Supply of Medical Services

Regional Variation in Medicare Spending

What causes regional variation in spending and outcomes?  Previous research claimed that physician treatment norms in different areas account for much of these differences.  Recent research, however, claims that most of these regional differences are caused by geographic differences in health status.  Reschovsky et al (2011) find the following when examining a sample of Medicare beneficiaries linked to 2004–2005 Community Tracking Study Physician Survey:

Nonetheless, a key finding from this work is that key conclusions from prior small area analyses (e.g., Fisher et al. 2003; Center for the Evaluative Clinical Services 2007) that much of the variation in cost of treating Medicare beneficiaries is driven by supply-induced demand (e.g., “supply-sensitive care”) cannot be supported when one comprehensively controls for health status and conducts analysis at the beneficiary level. Zuckerman et al. (2010) reaches a similar conclusion. Medical specialists serving as USOCs and the proportion of medical specialists in the county were the only two supply-side variables with positive effects on costs consistent with other research (Fisher et al. 2003; Baicker and Chandra 2004). However, the strength of the medical specialist results, though not trivial, would explain little of the geographic variation documented in the Dartmouth Atlas. The supplies of hospital beds had significant positive effects among high-cost beneficiaries, but elasticities suggest that the magnitude of the effect is extremely small: doubling hospital bed supply would increase costs by <2 percent.

Physician choice of treatments may still have some impact on cost for certain procedures although the latest research seems to indicate that its affect on regional variation for total spending is small. Further, over time, the physician discretion may decrease in the Internet age due to 1) patients being more informed of their treatment options and 2) physicians gaining easier access to information on best practices. Nevertheless, the most recent research clearly indicates that patient health status is the key driver of medical spending.


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