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Follow the Money: Why are High-Cost Medicare Beneficiaries So Costly?

Study Findings Run Contrary to Premise that Higher Supply of Hospitals and Physicians is a Major Factor in Higher Costs; No Easy Solutions to Reducing the Costs of Treating Very Sick Patients

News Release
Feb. 11, 2011

Alwyn Cassil (202) 264-3484 or

WASHINGTON , DC—In the quest to unravel the role of supply and demand in health care costs, policy makers may need to reconsider a commonly held premise that the supply of physicians, hospital beds and other health care resources is a major factor driving high Medicare costs, according to a study by the Center for Studying Health System Change (HSC) published online in the journal Health Services Research.

The study, “Following the Money: Factors Associated with the Cost of Treating High-Cost Medicare Beneficiaries,” is based on a national sample of 1.6 million elderly, fee-for-service Medicare beneficiaries linked to HSC’s 2004-05 nationally representative Community Tracking Study Physician Survey respondents and local market information, such as the supply of hospitals and physicians, from secondary data sources. The study was funded by the Robert Wood Johnson Foundation’s Changes in Health Care Financing and Organization Initiative, which is administered by AcademyHealth.

Researchers examined the relationship between demand factors—patient health status and other characteristics—and supply factors, such as the number of hospital beds, physicians and other health care resources relative to the population.

Using patient-level data—rather than geographic-area data—and a much richer set of explanatory factors than previous studies to examine the influence of key patient, physician, practice and local market characteristics, the study compared factors contributing to the costs of treating two sets of Medicare beneficiaries, based on their expected medical costs. Since 25 percent of Medicare beneficiaries account for 85 percent of spending, researchers were especially interested in high-cost beneficiaries.

 The bottom line: Not surprisingly, health was the predominant predictor of costs, but most physician, practice and market factors were insignificant or weakly related to cost, according to the study.  

“A key finding of the study is that prior research indicating that much of the geographic variation in the cost of treating Medicare beneficiaries is driven by supply-induced demand isn’t supported when you comprehensively control for health status and conduct the analysis at the beneficiary level,” said HSC Senior Researcher James D. Reschovsky, Ph.D., co-author of the study with Jack Hadley, Ph.D., of George Mason University; Cynthia B. Saiontz-Martinez, Sc.M., of Social Scientific Systems; and Ellyn R. Boukus, M.A., an HSC health research analyst. 

Previous studies looking at Medicare spending mostly looked at relationships between area averages, finding wide variations in the level of spending in different areas that were associated with supply of providers. But these studies did not comprehensively adjust for patient health differences across areas. In recent years, policy makers have focused a great deal of attention on geographic variations in Medicare spending and considered reducing Medicare payment updates to providers in high-cost areas.

However, the study authors write that, “Setting rates applicable to all providers based on average area costs (especially if outcomes are not considered) is likely to punish efficient providers in high-cost areas and reward inefficient providers in low-cost areas.”

The authors conclude, “It is imperative that we continue research to identify, develop, and test interventions aimed at improving care and reducing costs for various types of high-cost beneficiaries. After all, this is where the money is.”

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The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is affiliated with Mathematica Policy Research.



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The Center for Studying Health System Change Ceased operation on Dec. 31, 2013.