This research paper analyzes the impact of information technology (IT) in a healthcare

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1 Producvy of Informaon Sysems n he Healhcare Indusry Nrup M. Menon Byungae Lee Lesle Eldenburg Texas Tech Unversy, College of Busness MS 2101, Lubbock, Texas menon@ba.u.edu The Unversy of Illnos a Chcago, College of Busness, Chcago, Illnos blee@uc.edu The Unversy of Arzona, Karl Eller School of Managemen, Tucson, Arzona eldenbur@u.arzona.edu Ths research paper analyzes he mpac of nformaon echnology (IT) n a healhcare seng usng a longudnal sample of hospal daa from 1976 o We classfy producon npus no labor and capal caegores. Capal s classfed no hree componens medcal IT capal, medcal capal, and IT capal and labor s classfed no wo componens, medcal labor and IT labor. Resuls provde evdence ha IT conrbues posvely o he producon of servces n he healhcare ndusry. (Organzaonal Producvy; Healh IS; IS Invesmen; IS Performance Evaluaon; IS Research Mehodology) 1. Movaon Organzaons, convnced ha nformaon echnology (IT) provdes busness value, have been acqurng ncreasng amouns of IT capal over he pas wo decades. The average amoun of IT nvesmen vares consderably by ndusry. The healhcare ndusry, for example, has mplemened IT relavely slowly. Only n he las few years have hospals nvesed heavly n IT (Keelhu 1992). Tremendous naonal neres n healhcare coss (Fuchs 1996) and conflcng resuls from IT producvy sudes n oher ndusres (e.g., Brynjolfsson and Yang 1996) movae our sudy of he value creaed by IT n he healhcare ndusry. Daa for he sudy were obaned from he Washngon Sae Deparmen of Healh. These regulaory daa offer several advanages. Frs, hospals are requred o repor accouns for IT expenses separae from oher capal. Pror sudes have reled on exane surveys for IT expense daa, and hs nformaon may no be accuraely repored. Second, s dffcul o draw meanngful nferences from emprcal sudes usng daa ses /00/1101/0083$ elecronc ISSN ha conan observaons from heerogeneous frms. The use of one ndusry (hospals) ncreases our ably o conrol for key organzaonal and envronmenal confounds. Furhermore, cos nformaon used by oher researchers ncludes allocaons of headquarer expense. Allocaons do no reflec acual resource usage and hus lower he qualy of daa. Our daase does no suffer from hese shorcomngs. Accordngly, we explore he producvy ssue (he enhancemen of oupu for a un change n npu) of IT usng a hghqualy daa-se from a cos-conscous ndusry, and apply a robus model and approprae behavoral assumpons for hospals. We classfy hospal capal no hree componens: IT capal, medcal capal, and medcal nformaon echnology capal. IT capal ncludes daa processng and communcaon capal (manly for admnsrave purposes). Medcal nformaon echnology capal ncludes equpmen used for dagnoss and herapeuc purposes,.e., o collec daa from paens or repor nformaon o medcal personnel (e.g., X-ray, 2000 INFORMS Vol. 11, No. 1, March2000, pp

2 machnes, magnec resonance magng, ec.). Medcal capal consss of equpmen used solely for herapeuc purposes (e.g., mprovemens n acue care wards, or lasers). Labor s classfed no wo componens, medcal and IT labor. Producve capal s calculaed as capal sock aggregaed over he pas several years usng annual capal expenses. The valdy of he capal sock measure requres a me wndow over he lfe expecancy of capal npu a a mnmum. Accordngly, we use an 18-year wndow (relavely long compared o pror research). The mehodology adoped for hs sudy s also dfferen from prevous IT producvy sudes. We use a sae-of-he-ar paramerc echnque, he sochasc froner approach. Snce hs approach assumes all producon processes are nherenly neffcen, he model parameers capure neffcences of he producon process a he frm level (Lovell 1993). In addon o hese research refnemens, hs paper adds o he exsng leraure n several ways. Frs, here s lle research nvesgang he producvy of IT nvesmens n he healhcare ndusry. Snce he adopon of IT n he healhcare ndusry concded wh he ranson o for-prof ownershp and he pressure of cos conrol from managed care and he governmen, measuremen of he busness value of IT nvesmen has mporan manageral mplcaons for praconers. Second, our dervaon of npu and oupu varables s more robus han n pror research (for example, he use of capal sock raher han annual