: Saring from he benchmark symmeric case idenified in Proposiion 1, adopion of EHR by a single provider increases ha provider's prices in periods and +1 by a fracion of he increase in he value of EHR o he consumers. The adoping provider's wo-period operaing income increases as well (i.e. π o > 0 ). The prices and operaing income of he provider no adoping EHR decrease by equal magniudes. Deails of he proof of Lemma 1 are available in he mahemaical supplemen. In oher words, given symmeric providers, adopion of EHR by one provider ranslaes ino equal bu opposie sign changes in prices and operaing income for he wo providers. The proof of he lemma is provided in he mahemaical appendix, and i revolves around evaluaing he comparaive saics of he equilibrium expressions ha were deermined from Proposiion 1. Accordingly, he normal form of he game reduces o Figure 1 where he upper (lower) expression in he parenheses represens he profi of provider A (B). The resul is a Prisoner's dilemma for he providers wih respec o he adopion of EHR. Tha is, alhough here are gains o each provider adoping EHR if he oher provider does no, he equilibrium wih boh providers adoping generaes a loss for boh providers. We provide he equilibrium sraegies and oucomes formally in Proposiion 2, which follows direcly from he analysis of he normal form presened in Figure 1. 13

15 --Inser Figure 1 abou here-- Proposiion 2: If π o F, hen eiher provider will perceive a ne gain o he unilaeral adopion of EHR. However, if one provider adops EHR, he second provider also adops EHR as her gain equals he firs provider s original gain o adoping EHR. If boh providers adop EHR, equilibrium prices and operaing income are idenical o he case when neiher adops EHR. The providers profis will hus be lower if boh adop EHR given he fixed coss F > 0 in implemening he EHR. Thus, we have he poenial for he classic Prisoner's dilemma in he conex of EHR adopion. The key driving force for he above Prisoner's dilemma characerizaion of EHR adopion is ha consumers' choices across compeing providers depend on prices, swiching coss and he perceived difference in values ra rb. Wih iniial symmery across providers, adopion of EHR by one provider ranslaes ino equal bu opposie sign changes in operaing income for he wo providers, and ha provides a poenial incenive o adop if EHR implemenaion coss are no oo high. I also provides an incenive for he second provider o adop if one provider has already adoped EHR. When boh providers adop EHR, providers' relaive compeiive posiion is unchanged, heir price elasiciy of demand is unchanged, and hus equilibrium prices are he same as before. However, given posiive implemenaion coss o generae he benefis of EHR, i follows ha profis for each provider are lower when boh adop EHR. Proposiion 2 predicions are consisen wih he lieraure (e.g., Bender, e al. (2006) and he previously cied repors by Harris Ineracive and McKinsey Consuling), namely ha he main benefi of EHR adopion accrues o he paiens of he adoping provider, and his is paricularly rue if EHR adopion is widespread. Paradoxically, facors ha increase he wo-period operaing income advanage o a single provider adoping EHR also make losses from EHR adopion more likely. The reason for his is 14

16 ha he greaer he operaing-income gain o unilaeral adopion of EHR, he more likely his gain will exceed he fixed cos of implemening EHR for a single provider. Bu, as he Prisoner's dilemma resul of Proposiion 2 indicaes, he resul of such a posiive ne gain o unilaeral adopion of EHR is ha boh providers adop, and hus boh incur losses. We hus have he following proposiion: Proposiion 3: The prisoner's dilemma oucome idenified in Proposiion 2, one in which boh Providers adop EHR and suffer losses, is more likely o occur if here are higher swiching coss (s), a higher proporion of consumers locked-in o a provider in period +1 (due o a reducion in eiher η + 1 or µ + 1 ), or if consumers place a greaer value on EHR. Such facors raise he operaing income gain o a single provider adoping EHR, and hus make i more likely ha such operaing income gains will exceed he fixed coss of implemening EHR. Deails of he proof of Proposiion 3 are available in he mahemaical supplemen. 4. The Decision o Share Healh Records Elecronically Anoher poenial benefi of EHR for paiens is ha he cos o swich o a differen provider can drop if he providers share paien records elecronically. This can happen when providers adop he same sysem or heir sysems are buil according o esablished daa sandards. Several sandards currenly exis for he ineroperabiliy of EHR sysems, alhough in realiy heir implemenaion remains exremely limied. These include sandards like he ATSM Coninuiy of Care Record for ransfer of paien healh records summary (based on XML), he ANSI X12 sandard for ransmiing billing informaion (his has become popular in he Unied Saes because of he regulaory requiremens under he Healh Insurance Porabiliy and Accounabiliy Ac (HIPAA) for ransmiing billing daa o Medicare), he DICOM sandard for represening and ransferring radiology images, and he HL7 se of sandards for ransmiing 15

