Average per capita Medicare spending varies almost threefold across regions in the United States. Part of the differences could derive from the fact that Medicare pays health care providers in rural areas at lower rates than in large cities because the cost of living in Des Moines, for example, is lower than in New York City. In addition, other Medicare payment mechanisms boost payments for specific regions and hospitals, such as direct and indirect supplements for graduate medical education programs or federal payments for disproportionate numbers of low-income patients.
The Dartmouth Atlas of Health Care
has demonstrated large regional variations in Medicare spending.1
We extend those findings by deconstructing Medicare spending into variations owing to prices and those owing to utilization rates. By inpatient utilization
, we mean average diagnosis-related group (DRG) weights (a Medicare payment classification system) as set by the Centers for Medicare and Medicaid Services (CMS) to represent the amount of effort necessary for specific procedures or hospitalizations. By physician utilization
we mean the sum of relative value units (RVUs), Medicare's geographically adjusted payment schedule for physicians.
Along with other measures of utilization, we approximated quantities of health care services that are aggregated using a common set of national prices. Note that we did not directly measure inputs such as doctor visits and hospital days—a distinction to which we return below.
Our approach builds on previous analyses by the Dartmouth Institute for Health Policy and Clinical Practice and the pioneering work of the Medicare Payment Advisory Commission (MedPAC),2–4
which also examined differences in spending and utilization across states. Our approach differs in that we focused on Hospital Referral Regions (306 distinct hospital service areas in the United States) and provided a simpler analytic approach designed for use with multiyear measures of health spending.
Using Medicare claims from 2006, we present per capita non-price-adjusted (actual) expenditures and price-adjusted expenditures aggregated by Hospital Referral Region. (By price-adjusted expenditures we mean what expenditures would be if Medicare reimbursed all services at exactly the same national prices whether the patient were treated in Enid, Oklahoma, or San Francisco, California.) Both actual and price-adjusted expenditures were further adjusted for regional differences in age, sex, and race. Each component of Medicare payment, such as inpatient and outpatient services, is reimbursed using somewhat different price adjustments. As a result, we adjusted each component separately, and then we aggregated them to create a final measure of price-adjusted Medicare expenditures.
There has been considerable debate about the importance of Medicare spending variations across U.S. regions, particularly for high-expenditure areas such as McAllen, Texas, the subject of a widely read health policy narrative published in the New Yorker
Some analysts have suggested that spending differences are driven by factors such as higher prices, rates of illness, or poverty, rather than systemwide differences in how patients are treated. For example, a recent MedPAC study found weaker regional variations after adjusting for price and illness across regions.6
Although we have considered the potential importance of illness and poverty elsewhere,7
in this paper we focus solely on whether adjustments for prices “explain” regional variations in health care spending, particularly in areas with high Medicare spending such as New York, Miami, and Los Angeles. The specifics of price adjustment for each category are available in a technical report.8