Skip to content

Medicare Spending Variations Mostly Due To Health Differences, Study Concludes

Updated at 5:45 p.m.

The idea that uneven Medicare health care spending around the country is due to wasteful practices and overtreatment—a concept that influenced the federal health law — takes another hit in a study published Tuesday. The paper concludes that health differences around the country explain between 75 percent and 85 percent of the cost variations. 

Medicare Spending Variations Mostly Due To Health Differences, Study Concludes

“People really are sicker in some parts of the country,” said Dr. Patrick Romano, one of the authors.

That’s a sour assessment for those hoping to wring large savings out of the health care system by making it more efficient. Some, such as President Barack Obama’s former budget director, Peter Orszag, assert that geographic variations in spending could mean that nearly a third of Medicare spending may be unnecessary.

Their conclusions are based on the wide differences in spending, which in 2011 ranged from an average of $14,085 per Medicare beneficiary in Miami, to $5,563 per beneficiary in Honolulu, even after Medicare’s cost of living and other regional adjustments — but not health status — were taken into account.

The new study comes as advisors to the government consider whether regional differences are a useful tool to reduce health spending. An Institute of Medicine panel is preparing a report on whether Congress should pay less to hospitals and doctors in areas where there is heavy use of medical services, and more in regions where spending is lower. That report is due out this summer, but an interim version indicated that the panel was opposed to the idea.

The new paper is one of the sharpest attacks yet on the work of the Dartmouth Institute for Health Policy & Clinical Practice, whose three decades of research has popularized the theory that the unexplained regional differences in spending are due to the aggressiveness of some physicians to do more, in large part because it enriches them. The theory, popularized by a 2009 New Yorker article on high spending in McAllen, Texas, has divided health policy experts.

Dartmouth’s research has influenced a generation of health policy thinking. It helped provide a rationale for part of the health law that pushes hospitals to operate more efficiently by penalizing high cost ones.  Dartmouth researchers were also among the original architects of  “accountable care organizations,” to create financial incentives for physicians to avoid unneeded tests and treatments. 

In the study published in the journal Medical Care Research and Review, researchers affiliated with the Center for Studying Health System Change, a Washington think tank, purport to poke holes in the methods that Dartmouth uses. They conclude that it is “erroneous” to compare spending on different Medicare beneficiaries in their final months of life. By looking at the diagnoses included in Medicare claims, the researchers concluded the patients in different parts of the country were not equally ill, explaining much of the higher spending.

“The trouble with Dartmouth is they were trying to spin a simple story from a world which is far more complex and far more nuanced,” said James Reschovsky, the lead author on the paper. “They are to be credited for highlighting that there’s a lot of inefficiency in the delivery of health care in the United States. They defaulted by hanging their hat on geographic determinants of efficiency, and I think that premise is fundamentally being torn down, not only by my research, but also by the IOM work and a bunch of other studies.”

Dartmouth strongly disputed the study, which they said they could not replicate. Jonathan Skinner, a Dartmouth economist, called the study “fatally flawed” in an email. He noted that the Institute of Medicine’s preliminary report stated that “although a non-trivial amount of geographic variation can be explained by specific demographic and, potentially, health status variables, a substantial amount of variation remains unexplained.” (Dartmouth’s response can be read here.)

Skinner also noted that Dartmouth researchers have never endorsed the idea of adjusting Medicare spending by region.

Dartmouth researchers have long maintained that experts shouldn’t trust Medicare diagnosis records, which the new study used for its analysis. They believe that doctors in some areas of the country are more aggressive in diagnosing people with serious ailments than doctors elsewhere.

The new paper disputes this by looking at conditions such as hip fractures, head injuries and heart attacks, in which there’s little diagnosing discretion. The geographic differences in spending for those conditions were “strikingly consistent” with conditions where doctors might have more wiggle room in attaching a diagnosis.

“You can’t tell me that major head injuries, heart attacks, and amputations are underdiagnosed in low-spending areas,” said Romano, a professor at the University of California Davis School of Medicine. Jack  Hadley of George Mason University was the third author of the paper.

But Skinner said that Dartmouth’s efforts to reproduce the new study’s findings, using its own cache of Medicare data, led to very different results. Dartmouth for instance, found that hip fractures in the highest-spending areas were only 13.5 percent more frequent than in low spending areas–much less than for conditions where doctors had leeway in diagnosing. “That completely pulls the rug out from under their point – from their paper, in fact,” Skinner wrote.

Maribeth Shannon, a senior official at the California Healthcare Foundation, which has given grants to both Dartmouth and the Center, said that Dartmouth’s research was more carefully couched than its popular depictions. “People are stretching the research beyond the reasonable bounds,” she said. “We always have to take the research with its limitations.”

2008 “white paper” from Dartmouth directed at policy makers and titled “an agenda for change” implied the possibility of substantial savings if Medicare rooted out inefficiency and unnecessary treatments. “How much could Medicare save?” the paper asked. “Given the strong national reputations enjoyed by such organized practices as the Mayo Clinic and Intermountain Healthcare, and the objective evidence that they deliver more efficient, higher quality care, it seems reasonable to use these systems as benchmarks for the rest of the country. Were all providers in the country to achieve the same level of efficiency for inpatient spending on supply-sensitive care, we estimate a 28 percent reduction in hospital spending under a Mayo benchmark and a 43 percent reduction under an Intermountain benchmark.”

Previous research also has picked at some of the pillars of Dartmouth research and assertions made by its advocates. A 2010 study questioned whether health spending in the employer market tracks Medicare spending, as the New Yorker article had claimed.

More recent studies have found that spending varies wildly within regions of the country, in some cases more than it varies around the country.

Still, while faulting Dartmouth’s methods, the new paper left between 15 percent and 25 percent of geographic differences unexplained. And Romano said he agrees there are substantial differences in how medicine is practiced. “I really do believe there is huge practice variation, but I don’t think we see that variation at the level of these large geographic units,” he said. “We see those variations at the level of individual physician practices.”

This article was produced by Kaiser Health News with support from The SCAN Foundation.

Related Topics

Cost and Quality Medicare The Health Law