Clarifying Sources of Geographic Differences in Medicare Spending

This article examines the factors behind geographical variation in Medicare spending.

Two decades of research, driven by the Dartmouth Atlas of Health Care, suggest that there are substantial differences in Medicare spending by region. Furthermore, this body of research suggests that differences in spending do not correlate to quality of medical care and that the primary cause of these differences is variation in medical resource capacity. Since proposed reforms aim to use geographic variation to control health care costs in high-cost regions, more research is needed to understand the underlying reasons behind geographical variation in spending.

The authors analyzed data from 6,725 beneficiaries in the Medicare Current Beneficiary Surveys from 2000-2002. They used a series of linear multivariate regression models to assess the impact of individual health changes, demographics and area-level measures of health care supply on Medicare spending by region.

Key Findings:

  • Regions in the highest quintile of Medicare spending spent $7,183 per recipient per year, 52 percent more than regions in the lowest quintile of Medicare spending ($4,721). After adjusting for baseline health, changes in health, and demographics, this increase dropped from 52 percent to 33 percent.
  • Health accounted for 29 percent of geographical variation in spending.
  • Sixty percent of geographical variation in spending is unexplained by variation in health and demographics.
  • Regional variation in medical resource supply was not statistically significant.

Geographical variation in Medicare spending has complex roots. While some of the variation can be explained by variation in health among the populations covered, the majority of spending variation cannot be linked to health or demographics. Without a more robust understanding of the causes of variation, policy-makers should exercise caution in developing policies to curb spending in high-cost regions.