17 messages or documens like physician noes. An ineroperable EHR sysem can inegrae wih he oher provider s sysem in order o seamlessly exchange paien records. We henceforh assume ha boh providers have adoped ineroperable EHR sysems. However, each provider sill requires an economic incenive o share healh records elecronically; oherwise hey will accep elecronic records from incoming new paiens, bu limi ougoing esablished paiens access o heir records, for insance by only providing heir records on paper. 6 Such sraegic behavior inroduces direcion-dependen swiching coss ino he analysis. Wihin he conex of he model developed in he previous secion, aking as given ha he wo providers have adoped EHR, we now consider he choice of he providers regarding he abiliy o share elecronic records and is impac on paien mobiliy and provider profis. In he case of symmeric firms wih no experienced consumers in he firs period, Klemperer (1987) has shown ha firms may be beer or worse off wih lower swiching coss. In paricular, consider he se of consumers in he second period who are eiher new consumers or experienced consumers who have new preferences. If he second group is very small ( µ + 0), hen lower swiching coss can reduce firms' profis. On he oher hand, if he second 1 group is large, hen lower swiching coss can increase firms' profis. The reason for his is ha lower swiching coss reduces he compeiion for such consumers in he firs period, and hus can lead o higher prices. We conduc our analysis of he sharing of elecronic healh records in our more general seing in which providers echnology decisions can unilaerally impac he swiching coss (e.g., by adoping differen policies regarding he forma of daa o hand ou o ougoing esablished 6 Paiens frequenly have difficuly in accessing heir medical records because of he relucance of heir providers o release records. For example, see hp:// 16

18 paiens) and providers can differ in size. Given he complexiy of he analyical soluions, especially when here are heerogeneous providers, we carried ou exensive simulaions o gain several insighs. 7 As we indicaed in he proof of Proposiion 1, he exisence of a Nash equilibrium se of prices in he second period require cerain assumpions regarding he key parameers o assure ha all consumers in he marke purchase from one of he wo providers and ha here is robus compeiion across providers for new and experienced consumers in period +1. For such a siuaion o occur, we assume ha (a) he values of providers o consumers ( r i ) are sufficienly high; (b) hese values are sufficienly similar across providers; (c) he proporion of cusomers ( η + 1 µ + 1) + who poenially consider a new provider in period +1 is less han one bu sufficienly large; and (d) he swiching coss ( s, s ) are sufficienly small. In paricular, we consider he AB BA following "benchmark" se of parameer values: r = r = 4, s = s = 0.1, µ + 1 = 0.4, η + 1 = 0.5. Normalizing fixed coss o zero ( k = k = 0 ) and seing discoun facors equal o one, we esablish ha: A B A B AB BA Resul 1: There exis cases where a provider may choose o reain a daa sharing arrangemen even hough his reduces he swiching coss of is paiens. This resul arises even hough we can show ha a provider who unilaerally reneges on he daa sharing arrangemen would have higher prices and profis in he second period. This second-period profi increase, however, is more han offse by he fall in profis in he firs 7 As a consequence, we sae our findings hrough simulaions no as proposiions, bu as resuls : no formally proven (since i is impossible o check for all combinaions of he parameer values), bu neverheless esed for exisence across a range of values. 17

