can the variations in Medicare spending be explained by differences in illness?

MEDICAR E Geography And The Debate Over Medicare Reform reform proposal that addresses some underlying causes of Medicare funding woes: reform proposal that addresses some underlying causes of Medicare funding woes: Ageographic variation and lack of incentive for efficient medical practices. hyjohn E. Wennberg, Elliott S. Fisher, and Jonathan S. Skinner ABSTRACT: Medicare spending varies more than twofold among regions, and the variations persist even after differences in health are corrected for. Higher levels of Medicare spending are due largely to increased use of “supplysensitive” services—physician visits, specialist consultations, and

hospitalizations, particularly for those with chronic illnesses or in their iast six months of ^^^^^^ ^ life. Also, higher spending does not result in more effective care, eievated rates of elective surgery, or better health outcomes. To improve the quality and W96 MEDICARE „. . , u . »>i _, ^ u ^ u efficiency of care, we propose a new approach to Medicare reform based on the principles of shared decision making and the promotion of centers of medical excellence. We suggest that our proposal be tested in a major demonstration project, I N SOME REGIONS OF THE UNITED STATES Medicare pays more than twice as much per person for health care as it pays in other regions. For example, age-, sex-, and race-adjusted spending for traditional, fee-for-service (FFS) Medicare in the Miami hospital referral region in 1996 was $8,414—nearly two and a half times the $3,341 spent that year in the Minneapolis region.’ Even after differences in price levels across regions are adjusted for, there are no obvious patterns that suggest why some areas spend more than others. Spending in urban areas in the Northeast tends to be higher than average, but spending in rural regions in the South and urban areas in Southern California is as high or even John Wennberg directs the Center for Evaluative Clinical Sciences and is the Pe^ Y. Thomson Professor for Evaluative Clinical Sciences, Dartmouth Medical School, in Hanover, New Hampshire. Elliott Eisher is codirector of the Outcomes Group, Department of Veterans Affairs Medical Center, and professor of medicine and community and family medicine, Dartmouth Medical School and the Center for the Evaluative Clinical Sciences. Jonathan Skinner is the John Erench Professor of Economics, Dartmouth College; senior research associate. Center for the Evaluative Clinical Sciences, Dartmouth Medical School; and a research associate at the National Bureau of Economic Research. HEALT H AFFAIR S – We b Exclusiv e C2002 Project HOPE-The Prapk-to-Pcopk Health Foundation, Inc.MEDICAR E REFOR M higher. And the dollar transfers involved are enormous. The difference in lifetime Medicare spending between a typical sixty-fiveyear-old in Miami and one in Minneapolis is more than $50,000, equivalent to a new Lexus GS 400 with all the trimmings.^ Regional differences in spending have a more immediate consequence for the elderly who are enrolled in Medicare health maintenance organizations (HMOs), since capitated Medicare payments to HMOs under the Medicare+Choice (M+C) program are tied directly to local FFS per capita costs.’ Thus, HMOs in high-cost areas get paid more per subscriber and can therefore provide their clients with drug benefits and prescription eyeglasses, services that HMOs in low-cost regions cannot provide.” Efforts by the federal government to raise HMO capitation rates in low-cost areas have generated problems of their own. A recent report to Congress by the Medicare Payment Advisory Commission (MedPAC) ultimately targeted variation in FFS Medicare payments as the culprit: If a large portion of the [geographical] difference is due to differences in practice patterns that have no apparent effects on quality of care, then Congress may want to examine whether Medicare payment policy should accommodate that variation…The answer will not lie in changing M+C policy alone. Policies to limit variation in ^^^^^^^^ ^ practice patterns will have to be implemented in the FFS sector as weU.^ MEDICARE W97 In light of the policy recommendations above, we consider four distinct questions. First, can the variations in Medicare spending be explained by differences in illness? In other words, is spending higher in some regions simply because people there are sicker? Second, how do the patterns of practice vary, and what types of health care services do the elderly receive in high-spending regions that they do not get in low-spending regions? Do residents of highspending regions receive more elective surgery or more effective care? Third, how efficient is this additional spending? Do people in high-spending regions prefer the additional care or experience better health as a result?

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