In this paper, we examine the effect of the adoption of Electronic Medical Records (EMR) systems to neighboring hospitals. We find that although EMR systems increases the operational costs for adopting hospitals, it has significant spillover effects by reducing the health care costs of the other hospitals in the same region (possibly due to patient mobility and better care that is provided by these systems). These regional externalities are stronger especially in the long term. Our results provide support to the role of EMR investments in reducing overall health care costs. Estimates, based on our results, suggest that EMR investments can lead to net reduction in national health care cost by about $47 billion dollars over 4.