Regional variation in health care costs

February 15, 2008

CBO released a new study today on regional variation in health care costs. As previous CBO documents have emphasized (and I walk around with a chart about it!), health care spending varies substantially across the nation.

This geographic variation matters mainly as an indicator of the efficiency of the health sector: Large differences across the country in spending for the care of similar patients suggest a health care system that is not as efficient as it could be, particularly since the higher spending does not appear to produce commensurately better care or improved health outcomes.

CBO's study finds that:

  • A substantial portion of the variation cannot be explained by the health status of the populations in different regions and other variables:
    • The severity of illness and the prices of health services across regions together account for less than half (and possibly much less than half ) of the geographic variation in spending.
    • Income and the preferences of individuals for specific types of care appear to explain little of the variation in spending.
  • Some regions appear more prone to adopt low-cost, highly effective patterns of care whereas others are more prone to adopt high-cost patterns of care and to deliver treatments that provide little benefit or are even harmful.
  • Geographic variation in Medicare spending has dropped sharply over the past three decades and recently has been slightly lower than the variation in total health care spending.
    • The coefficient of variation, a common way to measure dispersion, in Medicare spending across states fell from a peak of 0.20 in 1976 to 0.125 by 1991, and then rebounded in the early 1990s before resuming a sharp decline, ending at 0.11 in 2005.
    • That reduction may be the result of changes in Medicares reimbursement policies.
    • In contrast to Medicare spending, geographic variation in total health care spending per capita has trended upward in recent years.
  • In recent years, geographic variation in health care spending has been much higher in the United States than in Canada, and somewhat higher than in the United Kingdom. Financing of health care in those countries is more centralized than it is in the United States.
    • From 1991 through 2004, the coefficient of variation in state-level health care spending per capita in the United States varied between 0.112 and 0.123.
    • Over the same period, the coefficient of variation in per capita spending by province in Canada (for public and private spending) varied between 0.059 and 0.088, with an increase in recent years.
    • In the United Kingdom, the coefficient of variation by region has varied in recent years between 0.091 and 0.107.
  • In recent years, geographic variation in spending in VA health care system has been similar to that in Medicare, despite the fact that the VA system uses an explicit allocation formula to distribute funds to regions.
  • The evidence suggests that efficiency gains in the health care system are possible: Spending in high-spending regions could be reduced without producing worse outcomes, on average, or reductions in the quality of care. Policies that reduce spending in high-spending areas, however, will not necessarily lead to increased efficiency unless the reductions target ineffective or harmful treatments. The report briefly explores policy options that could reduce geographic variation, including:
    • Increasing the bundling of services in payments to providers (such as those that have been implemented in the Medicare program for payment for hospitals), which could help to curb current incentives to provide more intensive services that produce only modest or no improvement in health.
    • Enhance incentives to provide care consistent with accepted guidelines for low-cost, highly effective care, thus helping to change patterns of medical practice in places that now are characterized by lower-quality, higher-cost care.
    • Generate more information about variations in practice patterns and the relative cost-effectiveness of different procedures for different populations as a way to help reorient inefficient practice patterns toward greater efficiency, especially if greater oversight or changed financial incentives led to increased pressure to use this sort of information.

Throughout this year, CBO is undertaking an expanded effort to examine options for modifying the health care system in the United States, which will ultimately result in two significant published volumes. The discussion of those options will include their potential impact on geographic variation.

The study was written by David Auerbach and Chapin White of our Health and Human Resources Division.

David Auerbach has been with the CBO since receiving his Ph.D. from Harvard University in 2002. His other work has focused mainly on issues related to health insurance coverage, including work developing a simulation model for analysis of proposals affecting the number of uninsured (described in a CBO background paper released in 2007). He has also worked extensively on topics such as Medicaid coverage, the individual health insurance market, and the effects of competition and tax incentives on health insurance premiums. He has masters degrees in technology and policy from MIT and in chemistry from UC Berkeley and received his undergraduate degree in chemistry from MIT. He is also an expert and co-author of an upcoming book on the nursing workforce.

Chapin White joined CBO in 2004 and is currently a Principal Analyst in the Health and Human Resources Division. His work focuses on health care financing, health insurance markets, medical malpractice, and nonprofit hospitals. His CBO publications include The Impact of Medicares Payment Rates on the Volume of Services Provided by Skilled Nursing Facilities, Nonprofit Hospitals and the Provision of Community Benefits, and Medical Malpractice Tort Limits and Health Care Spending. His publications include articles in Health Affairs, Inquiry, Health Services Research, and the Health Care Financing Review. He received his A.B. in social anthropology from Harvard College, M.P.P. from Harvard's Kennedy School of Government, and Ph.D. in health policy from Harvard University.