Regional Inequality in Medicare Spending: The Key to Medicare Reform?

Medicare expenditures per capita vary widely across different parts of the country. Average fee-for-service per capita expenditures in 1995/96 were $3,420 in Eugene, Oregon, $3,663 in Minneapolis, $7,847 in Miami, and $8,861 in McAllen, Texas. These measures are adjusted for differences across regions in the age, sex, and racial composition of the population, as well as differences in the underlying cost of healthcare. In this paper, we focus on these geographical variations in the Medicare program and argue that they are central to any proposed reform of the Medicare system. The first question that must be addressed is, are these expenditures higher in high-cost areas because the elderly population there is sicker? The answer is, largely no. Many of the areas with the highest levels of spending have similar underlying disease burdens to regions with low levels of spending. Nor does quality of care or patient satisfaction appear to be better in the high-expenditure areas. These disparities bring up a number of issues related to equity across regions, efficiency of Medicare spending, and the potential for funding Medicare reform. Reducing the intensity of care in high-expenditure regions can fund prescription drug benefits for the entire Medicare population, or extend the solvency of the Medicare trust funds by ten years, without obvious adverse implications for the health or satisfaction of the elderly population.