Strategic Complements or Substitutes? The Case of Adopting Health Information Technology by U.S. Hospitals

Abstract

This paper explores the adoption choice of electronic medical records by U.S. hospitals, which could exhibit strategic complements or substitutes. I find complementarities in adoption through a reducedform analysis with instruments for unobserved market characteristics. I further develop a dynamic oligopoly model to allow for strategic timing incentives that are missing in the static model. Adopting a dominant local vendor could increase perperiod profits from adoption by 9.2% over choosing a marginal vendor. A counterfactual analysis suggests an incentive program rewarding coordination, not just adoption, is more effective in achieving interoperability, especially before the widespread adoption of the technology.

Competition and Multilevel Technology Adoption: A Dynamic Analysis of Electronic Medical Records Adoption in U.S. Hospitals

“…(2018a) find that hospitals tend to agglomerate on the choices of EMR vendors using the cross‐sectional data on adoption from 2005 and 2012. Lin (forthcoming) reaches similar results by studying stand‐alone hospitals' adoption from 2006 to 2009, and finds that hospitals' profit increases with the prevalence of a vendor in the market. Relative to those works, my study includes the early adoption stage by studying hospitals' adoption decisions from 1999 to 2008.…”

“…I conduct a robustness check to see whether the results hold with an alternative definition of levels. Some papers focus on the adoption of CDR, and find that hospitals tend to agglomerate on the choices of EMR vendors (e.g., Freedman et al., 2018a; Lin, forthcoming). Therefore, I conduct a robustness check, by changing the definition of L1 adoption to CDR adoption and retaining the definition of L2 adoption.…”

“…Freedman et al. (2018a) and Lin (forthcoming) point out that EMR from different vendors typically are not interoperable. My findings of competitive effects in the adoption suggest either that the network externalities are dominated by competitive effects, or that hospitals do not take network externalities into account, as no communication actually occurred in the early period of adoption.…”

“…Their results do not conflict with mine. In practice, hospitals could be less likely to adopt if there are more neighboring adopters, and at the same time, they may tend to coordinate with each other (based on results of Freedman et al., 2018a; Lin, forthcoming) by choosing the same vendor conditional on adoption.…”

“…Regarding EMR adoption, sister hospitals could share a licensing fee, human-capital training material, and costs for external consultants, etc (Lin, 2021)…”