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Suggested Citation:"1 Introduction and Overview." Institute of Medicine. 2013. Variation in Health Care Spending: Target Decision Making, Not Geography. Washington, DC: The National Academies Press. doi: 10.17226/18393.
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1

Introduction and Overview

In 2009, following negotiations over the Patient Protection and Affordable Care Act (ACA),1 a group of members of the House of Representatives known as the Quality Care Coalition asked Secretary of Health and Human Services (HHS) Kathleen Sebelius to sponsor two Institute of Medicine (IOM) studies focused on geographic payments under Medicare, independent of final health care reform legislation (Sebelius, 2010). The first study evaluated the accuracy of Medicare’s geographic adjustment factors, which alter physician and hospital payment rates based on geographically based input prices. The IOM released two reports based on that first study—Geographic Adjustment in Medicare Payment—Phase 1: Improving Accuracy and Geographic Adjustment in Medicare Payment—Phase II: Implications for Access, Quality, and Efficiency—in 2011 and 2012, respectively (IOM, 2011, 2012b).

For the second study, documented in the present report, the Centers for Medicare & Medicaid Services (CMS) contracted with the IOM to conduct a 3-year consensus study to investigate geographic variation in health care spending and quality and to analyze Medicare payment polices that could encourage high-value care, including the adoption of a geographically based value index. This index would in principle account for both the health benefit obtained from health care services delivered and the cost of those services, as discussed later in this report. Deputy Director Jonathan Blum described CMS’s motivation for commissioning the study as an effort “to

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1Patient Protection and Affordable Care Act, Public Law 111-148, 111th Cong., 2nd sess., (March 23, 2010).

Suggested Citation:"1 Introduction and Overview." Institute of Medicine. 2013. Variation in Health Care Spending: Target Decision Making, Not Geography. Washington, DC: The National Academies Press. doi: 10.17226/18393.
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build more consensus about … the reasons, the causes, and the impacts for health care spending variation—to help [CMS] develop policies to address those variations.”2

Although the IOM has never published a report focused on geographic variation in health care spending and quality, the topic is a familiar one. Many IOM consensus reports and workshop summaries provide findings conclusions, and recommendations on issues related to geographic variation, such as improving health care quality (IOM, 2001, 2002, 2003, 2006a), reducing health care spending (IOM, 2010a; NRC, 2010), and improving value within the U.S. health care system (IOM, 2006b, 2010b, 2012b). The committee formed to conduct the present study drew on this prior work for conceptual and methodological insight.

SPENDING AND HEALTH CARE QUALITY IN THE UNITED STATES

There is broad consensus that U.S. health care expenditures have been growing at an unsustainable rate. In 2011, total U.S. health care expenditures amounted to $2.7 trillion, or 17.9 percent of national gross domestic product (GDP), substantially more than was spent by other developed countries (CMS, 2013; Kaiser Family Foundation, 2012). The Congressional Budget Office (CBO) projects that federal health care spending will total $7.94 trillion between 2014 and 2023 (ModernHealthcare.com, 2013). At current expenditure rates, moreover, the Medicare Hospital Insurance Trust Fund (which covers the cost of Medicare Part A hospital insurance benefits for Medicare beneficiaries) will be insolvent by the mid-2020s (Social Security and Medicare Boards of Trustees, 2008). Growing health care expenditures also strain state budgets (National Governors Association and National Association of State Budget Officers, 2012; The Pew Center on the States, 2012) and threaten the well-being of individuals and families (Schoen et al., 2011; World Bank, 2012).

Despite the tremendous resources dedicated to health care, health care quality in the United States remains inconsistent. Significant advances in biomedical sciences, medicine, and public health have contributed to better individual and population health, including increased life expectancy and state-of-the-art cancer treatment (Docteur and Berenson, 2009). However, systematic underuse, misuse, and overuse of medical services throughout the U.S. health care system contribute to decreased quality of patient care (IOM, 1999). For example, approximately one in seven Medicare beneficiaries experiences an adverse event during a hospital stay, resulting in 15,000

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22010 (November 9). Speech before the Committee on Geographic Variation in Health Care Spending and Promotion of High-Value Care. Washington, DC: National Academy of Sciences.

