Variation in Health Care Spending: Target Decision Making, Not Geography

IOM: July 24, 2013

For over three decades, researchers have documented large, systematic variation in Medicare fee-for-service spending and service use across geographic regions, seemingly unrelated to health outcomes. This variation has been interpreted by many to imply that high spending areas are overusing or misusing medical care. Policymakers, seeking strategies to reduce Medicare costs, naturally wonder if cutting payment rates to high cost areas would save money without adversely affecting Medicare beneficiary health care quality and outcomes.


Yet, many have cautioned that geographically-based payment policies may have adverse effects if higher costs are caused by other variables like beneficiary burden of illness, or area policies that affect health outcomes. Further, if there are substantial differences in provider practice patterns within regions, cutting payments to all providers within a region would unfairly punish low cost providers in high-spending regions and unfairly reward high cost providers in low spending regions. Little work has been conducted to evaluate variation in the private insurance market, which represents around 45 percent of United States health insurance expenditures. Even less is known about geographic variation in the Medicaid program and other vulnerable populations. Read more