First published in 2000. This book addresses the measurement of the effect of information technology (IT) investments on a firm''s productivity. Determining a quantifiable impact of a firm''s IT has plagued senior executives, researchers, and policy-makers for several years, as evidenced by articles in trade magazines such as Fortune and Businessweek and in academic journals such as Management Science. Simple statistical techniques for measuring IT impact in a firm are fraught with methodological problems, as these techniques do not account for either the causal direction in managerial decision making or the behavioral assumptions about firms. Therefore, such studies have led to results and inferences that are not generalizable. While studies that measure the satisfaction of people who use IT are important, management typically would like to know whether IT has reduced operation costs by streamlining processes or increased revenues by increasing the demand-meeting capability of the firm. This book attempts to determine cost-reduction or output-enhancement that may be linked to IT investments through methodological sophistication. The healthcare industry presents an important and interesting context in which to study IT impacts for several reasons. First, since the implementation of the Prospective Payment System (PPS) by Medicaid, most hospitals adopted cost containment measures, and hence capital investments in hospitals have come under greater scrutiny than ever before. Second, hospitals have been more thorough in reporting capital and labor expenses and revenues (due to state regulation) at a level of detail that makes it possible to aggregate IT and other capital investments without serious measurement error. Most non-healthcare firms do not collect or report such data in their financial statements. Finally, though hospitals were slow in IT adoption, most hospitals have been acquiring sophisticated hardware and software over the past few years. Results of the analysis bear evidence of the positive impact of IT on production of healthcare services. It also shows how methodological differences can lead to conflicting results. The effect of PPS determined in a comparative way shows that the economic behavior in the post-PPS differs from that in the pre-PPS years.