Health care spending variation in Medicare and private coverage ain’t the same thing

There are lots and lots of people who believe that increased health care spending must involve higher quality. Otherwise, we’d be forced to admit that we could spend a lot less and suffer no real consequences. A new viewpoint in JAMA summarizes a recent report from the IOM that begs to differ (emphasis mine):

Recognizing that unexplained geographic variation in medical expenditures is both persistent and possibly a sign of inefficiency, members of Congress asked the Institute of Medicine (IOM) to explore geographic variation and address its policy implications. We chaired the resulting IOM committee, which recently issued its final report. The committee scrutinized the magnitude and implications of geographic variation in Medicare expenditures and examined the variation in health expenditures for patients whose care was financed from other sources. In its analyses of geographic variation in overall area-specific medical expenditures, the committee estimated spending by private insurers, Medicaid, the uninsured, and other out-of-pocket spending in an effort to measure the per-capita dollars spent on health care from all payment sources. In short, the committee sought to compare the total dollars spent on health care in different areas.

The committee found that geographic variation in both Medicare and private expenditures was a real phenomenon and that high-cost areas in 1 year had high costs in other years. Areas with high costs in the treatment of 1 condition were somewhat more likely to have high costs in treating other conditions, but higher expenditures were not associated with better outcomes or higher quality care, either overall or when viewed from the perspectives of individual health conditions. Importantly, Medicare spending in an area and input-price-adjusted spending by private insurers were poorly correlated (with correlation coefficients of less than 0.1).

It seems that most of the variation in per beneficiary spending is in “post-acute care”. This includes home health services, nursing homes, rehab facilities, long-term care hospitals, and hospice care. In fact, about three quarters of variation is accounted for by these services, which account for about 13% of all Medicare spending. The rest of the variation comes from inpatient services. Variation in outpatient services was negligible.

Here’s something else that’s interesting (emphasis mine):

These findings from Medicare do not generalize to private health insurance, for 2 principal reasons. First, post–acute care services (the main source of variation in Medicare spending) are seldom used by the younger privately insured population. Second, whereas Medicare sets a take-it-or-leave-it price after adjusting for wage levels, private insurers individually negotiate prices with physicians, hospitals, and other health care institutions and practitioners. The variation in negotiated prices presumably reflects variation in the local market power of both the insurer and the health care entity or clinician, as well as any variation across markets in efficiency among clinicians, hospitals, and other health care institutions. These 2 differences may help explain the poor correlation between Medicare and private insurer costs.

Whereas price variation explains almost none of the overall variation in Medicare expenditures (after adjusting for wage variation), price variation is responsible for an estimated 70% of the total geographic variation in spending among privately insured persons. Variation in wage levels and variation in the quantity of services delivered are almost equally responsible for the remaining estimated 30% of spending variation. Thus, although most of the variation in per-beneficiary Medicare spending across HRRs is in the quantity of services, especially post–acute care services, the prices insurers pay in different areas—not the quantity of services—are responsible for most of the variation in private spending. These results are consistent with an important finding concerning Medicare: there is relatively little variation in either Medicare or among the privately insured in the quantity of services predominantly used by those younger than 65 years, such as outpatient visits and procedures. This helps explain why there is almost no correlation between Medicare spending and commercial spending in an area.

Bottom line: Medicare spending in an area tells you almost nothing about private spending in an area, and vice versa. Moreover, what we might do to reduce one may have little effect on the other. Medicare has a volume problem, while private insurance has more of a price problem. We’ve got our work cut out for us.


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