(Continued)

Such measurements in health care are more art than science. In other sectors, productivity is measured as output divided by hours worked. But health-care output is tough to measure. You can calculate how many worker hours it takes to deliver a one-day hospital stay. But there's no consensus on how to measure whether the quality of that care is better or worse than in the past. That's why the federal government punts, declining to put out a productivity stat for health care. Economy.com measures production and worker hours without adjusting for quality of care. Other economists take issue with that calculation. But even if it's just directionally correct, it means that after many sluggish years, Hackensack and other institutions are delivering hospital stays, X-rays, and the like more efficiently.

Refining the Software
Is this the beginning of a sea change or a false start? That question is being hotly debated. Skeptics abound. Most recently, a high-profile study published in the Journal of the American Medical Association in early March showed that a tech system used by the University of Pennsylvania's hospital to prescribe drugs created new ways to make errors. Why? In one example, it scattered patient data and drug-ordering forms over so many different computer windows that it increased the likelihood of doctors ordering the wrong medications. "Hospitals need to make the systems work with the way medicine is practiced," says Ross Koppel, the study's lead author and a professor at the University of Pennsylvania.

But the experiences of Hackensack and other hospitals nationwide suggest that health care really is making its way into the Digital Age. Hackensack has successfully put in place an electronic prescription drug system. The New Jersey hospital, however, has spent long hours refining its software to eliminate many of the potential pitfalls cited in the University of Pennsylvania study. Such tech work has helped boost Hackensack's operating margins, to 3.1% last year from 1.2% in 2000.

The stakes couldn't be higher. Health care accounts for 15% of the U. S. economy, or $1.7 trillion. It's so gargantuan that any efficiency gains make an impact on the overall economy. Dr. David J. Brailer, President George W. Bush's point man on health-information technology initiatives, predicts that tech investments could lead to $140 billion a year in cost savings by 2014, or an estimated 6% of health-care spending in that year. "I actually think that's conservative," says Brailer. "There's a body of literature that shows case studies with much larger savings."

More important than saving money, of course, is saving lives. Poor information kills some 7,000 Americans each year just by missing drug-interaction problems, according to the National Academy of Sciences Institute of Medicine. All together, hospital errors result in up to 98,000 deaths annually. Early evidence indicates that proper technology can reduce the toll. Hospitals that have begun using electronic prescription systems have seen up to 80% fewer prescription errors. And at Hackensack, patient mortality has dropped by 16% over the past four years, in part because of its digital initiatives.

While hospitals have always been devoted to saving lives, they're turning to tech now because of a fundamental change in U.S. health care. Pay for performance, that central tenet of Corporate America, is making its way into the world of health care. Medicare is leading the way. It set up a trial with 277 hospitals in which it's paying juicier fees for high-quality results in five treatment areas. "We're trying to create the business case for more coordinated, efficient care, and inevitably that means more investment in tech," says Dr. Mark McClellan, the head of Medicare.

It's quite a start. Medicare's trial suggests better information can lead to better care. The evidence? Since the 277 hospitals began gathering performance data and entering the spotlight of being publicly measured against their peers, the average quality-of care-scores have increased 6%. "This gave hospitals a chance to see if public measurement and incentives would let them improve, and it has," says Stephanie Alexander, senior vice-president at Premier Inc., a research co-op of 1,500 hospitals that helps run the Medicare study.

Private health insurers are moving toward pay-for-performance, too. Over the past two years, WellPoint Inc., UnitedHealth Group, and many other insurance companies have begun rating hospital treatments and rewarding high-quality care. Here's how it typically works: A hospital gets a fixed up-front fee for, say, a heart bypass. If the hospital scores high on quality for bypasses, it will get a bonus on top of that fee, usually 1% to 4%.

So why not jump in with both feet? Hospitals have financial constraints on their ability to purchase technology. There are competing demands. And while most hospitals can issue debt, they typically only do so for big-ticket items, such as a new building. For tech investments, hospitals pay for what they can out of cash flow. And cash isn't easy to come by these days. The nation's 5,760 hospitals have seen average profit margins fall for eight years, according to the American Hospital Assn.