capal expense). Las, capal nvesmen s caegorzed no hree ypes, provdng a more refned paronng han pror sudes. The paper s organzed as follows. In he nex, he healhcare ndusry s brefly revewed, and research expecaons are descrbed. In 3, producon heory and emprcal models are descrbed. Secon 4 descrbes he daa. Resuls are presened n 5, and 6 summarzes and concludes our sudy. 2. Background The un of analyss n hs sudy s a hospal. The hospal ndusry dffers from oher ndusres n ways ha may mpac he use of IT. These nclude he followng: (1) Hospal organzaonal srucure consss of wo separae enes. The medcal saff governs medcal decson makng, and hospal admnsraors provde servces ha physcans requre o rea paens (Harrs 1977). Ths creaes a enson beween physcans, who would prefer acquson of he laes medcal echnology, and admnsraors, who prefer o acqure capal suchas IT for admnsrave purposes. (2) The envronmen s hghly regulaed. Governmen legslaon deermnes he amoun and mehod of hospal rembursemen for large porons of paen care and hus affecs hospals economc behavor (cos mnmzaon, revenue maxmzaon, ec.) (Sloan e al. 1988). The healhcare ndusry was relavely slow n adopng nformaon echnology. Hospals emphaszed revenue maxmzaon pror o 1983, hus paen bllng sysems were among he early uses of IT. Paen charges were delvered daly o daa processng so ha paen blls were curren and could be ssued a dscharge. Manframe sysems were prmarly used for bllng and general ledger acves. Smaller hospals connued o perform hese funcons by hand. Informaon echnology was also used nensvely for regulaory reporng purposes, ncludng budgeng. Afer he change n Medcare rembursemen n 1983, IT connued o be adoped for revenue enhancemen. Sophscaed sofware allocaed coss wh he objecve of ncreasng revenues from hrd-pary payers suchas Medcare (Zmmerman 1995). Personal compuers were ncreasngly used by ndvdual deparmens for specfc purposes suchas nvenory conrol n pharmaces. Auomang clncal records s a relavely new objecve for hospals (Hern 1996). Only n recen years have hospals aemped o develop negraed cos accounng sysems (Andranos and Dykan 1996). Over he pas 30 years, here has been a consderable amoun of work on he producvy of healhcare organzaons. The search for a quanave measure of he conrbuon of he varous npu facors o producon has led o he esmaon of producon funcons and froners usng paramerc and nonparamerc echnques (e.g., Grosskopf e al. 1995). Research Expecaons. (1) Hospals were slow o adop IT. Durng he early sample years, nvesmens n IT capal and labor are proporonaely low when compared o oal nvesmens. Therefore we expec 84 Vol. 11, No. 1, March2000

3 low average IT producvy over he enre me perod. (2) In a rapdly changng rembursemen envronmen, especally afer 1983, hospals lacked drecon n employng IT and overhauled her sysems frequenly (Palley and Conger 1995). Thus low producvy for IT labor s expeced. (3) Federal and sae regulaory lms on nvesmen n expensve medcal nformaon echnology are expeced o resul n hgh producvy of medcal nformaon echnology for he few hospals allowed o nves. (4) To mnmze coss, hospals aemp o schedule medcal labor o mee demand. Accordngly, we predc a posve (and poenally he larges) producvy effec for medcal labor. 3. Producon Theores and Producvy Analyss Pror IT producvy sudes have been based on he heory of revenue maxmzaon wh he addonal assumpon of exogenously deermned npu expendures. However, emprcal analyss of producon models requres approprae assumpons abou frms economc behavor ncludng cos mnmzaon, prof maxmzaon, and revenue maxmzaon. If he regresson model fals o nclude manageral decsonmakng nformaon (e.g., managers use of esmaed demand and npu facor prces), he esmaes of he producon funcon parameers canno be usefully nerpreed. The use of behavoral assumpons n producvy analyss dffers markedly from hese smple regresson models. Whereas a regresson model examnes he exsence of correlaon beween ndependen and dependen varables, a behavoral model arbues causaly o suchcorrelaon. Incorporang he Behavoral Assumpon. The behavoral model mos commonly ascrbed o hospals s cos mnmzaon (Sloan e al. 1988). Consder a cos mnmzaon behavoral model gven by mn w * z z s.. ȳ f(z ), (1) where w (w 1,...,w n ) s he vecor of n npu prces; z (z 1,...,z n ) s he vecor of npus (such as capal