HEALTH CARE SPENDING
Target Decision Making, Not Geography
Committee on Geographic Variation in Health Care
Spending and Promotion of High-Value Care
Board on Health Care Services
Joseph P. Newhouse, Alan M. Garber, Robin P. Graham,
Margaret A. McCoy, Michelle Mancher, and Ashna Kibria, Editors
INSTITUTE OF MEDICINE
OF THE NATIONAL ACADEMIES
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NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance.
This study was supported by Contract/Grant No. HHSP23320042509XI between the National Academy of Sciences and the Centers for Medicare & Medicaid Services, Department of Health and Human Services. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the editors and do not necessarily reflect the views of the organizations or agencies that provided support for the project.
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Suggested citation: IOM (Institute of Medicine). 2013. Variation in health care spending: Target decision making, not geography. Washington, DC: The National Academies Press.
THE NATIONAL ACADEMIES
Advisers to the Nation on Science, Engineering, and Medicine
The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Ralph J. Cicerone is president of the National Academy of Sciences.
The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. C. D. Mote, Jr., is president of the National Academy of Engineering.
The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine.
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COMMITTEE ON GEOGRAPHIC VARIATION IN HEALTH CARE SPENDING AND PROMOTION OF HIGH-VALUE CARE
JOSEPH P. NEWHOUSE (Chair), John D. MacArthur Professor of Health Policy and Management, Department of Health Policy and Management, Harvard School of Public Health, Harvard Kennedy School, Harvard Medical School, and the Faculty of Arts and Sciences, Boston, Massachusetts
ALAN M. GARBER (Vice-Chair), Provost, Harvard University; Mallinckrodt Professor of Health Care Policy, Harvard Medical School, Boston, Massachusetts
PETER BACH, Director of the Center for Health Policy and Outcomes, Department of Epidemiology & Biostatistics, Memorial Sloan-Kettering Cancer Center, New York, New York
JOSEPH BAKER, President, Medicare Rights Center, New York, New York
AMBER E. BARNATO, Associate Professor of Medicine, Clinical and Translational Science, and Health Policy and Management and Director of the Clinical Scientist Training Program and the Doris Duke Clinical Research Fellowship, University of Pittsburgh, Pennsylvania
ROBERT BELL, Lead Member Technical Staff, Statistics Research Department, AT&T Labs-Research, Florham Park, New Jersey
KAREN DAVIS, Eugene and Mildred Lipitz Professor and Director, Roger C. Lipitz Center for Integrated Health Care, Department of Health Policy and Management, Johns Hopkins Bloomberg School of Public Health, Washington, DC
A. MARK FENDRICK, Professor, Departments of Internal Medicine and Health Management & Policy, University of Michigan; Director, University of Michigan Center for Value-Based Insurance Design, Ann Arbor
PAUL B. GINSBURG, President, Center for Studying Health System Change, Washington, DC
DOUGLAS A. HASTINGS, Chair of the Board of Directors, Epstein Becker & Green, P.C., Washington, DC
BRENT C. JAMES, Chief Quality Officer and Executive Director, Institute for Health Care Delivery Research, Intermountain Health Care, Salt Lake City, Utah
KIMBERLY S. JOHNSON, Assistant Professor, Department of Medicine, Division of Geriatrics, Duke University, Durham, North Carolina
EMMETT B. KEELER, Senior Mathematician, RAND Corporation, Santa Monica, California
THOMAS H. LEE, Professor of Medicine, Harvard Medical School and Harvard School of Public Health; CEO, Partners Community HealthCare, Inc., Boston, Massachusetts
MARK B. MCCLELLAN, Director, Engelberg Center for Health Care Reform; Leonard D. Schaeffer Chair in Health Policy Studies, Brookings Institution, Washington, DC
SALLY C. MORTON, Professor and Chair, Department of Biostatistics, Graduate School of Public Health, University of Pittsburgh, Pennsylvania
