Variation in Medicare Costs Driven by Health, Not Greedy Physicians

The main message of those involved with the Dartmouth Atlas is the claim that high costs are generated by wasteful physician practices that drive up costs by encouraging procedures of little value to health. This view has spawned an entire policy industry devoted to rooting out variations in health care expenditures and controlling them by unilaterally cutting reimbursements for high cost areas.

In fact, after ObamaCare was passed, the Institute of Medicine, was directed to address “unnecessary variation in Medicare spending,” especially for “high-volume, high-cost, conditions,” and to develop a value index based on measures of quality and cost that could be used to promote “high-value services by health care providers.”

But what if they are wrong?

James D. Rechovsky et al. examine a national sample of fee-for-service Medicare spending for 1.6 million beneficiaries in “Following the Money: Factors Associated with the Cost of Treating High-Cost Medicare Beneficiaries.” They conclude that the assertion that “much of the variation in cost of treating Medicare beneficiaries is driven by supply-induced demand,” “cannot be supported when one comprehensively controls for health status and conducts analysis at the beneficiary level.”

The Rechovsky et al. find that, as common sense would predict, “among high-cost beneficiaries [people with predicted annual expenditures of $48,000], health was the predominant predictor of costs, with most physician and practice and many market factors (including provider supply) insignificant or weakly related to cost.” High-cost beneficiaries were likely to be older, have more comorbidities, be institutionalized (27 versus 0.1 percent), and experience greater mortality than low-cost patients. They were also twice as likely to qualify for both Medicare and Medicaid.

Physician and practice characteristics were generally weak predictors of Medicare expenditure. High-cost beneficiaries who used specialists as their usual source of care had costs that were $1,839 higher than high-cost beneficiaries who went to primary care physicians, but this may reflect health status differences. The 6.5% of high-cost beneficiaries who had surgeons as their usual source of care had lower costs than beneficiaries with a primary care physician as their usual source of care. Costs were significantly lower “only for low-cost patients whose [usual source of care] physician reported being sensitive to patients’ out-of-pocket costs.”

The difference in costs between for-profit and non-profit home health agencies and skilled nursing facilities was minimal, a 10 percent increase in the proportion of skilled nursing facility beds run by businesses would increase the overall cost of treating Medicare patients by an estimated one half of one percent. Reducing “fragmentation” appears to be more effective at lowering costs for relatively healthy, low-cost, beneficiaries “suggesting the potential for cost savings may be limited.”

The authors warn that laws and regulations devoted to eliminating variation by setting rates using average area costs are likely to penalize efficient providers in high-cost areas while rewarding inefficient providers in low-cost areas. Given that one in five high-cost Medicare recipients receives care in different census divisions in any one year, the authors conclude that there are “no natural boundaries to local health care markets and that a very substantial portion of beneficiaries will use providers in multiple ‘markets’ however defined.” This means that the idea of an ACO is based on a false premise. Or, as the authors put it in more measured prose, “if care is not consistently concentrated within a narrow number of providers, especially among high-cost beneficiaries, ACO success in improving care and lowering cost may be limited.”

They conclude that local health care costs are “largely driven by disease burdens that go well beyond that which can be accounted for by demographic characteristics.” ObamaCare’s allocation of $400 million over 2 years to hospitals in the lowest “cost” quartile of counties based on Medicare spending adjusted for age, sex and race, is both inequitable and unlikely to be related to hospital efficiency. It also fails to account for differences in outcomes across areas or hospitals.

Comments (7)

Trackback URL | Comments RSS Feed

  1. Buster says:

    Physician culture may drive some variation in medical spending. But patient culture undoubtedly does too. Health disparities account for some as well. It is rather simplistic to assume the solution to controlling Medicare expenditure is to browbeat physicians in high spending regions.

  2. Virginia says:

    Nice new perspective on care variations.

  3. wanda j. jones says:

    It is remarkable that there is so much emotional investment in rooting out quality problems and variations in methods, assuming that would also root out unjustifiable costs. The problem with this point of view is that costs do not vary directly with variations in quality. If a hospital exists, its capital costs are “sunk,” meaning there whether there is good care or bad, or regardless of how rapidly patients flow through. If the hospital is staffed, that staffing pattern is likely to represent more than 50% of the budget, and to vary very little by variations in quality or patient flow.

    The biggest gain in financial tightening came in the mid-eighties, when Medicsare instituted the Diagnosis-Related Group for m of payment at the same time that a wave of ambulatory surgeries was built, which itself took 25% of census out of hospitals and into ambulatory settings. DRG payment had a strong incentive to reduce length of stay–which it did. In other words, not being in the hospital is the biggest cost saver of all.It has seldom been noted that from the Seventies until now, about 2,000 hospitals have closed in the US, even as our population has grown and aged. Dartmouth’s work is a fine example of public health statisticians using what they know how to do to mis-interpret numbers to a pre-conceived policy end.

    In California, hospital price variation can now be attributed to a single law–the 1994 requirement that acute hospitals be made earthquake proof. So if a hospital is small and in a low quake area, its costs can be well under the costs of an urban hospital that has been fully replaced at enormous expense. So these little powder puff changes so important in the literature, will make, maybe, less than 1% difference in costs. Capital intensity (Debt service and depreciation) has gone, in some cases, from 8% to 22%. How does quality improvement and efficiency overcome that? The answer is–it doesn’t.

    Anyone who has not worked in healthcare just comes off as naive, and stubborn in his ignorance like those who deny the moon landing.

    What will help with costs is massive distribution of ambulatory care and adoption of devices that help a patient care for himself at home, and there are many of these.

    This topic should stay open and vibrant until this policy kick gets some adult, rational attention.


    Wanda J. Jones
    New Century Healthcare Institute

  4. Larry C. says:

    Very good post, Linda. This is the kind of information that needs to be disseminated braodly.

  5. Ken says:

    Mega dittos. Good job, Linda.

  6. Mitchell Brooks says:

    Wonderful piece that, sadly, states the obvious but will not make a bit of difference in how out of control healthcare costs will be approached and “dealt with” by the political class, which is neither.

    Unless people have skin in the game and physician outcomes can be published utilizing a standardized system taking into account the necessary variables, all that we will see from D.C. is, as Ms. Jones states, is “powder puff” or as our British friends say, rubbish.

    The patient and their demand is the largest driver of healthcare cost and until such time as that patient has to take responsibility for a portion of the healthcare dollar,and as long as our solutions to the healthcare issues we face are political and come from the top (or what passes for the top) down, we will continue to have our cost structure spiral out of control dragging our national debt, our economy, our dollar and our way of life down with it.

    Mitchell Brooks, M.D.

  7. Greg Scandlen says:

    You show that once again the consequences of bureaucratic interference will make things worse, not better. How long can this go on?