and labor caegores); ȳ (y 1,...,y m ) s he vecor of oupus (suchas number of npaens cared for); f(z ) s he correspondence 1 ha defnes he producon echnology; and f(z ) quanfes he feasble oupus ha can be produced from gven quanes of npus z. Inpu quanes are assumed o be he decson varables (endogenous), and npu prces and oupu quany are assumed o be exogenous. The oupu n hospals s exogenous because he amoun of servce provded by a hospal s deermned by he casualy and llness raes n he populaon (McClellan 1995). Whle hospals have some degree of conrol over dscharge daes for paens, hey have relavely lle conrol over he demand for servces. The frs-order condons for Equaon (1) combned whhe producon funcon f(z ) yelds he followng sysem of equaons: ȳ f(z ) (2) f (z ) w,j 1,..., n, j, (3) f (z ) w j j where f k (z ) refers o he paral of f (z ) whrespec o z k. Equaons (2) and (3) represen a se of n equaons, one equaon for he producon funcon and he second se conanng n 1 equaons. The mcroeconomc nuon here s ha, n equlbrum, a frm wll equae he rao of margnal produc of an npu and s prce for all npu facors o a common rao. Usng suable funconal forms for f(z ), he generc sysem of equaons gven above can be wren explcly n erms of he parameers of he producon correspondence. Several facors (e.g., bounded raonaly, organzaonal consrans, and msmanagemen) preven he assurance of frs-order cos mnmzaon n an exac manner n emprcal daa. To reflec hs, we use sochasc producon froners o nroduce neffcency erms no he equaons. Tha s, Equaons (2) and (3) are rewren wh he sochasc neffcency erms (Schmd and Lovell 1979) as follows. (vu) ȳ f(z )e (4) f (z ) w e e k,j 1,..., n, k 1,..., f (z ) w j j n 1, and, j, (5) 1 f(z ) s called he producon funcon when ȳ s sngle-valued and no a se. Vol. 11, No. 1, March

4 where u s he echncal neffcency of a frm, v s random sascal nose, and e k s he relave allocave neffcency for npus and j. Noe ha here are n 1 allocave neffcency facors snce here are n npu facors and n 1 allocaon equaons. Once he producon funcon s esmaed, he mpac E of any npu z s deermned by smply dfferenang he funcon f (z ) whrespec o he npu facor z. Tha s, py f(z ) E. (6) p * z Equaons (4) and (5) presen a realsc pcure of hospal operaons by explcly modelng wo facors. Frs, s unlkely ha any wo hospals wll produce he same levels of oupu usng dencal levels of npu suchas IT resources. The parameer u k (suchha u k 0) reflecs echncal neffcency, whch s he dfference n converng npus o oupus beween frm k and he deal (see Equaon (4)). Second, facors suchas bounded raonaly, as menoned above (see Equaon (5)), preven frms from allocang resources a he opmal level gven by he frs order condon of cos mnmzaon. The allocave neffcency, e k, measures he dfference beween he acual allocaon and he opmal allocaon. The Full Informaon Maxmum Lkelhood (FIML) mehod of esmaon s appled on he maxmum lkelhood expresson derved from he sysem of equaons gven above o yeld conssen and mos effcen esmaes of he parameers (Greene 1993 p. 612) Characerscs of he Daa Se Daa from one sae are used o elmnae sysemac bases resulng from accounng pracces and healhcare polces pecular o dfferen saes. The fnancal daa colleced by he Washngon Sae Deparmen of Healhconss of 83 accouns from hree ypes of deparmens: (1) hose for npaen care, prmarly he room and board funcons, e.g., acue care and nensve care; (2) ancllary deparmens ha provde servces for bohnpaens and oupaens, e.g., emergency room and X-ray lab; and (3) cos ceners ha 2 Because of he hgh effcency of he esmaes, FIML ypcally yelds hgh -sascs when compared o leas-squares mehods. provde servces suchas admng and daa processng. These daa nclude charges and coss. Charges are he oal dollars blled for paen servces durng he perod and do no reflec rembursemen. Coss are he accumulaed operaonal expenses for he perod. The cos nformaon ncludes dealed expense caegores suchas salares and wages, supples, and ren. We asked hospal managers o classfy capal no caegores accordng o our defnons. Capal expenses allocaed o daa processng, daa communcaon, medcal records, admng, cenral servce, purchasng, accounng, medcal records, and personnel are caegorzed as IT capal. The capal expenses allocaed o MRI, CT Scan, radology (dagnosc), radology (herapeuc), elecrodagnoss, nuclear