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Health-Care Spending, Explained

MIT study sheds light on drivers of health-care expenditures.
December 20, 2016

In Miami, health-care providers spent $14,423 per Medicare patient in 2010. But in Minneapolis, average spending on Medicare enrollees that year was just $7,819. In fact, the United States is filled with regional disparities in medical spending. Why?

One explanation focuses on providers: in some regions, they may be more likely to use expensive tests or procedures. Another account focuses on patients: variation in the underlying health or the care preferences of regional populations may generate differences in spending. Most public discussion of this issue has highlighted providers, suggesting that reducing apparently excessive treatments could trim overall costs.

But now a study coauthored by MIT economists Amy Finkelstein and Heidi Williams and Stanford University economist Matthew Gentzkow provides a new answer: an examination of Medicare patients who have moved from one place to another shows that patients and providers account for virtually equal shares of the spending differences between geographic areas. The study, published in the Quarterly Journal of Economics, could help analysts and policymakers better understand the components of medical costs, adding nuance to the debate about possible inefficiencies in health-care spending.

The study provides “evidence that there are real, place-specific differences in how health care is practiced,” says Finkelstein. “On the other hand … rather than just saying [that] place matters, we’re quantifying how important it is, and showing that a lot of the geographic variation is due to differences across patients.”

To conduct the study, the scholars analyzed the health-care usage of 2.5 million Medicare patients from 1998 through 2008, including 500,000 Medicare enrollees who moved during that time. Beyond their bottom-line result, the researchers unearthed several other findings. About 71 percent of the regional spending discrepancy in emergency care was attributable to patients, suggesting that they make most decisions about seeking that kind of treatment. But just 9 percent of the regional discrepancy for diagnostic tests came from patients, suggesting that provider practices matter more in that case.

Williams stresses that some of the regional variation may arise because health-care providers in some areas are more skilled at certain intensive procedures and provide more of them.

“Just because there’s geographic variation on the provider side doesn’t mean that is necessarily inefficient,” she says. She adds: “The current consensus [has been] that almost all this variation was about providers, and that patient-specific health or preferences were unlikely to be important in explaining geographic variation in spending. I think our paper shifts the weight of the evidence.”

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