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Health Differences Explain Most Geographic Variation in Medicare Costs

Population Health Explains 75% to 85% of Cost Variation; People Sicker in High-Cost Areas

Media Advisory
May 28, 2013

Alwyn Cassil (202) 264-3484 or

WASHINGTON, DC—Wide geographic variation in Medicare costs is largely explained by health differences across communities rather than inefficient care delivery, according to a Center for Studying Health System Change (HSC) study published online today in the journal Medical Care Research and Review.

Earlier research has asserted that Medicare could reduce spending by as much as 30 percent without harming health if all providers adopted treatment patterns found in low-cost areas, but the new Medical Care Research and Review study questions how well earlier studies accounted for differences in Medicare beneficiaries’ health status.

HSC Senior Fellow James D. Reschovsky, Ph.D., along with Jack Hadley, Ph.D., of George Mason University; and Patrick Romano, M.D., M.P.H., of the University of California, Davis, Center for Healthcare Policy and Research, examined multiple ways of adjusting for patient health, finding that a fuller accounting of health status explained at least 75 percent to 85 percent of Medicare geographic cost differences between high- and low-cost areas.

“Geographic variation research has been used to argue that there is considerable waste and inefficiency in the delivery of health care. We do not question this conclusion, but caution that inefficiencies in American health care may not be nearly as strongly related to geography as the Dartmouth Atlas of Healthcare and others have suggested…. Although data limitations may preclude ever developing the perfect casemix adjustment approach, our results suggest that the portion of the geographic variation that can be explained by patient health is much greater than previously estimated, leaving less of the geographic variation potentially attributable to inefficiency,” the article states.

Earlier geographic variation research often used average spending on beneficiaries in their final months of life to define high-  and low-cost areas—an approach that assumes people near death have roughly equal health status. The Medical Care Research and Review study by Reschovsky and colleagues, however, found that beneficiaries near death varied considerably in terms of the number and types of conditions they had, and that those differences in health status explained 84 percent of the health care costs during their final year of life. This differed little—only two percentage points less—than when the same casemix indicators were applied to the entire elderly Medicare population.  Because the end-of-life spending approach fails to effectively account for differences in population health, it misclassifies many areas in terms of how costly they are in treating Medicare patients, the study found.    

The study, titled “Geographic Variation in Fee-for-Service Medicare Beneficiaries’ Medical Costs Is Largely Explained by Disease Burden,” was based on an analysis of claims from 1.6 million Medicare beneficiaries in 60 representative communities and was funded by the Robert Wood Johnson Foundation through a grant from the Health Care Financing and Organization program.

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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.