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Geographic Variation Offers Clues to Health Care Efficiency, CBO Says

By John Reichard, CQ HealthBeat Editor

February 19, 2008 -- A new report by the Congressional Budget Office says that large variations across the United States in spending for the care of similar patients underscore the importance of identifying efficient methods of delivering treatment. The report analyzes data and reaches conclusions about geographic variations well known to health policy analysts, but that doesn't mean the report won't have influence. The CBO is undertaking a high-profile analysis of rising health care costs and is giving geographic variation prime billing, which could lead Congress to give greater attention to the issue.

"Large differences across the country in spending for the care of similar patients could indicate a health care system that is not as efficient as it could be," the report says. "Given the importance of health care spending in the nation's long-term fiscal outlook, identifying and encouraging patterns of care that are more efficient is clearly important."

The analysis, which focuses primarily on Medicare data, says that factors such as the prices of health care services and the severity of illness explain less than half the geographic variation in health care spending. Income and the preferences of individuals for specific types of care appear to explain little variation in spending, the report adds.

"Unmeasured differences in demand for care could be important, but some of the variation in medical practice probably is attributable to regional differences in the supply of medical resources . . . and the propensity to take advantage of the financial incentives provided by Medicare or other payers in developing and using those resources," the report says. Examples of medical resources include the supply of specialist physicians and health care facilities.

"Some regions appear more prone to adopt low-cost, highly effective patterns of care whereas others are more prone to adopt high-cost patterns of care and to deliver treatments that provide little benefit or are even harmful," the report notes. "Spending in high-spending regions could be reduced without producing worse outcomes, on average, or reductions in the quality of care. But policies that reduce spending in high-spending areas would not necessarily lead to increased efficiency—and could result in worse health outcomes—unless the reductions targeted ineffective or harmful treatments."

The report does not offer a specific policy solution to the problem of geographically-based inefficiency but it does offer policy options.

"More intensive oversight, which helped end the rapid increase in spending for Medicare's home health care program, would probably serve to increase the program's efficiency and reduce geographic variation in spending," the report said. As a first step, the Centers for Medicare and Medicaid Services, the Medicare Payment Advisory Commission (MedPAC), and the Government Accountability Office could identify services with high rates of spending growth or high rates of geographic spending variation or both, CBO analysts said. "If distorted financial incentives or regulatory lapses were found to promote those services, MedPAC could propose legislative remedies and CMS could implement appropriate regulatory changes," the report said.

It added that experts have noted a link between geographic spending variations and the "degree of uncertainty regarding the clinical effectiveness of a procedure." Greater research on clinical effectiveness has some potential to reduce geographic variation, although guidelines and payment incentives would be required to persuade doctors to change their treatment methods based on clinical effectiveness findings, the report concluded.

Among the options policy makers could consider for improving efficiency of services is an increase in "bundling" of services in setting insurance payments. "Providers could be paid a fixed amount for all treatments for a certain patient with a certain condition, or they could be paid for episodes of care that include inpatient care, physician services and post-acute care," the report advised.

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