Researchers continue to study why Medicare spending per beneficiary varies significantly from one part of the country to another.
What’s the issue?
While geographic variation in Medicare spending per beneficiary is itself well documented, the causes of that variation, whether it is appropriate, and what can be done to reduce spending in high-cost areas are less clear. This brief describes the research on geographic variation in Medicare spending and different interpretations of what it suggests for Medicare payment policy.
What’s the background?
Medicare is the largest single payer in the United States, providing health insurance for 52 million elderly and disabled beneficiaries. Three out of four Medicare beneficiaries are in traditional fee-for-service (FFS) Medicare, which covers a wide range of acute and post-acute care services including inpatient and outpatient hospital services, physician visits, stays in skilled nursing facilities, home health care, durable medical equipment, and prescription drugs. The types of services covered by FFS Medicare are essentially the same across the country.
Some health care researchers and policy makers have suggested that reducing this geographic variation could provide an opportunity for reducing overall health care spending. In 2009 Peter Orszag, then director of the Office of Management and Budget, cited estimates suggesting that if high-cost areas adopted the practice patterns and associated spending of the lowest-cost areas, health care spending could be reduced by 29 percent or $700 billion per year.
Others have asked: What if beneficiaries in high-spending areas are not receiving too much care but, rather, beneficiaries in low-spending areas are receiving too little? Or, if the variation in spending is driven by differences in the health status or needs of the population in different parts of the country, would reducing payments based on geography mean beneficiaries in high-cost areas will no longer have access to necessary care?
Understanding the cause of geographic variation is critical to determining the appropriateness of adjusting Medicare spending by geographic location.