Electronic evolution: electronic records are on the way, and payors need to watch the process closely.

For a decade or more, health policymakers have argued that the nation's health system needs to digitize its records. Yet even as most American businesses have digitized their processes to cut costs and boost efficiency, a great deal of the record-keeping in the $1.9 trillion healthcare industry remains manila-bound.

However, with the new federal push to adopt health-information technology, it's beginning to appear more likely that health-care record-keeping will finally leave the Dr. Kildare era. Beginning in September, a number of companies will be awarded contracts by the U.S. Department of Health and Human Services to begin the arduous process of working out standards, security, and prototype systems.

That's probably good news for the health-care industry. It also means, however, that the planning process is moving into a riskier phase for payors. The early stage of sunny speeches and big bubbles on PowerPoint slides is ending. In the coming months, policymakers and consultants will began to thrash out the details.

Details is perhaps not the right word: The issues that need to be resolved are huge. How the electronic health network will operate, who will pay for it, and how to get doctors to use it are all huge questions that remain on the table.

To its credit, HHS officials appear to understand that there ought to be a lot of chairs around that table. Recently, the department began encouraging the formation of a group of players from every segment of the health-care industry called the American Health Information Community to act as a kind of advisory board.

For payors, the technology seems promising. A new study from the Center for information Technology Leadership, a Boston-based research organization, estimated that there would be significant savings ff health information technology is broadly adopted. The group concluded that such an electronic system would include savings in program labor administration and a decline in duplicate testing.

One of the largest sources of savings for payors is in the growth of auto-adjudication, the center said. The analysts estimated $77.8 billion in annual savings through auto-adjudication with $9.84 billion flowing through to all payors, including Medicare and Medicaid.

However, the center's study is really an extrapolation based on estimates of expert panels--basically, highly educated guesses. Also, much of the savings are expected to come in the form of fractional labor reductions, which may be hard to translate into tangible cost savings.

The raw number of claims could possibly be reduced, too, although evidence here is thinner, since only six credible studies have been conducted on the topic. Booz Allen Hamilton conducted a payor-focused study, and that was a projection of what health information teclmolog3, conversion might mean for Canada's national health service. Booz analysts concluded that adoption of the technology in Canada would substantially reduce redundant tests and drag errors.

There are also some tricky practical questions that remain to be worked out, such as:

* What should an electronic health record contain? One of the biggest challenges is crafting a system that will provide an electronic record without becoming so expensive or unwieldy that it can't function in the real world.

* Who will pay for it? Politicians may be tempted to repeat the government's HIPAA gambit in the late 1990s, when insurance companies ended up footing the cost of the entire program. However convenient that kind of solution might be for policymakers, payors shouldn't reach for the check just yet. Although the business case of electronic record-keeping for payors is showing some promise, it requires additional experience and analysis.

* How can universal adoption be achieved? Even if funding sources are identified, getting doctors to start keeping electronic records is likely to be a colossal managerial challenge. While Medicare and Medicaid's expected mandate requiring electronic-record keeping may serve as a sturdy stick, finding the right carrots may prove more difficult, particularly with poorer hospitals and doctors in small practices. Even a 100% subsidy evidently won't do it. For example, when WellPoint Health Networks offered a group of doctors a Palm Pilot or a computer to make electronic prescriptions on, only 75% signed up.

There are unlikely to be easy answers to any of these questions, but there can be fair ones. To ensure a positive outcome, payors should stay involved in the process: Join industry groups; conduct pilot projects to test the clinical advantages of electronic adoption; mine data to better understand customer needs; begin to modify their systems to accommodate the emerging standards and pursue projects to cut administrative costs through electronic streamlining.

Best's Review Columnists: Gary Ahlquist is a senior vice president in the Chicago office of Booz Allen Hamilton. Gil Irwin and David Knott are vice presidents in Booz Allen's New York office. They may be reached at [e-mail].