Suggested Citation:"1 Introduction and Overview." Institute of Medicine. 2013. Variation in Health Care Spending: Target Decision Making, Not Geography. Washington, DC: The National Academies Press. doi: 10.17226/18393.
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avoidable deaths each month (Levinson, 2010). The CBO estimates that medical negligence contributes to 181,000 severe medical injuries each year (CBO, 2008). In 2009, Medicare paid an estimated $4.4 billion to care for patients who had been harmed in the hospital and $26 billion for hospital readmissions. Even as they threaten the welfare of patients, inefficiencies within the health care system divert limited resources from other national priorities, such as education, infrastructure, and debt reduction.

MEDICARE PAYMENT POLICY REFORM AND GEOGRAPHIC VARIATION IN SPENDING AND QUALITY

For more than three decades, experts at the Dartmouth Institute for Health Policy and Clinical Practice (“Dartmouth”) have documented significant variation in Medicare spending and quality across geographic regions,3 producing a series of maps that have become known as the Dartmouth Atlas of Health Care (Dartmouth Institute for Health Policy and Clinical Practice, 2013; Wennberg and Cooper, 1999). From this seminal body of work, a finding emerged that health care spending and rates of utilization of specific services varied widely but did not appear to be consistently related to health outcomes or patient satisfaction among Medicare beneficiaries (Baicker and Chandra, 2004; Fisher et al., 2003a,b; MedPAC, 2009, 2011; Zhang et al., 2010).

A central question in the debate about geographic variation is the following: Should Medicare’s policy for paying health care providers be modified in light of the possibility that Medicare beneficiaries in high-spending areas do not experience better health outcomes? In fact, some legislators have asked whether cutting Medicare payment rates to high-cost areas might save money without adversely affecting health care quality for beneficiaries. The authors of one study assert that Medicare spending would drop by as much as 29 percent if practices of low-cost, high-quality regions were adopted nationwide, while health care for Medicare beneficiaries would significantly improve (Wennberg et al., 2002). Moreover, some argue that Medicare’s traditional fee-for-service reimbursement system is a major driver of both variation and waste because it rewards providers based on the volume and intensity rather than the value of services delivered. For instance, congressional representatives in areas generally associated with high-quality, low-cost health care argue that highly efficient hospitals and providers are penalized under the current payment system.4

Based on these observations, some lawmakers have proposed that

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3Hospital referral regions (HRRs) and hospital service areas (HSAs); see Chapter 2, Box 2-1, for definitions.

4Personal communication, Michael Kitchell, Iowa Medical Society, January 7, 2011.

Suggested Citation:"1 Introduction and Overview." Institute of Medicine. 2013. Variation in Health Care Spending: Target Decision Making, Not Geography. Washington, DC: The National Academies Press. doi: 10.17226/18393.
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Medicare should adjust physician reimbursement rates based on regional performance to encourage more uniform performance of the health care system for Medicare beneficiaries across hospital markets.5,6,7 Proponents of a geographic value index theorize that such regional payment adjustments would encourage all hospitals and providers within an area to coordinate care, leading to better system efficiencies across the region.8,9

Other health care experts counter that supporters of the above policy proposal conflate the issue of improving value with that of reducing geographic variation. They point out that some variation in health care spending is to be expected in an efficient health care system, reflecting anticipated differences in consumption of health care services by individual patients. They argue that reducing geographic variation is desirable only to the extent that measured variation represents inefficiencies in the health care system. This concept is explored further in Chapter 2.

