In the US healthcare industry, payors and providers¹ are spending on IT like never before, convinced that it will be a key strategic factor. Hospitals alone spent more than $7 billion on IT in 1994—nearly 2.5 percent of their net revenues. Payors and providers as a whole spent nearly $17 billion. These sums are expected to increase to at least $44 billion and perhaps even as much as $75 billion by 2004.

Is this heavy spending bringing anything in return? So far, payors and providers have mostly succeeded only in adding to costs. Productivity is showing few signs of improvement. The chief beneficiaries of the spending boom have instead been IT suppliers. They have enjoyed average compound annual growth of 17 percent in revenues and 88 percent in profits since 1991 (Exhibit 1).

Yet payors and providers are right to see an important source of competitive distinction in the information they possess. As healthcare markets evolve, information will visibly reduce costs and raise clinical quality for purchasers. IT will be essential in managing the extra risks associated with capitated revenues,² as well as in tackling the new managerial...