19 period, as new consumers anicipae he negaive impac of such higher swiching coss on he value o paronizing ha provider, and his leads o a significan drop in he perceived value of he provider in he firs period. The negaive impac on he firs period profi dominaes he posiive impac on he second period profi because he proporion of he marke affeced by he provider s decision in he second period is smaller han ha in he firs period. However, such an oucome is less likely given our modificaions o he benchmark analysis. In paricular, oher hings equal, when we simulae unilaeral increases in swiching coss (somehing ha can be achieved in real life by giving ougoing paiens heir records in paper, for example) we find ha his resul is reversed if we allow for a sufficien proporion of inheried experienced consumers in he firs period. The addiion of experienced consumers in he firs period reduces he relaive imporance of new consumers ha he providers compee for. This allows hem o charge higher prices in he firs period and hereby improve profis. Furher, he reduced imporance of new consumers in he firs period increases he poenial gain from unilaerally reneging on he daa sharing arrangemen (even hough such an acion makes he provider less aracive o he new consumers). We sae his observaion as our second simulaion resul. Resul 2: Even if boh providers may profi from an elecronic daa sharing arrangemen compared o he benchmark case of no elecronic daa sharing, each may have he incenive o deviae and give ougoing esablished paiens heir records on paper. The incenive o deviae, if any, is more pronounced for he beer/larger provider. The effecs of Resuls 1 and 2 are illusraed in Figure 2, which shows he resuls of he numerical analyses as we move away from he benchmark case. The horizonal axis represens provider heerogeneiy in erms of value as perceived by he consumers ( r r ) A B, and he 18

20 verical axis represens he degree of consumers forward-looking behavior ( β C ). The an area of he graph represens combinaions of parameer values where boh providers have he incenive o share heir healh records elecronically, hereby showing he possibiliies for Resul 1 o occur. --Inser Figure 2 abou here-- We observe ha heerogeneiy beween he providers inroduces he incenive o renege on a daa sharing arrangemen, since given a sufficien size difference, he more aracive, and hus larger provider, will no find elecronic sharing of paien records profiable (see he purple area in Figure 2). This is because high swiching coss make he larger provider relaively more aracive o consumers in he curren period, as he larger provider is more likely o be heir preferred provider in he nex period (and hereby have a smaller probabiliy of a cosly swich) if hey experience new preferences. The reduced mobiliy of paiens benefis he larger provider relaively more in he second period, oo. In oher words, he larger/beer provider will have he incenive o unilaerally increase he swiching coss for paiens who wan o defec from i, even if he smaller provider coninues o cooperae wih i by lowering is own swiching coss. In pracice, his can be realized wih he larger/beer provider supplying he healh records of a defecing paien on paper, even hough he smaller provider coninues o supply he healh records of is own defecing paiens elecronically. The incenive o renege on a daa sharing arrangemen increases furher as consumers become less forward-looking (low β C ). This is because, when consumers do no look ahead, each provider benefis (in he nex period) from unilaerally raising is own swiching coss as i limis he mobiliy of esablished paiens. Consumers can ofen be myopic or discoun he fuure impac of heir curren decisions regarding healhcare since hey are less likely o hink of fuure 19

21 periods a a ime when heir immediae houghs are cenered around heir curren illness. This is especially rue if he ype of illness is no chronic in naure, and he consumers do no expec o be back wih he provider a regular inervals. Thus, he presence of provider heerogeneiy and myopic consumers are wo reasons ha may preven providers from sharing heir records elecronically. This observaion is consisen wih he findings of Hillesad, e al. (2005), who conclude ha even hough ineroperable EHR sysems could resul in a large social surplus (esimaed o be in he range of $142-$371 billion), hey are unlikely o be realized in he curren pluralisic healh care sysem. So far, we have assumed ha he wo providers are idenical in erms of he likelihood of acquiring new consumers in each period as well as he likelihood ha he new consumers will be locked-in during he second period. However, his may no be he case. For example, here may be some specialized naional providers (e.g., he Mayo Clinic) who serve paiens ha are predominanly new each period, as prior paiens ypically swich o heir local hospial for longerm care. In he conex of our generalized model, his could be inerpreed as asymmery in boh η ' s and µ ' + 1 s across he providers. For insance, if provider A had a higher η A and a higher µ A + 1, hen his could induce provider A o seek a daa sharing arrangemen (and correspondingly lower swiching coss), as he gain his provides prospecive new consumers is more widespread and can be exraced by he provider in erms of higher prices. Our discussion on daa sharing up o his poin has been independen of changes in eiher direc coss o he provider or direc benefis o consumers in erms of improved healh care from adoping EHR. However, such facors may also play an imporan role in limiing he adopion of EHR sysems. For example, smaller providers may find he fixed (per paien) cos of EHR implemenaion oo high and hence may no digiize heir records. This may explain why small 20