Still other health care experts argue that regionally based payments are inherently unfair and would fail to create market incentives necessary to promote high-value, patient-centered care. Region-level measures of variation mask variation within regions. Specifically, such finer-grained variation means provider payments based on regional area performance would reward inefficient providers in low-cost regions and punish more efficient providers in high-cost regions (MedPAC, 2007). Given the public and private resources at stake and the need for improved health care quality, lawmakers and health care experts demanded additional research and expert opinion to inform the debate on geographic variation. Examples of these arguments, presented at the public workshops held for this study, are offered later in this chapter.

STUDY CHARGE AND SCOPE

To conduct this study, the IOM convened the Committee on Geographic Variation in Health Care Spending and Promotion of High-Value Care, whose 19 members included experts in health economics, statistics, health care financing, value-based health care purchasing, health services research, health law, and health disparities. The committee’s statement of

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5Medicare Payment Improvement Act of 2009, S. 1249, 111th Cong., 1st sess. (June 12, 2009).

6Medicare Payment Improvement Act of 2009, H.R. 2844, 111th Cong., 1st sess. (June 15, 2009).

7It should be noted that Dartmouth researchers do not recommend the use of a geographically based value index (Skinner et al., 2010).

8Personal communication, Michael Richards, Gundersen Lutheran Health Services, January 17, 2011.

9U.S. Congress, Senate. 2009. Health Care Reform. 111th Cong. (July 30, 2009).

Suggested Citation:"1 Introduction and Overview." Institute of Medicine. 2013. Variation in Health Care Spending: Target Decision Making, Not Geography. Washington, DC: The National Academies Press. doi: 10.17226/18393.
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task (see Box 1-1) draws on language in earlier federal health care reform legislation10 and includes the following three tasks11:

1. to independently evaluate geographic variation in health care spending levels and growth among Medicare, Medicaid, privately insured, and uninsured populations in the United States;

2. to make recommendations for changes in Medicare Part A, B, and C payments, considering findings from task 1, as well as changes to Medicare payment systems under the ACA; and

3. to address whether Medicare payments for physicians and hospitals should incorporate a value index that would modify the payments based on geographic-area performance.

STUDY METHODS

This section describes the methods used to conduct this study. The first step was to formulate an operational definition of value in health care. Then, to evaluate geographic variation in health care costs and quality and thereby value, the committee commissioned an extensive body of new statistical analyses and four papers from subject-matter experts and held two public workshops to complement its review of the existing literature.

Definition of Value

To respond to its statement of task, the committee identified two basic questions:

1. What is known about geographic variation in health care spending, utilization, and quality?

2. Should geographically based measures of value be used to adjust Medicare fee-for-service hospital and provider reimbursement rates in a geographic region?

Before seeking to answer these questions, the committee needed to adopt an operational definition of “value.” In health care, the term “value” is used widely but imprecisely and with very different meanings. A common thread is the notion of efficiency, as in health services or health outcomes achieved per unit costs, where outcomes encompass a variety of health di-

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10The Affordable Health Care for America Act, H.R. 3962, 111th Cong., 1st sess. (October 29, 2009).

11Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, Public Law 111-192, 111th Cong., 2nd sess. (June 25, 2010).

Suggested Citation:"1 Introduction and Overview." Institute of Medicine. 2013. Variation in Health Care Spending: Target Decision Making, Not Geography. Washington, DC: The National Academies Press. doi: 10.17226/18393.
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BOX 1-1
Statement of Task

An ad hoc committee will conduct a study on geographic variation in intensity, cost, and growth of health care services and in per capita health care spending among the Medicare, Medicaid, privately insured, and uninsured U.S. populations as proposed in Section 1159 of the Affordable Health Care for America Act (H.R. 3962) in 2009, and commissioned by the Secretary, U.S. Department of Health and Human Services, in 2010.

