Why Is There Such a State-by-State Disparity in Medicare Spending?

A Medicare newspaper headline on assorted money representing medicare spending disparities in different states

America is comprised of 50 states and the District of Columbia, so you would expect a certain level of price disparity from place to place. However, the sheer scale of these price differences is something that apparently costs Medicare a fortune in unnecessary spending. In 2009, Peter Orszag, the Office of Management and Budget director at the time, said state variations in spending were to blame for up to 33% of unnecessary Medicare spending. He claimed that if the high-cost areas followed the patterns of low-cost areas, America could reduce healthcare spending by around $700 billion a year, an almost 30% reduction.

He made the claim eight years ago, but researchers have debunked this theory.One of the major assumptions, when the government created the Affordable Care Act, was that over treatment and wasteful practices were the reason for uneven Medicare spending across the United States. However, according to a 2013 study, people are just “sicker” in some parts of the country than others. The paper suggests that health differences across America account for up to 85% of price variations.

The Original Theory

The disparity in spending, not only between states but also in different cities, stunned the new administration in 2009. It used 2006 figures, which showed that the average Medicare expenditure per beneficiary was $8,304. Hawaii spent the least at $5,311 per person, while New Jersey was the most expensive at $9,564. The disparity was more noticeable in cities. The average in Miami was $16,351, but just $8,331 in San Francisco.

Armed with these findings, the Senate Finance Committee threatened to introduce a cap on Medicare payments that were a certain percentage over the national average. There was also a theory that physicians were overly aggressive in prescribing treatments and medication to patients; this apparently accounted for the difference in pricing.

Poking Holes

The Dartmouth Institute for Health Policy and Clinical Practice used three decades of research to claim that price differences were down to physicians looking for more money from patients. The 2009 paper changed the way Medicare and the healthcare system at large operated. Now, there are new measures in place that force hospitals to operate more efficiently with punishments meted out to practices deemed wasteful.

According to the lead author on the paper, James Reschovsky, Dartmouth is guilty of simplifying a very complex topic. He said that while Dartmouth deserves praise for pointing out inefficiency in healthcare, it loses credibility by blaming geographical locations for the issue. In reality, patients across different states are never equally sick.

What Is Actually Happening Across Different States?

The disparity in state spending didn’t go away after Dartmouth’s study. In 2012, the average spending per Medicare beneficiary in the United States was $9,503. However, Miami beneficiaries spent an average of $15,957 compared to $6,569 in Grand Junction. Researchers came up with the following possible reasons for the discrepancy in spending:

  • Medicare Payment Differences: This is perhaps the most obvious starting point. Medicare does not pay the same amount for the same service in every city in America. Rates vary to reflect the variations in the cost of living, such as average rent and income. The healthcare provider also adjusts the payments. A teaching hospital receives more than a non-teaching facility, for example. Critics say regional differences only account for a small percentage of the difference.
  • Different Medicare Beneficiary Health Status: Sicker people use more services and have higher costs. Perhaps the patient’s environment also influences cost. People living in areas with a high density of services are more likely to report common chronic illnesses on their claims.
  • Varying Use of Services: Hospitals across the country have different ways of treating conditions. After a hospital stay, for example, you could receive post-acute care in a skilled nursing facility. Clearly, this adds a significant cost to a state’s Medicare bill.
  • Spending Patterns: Healthcare spending for Medicare does not have the same patterns as Medicaid. State spending patterns are very different for individuals with private insurance, while regional patterns are similar. Researchers believe that supply factors result in the regional similarity, but income levels result in a state dissimilarity. States with lower income levels have less generous Medicaid coverage, which leads to less spending overall.

Final Words

Studies indicate that there is no clear answer to addressing the issue of Medicare spending disparities in different states. Although the paper we cited in this article has cleared up many issues, there are still unresolved discrepancies. Perhaps the last issue relates to local health care system efficiency. If so, it will be tricky for the federal government to promote greater efficiency and fix the problem.