22 providers would no seek o share daa elecronically even hough, on he basis of reducing swiching coss alone, a small provider migh gain from doing so. In addiion, he improvemen in he qualiy of healh care service due o he adopion of EHR could differ depending on he size of he providers. Specifically, he benefis of EHR may be greaer a large providers, as a larger provider migh realize a greaer gain from he sharing of elecronic records inernally across a more diverse se of deparmens. Noe ha his would sugges large providers would be more likely o adop EHR sysems, bu does no direcly address he quesion of heir likelihood of making such a sysem ineroperable wih compeiors for he purpose of daa sharing. In fac, i could be he case ha, in offering more varied services, heir paiens would be less likely o seek o swich o a differen provider, and hus large providers gain from elecronic daa sharing hrough ineroperable EHR sysems could be less han wha is modeled here. These findings are imporan in he conex of he significan oulays allocaed owards adopion of elecronic healh records in he American Recovery and Reinvesmen Ac of 2009 (ARRA 2009), popularly known as he simulus bill. While a grea deal of emphasis was laid on having ineroperable records, he resuls of our analysis indicae ha having ineroperable records migh sill no be sufficien o incenivize he providers o share he records elecronically wih compeing providers. This can be achieved hrough new regulaion or via an inervenion of a privae eniy who can creae he necessary incenives for daa sharing. The enry of independen PHR plaforms is, herefore, imporan in his conex. We discuss he implicaions in he following secion. 21

23 5. The PHR Plaform In his secion, we consider a plaform ha offers an online PHR service o paiens and providers, similar o he services of Google Healh and Microsof s HealhVaul. The PHR plaform akes on he responsibiliy of developing he middleware and rouines ha will enable he auomaic ransfer of paiens healh records from providers EHR sysems o is servers. A PHR plaform ypically seeks paricipaion from boh providers and consumers. A provider paricipaes by uploading is paiens records o he plaform s servers. Once records are on he plaform, he consumer can esablish an accoun wih he plaform and gain elecronic access o her records. Assuming he providers have no already commied o elecronic sharing of records direcly horough heir EHRs, having a PHR accoun reduces he cos a paien incurs when ransferring healh records o a new provider. All he paien needs o do is o eiher gran appropriae access righs o he new provider (if ha provider is on he plaform) or download he records and submi hem eiher elecronically or physically (if ha provider is no on he plaform). While he laer process would require he consumer o incur a non-negligible cos, he acual amoun is likely o be considerably lower han wha would be he case wihou he plaform. By sraegically posiioning iself beween paiens and providers, he PHR plaform can charge appropriae prices o faciliae paricipaion of eiher side of he wo-sided marke in a way ha maximizes is oal profi. Taking as given he adopion of EHR, our analysis suggess one advanage of he plaform is he requiremen ha each paricipaing provider makes available elecronic records o a hird pary. This limis a provider s abiliy o unilaerally raise swiching coss for consumers hrough is policy on he forma in which he paien daa is shared (e.g., giving hard-copy raher han elecronic records o prior esablished paiens who wish o swich o a new provider, an 22