ROBERT D. REISCHAUER, Distinguished Institute Fellow and President Emeritus, The Urban Institute, Washington, DC
ALAN WEIL, Executive Director, National Academy for State Health Policy, Washington, DC
GAIL R. WILENSKY, Senior Fellow, Project HOPE, Bethesda, Maryland
ROBIN P. GRAHAM, Senior Program Officer, Study Director
DIANNE WOLMAN, Senior Program Officer (through December 2010)
MARGARET A. MCCOY, Program Officer
MEG F. BARRY, Associate Program Officer (through December 2012)
MICHELLE MANCHER, Associate Program Officer
ASHNA KIBRIA, Research Associate (from July 2012)
CASSANDRA CACACE, Research Associate (October 2011 through April 2012)
REBECCA MARKSAMER, Research Associate (from February 2013)
NINA SURESH, Research Assistant (through August 2012)
JILLIAN LAFFREY, Assistant, Board on Health Care Services
KATERINA HORSKA, Presidential Management Fellow (December 2011 through May 2012)
MARGARET L. SCHWARZE, IOM Anniversary Fellow
SETH GLICKMAN, IOM Anniversary Fellow
ROGER HERDMAN, Director, Board on Health Care Services
GARY ALLEN, Truven Health Analytics
ABBY ALPERT, RAND Corporation
DAVID AUERBACH, RAND Corporation
ANITA AU-YEUNG, Acumen, LLC
SARAH AXEEN, Precision Health Economics
KATHERINE BAICKER, Harvard University
SEO HYON BAIK, University of Pittsburgh
JOHN BAILAR, University of Chicago (Emeritus)
ERIC BARRETTE, The Lewin Group
HANI BASHOUR, Acumen, LLC
JAY BHATTACHARYA, Acumen, LLC
RONA BRIERE, Technical Writing Consultant
AMITABH CHANDRA, Harvard Kennedy School of Government
MICHAEL CHERNEW, Department of Health Care Policy, Harvard Medical School
CAMILLE CHICKLIS, Acumen, LLC
KENNAN CRONEN, Acumen, LLC
BRYAN DOWD, University of Minnesota
EMILY EHRLICH, Truven Health Analytics
AMANDA FARR, Truven Health Analytics
ELLIOTT S. FISHER, Dartmouth Institute for Health Policy and Clinical Practice
CAROL FORHAN, Truven Health Analytics
JESSELYN FRILEY, Acumen, LLC
PROJESH GHOSH, The Lewin Group
TERESA GIBSON, Department of Health Care Policy, Harvard Medical School; Truven Health Analytics
IAN GLENN, The Lewin Group
DANA GOLDMAN, Precision Health Economics
CLIFFORD GOODMAN, The Lewin Group
DANIEL GOTTLIEB, Dartmouth Institute for Health Policy and Clinical Practice
THOMAS HOERGER, RTI International
PAUL HOGAN, The Lewin Group
PETER HUCKFELDT, RAND Corporation
MARCO D. HUESCH, University of Southern California
PETER HUSSEY, RAND Corporation
JOSIE IDOKO, The Lewin Group
MELINA IMSHAUG, Truven Health Analytics
CAMERON KAPLAN, University of Pittsburgh
DARIUS LAKDAWALLA, Precision Health Economics
BRUCE LANDON, Department of Health Care Policy, Harvard Medical School; Division of Primary Care and General Internal Medicine, Department of Medicine, Beth Israel Deaconess Medical Center
MARY BETH LANDRUM, Department of Health Care Policy, Harvard Medical School
CHRISTOPHER LAU, RAND Corporation
BRANDY LIPTON, Acumen, LLC
HANGSHENG LIU, RAND Corporation
THOMAS MACURDY, Acumen, LLC
WILLARD G. MANNING, University of Chicago
JACLYN MARSHALL, The Lewin Group
MICHAEL MCKELLAR, Department of Health Care Policy, Harvard Medical School
ELLEN MEARA, Dartmouth Institute for Health Policy and Clinical Practice
ATEEV MEHROTRA, RAND Corporation
COURT MELIN, The Lewin Group
KAY MILLER, Truven Health Analytics
BRIAN MOORE, Truven Health Analytics
CAITLIN MORRIS, The Lewin Group
SIVIA NAIMER, Department of Health Care Policy, Harvard Medical School
SEBASTIAN NEGRUSA, The Lewin Group
SIMON NEUWAHL, RTI International
EDWARD C. NORTON, University of Michigan
MICHAEL K. ONG, University of California, Los Angeles
DANIELLA PERLROTH, Acumen, LLC
TOMAS PHILIPSON, Precision Health Economics
BRADY POST, The Lewin Group
DANIEL ROGERS, Acumen, LLC
JOHN ROMLEY, Precision Health Economics
SHAHIN SANEINEJAD, Acumen, LLC
JASON SHAFRIN, Acumen, LLC
VICTORIA SHIER, RAND Corporation
ELEN SHRESTHA, Acumen, LLC
JONATHAN SKINNER, Dartmouth Institute for Health Policy and Clinical Practice
MARK TOTTEN, RAND Corporation
JASON WAHLMAN, The Lewin Group
NANCY WALCZAK, The Lewin Group
