Government Budgeting: Health Information System

The federal government is considering building a fully interconnected health information system for all U.S. physicians and hospitals. The system would cost $55 billion to build today (this year), but would save the U.S. Medicare program (the federal health insurance program for seniors) $6.5 billion annually in avoiding unnecessary procedures and medical errors in each of the next 10 years. Suppose future values are discounted at a rate of 2 percent.

Questions:

a. What is the present value of the $6.5 billion annual savings from the project?

b. Should the government finance this project? Briefly explain.

c. Scenario Analysis: For each scenario below, indicate whether the government should undertake the project (Yes or No), and prove your answer by calculating the present value of the revised annual savings of the project.

c1. What if the annual savings were $6.0 billion instead of $6.5 billion?

c2. What if the discount rate were 1.5% instead of 2%?

c3. What if the annual savings were $6.0 billion instead of $6.5 billion AND the discount rate were 1.5% instead of 2%?