24 oucome ha was shown o be possible in Resul 2). We find ha his feaure can play an imporan role in supporing an equilibrium wih elecronic daa sharing. In he previous secion, we have discussed a scenario in which boh providers would benefi from muual daa sharing hrough ineroperable EHR, bu ha such an oucome may no be aained due o he providers sraegic behavior, since each has he incenive o unilaerally renege on he daa sharing arrangemen. We find ha he emergence of he plaform can help resolve such incenive issues. Specifically, we carried ou simulaions o invesigae he differen possibiliies in his scenario. While such simulaions canno be exhausive due he surfei of parameers, exploring across a range of parameer values gives us he following resul. Resul 3: The PHR plaform can faciliae paricipaion by selecively subsidizing providers. Across a range of parameer values, he likelihood ha a subsidy is required for a leas one provider increases as he wo providers become more heerogeneous in erms of he value hey provide o consumers and decreases as he proporion of new consumers in he firs period goes up. Figure 3 illusraes hese possibiliies. The figure idenifies hree disinc oucomes in erms of he adopion of ineroperable EHR and daa sharing and links hese oucomes o wo key parameers: provider heerogeneiy and he exen of inheried consumers in he firs period. We have previously esablished he imporance of hese wo parameers in he discussion of Resul 2. On he graph, a higher value on he horizonal axis reflecs an increase in he perceived value of provider A relaive o provider B ( r A r B ), and hus an increase in A s marke share. A higher value on he verical axis reflecs an increase in he proporion of new consumers in he firs period, η. The remaining inheried consumers are assumed o obain new preference values, such ha η + µ = 1. A provider ha lowers her swiching coss reduces he likelihood an 23

25 inheried consumer will say, oher hings equal. On he oher hand, a provider ha lowers her swiching coss increases he likelihood a new consumer will choose ha provider, as he new consumer values lower fuure swiching coss, oher hings equal. As he proporion of new consumers in he firs period increases, new consumers' (raional) expecaions of fuure swiching coss play a greaer role in he providers' choices of elecronic daa sharing. --Inser Figure 3 abou here-- Assuming boh providers have adoped EHR, he an area in he graph indicaes he parameer values such ha boh providers would benefi from elecronic daa sharing and hence would be ineresed in joining he plaform if heir sysems are no ineroperable. To undersand his oucome, consider he limiing case of he benchmark model, wih symmeric sellers and no inheried consumers in he firs period ( r = r and η = 1). In his case, a unilaeral reducion in A B swiching coss improves he compeiive posiion of a provider in he firs period, as forwardlooking new consumers in he firs period place a higher value on a provider wih a lower swiching cos given he chance in he second period ha he consumer will desire o swich. The resuling increase in profis from new consumers in he firs period o a provider who reduces swiching coss more han ouweighs he poenial loss in profis from lower swiching coss in he second period regardless of wha he oher provider has done. Thus, his represens he parameric region associaed wih volunary elecronic daa sharing across he providers. In conras, he purple area in he graph indicaes he parameer values for which neiher provider would find i advanageous o share he records elecronically. Noe ha if providers are sufficienly similar and/or he inheried base of paiens is sufficienly high (or equivalenly he number of new consumers sufficienly low), hen neiher provider has an incenive o ease he swiching process for consumers. For insance, for symmeric providers, as he proporion of 24

26 inheried consumers in he firs period increases, a some poin he loss in profis from daa sharing exceeds he associaed gain due o being more aracive o new consumers who anicipae he poenial desire o swich in he second period. Under hese condiions, he PHR plaform would need o subsidize boh providers o secure heir paricipaion. The gray area indicaes he parameer values for which he smaller provider (B) is ineresed in daa sharing, bu he larger provider is no. The reason is ha, as provider A s expeced value advanage o consumers increases, and hus is marke share, provider B appeals less o he new consumers in he firs period. Accordingly, he smaller provider benefis relaively more from increased paien mobiliy, which enhances is perceived value by he new consumers who anicipae he oher provider as being he more preferred provider in he second period. In conras, as he marke share of provider A increases due o is inheren higher valuaion by consumers, elecronically sharing paien records wih he compeing provider becomes less advanageous given he larger number of consumers who would leave wih relaive ease. Thus, in his parameric region, he PHR plaform would need o subsidize provider A o ensure is paricipaion. Noe ha his is precisely wha Google Healh and Microsof HealhVaul have embarked on doing wih heir (subsidized) parnerships wih large, well-known providers. We have indicaed ha by signing on he providers, possibly wih a subsidy o induce paricipaion or by providing cosly sofware services, a PHR plaform can offer a service ha reduces swiching coss across providers and provide paiens wih up-o-dae online access o heir medical hisory. Bu wha is he gain o he plaform? While he PHR plaform could charge a fee o paiens, we expec he gains o be less direc due o he sensiiviy of he informaion. Google, for example, expecs ha consumers who come o rus i for unbiased 25

