Juhee Kwon and M. Eric Johnson Center for Digital Strategies Tuck School of Business Dartmouth College WEIS 2011

1. Proactive vs. Reactive Security Investment in the Healthcare Sector Juhee Kwon and M. Eric Johnson Center for Digital Strategies Tuck School of Business Dartmouth College WEIS 2011

2. Healthcare Breaches • HHS new reporting rules have increased breach visibility. • HITECH mandates public posting of breaches involving more than 500 people. • Over 100 announcements by the first anniversary (sept 2010).

3. Security Investments Security investments are often triggered by • breaches • government regulations Federal & state legislations Information Network Negative public opinion & Momentary loss Patients Providers /Payers Identity theft

4. Theoretical Background (1) • Investment for performance improvement • from defects or external mandates • in organizational learning for performance improvement • Organizational learning from the investments • Whether defects trigger or not (Ittner et al. 2001, Management Science) • Learning is a function of both proactive investments and autonomous learning-by-doing rather than a function of reactive investments alone

5. Theoretical Background (2) • Interaction with external mandates • Public attention can make organizations focus on the problem area. • Voluntary recalls result in more learning than involuntary recalls • The effects of voluntary and involuntary recalls on subsequent recall rates (Haunschild et al. 2004, Management Science) • Organizational learning in security investments

6. Research Questions • How do proactive and reactive investments work for security improvement? • How do external regulatory pressures impact security performance? • Are there social incentives for security investments?

7. Hypotheses (1) • Proactive (H1) and Reactive(H2) investments reduce security failures • Resources stimulate innovation & create opportunities for organizational learning. • Proactive vs. Reactive (H3) • Proactive investments require more analysis (to determine appropriate action) and a clear understanding of government and public expectations. H5(±) Proactive Investments H1(–) External Pressures H4(–) Security Failures H3(±) H2(–) Reactive Investments H6(±)

8. Hypotheses (2) • The mixed effect of external pressure • Increasing organizational attention on a problem area . • Creating defensive reactions. • How does external pressure influence security failures (H4)? • How does external pressure influence the effects of proactive (H5) or reactive (H6) investments? H5(±) Proactive Investments H1(–) H4(±) External Pressures Security Failures H3(±) H2(–) Reactive Investments H6(±)

9. Data Collection • 281 healthcare security breaches from HHS, ITRC, and Data Loss • 2,386 healthcare organizations from 2005 to 2009 from HIMSS Analytics™ • Security investments • Proactive vs. Reactive • 0, if an organization invests after any member of it’s group experiences a breach; otherwise 1. • Control for EHR adoption, annual revenue, bed size, etc.

10. Cox Proportional Hazard Model • “time to events” to explore the effects of explanatory variables • hazard rate = failure rate (less than one decreases failures)

11. Endogeneity • Endogeneity of Security Investment • Those who proactively invest might have better security processes, management, or technological expertise than those who do not. • Two-step econometric procedure (Heckman 1979) • Endogenous Adoption of Regulation • Due to a sudden rise in breaches • Two-sample t-test (p-value > 0.1) • the numbers of breaches in states before adoption of new regulation and in states without adoption. Proactive or Reactive Investment Breach or the end of the time line Time line t-1 t The probability () that an organization has no breach Hazard Rate(h(t))

12. Results at the organization level • Supporting the effect of proactive, but not reactive. • Regulation reduces failures, but also decreases the effect of investments.

13. Results at the state level • Supporting both the effects of proactive and reactive. • Lower hazard rate at the state level than at the organization level.

14. Results • Proactive investments are more effective at reducing security failures than reactive investments. • When proactive investments were forced by an external requirement, the effect of proactive investment is diminished. • Both proactive and reactive security investments have positive externalities. • one organization's security investments help the others

15. Implications • The regulatory value of carrot vs. stick • Due to positive externalities, incentives could be earmarked to boost investment in security. • Regulatory requirements should not be prescriptive • For example, regulation could mandate that a portion of the overall IT budget be dedicated to security, allowing organizations to decide on the types of security investment.

16. Further and Future Work • External & Internal Failures • Results: external breaches have a significant association with security investment, whereas internal breaches have no effect. • Why? • Our investment data is focused on external threats. • Greater concern about a problem leads to more effort to resolve it. • Future Work • Examine security policies and training programs. • Consider the momentary size of security investments. • Consider the severity of breaches.