medcne, emergency room, elecromyography, recovery room, anaeshesology, IV herapy, and surgcal servce are consdered medcal IT capal. Capal expenses n accouns suchas ICU, sem-nensve care, acue care, physcal rehablaon, laboraory, pharmacy, home care servces, and medcal saff are classfed as medcal capal. Several of he remanng accouns (deary, cafeera, laundry, ec.) nclude neglgble capal expense, eher due o few capal expenses or because hese are ousourced. Any capal expense n hese remanng accouns s consdered srucural capal and s added o medcal capal. Salares n IT accouns are classfed as IT labor, and salares n he remanng accouns are classfed as medcal labor. For he oupu measure, we use adjused paen days, whch s he sum of npaen days and oupaen days. Oupaen days are derved by dvdng oupaen revenue by npaen revenue per day (npaen revenue dvded by npaen days). 3 Our sample consss of observaons from hospals classfed by he Amercan Hospal Assocaon as general medcal and surgcal hospals. We elmnae specalzed hospals such as psycharc and subsance 3 MacLean and Mx (1991) provde evdence ha hospal producvy s underesmaed f npaen and oupaen servces are no boh ncluded n he oupu measure. Snce our mehodology allows specfcaon of only one oupu, we use revenue shares of he wo oupus o wegh hem pror o aggregang hem. 86 Vol. 11, No. 1, March2000

5 abuse reamen ceners. Mssng values for capal deprecaon are nerpolaed snce he capal sock calculaons for eachyear depend on he capal deprecaon amoun for prevous years and mssng values n he seres underesmae he derved capal sock. Approxmaely 30 daa pons are generaed by nerpolaon. Observaons whcodng errors are elmnaed, leavng approxmaely 50 hospal observaons per year for he years 1976 o 1994 for a oal of 1,064 observaons. A sascal descrpon of he sample s presened n Table 1. Means are larger han medans, ndcang fewer large hospals and more small rural hospals, whch s a ypcal paern n Wesern saes Measuremen of Inpu and Oupu Varables Labor npu quanes are avalable from he full-me equvalen employee measure n he daa-se. Snce labor daa are also avalable n dollar amouns, he prce of labor can be derved for ndvdual hospals for eachyear. Salares are deflaed by he employmen prce ndex for healh care servces (Bureau of Sascs 1995) o adjus for qualy changes n labor over he years. Smlarly, dollar amoun and quany for he oupu measure are avalable n he daa. A hospal s annual charges for servces (n dollars) reflec he oupu dollar measure. To adjus for macroeconomc effecs over he years, he charges were deflaed by he consumer prce ndex for healh care servces (WEFA 1994). Our prevous dscusson on producon funcons suggess Table 1 Descrpve Sascs for he Sample for 1992 (Dollars n Thousands) Varable Obs. Mean Medan Sandard Devaon Avalable Beds Adjused Paen Days 55 56,895 50,454 46,074 Operang Revenues 55 $66,686 $52,417 $58,807 Operang Cos 55 $63,345 $44,117 $61,067 Operang Income 55 $3,341 $3,235 $13,267 IT Capal Expense 55 $1,137 $615 $1,487 IT Labor 55 $4,449 $3,071 $4,253 Medcal IT Capal 55 $1,103 $763 $9,907 Medcal Capal Expense 55 $2,805 $2,008 $2,672 Medcal Labor 55 $27,458 $20,687 $25,227 ha producon funcons can be emprcally deermned only f npu quanes z are known; dollar amouns (or expendure) of npu facors alone wll no suffce. Therefore, n addon o he capal sock n dollar amouns, we also deermne he prces of npus; capal sock and prces wll hen yeld he npu quanes Calculaon of Capal Sock We defne capal sock as he capal accumulaed by he frm from pas and curren nvesmens, adjused for deprecaon. Capal sock operaonalzes he capably of frms producve asses, whereas annual nvesmens only reflec asses acqured durng a parcular year. Hence, producve capal sock n a frm s measured by C C NI D (7) 1 where C, capal sock n he curren year, s equal o capal sock of he prevous year C 1 augmened by new capal purchased n he curren year NI, and reduced by some poron D of capal ha has been rered or deprecaed. The capal for each accoun n our daase s he deprecaed dollar amoun raher han new annual nvesmen. To conver he deprecaed capal daa back no capal sock, we assume an approprae common deprecaon rae for all hospals, snce fnancal deprecaon used by ndvdual hospals does no reflec he acual economc deprecaon. 