Why was per capita spending on people enrolled in Medicare $2,500 more in East Long Island, NY, than in San Francisco in 2006? Did the folks in New York get better care and achieve better outcomes than those on the west coast?

The answer is, “no.”

Welcome to the world of health care cost variation, the topic of an important paper published in the February 26, 2009, issue of New England Journal of Medicine, “Slowing the Growth of Health Care Costs – Lessons from Regional Variation.”

This research is important because it shines a light on the critical issue of health care costs — which are, according to Peter Orszag, the health budgeting guru at OMB, the greatest long-term threat to the U.S. budget deficit.

Since Orszag is currently burning the midnight oil on health reform scenarios with respect to cost, this issue is well worth digging into.

The chart above illustrates the annual growth rates of per capital Medicare spending in five metropolitan areas of the U.S. Each area represents a “hospital-referral region,” which is the natural catchment or service area for health care for these five markets. The metros are located in Florida, New York, Massachusetts, California, and Oregon — well spread out to demonstrate the authors’ points.


Over the course of 1992 to 2006, the overall increase in Medicare spending was 3.5%. The orange curve above represents Miami: where health costs are increasing at a much faster rate (5% per annuum) than in Salem, Oregon (2.4% annually) — the red curve at the lowest points on the graph. As the authors say, “There is no evidence that health is decaying more rapidly in Miami than in Salem.”

The researchers found that when presented with strong evidence about clinical interventions, physicians in all regions were equally likely to recommend the same treatments. However, in the fast-cost-growth regions, doctors recommended other services that were in the gray area of clinical evidence (such as admission to an ICU versus recommending palliative care at home).

Health Populi’s Hot Points:
Physicians determine the bulk of hospital and prescription drug spending: thus, when trying to address the challenge of managing health cost growth in the U.S., it’s in physician decision making where big impacts can be achieved. However, motivating physicians to behave as if they all operated in Salem, Oregon, can only be accomplished through the right mix of incentives and information. The current reimbursement system rewards on volume, not on quality and certainly not on standardized protocols.

This underscores the importance of getting real-time information into the hands of clinicians at the point-of-care and decision making. Aligning payment with those sound decisions will help stem cost-inflation and, at the same time, ensure better health care quality for patients throughout the nation.

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