The committee will commission relevant new analyses and will evaluate and review factors such as:

• Variation in areas of different sizes;

• Input prices; health status; practice patterns; access to medical services; supply of medical services; socioeconomic factors, including race, ethnicity, gender, age, income and educational status; and provider and payment organizations;

• Patient access to care, insurance status, distribution of health care resources, health care outcomes and quality;

• Physician discretion consistent with or different from best evidence;

• Patient preferences and compliance;

• Empirical evidence for variation;

• Insurance status prior to Medicare enrollment, dual eligibility, fee-for-service, Parts C and D Medicare; and

• Other factors deemed appropriate.

The effects of relevant sections of the Affordable Care and Budget Reconciliation Acts of 2010 on variation in Medicare Parts A, B, and C spending will be taken into account and recommendations made for changes in Medicare Parts A, B, and C payments for items and services that include impacts on physicians and hospitals, beneficiary access to care, and Medicare spending (but excluding graduate medical education, disproportionate share hospital, and health information technology add-ons).

The committee will further address whether Medicare payment systems should be modified to provide incentives for high-value, high-quality, evidence-based, patient-centered care through adoption of a value index (based on measures of quality and cost) that would adjust payments on a geographic area basis.

A workshop will be convened to gather public input into issues in the statement of task.

To meet a firm congressional deadline, a brief interim report will be issued in March 2013. The report will include the committee’s preliminary observations, based primarily on the results of the sub-contracted analyses, but will not contain any recommendations.

A final report will be issued at the end of the project in approximately 36 months.

Suggested Citation:"1 Introduction and Overview." Institute of Medicine. 2013. Variation in Health Care Spending: Target Decision Making, Not Geography. Washington, DC: The National Academies Press. doi: 10.17226/18393.
×

mensions (CMS, 2008; Conway, 2009; HHS, 2009; Porter, 2010; Wong et al., 2009). In legislation leading to this study, Congress defined high-value care as “the efficient delivery of high-quality, evidence-based, patient-centered care.”12 In traditional economic terms, “efficiency” is the production and allocation of goods and services that generate the greatest utility for a given set of resources or inputs, where “utility” reflects consumer satisfaction. As efficiency improves, more resources can be freed up to provide more goods and services.

In addition to deriving the greatest utility from a given set of inputs, economic efficiency reflects investing the proper amount of inputs into a given activity relative to other activities (Garber and Skinner, 2008). Thus, determining value in health care also requires having a measure of society’s and/or an individual’s willingness to pay for certain services relative to others. In the context of Medicare, this includes general coverage determinations, as well as specific reimbursement rates for covered items and services.

The goal of evaluating geographic variation in health care spending and quality imposed additional operational conditions on the definition of value. The measure of value would need to allow for comparisons of health care performance across different units of analysis using claims datasets. Consequently, the committee defined health care value as the equivalent of net benefit: the amount by which overall health benefit and/or well-being produced by care exceeds (or falls short of) the costs of producing it. Those costs should incorporate the opportunity costs of resources used to produce health care services. But because these opportunity costs seldom are observed directly, the committee defines “costs” for the purposes of this study as Medicare or other payer spending for goods and services. These observed costs are based on payment formulas that bear some relation to opportunity costs, but they could differ considerably.

To operationalize the committee’s definition of value, consistency is necessary in the way health benefit is valued conceptually. Typically, either dollars or quality-adjusted life years (a measure of health outcomes) are used for this purpose. Because a health care system is designed to promote health through the provision of health care services, taking into account the system’s fiscal sustainability,13 health outcomes are a logical choice for assessing the overall health benefit or well-being attributable to health care. Health care researchers assess health outcomes using different quality metrics, which are intended to measure “the degree to which health [care] services for individuals and populations increase the likelihood of desired

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12The Affordable Health Care for America Act, H.R. 3962, 111th Cong., 1st sess. (October 29, 2009).

13Expanding on an earlier definition of health care system purpose recommended by the Institute of Medicine (IOM, 2001).

