Reducing Medicare Spending Through Electronic Health Information Exchange: The Role of Incentives and Exchange Maturity

Health information exchanges (HIEs) are entities that have emerged in healthcare delivery markets across the United States. By providing an interorganizational information system (IOIS) and governance over use of this system and the information exchanged through it, HIEs enable more routine and efficient electronic sharing of patient information between disparate and fragmented healthcare providers. This should result in improved quality and efficiency of care. However, significant questions persist about the extent to which HIEs produce these benefits in practice, particularly in terms of reducing healthcare spending. We use transaction cost economics (TCE) to theorize that HIEs establish a quasi-hierarchy that decreases frictions associated with information sharing in ways that reduce healthcare spending, and that the magnitude of reductions is greater when (1) insurer and provider incentives align, and (2) HIE capabilities mature. We can test these conjectures because HIEs, unlike other efforts that provide IOIS, are typically confined to regional markets and develop heterogeneously between these markets, introducing variation in insurer-provider incentive alignment and HIE maturity. Leveraging a unique national panel data set, we evaluate whether HIEs reduce spending for the largest insurer in the United States, i.e., Medicare, and whether incentives and HIE maturity modify the magnitude of reductions. We find significant spending reductions in healthcare markets that have established operational HIEs, with an average reduction of $139 per Medicare beneficiary per year (1.4% decrease) or a $3.12 billion annual reduction in spending if HIEs were nationally implemented in 2015. We also find that these reductions occur disproportionately in healthcare markets where providers have financial incentives to use an HIE to reduce spending and when HIEs are more mature. Our results inform an important open empirical question in the healthcare domain related to the value of HIEs, while also joining perspectives from TCE with the IOIS literature to understand the factors that may be relevant to IOIS value creation more generally.