4 We seleced hree dfferen seres of deprecaon raes from he WEFA (1994) daa se for he hree capal socks. To reflec echnologcal advancemens, a qualy adjusmen was appled by WEFA n preparng hese deprecaon raes. These seres are used exensvely by macroeconomss and governmen agences suchas he Bureau of Labor Sascs. Table 2 lss he capal sock and he seres name as descrbed n he WEFA 1994 daa se. 5 4 For example, f $100 was nvesed n capal n 1981, hen, wh a deprecaon rae of 20%, he daa se would conan $20 for each year from 1981 o Capal purchased n 1981 s worh $0 n 1986, bu hs capal (plan or equpmen) s lkely used n he producon process afer We acknowledge ha he use of hese average seres could lead o some bas. However, values of deprecaon raes for medcal capal range from and snce medcal capal conans srucures Vol. 11, No. 1, March

6 Table 2 Descrpon of Deprecaon Raes Used for Capal Sock Capal Sock Type Seres Descrpon Accordng o WEFA 1994 IT Capal Medcal IT Capal Medcal Capal Annual deprecaon rae, nonresdenal, producers durable equpmen, nformaon processng equpmen Annual deprecaon rae, nonresdenal, producers durable equpmen, ndusral equpmen Annual deprecaon, producers durable equpmen, oher Appendx A presens he dervaon of he producve capal sock from he deprecaon raes and he deprecaed capal daa. Snce deprecaed capal amouns pror o 1975 are no avalable, capal sock values for he begnnng few years may be nosy. For sensvy analyss, we lef ou he frs year and reran he analyss. Smlarly, we lef ou he frs wo years, and so on, hrough he frs sx years. The resuls were sascally very smlar, suggesng ha he capal sock sablzed quckly n he successve years (Menon e al. 1997) Prces and Quanes of Inpu Facors Pror healhcare producvy sudes have used npu prce proxes suchas capal dvded by number of beds (Zucherman e al. 1994) because daa on prces are rarely avalable. Suchprce proxes are no adequae for our daa snce he quany of capal n he producon funcon would hen be deermned by number of beds. Alernavely, had we specfed ndvdual peces of equpmen as npus, he model would be nracable. Anoher approach s o specfy caegores of capal n erms of absrac and aggregae physcal uns by frs deermnng he mplc renal prce or user cos of capal. Ths cos combned wh he derved capal sock n dollar amouns yelds he physcal uns of capal. The nuon behnd such a prce dervaon s ha, a he margn, he purchase prce of a capal asse equals he dscouned value of he sream of servces (and, hence, mplcly he rens) ha he asse wll provde (BLS 1983) and hus reflecs he margnal wllngness o pay for he asse. The renal prces for npu facors rely upon he Chrsensen and Jorgenson (1969) macroeconomc formulaon for asse prcng gven below. Ignorng nflaon and axes, he renal prce s gven by p q (r d ) (8) where q s he prce ndex of he asse for he year, r s an annual rae of reurn on he asse, and d s he annual economc deprecaon rae. Snce he ndvdual asse rae of reurn s unknown, we use frm s rae of reurn r n Equaon (8) for eachasse. The rae of reurn (Chrsensen and Jorgenson 1969) for a hospal n year s 3 1 A A A A A A A1 3 1 [q A * C A] A1 r (I [q * d * C (q q )*C ]) where A s he capal caegory, I s capal ncome defned by revenues mnus operang expenses, and C A s capal sock n asse A for he un for he year. Annual operang expense s he sum of annual capal deprecaon (no capal sock), salares, supples, and renal/lease expenses. Prce ndces q A and raes of deprecaon d A are obaned from WEFA (1994). The esmaed rae of reurn s subsued no Equaon (8) o yeld he renal prce of each asse for each hospal year. The above dervaon holds heorecal appeal because he rae of reurn vares over asses, hospals and years, hereby leadng o a se of seemngly exogenous prces. 6 We assumed ha prces vary beween hospals for (9) and equpmen of lower deprecaon, hs seems reasonable. The values of deprecaon raes for medcal IT capal are and IT capal ranges from , suggesng more rapd deprecaon and obsolescence compared o medcal capal. Ths also seems reasonable. 6 Alhough he dependence beween prce and capal sock s hghly nonlnear, we analyzed her correlaon and found low correlaon (0.30). In addon, resuls from he Hausman specfcaon es suppor our assumpon ha he varaon n prces mmcs exogeney (Menon e al. 1997). 88 Vol. 11, No. 1, March2000

