Federal Reserve Paper: Geographic Variation Can’t Tell Much about Efficiency or Quality

Why the Geographic Variation in Health Care Spending Can’t Tell Us Much about the Efficiency or Quality of our Health Care System  Louise Sheiner, Federal Reserve Board of Governors

Full paper available at: http://www.federalreserve.gov/pubs/feds/2013/201304/201304pap.pdf

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 health 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; lows pending 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 (the method used in this paper) and controlling for them at the individual level (the approach used by the Dartmouth group.) I show that a state-level approach is likely to explain more of the state-level variation associated with omitted health attributes than the individual level approach, and argue that this econometric differences 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.

Note: This is a staff working paper in the Finance and Economics Discussion Series (FEDS), Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, Washington, D.C.

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One response to “Federal Reserve Paper: Geographic Variation Can’t Tell Much about Efficiency or Quality

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