Suggested Citation:"1 Introduction and Overview." Institute of Medicine. 2013. Variation in Health Care Spending: Target Decision Making, Not Geography. Washington, DC: The National Academies Press. doi: 10.17226/18393.
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health outcomes and are consistent with current professional knowledge” (IOM, 1990, p. 21). However, rarely is it straightforward to ascertain the contribution of an individual health care service to a specific health outcome, particularly in the management of chronic conditions. Measurement of health outcomes is challenging for numerous reasons, including those cited below and discussed in Chapter 2.

First, health is affected by determinants other than the provision of health care services, such as social factors, individual behavior, the environment and genetics (McGinnis, 2002). Additionally, many health outcomes evolve over time and result from multiple patient-provider interactions across episodes of care. Consequently, attributing specific health outcomes to specific health care services or to individual providers can be difficult, especially in the context of chronic diseases or conditions.

Second, health is multidimensional. Thus, no single indicator accurately reflects a patient’s overall health status. Although composite measures of health are available and in use, they are partial measures of health, as explained in Chapter 3. Moreover, “the perceived benefits of a particular intervention diagnostic technology, or process will vary for each stakeholder in the health care system” (IOM, 2012a, p. 232).

Third, although a number of private organizations and government agencies have made tremendous progress toward developing health care quality metrics in recent decades, such metrics, especially those that purport to measure outcomes, still are not fully developed. Consequently, other metrics often are used to measure the performance of the health care system, and have been used successfully. For example, the Agency for Healthcare Research and Quality (AHRQ) endorses some process-of-care metrics that measure “health care-related activity performed for, on behalf of, or by a patient” if evidence indicates “that the clinical process … has led to improved outcomes” (AHRQ, undated-a). Similar endorsements exist for specific structural and patient satisfaction metrics, where structure of care refers to “a feature of a health care organization or clinician related to the capacity to provide high quality health care,” and patient satisfaction refers to “a patient’s or enrollee’s report of observations of and participation in health care, or assessment of any resulting change in their health” (AHRQ, undated-b).

The committee commends the efforts of public- and private-sector organizations such as AHRQ, the National Quality Forum, the National Committee for Quality Assurance, the Joint Commission, the American Medical Association, and CMS to advance the field of health care performance measurement and encourage public dissemination of results. As health outcome and cost measurement continues to improve in response to evolving technological capabilities and increasingly sophisticated, multidimensional metrics of health care performance, so, too, will the system’s

Suggested Citation:"1 Introduction and Overview." Institute of Medicine. 2013. Variation in Health Care Spending: Target Decision Making, Not Geography. Washington, DC: The National Academies Press. doi: 10.17226/18393.
×

ability to encourage fiscal sustainability and high-quality care throughout the Medicare program and the U.S. health care system as a whole.

Statistical Analyses

Partly for reasons of data availability, the literature on geographic variation has focused on spending and utilization in traditional Medicare Parts A and B and, to a lesser extent, Part D. Little attention has been paid to the commercial health care sector, Medicare Advantage (also known as Part C), Medicaid, or the uninsured. To enhance current understanding of geographic variation, the committee commissioned empirical analyses of the complete database of Medicare beneficiaries, including Parts A, B, C, and D, as well as two nationwide commercial databases. These statistical analyses were focused on describing and accounting for geographic variation in health care spending, utilization, and quality; quantitative and qualitative syntheses of those analyses were performed as well. The committee additionally commissioned empirical analyses of Medicaid fee-for-service data, but the available samples were too small to enable reliable or valid statistical inferences, leading the committee to conclude that it would be inappropriate to draw any specific conclusions from the results. Consequently, the results of those analyses are not included in this report. Even more severe data limitations precluded meaningful analyses of geographic variation in spending among the uninsured, although the committee did attempt to account for this population in its analyses of total health care spending (see the related discussion in Chapter 2).