7 several reasons. Frs, alhough Medcare s fla fee perdagnoss rembursemen s based on naonal average resource usage, he rembursemen scheme conans dfferenal paymens for eachng hospals, for hospals n rural and urban locaons, and for hospals ha provde dsproporonaely large amouns of ndgen care. These hospal characerscs provde unavodable or legmae cos dfferences (Shengold 1986, p. 7). Second, our dervaon of aggregaed capal values combnes dfferen ypes, models, and vnages of smlar equpmen sold by dfferen vendors resulng n varyng prces for a common denomnaon/un of capal across he sample. We analyzed he sandard devaons of derved prces o see f hey vared from hospal o hospal over he years and found ha whle he mean prces of he hree ypes of capal declned over he years, he varaon beween hospals eachyear was suffcen o mmc exogeney, bu a he same me, dd no seem arfcally nflaed (Menon e al. 1997). Fnally, he annual npu quanes for capal for eachhospal are deermned by dvdng he capal n dollar amouns by he derved prces. 4.4 Conrol Varables Alhough our daa se consss of seemngly homogeneous uns, organzaon-specfc facors may gve rse o poenal confounds. In hospals, ownershp srucure, he effec of me, and eachng saus need o be conrolled for. In hs daa, ownershp s no a confound because he majory of hospals n Washngon are nonprof (abou 92%). However, a conrol s added for he effec of me snce he sample perod s 18 years and characerzed by echnology advances and sae and federal polcy changes. A dummy varable for eachng saus s also ncluded. 5. Resuls and Dscusson The Cobb-Douglas funcon represens a consan reurns-o-scale producon echnology and s gven by a mulplcavely separable funcon beween he oupu and npu facors as shown below. y n a b cd z e e (10) 1 where he n npu facors are z and a, and b and D are parameers ha characerze he producon funcon. We do no assume consan reurns o scale snce ha may be oo resrcve n he healhcare conex. The effec of me s conrolled by he varable and s nonzero coeffcen b. The parameer for he eachng dummy D s c. Subsung Equaon (10) no Equaons (2) and (3) resuls n a sysem of equaons. Incorporang he sochasc parameers no hese equaons, he sysem can be wren n logarhm form as v u log(y) (a log z ) b * c * D e log(a ) log(a ) log(z ) log(z ) k 1 j j 1 log(w j) log(w 1), k 1,..., n 1; j 2,..., n; 1,..., n. (11) The above equaons canno be esmaed usng normal smulaneous equaon esmaon because wo random varables are summed n he frs equaon n (11). However, Schmd and Lovell (1979) show ha he lkelhood funcon can be obaned wh approprae assumpons regardng he error dsrbuons. See Appendx B for he lkehood funcon. To acheve convergence of he lkelhood funcon (Equaon (12)), he maxmum lkelhood funcon s concenraed whrespec o he mean and sandard devaon of he error erms. The deermnsc formulaon gven by Equaons (2) and (3) are frs esmaed usng he FIML/2SLS mehod on he sysem of smulaneous equaons. The error erms of Equaon (3) are calculaed usng he deermnsc formulaon esmaon. Keepng he mean and sandard devaons of errors consan, he maxmum lkelhood esmaes for he sochasc formulaon (Equaon (12)) are hen obaned. These parameer esmaes are nsered no Equaon (3) and new esmaes for he mean and sandard devaon of erros are calculaed. Ths procedure s eraed several mes unl he parameer esmaes converge o he.01% level. The resuls of he sochasc froner parameer esmaon gven by Equaons (4) and (5) are presened n Table 3. The resuls of hs analyss suppor our expecaons of hgh producvy mpac for medcal IT capal and low average producvy of IT capal. However, he expecaon ha IT labor would exhb low producvy mpacs (because of frequen overhaulng of IT) s Vol. 11, No. 1, March

8 no suppored. Table 3 shows ha mos npus, ncludng IT labor and capal, exhb a posve nfluence on he producon of oupu. Medcal labor shows he hghes posve mpac, as predced. Medcal capal, n conras, shows a negave mpac. Medcal capal expense reflecs nvesmen n deparmen mprovemens, prmarly on npaen wards, eher acue care or nensve care. Rembursemen changes affeced hospals ncenves, resulng n connually decreasng lenghs of say afer However, adjused paen days dd no decrease over he me perod because oupaen admssons ended o ncrease, parally hrough a subsuon of oupaen servces for npaen servces (Menke 1990). Thus, any ncreases n capal expense n npaen deparmens would be assocaed whdecreasng adjused paen days. The negave coeffcen on medcal