HC Statistics

IOM Final Report: Geographic Variation in Health Care Spending

The Institute of Medicine (IOM) was charged with answering two questions:

  1. How do health care spending, utilization, and quality vary across geographic regions?
  2. Should Medicare provider payments be adjusted for regionally-based measures of value?

Based on research conducted by Precision Health Economics, Acumen, and other research firms, IOM reached the following conclusions:

  • Geographic variation in spending and utilization is real, and not an artifact reflecting random noise. The committee’s empirical analyses of Medicare and commercial data confirm the robust presence of variation, which 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 the differences in the utilization of health care services.
  • The committee’s empirical analysis revealed that after accounting for differences in age, sex, and health status, geographic variation 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.
  • Variation in total Medicare spending across geographic areas is driven largely by variation in the utilization of post-acute care services, and to a lesser extent by variation in the utilization of acute care services.
  • 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.
  • Quality across conditions and treatments varies widely within HRRs; spending and utilization across conditions are moderately correlated within HRRs
  • HRR-level quality is not consistently related to spending or utilization in Medicare or the commercial sector.

Based on these conclusions, IOM made the following recommendations.

  • Congress should encourage CMS, and provide the necessary resources, to make accessing Medicare and Medicaid data easier for research purposes.
  • 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.
  • To improve value, 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.
  • During the transition to new payment models, CMS should conduct ongoing evaluations of the impact on value of the reforms… by measuring Medicare spending and beneficiaries’ clinical health outcomes.
  • If evaluations of specific payment reforms demonstrate increased value, Congress should give CMS the flexibility to accelerate the transition from traditional Medicare to new payment models.

The New York Times summarizes the IOM conclusions as follows:

President Obama has said the nation could save huge sums if all doctors and hospitals were as efficient as those in lower-cost states like Iowa, Minnesota, Washington and Wisconsin. But the academy said a regional value index made no sense because spending for doctors and hospitals in a single region often varied as much as spending for providers in different regions.


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