27 healh informaion will subsequenly use is oher services exclusively in he long run. Thus, Google will benefi from is PHR service in a sochasic sense he consumers of Google Healh will indirecly provide revenues from he various oher services ha hey use, when hey, for example, click on adveriser links wihin oher Google producs (Informaics 2008). Oher sources of revenue can emanae from oher eniies, such as medical researchers who wish o gain access o he voluminous healh daa (wih explici permission from he paiens) or companies who migh wish o marke medical devices (a sraegy pursued aggressively by Microsof HealhVaul) or personalized advice o he paiens (e.g., he online medical advice sie Keas.com uses impored daa from PHR services o come up wih personalized recommendaions for paiens who gran access o heir records). 6. Discussion and Conclusion Sudies have consisenly poined ou he lile progress ha has been made in he U.S. oward a naional healh nework, despie is disinc poenial benefis. The core of he problem is ha he adopion of ineroperable sysems and elecronic sharing of daa among compeing providers requires ha all key decision makers in a pluralisic sysem be beer off by doing so. Online service providers such as Google and Microsof have sensed he profi poenial in his saus quo, and have herefore decided o develop online PHR services ha can exrac some of he available surplus as ren. So, raher han an inegraed, globally disribued healh nework, we may well be moving owards a sysem where healh records are ranspored o and aggregaed in he cloud provided by he privae, independen PHR plaforms. Our analysis shows ha such plaforms will have he incenive o no only provide he middleware for an ineroperable sysem, bu also in some cases subsidize he healh care providers in building heir own EHR sysems (or, equivalenly, provide i as a cloud compuing service). 26

28 Our resuls are imporan from a policy sandpoin, since a significan amoun of he public debae on healhcare revolves around he digiizaion and sharing of paiens records among providers. Since many healh care providers do no have he incenive o adop elecronic healh records, he subsidies provided o docors in he recen simulus bill o digiize paien records is indeed a laudable sep. However, he resuls of our analysis indicae ha his migh no be enough, since even when compeing providers (as well as heir paiens) sand o gain by sharing records elecronically, an individual provider may have he perverse incenive o renege from such an arrangemen. Daa sharing may hus have o be enforced by dika in he form of addiional regulaion, which may be me wih resisance. The cos of digiizing healh care records in he hospials wihin he Unied Saes have been esimaed a $75 o $100 billion dollars (Goldman 2009), and his represens a considerable risk for he sakeholders. As he on-going experience of he Unied Kingdom governmen s program o creae an inegraed naional EHR shows (Charee 2008), such iniiaives can significanly go over budge and behind schedule even in a single provider sysem where providers do no have independen incenives. The challenges are only be magnified in a pluralisic sysem. In his seing, he relaively low-key enry of a PHR plaform such as Google Healh can be a poenially imporan alernaive o regulaion. By enabling a proxy naional exchange for healhcare records, he presence of he online PHR plaform can provide he impeus oward exracing he gains o shared EHRs. The aggregaion of healh records in he cloud in a sandard forma has he poenial o benefi medical research immensely. We believe ha here will be significan opporuniies for providers such as Microsof and Google o weak heir revenue models in order o build a large base of users, as some indusry observers have suggesed (Robers 2008). For example, Google 27