Technology is once again being touted as a cure-all, this time for what ails the American health-care industry. The Obama administration's $787 billion stimulus plan includes $19 billion for health-care IT spending that provides incentives for doctors and hospitals to adopt electronic health records. Starting in 2011, stimulus funds will provide additional Medicare and Medicaid reimbursements for health-care providers using such systems.

These federal funding programs assume that the critical hurdle to widespread adoption of electronic medical records is cost. Indeed, hospitals surveyed in a study published last year in the Journal of the American Medical Association reported cost as the major barrier. Yet compared with other businesses, the health-care industry has been unmoved by the logic of lowering costs to increase profits. The truth is that these folks could have digitized the whole industry ages ago. The technology has been around for a long time: Wall Street began phasing out physical stock certificates over 35 years ago. Even the cash-strapped airline industry has gone ticketless, removing huge labor and overhead costs. These industries started using electronic records because they believed it would save money. The health-care industry simply has not followed suit.

The reason lies neither with cost nor with inadequate technology. Rather, the health-care industry's reluctance to digitize its records is rooted in a desire to keep medicine's lucrative business model hidden. Dangling $19 billion in front of a $2.4 trillion industry is not nearly enough to get it to reveal the financial secrets that electronic health records are likely to uncover--and upon which its huge profits depend. In those medical records lie the ugly truth about the business of medicine: sickness is profitable. The greater the number of treatments, procedures, and hospital stays, the larger the profit. There is little incentive for doctors and hospitals to identify or reduce wasteful spending in medicine.

The amount of unnecessary spending is huge. In a project that analyzed 4,000 hospitals, the Dartmouth College Institute for Health Policy and Clinical Practice estimated that eliminating 30 percent of Medicare spending would not change either access to health care or the quality of the care itself. The Congressional Budget Office then suggested that $700 billion of the approximately $2.3 trillion spent on health care in 2008 was wasted on treatments that did not improve health outcomes. This excessive spending has kept the entire health-care industry growing faster than the population, and faster than inflation, for decades.

While electronic medical records do have sizable up-front costs, they also have the potential to save big, in part by streamlining administrative costs. According to a 2003 article by Dr. Steffie Woolhandler in the New England Journal of Medicine, administration accounts for 31 percent of expenses in the U.S. health-care industry, or more than $500 billion per year. (To put that in perspective, Google has spent well under 10 percent of that on all its R&D.) Richard Hillestad of the Rand Corporation wrote in Health Affairs, in 2005, that health-care information technology could save physicians' offices and hospitals more than $500 billion over 15 years thanks to improvements in safety and efficiency.

Electronic medical records would make it much easier to conduct the studies needed to track down this wasteful spending. According to one estimate, only about 4 percent of U.S. hospitals use comprehensive electronic record systems; most rely on paper records. As a result, analyzing the effectiveness of specific treatments--for example, spinal-fusion surgery versus physical therapy for back pain caused by a herniated disc--is unnecessarily expensive and time consuming. Physicians must compile data for a significant number of patients undergoing each treatment and correlate that information with each patient's outcome.