Wide geographic variation in healthcare spending has generated concern about inefficiency and policy debate about geographic-based payment reform. Evidence on variation has focused on hospital referral regions (HRRs), which incorporate numerous local hospital service areas (HSAs). If there is substantial variation across local areas within HRRs, then policies focusing on HRRs may be poorly-targeted.
Using pharmacy and medical claims data from a 5% random sample of Medicare beneficiaries in 2006–2009, we compared variation in health care spending and utilization in 306 HRRs and 3436 HSAs. We adjusted for beneficiary-level demographics, insurance status, and clinical characteristics to calculate adjusted use and spending.
There is substantial local variation in drug and non-drug utilization and spending, and substantial dispersion of local areas within HRRs; many low-spending HSAs are located within the borders of high-spending HRRs and vice versa. Only about half of the HSAs located within the borders of the highest spending quintile of HRRs are in the highest spending quintile of HSAs; conversely, only about half of the highest spending HSAs are located within the borders of the highest-spending HRRs.
The effectiveness of payment reforms in reducing overutilization while maintaining access to high-quality care depends crucially on the effectiveness of targeting. Our analysis suggests that HRR-based policies may be too crudely targeted to promote the best use of healthcare resources.