In today’s interconnected world it seems intuitively true that instant access to comprehensive medical patient histories will help physicians to provide better care at a lower cost. This simple argument was persuasive enough for the federal government to spend $26 billion to incent medical providers to adopt electronic health records (EHR) systems so that they can electronically share medical records. The initial investment appeared to be large, but it was an economically sound solution to control the rising healthcare expenditure. The resulting HITECH act is one of the few healthcare laws that maintains bipartisan support. To establish a nationwide health information exchange network, officials designed a two-stage plan. First, incent every medical provider to create an electronic archive of their patients’ medical records. Second, connect these electronic archives together so that the providers can share their patients’ records. The $26 billion in federal incentives was a lucrative source of revenue for hundreds of different software vendors to develop and aggressively market their own type of EHR products in a medical market that knew little about information technology. According to the Office of National Coordinator for Health IT, in 2008, less than 10 percent of hospitals had basic EHR systems, and a mere five years after, 94 percent of the hospitals use a certified EHR system.

The next step forward is to connect these electronic silos together so that physicians can share their patients’ records. The billions of dollars in federal spending will only have any tangible benefit if this is done successfully. EHR vendors have taken patient data hostage and are not willing to release it unless they receive a big ransom. They typically claim that technical problems limit the interoperability of their products. This prevents physicians from sharing their patient records with other doctors. This is like T-Mobile claiming that its users cannot make calls to AT&T customers. The claimed interoperability limitation does not end here. The vendors are proposing hefty charges to allow data sharing between their own customers.

As I have discussed in detail before, this a hole that the government has dug for itself. A nationwide health information exchange network sounds great, but it is not possible to achieve this goal without the proper alignment of economic benefits for every player in the healthcare market. In the face of this problem, the government has three choices:

Pay EHR vendors the ransom that they are asking to release their hostage and allow sharing of the patient data among medical providers. Regulate the industry and force the EHR vendors to allow sharing of patient data among medical providers. Do nothing.

The government appears to be following the first plan. Officials had not anticipated interoperability challenges and assumed that all of the providers with EHR systems would have the capacity to exchange records. Based on this assumption, the third stage of the EHR incentives program was designed to encourage physicians to actively engage in the exchange of medical records. Today nearly every physician has an EHR system and although many of them also want to exchange information, the EHR vendors do not allow them. The incentives, which were initially planned to encourage physicians, will end up with EHR vendors and help drive future profits. As Rep. Phil Gingrey (R-GA) put it, “we have been subsidizing systems that block information instead of allowing for information transfers, which was never the intent of the [HITECH] statute.”

Regulating the industry seems like the only feasible solution to this problem. Rep. Michael Burgess (R-TX), the leader of the House Energy and Commerce trade subcommittee is drawing up a bill to enforce data sharing. The benefits of regulating the EHR industry, if any, will take a very long time to become tangible. The EHR vendors will furiously push back against any kind of regulation and will insist that technical challenges are a real barrier to interoperability. Congress is poorly situated to adjudicate this claim. Time is a critical factor in the long term success of HITECH plans, which threatens the viability of this strategy.

The best solution for the government is to do nothing. The new pay for performance payment methods in which the medical providers are being paid a fixed amount for treating patients would drive them to become more efficient and increase their profit margin by seeking solutions such as health information exchange to cut costs. Because the market for new EHR products is now saturated, the only revenue source for EHR vendors are charges for data exchange. Currently, they can get away with outlandish charges because they know the incentives from the federal government allow doctors to cover their costs. But if the free money from the government were to stop, then EHR vendors would have to persuade the physicians to pay for the exchange fees. Just like any other service, the highest price that the medical providers would pay is equal to the value of the service for them. If the electronic exchange of information helps medical providers to cut back on their costs and save some money they will be willing to pay a fair price for it. EHR vendors will end up lowering their fees to a reasonable level or will eventually go out of business.