JOHN WARNER, The Lewin Group
ADAM S. WILK, University of Michigan
BENJAMIN YARNOFF, RTI International
SAJID ZAIDI, Acumen, LLC
YUTING ZHANG, University of Pittsburgh
WEIPING ZHOU, Dartmouth Institute for Health Policy and Clinical Practice
This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the National Research Council’s Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making its published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process. We wish to thank the following individuals for their review of this report:
HENRY AARON, The Brookings Institution
STUART ALTMAN, Brandeis University
GERARD F. ANDERSON, Johns Hopkins University
DAVID A. ASCH, University of Pennsylvania
KATHERINE BAICKER, Harvard School of Public Health
RICHARD A. BERMAN, Emeritus, Manhattanville College
DAVID BLUMENTHAL, The Commonwealth Fund
ELLIOT FISHER, Dartmouth Institute of Health Policy and Clinical Practice
ELIZABETH A. MCGLYNN, Kaiser Permanente
MARILYN MOON, American Institutes for Research
ROBERT PHILLIPS, American Academy of Family Physicians
THOMAS M. PRISELAC, Cedars-Sinai Health System
JOHN ROTHER, National Coalition on Health Care
DANA GELB SAFRAN, Blue Cross Blue Shield of Massachusetts
GORDON TRAPNELL, Actuarial Research Corporation
ALAN M. ZASLAVSKY, Harvard Medical School
STEVE ZUCKERMAN, The Urban Institute
Although the reviewers listed above provided many constructive comments and suggestions, they were not asked to endorse the report’s observations nor did they see the final draft of the report before its release. The review of this report was overseen by DONALD M. STEINWACHS, Johns Hopkins Institute for Policy Studies, and CHARLES E. PHELPS, University of Rochester (Emeritus). Appointed by the Institute of Medicine and the National Research Council, they were responsible for making certain that an independent examination of this report was carried out in accordance with institutional procedures and that all review comments were carefully considered. Responsibility for the final content of this report rests entirely with the authoring committee and the institution.
Medicare’s current cost trajectory is unsustainable. However, cutting expenditures through indiscriminate payment or benefit reductions would tend to shift costs to overburdened beneficiaries or diminish access to and quality of care. The only sensible way to restrain costs is to enhance the value of the health care system, thus extracting more benefit from the dollars spent. Public officials and policy makers long have searched for a simple way to accomplish this task and recently proposed an approach based on the long-standing phenomenon of geographic variation in Medicare spending and quality. The underlying premise is that certain regions of the United States spend less per Medicare beneficiary because they are more efficient providers of health care. If only researchers were able to determine what these high-value regions do that low-value ones do not, the theory goes, the core goal of the U.S. health care system (simultaneous achievement of high performance and affordability) could be achieved.
The Institute of Medicine’s Committee on Geographic Variation in Health Care Spending and Promotion of High-Value Care explored a wealth of public (Medicare and Medicaid) and private (commercial insurer) data to understand better the extent and sources of geographic variation in spending and quality for Medicare and for the U.S. health care system as a whole. The data informing the committee’s work may be accessed at www.iom.edu/geovariationmaterials. The analyses of these data exposed a number of new questions, as well as answers. Do existing measures of health status account sufficiently for differences in disease burden among regions? How does one adequately measure market competition, let alone patient preferences and provider discretion? Do the geographic regions
studied represent the health care markets where most health care spending occurs for respective regional populations?