The following seven subcontractors supported the committee’s core statistical analytic work: Acumen, LLC; Dartmouth Institute for Health Policy and Clinical Practice; Harvard University; The Lewin Group; Precision Health Economics, LLC; the RAND Corporation; and the University of Pittsburgh. Using large public and commercial claims databases (listed in Box 1-2), these subcontractors examined variation in aggregate health care spending, utilization, and quality across different units of analysis, including various geographic areas, as well as hospitals and providers. RAND modeled the impact of the committee’s recommendations on providers, hospital referral regions, and total Medicare spending.

The subcontractors performed regression analyses to quantify how demographic, health status, and health plan characteristics of beneficiaries, as well as price and market factors, affect variation across geographic areas. In addition to the overall Medicare and commercial populations (aggregate analyses), 15 subpopulations with specific acute and chronic clinical conditions were studied (cohort analyses). The extent of geographic variation was examined within and across geographic units, across clinical condition cohorts, and over time. In accordance with CMS’s direction, Medicare ex-

Suggested Citation:"1 Introduction and Overview." Institute of Medicine. 2013. Variation in Health Care Spending: Target Decision Making, Not Geography. Washington, DC: The National Academies Press. doi: 10.17226/18393.
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BOX 1-2
Commissioned Statistical Analyses

Subcontractor Data Source
Acumen, LLC Medicare Parts A, B, and D, as well as Medicare Advantage (Part C)*
Dartmouth Institute for Health Policy and Clinical Practice Medicare Parts A and B (hospital-level data)
Harvard University Thomson Reuters MarketScan Commercial Claims and Encounters database
The Lewin Group Optum De-identified Normative Health Information (dNHI) database and Centers for Medicare & Medicaid Services (CMS) Chronic Conditions Warehouse database
Precision Health Economics, LLC Synthesized data from the aforementioned analyses, as well as data on the uninsured
RAND Corporation Medicare Parts A and B
University of Pittsburgh Medicare Part D (prescription drug plans)

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NOTE: For a complete description of these commissioned analyses, see Chapter 2.
   *Analyses included all spending for dual-eligibles (by both Medicare and Medicaid) for Medicare-covered services.
SOURCE: All subcontractor spreadsheets and final reports can be accessed via the following link: http://www.iom.edu/geovariationmaterials.

penditures related to graduate medical education, disproportionate share hospitals, and indirect medical education were excluded from all spending calculations.

Additionally, because of issues of proprietary information and patient privacy, the committee was unable to access individual claims data used by the subcontractors. Consequently, the results presented in this report are based predominantly on aggregated output supplied by the subcontractors. The committee also contracted with two independent firms, IMPAQ Inter-

Suggested Citation:"1 Introduction and Overview." Institute of Medicine. 2013. Variation in Health Care Spending: Target Decision Making, Not Geography. Washington, DC: The National Academies Press. doi: 10.17226/18393.
×

national and RTI International, to perform a quality control audit of the research methods and statistical analyses applied to this study.

Public Workshops

The committee consulted with a number of experts and stakeholders through two public workshops and personal communications (see Appendix H for the workshop agendas). At the first public workshop, the committee heard testimony from the sponsor about the study scope. A member of Congress and congressional staff placed the study within its legislative context (Box 1-3 presents selected remarks made by these speakers). In addition leading experts on geographic variation in health care spending and measurement of health care quality and value briefed the committee on the state of the science and evidence with regard to these topics.

At the second public workshop, the committee invited stakeholders to address the effects of geographic variation on their sectors or organizations. The 13 invited speakers represented the viewpoints of one or more of the following stakeholders: hospitals and health systems, clinicians, experts from organizations devoted to improving health care value, and consumers and purchasers. The discussion covered a range of topics relevant to the committee’s scope of work, such as potential sources of geographic variation, methodological challenges entailed in measuring variation in spending and quality, and dimensions for consideration in determining payments. In addition, the committee heard testimony from members of the public. A formative discussion was held among many experts in the field, in which geographic variation was debated from numerous viewpoints. This discussion highlighted many topics that suggested domains of inquiry for this study.

