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

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.

In 2009, a group of U.S. House of Representatives members asked the HHS to sponsor two IOM studies focused on geographic payments under Medicare, independent of final health reform legislation. The first study evaluated the accuracy of geographic adjustment factors used for Medicare payment. This second study investigates geographic variation in health care spending and quality and to analyze Medicare payment polices that might encourage high-value care that would modify provider payments based on composite measures of cost and quality of geographic-area performance.

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