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Why Geographic Variation in Medicare Spending Matters

Kelly Van Ochten, for HealthLeaders Media, December 6, 2010

Another study, "States with More Healthcare Spending Have Better-Quality Health Care: Lessons About Medicare" in Health Affairs, 2008, conducted by Richard A. Cooper, argues that the Dartmouth Atlas does not paint an accurate picture of healthcare spending since they only consider Medicare expenditures.

Cooper claims that in order to determine if quality correlates to spending, one must consider total healthcare expenditures. He postulates that areas with a larger social burden may have disproportionately high Medicare payments which could sway the results presented by the Dartmouth Atlas.

Implications for Hospitals
The Medicare Payment Advisory (MedPAC) Commission and the Congressional Budget Office (CBO) have both started investigating causes of geographic variation. Amendments to the Patient Protection and Affordable Care Act include funding for the Institute of National Academy of Science to research geographic variation, and make suggestions for new adjustment factors for the Medicare Payment System. Although outcomes of that process are yet to be determined, one thing is certain, the government recognizes that variation exists and is taking steps to adjust the Medicare system to account for those variations.

The years of Medicare attempting to regulate spending by cutting reimbursement to physicians one year and then cutting payments to hospitals the next are likely coming to an end. Instead, the initial pilot programs for bundled payments and accountable care organizations suggest that the government will leave it up to local geographies to monitor "wasteful" and "excessive" spending across the care continuum. Moreover, the fact that accountable care organizations are modeled after the successes of other healthcare organizations, such as the Mayo Clinic and Geisinger, suggests that the government believes much of variation is driven by, and thereby can be controlled by, physicians.

However, because hospitals, not clinics, are the largest healthcare entity in most communities across this country, hospitals are expected to take the lead on developing the process and infrastructure necessary to receive and distribute bundled payments from Medicare. By default, many hospitals will soon be responsible for the efficiency and appropriateness of the care provided by local physicians.

Kelly Van Ochten is a research consultant with Health Planning Source, a healthcare strategy consulting firm based out of Durham, North Carolina. She can be reached at KellyVanOchten@healthplanningsource.com.  

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