Commissioned Papers

To complement its members’ expertise, the committee commissioned papers from technical experts on the following topics:

• “Policy Approaches to Addressing Geographic Variation in Spending Utilization, and High Value Care and the Implications of Those Approaches,” by Marco D. Huesch, Michael K. Ong, and Dana P. Goldman

• “Economics Meets the Geography of Medicine,” by Amitabh Chandra

• “Explaining Geographic Variation in Health Care Spending, Use and Quality, and Associated Methodological Challenges,” by Willard G. Manning, Edward C. Norton, and Adam S. Wilk

Suggested Citation:"1 Introduction and Overview." Institute of Medicine. 2013. Variation in Health Care Spending: Target Decision Making, Not Geography. Washington, DC: The National Academies Press. doi: 10.17226/18393.
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BOX 1-3
Selected Testimony by Public Officials at the Committee’s Public Workshops (November 9, 2010)

Deputy Administrator of the Centers for Medicare & Medicaid Services (CMS) Jonathan Blum

There are some who argue that much of the variation can’t be explained. There are others who argue the variation can be explained when you take into account demographic considerations, teaching costs, disproportionate share costs. I think from our perspective, we are really hoping to build more consensus about what [are] the reasons and the causes and the impacts for health care spending variation, to help us develop policies to address those variations.

Member of the U.S. House of Representatives Allyson Schwartz

There were some in Congress who looked at geographic variation in spending, and believed that if we just smoothed out these differences by redistributing money from high cost areas to low cost areas, we could achieve greater value. I believe, in fact, it is not that simple. We all share the goal of promoting quality and reducing costs, but agreeing on what we mean by value and how best to achieve it prove to be pretty difficult.

Our goal is to ensure quality and improve health outcomes for the best price for all populations, and for good reasons. Spending may not be the same in every location or every population. Payment and delivery systems need not be the same. One size need not fit all. We do need to realign incentives for providers to drive cost efficiencies and quality improvement while maintaining incentives for teaching, innovation and medical advancement. We do need to learn from strategies that are working, including the many new delivery system innovations that will come from implementing health care reform. We need your help developing data that we can trust, data that appropriately reflects differing circumstances among providers, so that we can hold everyone account-

• “Geographic Variation in Health Care Spending and Utilization in Subgroups: Medicaid, Uninsured, and Undocumented Populations,” by Ellen Meara

These papers contributed to the committee’s deliberations and the evidentiary underpinnings of this report, although their perspectives and any implicit recommendations are solely those of the authors. These papers can be accessed on the IOM website at www.iom.edu/geovariationmaterials.

Suggested Citation:"1 Introduction and Overview." Institute of Medicine. 2013. Variation in Health Care Spending: Target Decision Making, Not Geography. Washington, DC: The National Academies Press. doi: 10.17226/18393.
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able to contain costs and to meet ongoing demands of a population that is aging, that is diverse, and that expects and deserves health care services that it needs.

Timothy Gronniger, Staff Member from the U.S. House of Representatives’ Subcommittee on Health and Committee on Energy and Commerce

The value index at issue in this study, however, is clearly the geographic sort. With that in mind, the charge to your panel is to consider whether varying payments for defined geographic areas according to some measures of quality and cost is an appropriate next step for delivery system reform.

Geoff Gerhardt, Staff Member from the U.S. House of Representatives’ Subcommittee on Health and Committee on Ways and Means

Patient-based factors such as health status, ethnicity, income, education, treatment preferences, and presence of insurance may also help explain regional variation in spending patterns. Provider-based factors such as training, regional treatment norms, physician ownership, prevalence of fraud, and access to technology can play important roles in determining how much is spent in different areas. It is critical to recognize these types of factors when reaching conclusions about why spending and utilization vary from one part of the country to another.

Susan Walden, Staff Member from the U.S. Senate’s Committee on Finance

We should try to promote high value care, and the value payment modifier that [was] mentioned, that was enacted in the Senate bill which became law is an effort to do that for physicians primarily and in the fee-for-service system. But clearly the questions of how [to] measure quality and how [to] measure cost, those are the critical factors. Those are things that we look to the [Institute of Medicine] for your recommendations, because these are the most difficult.