capal probably reflecs hs rend. The negave value for he me coeffcen ndcaes a shf of producon se o lower oupu levels n he recen years. Table 4 s of more praccal neres snce shows he dependence of revenues on un change n npu coss. The resuls ndcae ha revenues ncrease by a facor of 2.9 for every un ncrease n IT labor. A smlarly large revenue conrbuon of medcal labor s found. Labor s ypcally scheduled o mee demand, and herefore uses fewer uns han capal o acheve revenue growh. Ths paern s conssen wh hospal rembursemen schemes ha were prmarly cosplus unl he md 1980s. Medcal IT capal also shows Table 3 Parameer Esmaes from Sochasc Producon Froner Parameer Esmae -Sasc Consan Non-IT Labor IT labor Medcal Capal Medcal IT Capal IT Capal Teachng Conrol Tme conrol r u r v For all values, p Noe. Adjused paen days s he oupu measure. a hgh margnal revenue conrbuon for he sample. Ths s no surprsng gven ha acquson of medcal IT capal equpmen by hospals was resrced by legslaon and he prces of ypcal servces usng hs equpmen were hgh, hereby affecng revenues. Alhough IT capal exhbs a posve producvy mpac, does no affec revenues as muchas labor does. Conssen wh pror healhcare sudes (Zucherman e al. 1994), he eachng saus varable reflecs a negave nfluence on producon of servces (Table 3). The lower producvy of eachng hospals suggess overulzaon of labor and capal. Several physcans and pad nerns are assgned o one paen, and cases end o be hghly complex, resulng n lower producvy. Our model myopcally consders only one objecve (cos mnmzaon) and one oupu (revenues). Hence, we are no able o capure eachng hospals mulple objecves, whch nclude no only provdng healhcare servces bu also developng healhcare professonals. However, hs sudy does valdae exan hypoheses ha organzaonal varables such as eachng saus do affec hospals overall, and lack of a conrol for eachng saus may resul n poenal underesmaon of parameers. Smlarly, n varous ndusres n whch IT producvy s beng deermned, dfferen organzaonal varables may lead o he overesmaon or underesmaon of producvy conrbuon. Conclusons Ths sudy uses a healhcare seng o examne he producvy of IT. Snce hospals are regulaed, dealed daa (e.g., salares, drec coss, deprecaon) are avalable a he deparmen level. These daa allow more Table 4 Facor Mean Margnal Revenue Conrbuon of Inpu Facors Usng Sochasc Froner Formulaon Mean Margnal Revenue Conrbuon Sd. Devaon IT Capal Medcal Capal Medcal IT Capal IT Labor Medcal Labor Vol. 11, No. 1, March2000

9 refned model specfcaon and reduce he level of measuremen error n oupu and npu varables. A sochasc froner approach s used ha assumes neffcency of processes. Ths approach models he producon process for eachhospal more realscally. Capal expense s caegorzed no hree separae caegores: IT capal, medcal IT capal, and medcal capal. Conrol varables for eachng hospals and for me-relaed facors are ncluded n he model, and our sample perod s relavely long ( ). Resuls obaned wh hese mehodologcal refnemens show ha boh IT and medcal IT capal exhb a posve nfluence on oupu. A posve mean margnal revenue conrbuon s also obaned for IT and medcal IT capal nvesmens. In addon, our resuls ndcae ha IT labor and medcal labor exhb a posve nfluence on oupu as well as a posve mpac on mean margnal revenue. However, we fnd ha medcal capal appears o be negavely assocaed wh oupu durng hs me perod. Ths fndng may reflec hospals aemps o conan coss by subsung oupaen servces for npaen servces, resulng n a decrease n lenghof say for acue care wards (where medcal capal s nvesed) and ncreasng oupaen vss for dagnosc ess and procedures (where medcal IT capal s nvesed). Margnal revenue conrbuon of he npus (n ncreasng order) are medcal capal, IT capal, medcal IT capal, medcal labor, and IT labor. Medcal IT capal conrbued nearly 100 percen more han IT capal, whle labor componens conrbued over 200 percen more han IT capal. Fnally, conssen whpror research, we fnd ha eachng hospals perform poorly relave o he res of he sample. Smlar o pror researchha aggregaes across varous ypes of capal, hs sudy s subjec o problems ha occur when he producvy mpacs of dfferen nformaon echnologes are averaged. When nformaon echnology s aggregaed over manframes, personal compuers, and neworks, he producvy mpac of IT may be undersaed, snce manframes are