In its critical and comprehensive assessment, the committee uncovered layers of complexity: Variation exists not only across previously defined geographies, but also among hospital service areas within them, across health service sectors and clinical condition categories, and for individual providers. There is no clear pattern suggesting that certain regions or providers uniformly deliver higher-value care than others. This conclusion implies that sound solutions for achieving high-value care should be derived from, and targeted to, the loci of health care decisions, including hospitals, single- and multispecialty physician groups, health care organizations, and individual practitioners and patients. The Center for Medicare and Medicaid Innovation is mandated by the Patient Protection and Affordable Care Act to support innovative payment and organizational models that target a variety of health care decision makers. Fulfilling this mandate is one way the United States can test and evaluate different payment reform models to identify those that influence decisions about care delivery most constructively.
I would like to thank the committee and staff who undertook this formidable assessment and produced a straightforward and concise report that illuminates the relationship between variation in health care spending and the promotion of high-value care.
Harvey V. Fineberg
President, Institute of Medicine
Variation in medical practice has undoubtedly existed for centuries. The modern era of interest in geographic variation in health care began with a 1938 publication by Sir Alison Glover, which reported that tonsillectomies were performed at widely varying rates across different locations in England. This report, and others that followed, revealed not only that physicians varied in how they treated apparently similar patients, but also that their patterns of treatment clustered geographically. This variation is now known to be a feature of almost every country’s health care system. In the United States, the efforts of a dedicated group of researchers at Dartmouth Medical School have raised awareness of the phenomenon of geographic variation in health care among professionals, government officials and legislators, and the public. The Dartmouth researchers began by defining market areas within the United States and examining variation in practice across those areas using data from the original Medicare program. For many years they have published the Dartmouth Atlas of Health Care, documenting in great and colorful detail the large variation in both spending and service utilization exhibited by these market areas.
This variation attracted additional attention from members of Congress after Medicare Part C, now known as Medicare Advantage, was established in the 1980s. Because payment to the health plans that participated in Part C was based on spending for traditional Medicare in the beneficiary’s county of residence, and because that spending varied, payments to Part C health plans varied widely across areas. This variation in turn led to more generous supplementary benefits, lower cost sharing, and lower premiums in the high-spending areas. Members of Congress from the lower-spending
areas began to question why their constituents did not receive the same benefits as residents of the high-spending areas, and they asked how per-beneficiary expenditures could vary so greatly in a federal program that was ostensibly uniform throughout the nation.
These observations and questions led to proposals for creating a value index to reallocate Medicare spending. A value index would adjust Medicare reimbursement in an area according to the area’s value of services, rewarding areas that provided high-quality services at relatively low cost. The committee that produced this report was asked to address the desirability of such an index, and it did so in an interim report issued in March 2013.
Because the committee was charged with an ambitious set of goals that went well beyond consideration of a value index, it conducted a broad inquiry into geographic variation. First, it looked at spending in Medicare Parts C and D by area, not just the spending in the traditional Medicare program that has been exhibited in the Dartmouth Atlas. The proportion of Medicare beneficiaries in an area enrolled in Part C varies widely across the country; to the degree that beneficiaries in Part C have different health risks from those in the original Medicare program, including them could yield a different picture of total Medicare spending. The same is true of Medicare Part D. Although dollar spending under Part D is considerably smaller than that under Parts A and B, it does not exhibit the same geographic patterns.
Second, because Medicare accounts for only a minority of health care spending in an area, the committee tried to estimate the total spending in an area by all payers. Hospitals, physicians, and other health care providers treat both Medicare and non-Medicare patients, so their economic conditions and the incentives they face are influenced by commercial insurers and other payers, not Medicare alone. A hospital’s nursing staff, for example, treats all the hospital’s patients, not just its Medicare patients, and in considering the quantity and quality of nursing staff to hire, the hospital will take account of its revenue from all payers. This is obviously the case for its capital spending as well. Moreover, Medicare beneficiaries use a different mix of services from those used by the nonelderly population, which could result in a different spending pattern.