Literature Search

In late 2010, the committee conducted an initial literature search of the following databases: MEDLINE, Embase, Scopus, Global Health, Web of Science, and Google Scholar, as well as several gray literature sources. Staff routinely updated the literature search and monitored electronic table of contents alerts from more than 20 journals throughout the course of this study. In all, the committee reviewed more than 2,500 peer-reviewed published articles. The committee relied on this literature to fill gaps in

Suggested Citation:"1 Introduction and Overview." Institute of Medicine. 2013. Variation in Health Care Spending: Target Decision Making, Not Geography. Washington, DC: The National Academies Press. doi: 10.17226/18393.
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research areas that could not be addressed by the commissioned papers or subcontractors’ empirical analyses.

REPORT STRUCTURE

This report comprises four chapters and is intended to be useful to both lay and technical audiences. Following this introduction and overview, Chapter 2 reports on the committee’s commissioned statistical analyses and results, complemented by the findings of related literature on geographic variation in health care spending, utilization, and quality across the public and private health care sectors. Chapter 3 reviews proposals for adopting a geographically based value index for Medicare payments and presents the committee’s statistical analytic findings that support rejection of the use of such an index. Finally, Chapter 4 considers various payment interventions for improving value throughout the U.S. health care system.

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CBO (Congressional Budget Office). 2008. Key issues in analyzing major health insurance proposals. Washington, DC: CBO.

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———. 2003b. The implications of regional variations in Medicare spending. Part 2: Health outcomes and satisfaction with care. Annals of Internal Medicine 138(4):288-298.

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Suggested Citation:"1 Introduction and Overview." Institute of Medicine. 2013. Variation in Health Care Spending: Target Decision Making, Not Geography. Washington, DC: The National Academies Press. doi: 10.17226/18393.
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Health care in the United States is more expensive than in other developed countries, costing $2.7 trillion in 2011, or 17.9 percent of the national gross domestic product. Increasing costs strain budgets at all levels of government and threaten the solvency of Medicare, the nation's largest health insurer. At the same time, despite advances in biomedical science, medicine, and public health, health care quality remains inconsistent. In fact, underuse, misuse, and overuse of various services often put patients in danger.

Many efforts to improve this situation are focused on Medicare, which mainly pays practitioners on a fee-for-service basis and hospitals on a diagnoses-related group basis, which is a fee for a group of services related to a particular diagnosis. Research has long shown that Medicare spending varies greatly in different regions of the country even when expenditures are adjusted for variation in the costs of doing business, meaning that certain regions have much higher volume and/or intensity of services than others. Further, regions that deliver more services do not appear to achieve better health outcomes than those that deliver less.

Variation in Health Care Spending investigates geographic variation in health care spending and quality for Medicare beneficiaries as well as other populations, and analyzes Medicare payment policies that could encourage high-value care. This report concludes that regional differences in Medicare and commercial health care spending and use are real and persist over time. Furthermore, there is much variation within geographic areas, no matter how broadly or narrowly these areas are defined. The report recommends against adoption of a geographically based value index for Medicare payments, because the majority of health care decisions are made at the provider or health care organization level, not by geographic units. Rather, to promote high value services from all providers, Medicare and Medicaid Services should continue to test payment reforms that offer incentives to providers to share clinical data, coordinate patient care, and assume some financial risk for the care of their patients.

Medicare covers more than 47 million Americans, including 39 million people age 65 and older and 8 million people with disabilities. Medicare payment reform has the potential to improve health, promote efficiency in the U.S. health care system, and reorient competition in the health care market around the value of services rather than the volume of services provided. The recommendations of Variation in Health Care Spending are designed to help Medicare and Medicaid Services encourage providers to efficiently manage the full range of care for their patients, thereby increasing the value of health care in the United States.

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