MIT Study: Both Providers and Patients Drive Health Care Spending

Decoding the regional medical cost mystery

In Miami, health care providers spent approximately $14,423 per Medicare patient in 2010. But in Minneapolis, average spending on Medicare enrollees that year was $7,819, just over half as much. In fact, the United States is filled with regional disparities in medical spending. Why is this? A new study coauthored by economists at the Massachusetts Institute of Technology (MIT) provides a possible answer.

By assessing millions of Medicare patients who have moved from one place to another, the researchers found that patients and providers account for virtually equal shares of the differences in regional spending.

“We find it is about 50/50, half due to patients and half due to places,” said coauthor Dr. Heidi Williams of MIT’s Department of Economics.

Specifically, the study found that nearly 50% of the spending differences across geographic areas stems from the characteristics of patients, meaning both their basic health and their varying preferences concerning the intensiveness of medical care. The rest of the spending differences derive from place-specific factors, potentially due to disparities in provider practices and incentives. The finding could help analysts and policy-makers better understand the components of medical costs, and could add to the debate about possible inefficiencies in health care spending, the authors said.

To conduct the study, the researchers analyzed a sample of 2.5 million Medicare patients and examined their health care usage from 1998 through 2008. The study focused on a subgroup of enrollees who did not move during this period as well as on 500,000 Medicare enrollees who moved from one “hospital referral region” to another.

In addition to their primary result, the researchers uncovered several more specific findings. For example, when it comes to emergency care, a relatively larger share of the regional spending discrepancy (71%) was attributable to patients, who likely make more of the decisions about whether to seek care in those situations.

However, patients accounted for only 9% of the regional discrepancy for diagnostic tests and 14% of the discrepancy for imaging tests; in those cases, the variation by geographic region seemed to be due to differing provider practices, with health care institutions in some places consistently spending more money on testing than other providers do elsewhere, according to the authors.

The study also found that when a Medicare enrollee moves and receives a different level of health care spending, most of that change occurs during the first year after the move.

Even when given these more-detailed findings, however, the researchers noted that it was still difficult to assess which of the higher-spending or lower-spending regions had more-efficient medical practices. In Williams’ view, an overly simplistic reading of the paper’s results would be that variations on the provider side reflect “inefficiency,” in the sense of some institutions providing suboptimal levels of care. She stresses that there may also be efficient geographic variations if providers in some areas are relatively more skilled at certain intensive procedures and provide more of those procedures.

The study was published in the Quarterly Journal of Economics.

Source: EurekAlert; November 3, 2016.