What's the Problem?

Geographic variations in spending are associated with two different problems for Medicare. First, these variations cause payments for managed care plans to differ substantially across the United States. The resulting perceived inequities resulted in the Balanced Budget Act of 1997, legislation that has had its own undesirable consequences. Second, the pressure to restrain Medicare spending, which has been a part of the policy process for the past decade, can be expected to increase dramatically over the coming two decades because of the impending retirement of 77 million baby boomers. To the extent that expenditures in high-spending areas are in part unnecessary or inappropriate, reducing spending in these areas could represent a source of new savings for Medicare.

Before the Balanced Budget Act of 1997, unadjusted Medicare spending at the county level was observed to differ by a factor of 3.5. Actually, this observation showed that premium payments made to health maintenance organizations on behalf of seniors who chose to join one differed substantially depending on where they lived. This meant that seniors in different geographic areas would have access to substantially different benefits paid for by Medicare. Both Congress and seniors who lived in low-payment areas viewed this as inequitable. The 1997 legislation introduced a floor on payments to Medicare managed care plans.

However, Congress ignored the cause of the variation in premium payments: the variation in spending in the underlying fee-for-service program. By reducing the variation in payments only to managed care plans and ignoring the underlying variation in spending on traditional Medicare, Congress reduced geographic inequities for managed care participants but increased market distortions in the choice between traditional Medicare and managed care plans. This happened because health care is delivered in local markets and spending by Medicare now differs substantially in some local markets, depending on whether the senior participates in traditional Medicare or in a managed care plan.

Why Has It Been So Hard To Fix?

There is widespread agreement that some of the variation in spending is appropriate because it is associated with differences in the underlying health status of individuals and with differences in input prices. The more difficult issues are associated with residual variations and whether higher-spending areas have "better" outcomes, however defined. The development of effective strategies that might drive high-spending areas to lower spending levels requires a better understanding of why these variations in spending occur and what changing the level of spending is likely to mean for care provided to seniors.

Contribution of the Articles by Fisher and Colleagues

The study reported in this issue by Fisher and colleagues (1, 2) is a careful attempt to assess the types of expenditures associated with regional variations after adjusting for illness levels and prices of medical services. Although I will leave it to Dr. Phelps (3) to assess the adequacy of their methods, by limiting the analysis to patients with three conditions and classifying regions on the basis of spending in the last 6 months of life, Fisher and colleagues were better able to control for many of the confounding factors that have plagued other studies. This makes their findings more credible, although not necessarily relevant to all variations in Medicare spending. The most important finding is that greater expenditures appear to be associated with discretionary services but not with improvements in health outcomes. By including measures that encompass quality of life (such as patient satisfaction and functional status) as well as quantity of life (that is, mortality rates), Fisher and colleagues begin to address some of the most important qualifications that had been associated with earlier studies.

What the Findings Could Mean for Medicare and the Centers for Medicare & Medicaid Services

Fisher and colleagues' findings, if upheld in analyses that include other medical conditions, would provide the best rationale to date for Medicare and the Centers for Medicare & Medicaid Services, the agency that administers Medicare, to drive down spending in high-expenditure areas of the United States.

The problem is that many of the obvious policies are exceedingly blunt as policy tools. The easiest way to drive down spending in high-spending areas is to use local service use or payment targets. This would link payment rates to overall use or spending in the county, much as now happens with physician payments at the national level and changes in the gross national product. The problem is that this strategy would penalize the most conservatively practicing physicians because of the practices of the most aggressive physicians in the area—hardly a desirable set of incentives for reducing expenditures. A second strategy would be to enforce the use of national benchmarks for desirable practice patterns, or at least to require justification for any deviation from such benchmarks. Aside from the problem of not having many of the benchmarks that would be needed, this strategy raises questions about the proper role of Medicare in setting standards for the practice of medicine, particularly since the federal government has historically deferred to local decision making in this area (4).

Conclusion

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An increasing amount of attention has been given to the importance of improving quality and patient safety in Medicare. Medicare now pays for the correction of medical errors but does not pay for the costs of putting systems in place that might prevent these errors. We need to find ways to encourage better practices, not discourage them by creating disincentives. We need more thought about how to reward physicians who practice high-quality conservative medicine. Today is none too soon to begin.