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Why the geographic variation in health care spending can't tell us much about the efficiency or quality of our health care system

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  • Louise Sheiner

Abstract

This paper examines the geographic variation in Medicare and non-Medicare health spending and finds little support for the view that most of the variation is attributable to differences in practice styles. Instead, I find that socioeconomic factors that affect the need for medical care, as well as interactions between the Medicare system, Medicaid, and private health spending, can account for most of the variation in Medicare spending. Furthermore, I find that the health spending of the non-Medicare population is not well correlated with Medicare spending, suggesting that Medicare spending is not a good proxy for average health spending by state. Finally, there is a negative correlation between the level and growth of Medicare spending: Low-spending states are not low-growth states and are thus unlikely to provide the key to curbing excess cost growth in Medicare. ; The paper also explores the econometric differences between controlling for health attributes at the state level vs the individual level. I show that a state-level approach is better at controlling for health attributes and argue that this econometric difference likely explains most of the difference between my results and those of the Dartmouth group. ; More broadly, the paper shows that the geographic variation in health spending does not provide a useful measure of the inefficiencies of our health system. States where Medicare spending is high are very different in multiple dimensions from states where Medicare spending is low, and thus it is difficult to isolate the effects of differences in health spending intensity from the effects of the differences in the underlying state characteristics. I show, for example, that the relationships between health spending, physician composition and quality are likely the result of omitted factors rather than the result of causal relationships.

Suggested Citation

  • Louise Sheiner, 2013. "Why the geographic variation in health care spending can't tell us much about the efficiency or quality of our health care system," Finance and Economics Discussion Series 2013-04, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2013-04
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    References listed on IDEAS

    as
    1. Amitabh Chandra & Douglas O. Staiger, 2007. "Productivity Spillovers in Health Care: Evidence from the Treatment of Heart Attacks," Journal of Political Economy, University of Chicago Press, vol. 115, pages 103-140.
    2. Amy Finkelstein & Sarah Taubman & Bill Wright & Mira Bernstein & Jonathan Gruber & Joseph P. Newhouse & Heidi Allen & Katherine Baicker, 2012. "The Oregon Health Insurance Experiment: Evidence from the First Year," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1057-1106.
    3. Louise Sheiner & David M. Cutler, 1999. "The Geography of Medicare," American Economic Review, American Economic Association, vol. 89(2), pages 228-233, May.
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