Estimates of total spending are necessarily limited by the data available. Although the Medical Expenditure Panel Survey obtains data on spending by all payers, it is not large enough to provide reliable estimates of such spending for each market, nor is that its intent. There is no data source for commercial claims or Medicaid comparable to the large database of Medicare health care claims that can be used to quantify spending at the market level. The committee was able, however, to contract for analyses of two very large commercial databases. Although neither of these databases is a random sample of all Americans with commercial insurance, the results of these two analyses are largely, though not entirely, consistent, giving the
committee confidence that it could draw reasonable inferences about commercial spending in each area. The committee’s estimates for Medicaid and the uninsured are even less precise than those for the commercially insured, but the committee believes it has done the best job possible with existing data to quantify the variation in total spending across geographic areas.
Unusual for an Institute of Medicine committee, this committee had a substantial research budget with which to conduct original empirical analyses. But the ability to direct the data collection and analyses that this budget enabled was only one reason that it was a pleasure for us to chair this endeavor. The committee itself was outstanding and worked together harmoniously to assess, analyze, and draw conclusions from the vast array of numbers that the subcontractors commissioned to conduct these analyses produced at the committee’s request. We also wish to thank the staff who worked long hours to coordinate the activities of the many subcontractors and to translate the committee’s deliberations into prose, as well as the subcontractors, whose results deeply informed the thinking that is documented in this report.
Joseph P. Newhouse, Chair
Alan M. Garber, Vice-Chair
Committee on Geographic Variation in Health
Care Spending and Promotion of High-Value Care
The committee and staff are indebted to a number of individuals and organizations for their contributions to this report. The following individuals provided testimony to the committee at its public sessions:
Jeffrey Bailet, Aurora Medical Group
Donald M. Berwick, Former President and CEO, Institute for Healthcare Improvement
Jonathan Blum, Centers for Medicare & Medicaid Services
Carolyn Clancy, Director, Agency for Healthcare Research and Quality
Janet Corrigan, National Quality Forum
Denis Cortese, Arizona State University
Helen Darling, National Business Group on Health
William Davenhall, Department of Health and Human Services, Esri
Chris Dawe, Committee on Finance, U.S. Senate
Larry DeGhetaldi, California Medical Association
Cynthia Flynn, Family Health and Birth Center
Geoff Gerhardt, Subcommittee on Health, Committee on Ways and Means, U.S. House of Representatives
Raymond Gibbons, Mayo Clinic
Elizabeth Gilbertson, Hotel Employees and Restaurant Employees International Union Welfare Fund
Timothy Gronniger, Committee on Energy and Commerce, U.S. House of Representatives
Lorrie Kaplan, American College of Nurse-Midwives
Michael Kitchell, Iowa Medical Society
Richard Kronick, Office of the Assistant Secretary for Planning and Evaluation
Nancy Lane, PDA Inc. Health Planning Management Consultants
John (Jack) Lewin, American College of Cardiology
Scott Malaney, American Hospital Association
Mark Miller, Medicare Payment Advisory Commission
Larry Minnix, American Association of Homes and Services for the Aging
Sam Nussbaum, WellPoint
Peggy O’Kane, National Committee for Quality Assurance
Anne O’Rourke, California Hospital Association
Herbert Pardes, New York Presbyterian Hospital
Bruce Pyenson, Milliman, Inc.
