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New Health Policy Brief: Geographic Variation In Medicare Spending

March 6th, 2014

A new Health Policy Brief from Health Affairs and the Robert Wood Johnson Foundation describes geographic variation in Medicare spending. Data from the Centers for Medicare and Medicaid Services (CMS) show that in 2012 Medicare spent an average of $9,503 nationally per beneficiary, ranging from $15,957 in Miami, Florida, to $6,569 in Grand Junction, Colorado.

This brief looks at the factors that may be driving these variations, including the amount Medicare pays for services, the health status of beneficiaries, the types of services provided to a region’s population, and whether the local spending patterns are consistent with the spending on patients with private insurance.

As policy makers continue to find ways to improve quality in health care and eliminate unnecessary spending, a better understanding of geographic variation in Medicare spending has the potential to help achieve the so-called Triple Aim: better health, better health care, and lower costs.

Some of the topics covered in this brief include:

  • What’s the background? The brief describes research in this area beginning with the findings of the first Dartmouth Atlas in 1996, which was the first demonstration that considerable differences in spending occur at both state and regional levels. In 2009, Peter Orszag, then director of the Office of Management and Budget, cited data suggesting that if high-cost areas incorporated the practice patterns of the lowest-cost areas, health spending could be reduced by some $700 billion annually. Other researchers, however, feel that the problem is more nuanced and are concerned that the variation has more to do with differences in the health needs of a population. If that were the case, reducing payments in a high-cost region could mean that residents in that area could lose access to necessary care.
  • What’s Medicare-specific? Medicare is the largest single payer in the United States, providing health insurance for 52 million elderly and disabled beneficiaries. When researchers compare Medicare spending patterns to private insurance, they have found discrepancies. While these patterns are similar at the hospital referral region (HRR) level, differences at the state level suggest that supply factors, such as the number of hospital beds or specialists in a region, may be an underlying factor in geographic spending variations. Researchers conclude that mechanisms—prior authorizations required by private insurers and prices negotiated by health plans—could explain the difference between Medicare and private insurance at the state level.
  • What’s next? As the research has demonstrated, there is no single answer to addressing geographic variation in Medicare spending. The brief describes the recommendations of a 2013 Institute of Medicine (IOM) report, which urged the CMS to continue to investigate payment reforms that focus on providing incentives for clinical decision makers to improve care coordination and improve health outcomes.

About Health Policy Briefs. Health Policy Briefs are aimed at policy makers, congressional staffers, and others needing short, jargon-free explanations of health policy basics. The briefs, which are reviewed by experts in the field, include competing arguments on policy proposals and the relevant research supporting each perspective.

Sign up for an e-mail alert about upcoming briefs. The briefs are also available from the Robert Wood Johnson Foundation’s website. Please feel free to forward the briefs to any of your colleagues who are tracking health issues. And after you’ve taken a look, we welcome your feedback at:

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1 Response to “New Health Policy Brief: Geographic Variation In Medicare Spending”

  1. Jeff Goldsmith Says:

    As someone who has visited most of these places (both high and low utilizing regions), can I offer a non-economist’s answer? In most of the low utilizing regions or HHR’s, it would be considered unseemly for a physician to drive a Ferrari or otherwise engage in visible displays of wealth. I think a lot of the variation not explainable by obvious socio-economic factors (e.g. the Bronx) or the presence of a high concentration of teaching hospitals can be explained by the presence or absence of a strong mercantile ethos in the physician community.

    (Anyone foolish enough to drive a Ferrari around the Bronx probably won’t keep it very long).

    This phenomenon is much more complex than the supply-drives-demand thesis originally offered by Wennberg and his colleagues. That mercantile ethos is dying as the entrepreneurial baby boomer docs who were animated by it retire, and I would expect that if payment policy didn’t change at all, markets will converge as the entrepreneurs are replaced by frightened, debt burdened, salaried Gen Y docs. Perhaps the ACO could be used to accelerate this convergence in the high expense areas.

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