Geography of Medicare By David M. Cutler and Louise Sheiner American Economic Review Vol. 89 No Cliff Gagnier

Research Questions In 1997, regional Medicare payments averaged $5,182 with a stand deviation of $897 What factors account for regional differences in Medicare spending? Are there regional inefficiencies that can be corrected by policy?

Three Theories 1: Spending variation is due to regional differences in illness 2: Spending variation is due to differences in demand factors, ex. demographic factors, insurance coverage 3: Spending variation is due to the structure of medical care markets, ex. generalists vs. specialists

Data Source 1998 Dartmouth Atlas of Health Care Contains information on Medicare spending for 212 hospital referral regions (HRR’s) Authors use HHR’s for the data values of metropolitan statistical areas (MSA’s)  The authors state that HHR’s are closely aligned with MSA’s

Method Correlation of Medicare spending across MSA’s Authors compared spending within MSA’s overtime 15 year and 25 year time periods

Results After 15 years, correlation = 70% After 25 years, correlation = 40% Therefore Illness does not vary greatly by region over time

Method Explaining Medicare spending across areas Variables implied in the three theories were gradually introduced in order to measure their impact on the difference in regional Medicare spending The reduction in standard deviation was used as a measure of the set of variables’ relative impact

Method Variables (5 analysis categories) Each category includes the variables from the previous category 1. No adjustment (no variables) 2. Illness 3. Demographics 4. Insurance Supply 5. Medical care supply

Results No variables Standard deviation = $869 Illness Standard deviation = $510 Demographics Standard deviation = $472 Insurance Supply Standard deviation = $436 Medical care supply Standard deviation = $390 Remaining deviation due to the number of patients or the relative expense of care provided for the same illness

Policy Implications Total discharges correlate with spending (.77) greater than average cost per discharge (.46) Expensive regions hospitalize more often for the same illness than inexpensive regions 1/3 of Medicare spending comes in the last six months of life For-profit hospitals and a large percentage of specialists increase costs HMO’s reduce cost How can we get a level of care that is necessary but not more; or in other words maximize net social benefit?