Chris Queram, Wisconsin Collaborative for Healthcare Quality
William Rich, American Academy of Ophthalmology
Michael Richards, Gundersen Lutheran Health System
James Rohack, Scott & White Center for Healthcare Policy
Craig Samitt, Dean Clinic
Deborah Schumann, Physicians for a National Health Program
The Honorable Allyson Schwartz, U.S. House of Representatives (D-PA)
Jason Scull, Infectious Disease Society of America
Eileen Sullivan-Marx, University of Pennsylvania School of Nursing
Jonathan Sunshine, American College of Radiology
John Tooker, American College of Physicians
Karl Ulrich, Marshfield Clinic
Susan Walden, Health Policy Counsel, Committee on Finance (Minority), U.S. Senate
Lina Walker, AARP
Andrea Weddle, HIV Medicine Association
We also extend special thanks to the following individuals who were essential sources of information, generously giving their time and knowledge to further the committee’s efforts:
Arlene S. Ash, University of Massachusetts Medical School
Alan D. Aviles, New York City Health and Hospitals Corporation
John Bertko, Centers for Medicare & Medicaid Services
Mark S. Blumberg, MD, TruRisk LLC
Congressman Earl Blumenauer, State of Oregon
Rick Cooper, CEO, The Everett Clinic
Guy David, University of Pennsylvania
Mark Duggan, Wharton School, University of Pennsylvania
Abe Dunn, Bureau of Economic Analysis
Anne Elixhauser, Agency for Healthcare Research and Quality
Sherry Glied, Columbia University, Mailman School of Public Health
Senator Chuck Grassley, State of Iowa
Atul Grover, Association of American Medical Colleges
James H. Harrison, Onpoint Health Data
Christine L. Johnson, Florida Hospital Association
Abbi Kaplan, Washington Healthcare Forum
Lorrie Kline Kaplan, American College of Nurse-Midwives
Bruce M. Kelly, Mayo Clinic
Robert Krasowski, National Center for Health Statistics/Research Data Center
Congressman Rick Larsen, State of Washington
Roderick J. Little, University of Michigan
Willard G. Manning, Emeritus, The University of Chicago
Peter McMenamin, American Nurses Association
Nancy McNeilly, National Association of Urban Hospitals
Karen Milgate, Centers for Medicare & Medicaid Services
Mark Miller, Medicare Payment Advisory Commission
Arielle Mir, Medicare Payment Advisory Commission
Robert Murray, Maryland Department of Health and Mental Hygiene
Edward C. Norton, University of Michigan School of Public Health
Wendell Primus, Senior Policy Advisor, Office of the House Minority Leader
Chris Mambu Rasch, Wisconsin Medical Society
Dana Gelb Safran, Blue Cross Blue Shield of Massachusetts
Deborah Schumann, Physicians for a National Health Program
James G. Scott, Applied Policy
Frank A. Sloan, Duke University
Caroline Steinberg, American Hospital Association
Jeffrey Stensland, Medicare Payment Advisory Commission
Mayor Ray Stephanson, Everett, Washington
David Wennberg, The Dartmouth Institute
John E. Wennberg, The Dartmouth Institute
We would like to thank OptumInsight for the use of the Normative Health Information database, the Centers for Medicare & Medicaid Services (CMS) and Truven Health Analytics for providing new data on geographic variation, and Verisk Health for making the DxCG® DCG Commercial Software available to our contractors. Their contributions to our research were substantial and essential. We would also like to
thank Rona Briere for her expert assistance in editing the report and Alisa Decatur for her support in manuscript preparation.
Funding for this study was provided by the CMS. The committee appreciates the opportunity and support extended by CMS for the development of this report.
Finally, many individuals within the Institute of Medicine were helpful to the study staff. We would like to thank Clyde Behney, Laura Harbold DeStefano, Chelsea Frakes, Jim Jensen, Sandra McDermin, William McLeod, Abbey Meltzer, Christine Stencel, Vilija Teel, Lauren Tobias, Cheryl Ulmer, Jennifer Walsh, and Sarah Ziegenhorn.
For more than three decades, experts at the Dartmouth Institute for Health Policy and Clinical Practice have documented that Medicare spending varies greatly across geographic regions, and that higher expenditures do not correspond to better health care outcomes. This seminal body of work raised the possibility that some regions of the country may be more efficient than others at providing high-quality health care services. Seeking strategies for reducing Medicare costs, some wonder whether cutting payment rates to high-cost areas would save money without adversely affecting health care quality for Medicare beneficiaries. This Institute of Medicine study was undertaken to independently evaluate geographic variation in health care spending levels and growth among Medicare, Medicaid, privately insured, and uninsured populations in the United States; to make recommendations for changes in Medicare payment systems under the Patient Protection and Affordable Care Act (ACA); and to address whether Medicare payments for physicians and hospitals should be adjusted by a value index that is based on geographic area performance.