frequenly used pas her accounng deprecaon lfe and snce he prces of PCs dropped over he perod n queson. Hospals were slow n adopng new IT and mos IT managers kep gh conrol over he manframe nsallaons, so IT capal was probably no replaced n a mely manner. Whle he lower prces of a un of new IT and exended use of old IT may have somewha balanced each oher, he exac effecs of hese nfluences are dffcul o gauge a hs level of analyss. Acknowledgmens. We are graeful o Professor John Kng, Professor Izak Benbasa, he assocae edor and he anonymous revewers for her suggesons ha have grealy mproved he paper. A more dealed verson of he curren paper can be obaned from he auhors. Appendx A. Calculaon of Capal Sock. Le K 1976 be he capal sock for he asse n year, d 1976 be he deprecaon rae of capal sock, and D 1976 be he deprecaed capal sock. 1 represens he year 1975 and 0 represens We assume ha K 1 K 0 / d 1, hen D 0 (K 1 K 1 d 1 )d 0. If D 0 D 0 hen I 0 D 0 D 0/d 0, else I 0 0. So ha K 0 (K 1 K 1 d 1 ) I 0. The algorhm can be appled recursvely o all fuure years o deermne capal sock n eachyear. Thus, for any year n he fuure, D 1976 (K 1977 K 1977 d 1977 )d If D 1976 D 1976 hen I 1976 D 1976 D 1976/d 1976 else I K 1976 (K 1977 K 1977 d 1977 ) I B. Lkelhood Funcon. Adapng from Schmd and Lovell (1979), we derved he log lkelhood expresson from Equaon (11) as ln ( r v r u ) ln( R ) ln (a ) ēr ē 2 2 ln y ln (a ln z ) b* c*d 2 2 r v r u r u ln y (a ln z ) b* c*d rv 1 F 2 2 r r v u (12) where r u and r v are he sandard devaons of u and v, respecvely, ha also are parameers o be esmaed, ē s a 4 1 vecor of error erms from Equaon (11), and R s a 4 4 covarance marx derved T from (ē l)(ē l) where l s he average of ē and T sands for he ranspose of a marx. R s he deermnan of he marx. References Andranos, J., M. Dykan Usng cos accounng daa o mprove clncal value. Healhcare Fnancal Managemen Vol. 11, No. 1, March

10 Bureau of Labor Sascs (BLS) Trends n mulfacor producvy. Bullen US Deparmen of Labor, Washngon, D.C. Bureau of Sascs Sascal Absracs of he Uned Saes. Washngon, D.C. Brynjolfsson, E., S. Yang Informaon echnology and producvy: A revew of leraure. Advances Compu Chrsensen, L. R., D. W. Jorgenson The measuremen of U.S. real capal npu, Rev. Income and Wealh 15(4) Fuchs, V. R Economcs, values, and healh care reform. Amer. Econom. Rev. 86(1) Greene, W. H Economerc Analyss. Prence-Hall Inc., Englewood, NJ. Grosskopf, S., D. Margars, V. Valdmans Esmang oupu subsuably of hospal servces: A dsance funcon approach. European J. Oper Res Harrs, J. E The nernal organzaon of hospals: Some economc mplcaons. Bell J. Econom Hern, W Informaon sysems requre a Leap of Fah. Healhcare Fnancal Managemen Keelhu, M. C Sraegc requremens for IS n he urbulen healhcare envronmen. J. Sysems Managemen 43(6) 6 9. Lovell, C. A. K Producon froners and producon effcency. H. O. Fred, C. A. K. Lovell, S. S. Schmd, eds. The Measuremen of Producve Effcency: Technques and Applcaons. Oxford Unversy Press, New York. MacLean, M., P. Mx Measurng hospal producvy and oupu: he omsson of oupaen servces. Healh Repors 3(3) McClellan, M Uncerany, healhcare echnologes, and healhcare choces. Amer. Econom. Rev. 85(2) Menke, T Impacs of PPS on Medcare par B expendures and ulzaon for hospal epsodes of care. Inqury Menon, N. M., B. T. Lee, L. Eldenburg Producvy and effcency of nformaon sysems n he healhcare ndusry. Workng paper, Texas TechUnversy, Lubbock, TX. Palley, M. A., S. Conger Healhcare nformaon sysems and formula-based rembursemen: An emprcal sudy. Healh Care Managemen Rev. 20(2) Schmd, P., C. A. K. Lovell Esmang echncal and allocave neffcency relave o sochasc producon and cos froners. J. Economercs Shengold, S. H Unnended resuls of Medcare s naonal prospecve paymen raes. Healh Affars Sloan, F. A., M. A. Morrsey, J. Valvona Effecs of he Medcare prospecve paymen sysem on hospal cos conanmen: An early apprasal. Mlbank Quar. 66(2) WEFA U.S. Long-Term Economc Oulook. Eddysone, PA. Zmmerman, J Accounng for Decson Makng and Conrol. Irwn, Boson, MA. Zucherman, S., J. Hadley, L. Iezzon Measurng hospal effcency whfroner cos funcons. J. Healh Econom Trdas Mukhopadhyay, Assocae Edor. Ths paper was receved on January 14, 1997, and was wh he auhors 13 monhs for 3 revsons. 92 Vol. 11, No. 1, March2000