This report presents findings from commissioned analyses of traditional, fee-for-service Medicare (and to a lesser extent Medicare Advantage, or Part C) and commercial insurance. Because of methodological challenges and data limitations, it does not include separate analyses of variation in the Medicaid and uninsured populations, although estimates of spending by these two groups are included in the study committee’s area-wide estimates of total health care spending. The commissioned analyses and the committee’s research and deliberations led to the following conclusions:
• Geographic variation in spending and utilization is real, and not an artifact reflecting random noise; it persists across geographic units and health care services and over time.
• Variation in spending in the commercial insurance market is due mainly to differences in price markups by providers rather than to differences in the utilization of health care services.
• After accounting for differences in the age, sex, and health status of beneficiaries, geographic variation in spending in both Medicare and commercial insurance is not further explained by other beneficiary demographic factors, insurance plan factors, or market-level characteristics. In fact, after controlling for all factors measurable within the data used for this analysis, a large amount of variation remains unexplained.
• Total spending per Medicare beneficiary and per person with commercial insurance is little correlated across hospital referral regions (HRRs); utilization of services between the two populations, however, is much more correlated across HRRs.
• Health care decision making generally occurs at the level of the individual practitioner or organization (e.g., hospital or physician group), not at the level of a geographic region. Therefore, a geographically based value index is unlikely to promote more efficient behaviors among individual providers and thus is unlikely to improve the overall value of health care.
• Substantial variation in spending and utilization remains as units of analysis get progressively smaller (hospital referral region, hospital service area, hospital, practice, and individual provider).
• HRR-level quality is not consistently related to spending or utilization among either Medicare beneficiaries or the commercially insured.
The committee’s first recommendation reflects research and data limitations encountered during the course of this study:
RECOMMENDATION 1: Congress should encourage the Centers for Medicare & Medicaid Services (CMS), and provide the necessary resources, to make accessing Medicare and Medicaid data easier for research purposes. CMS should collaborate with private insurers to collect, integrate, and analyze standardized data on spending, as well as clinical and behavioral health outcomes, to enable more extensive comparisons of payments and quality and evaluation of value-based payment models across payers.
The committee’s remaining recommendations are based on the conclusions presented above and the committee’s analysis of payment and organizational reforms that would promote the delivery of high-value care while taking account of the ACA and related changes already under way:
RECOMMENDATION 2: Congress should not adopt a geographically based value index for Medicare. Because geographic units are not where most health care decisions are made, a geographic value index would be a poorly targeted mechanism for encouraging value improvement. Adjusting payments geographically, based on any aggregate or composite measure of spending or quality, would unfairly reward low-value providers in high-value regions and punish high-value providers in low-value regions.
RECOMMENDATION 3: To improve value, the Centers for Medicare & Medicaid Services (CMS) should continue to test payment reforms that incentivize the clinical and financial integration of health care delivery systems and thereby encourage their (1) coordination of care among individual providers, (2) real-time sharing of data and tracking of service use and health outcomes, (3) receipt and distribution of provider payments, and (4) assumption of some or all of the risk of managing the care continuum for their populations. Further, CMS should pilot programs that allow beneficiaries to share in the savings due to higher-value care.
RECOMMENDATION 4: During the transition to new payment models, the Centers for Medicare & Medicaid Services (CMS) should conduct ongoing evaluations of the impact on value of the reforms included in Recommendation 3 by measuring Medicare spending and beneficiaries’ clinical health outcomes. CMS should use the results of these evaluations to iteratively improve these payment models. CMS should also monitor how these reforms impact Medicare beneficiaries’ access to medical care.
RECOMMENDATION 5: If evaluations of specific payment reforms demonstrate increased value, Congress should give the Centers for Medicare & Medicaid Services the flexibility to accelerate the transition from traditional Medicare to new payment models.