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A reform proposal that addresses some underlying causes of Medicare funding woes: geographic variation and lack of incentive for efficient medical practices.
ABSTRACT: Medicare spending varies more than twofold among regions, and the variations persist even after differences in health are corrected for. Higher levels of Medicare spending are due largely to increased use of "supply-sensitive" services-physician visits, specialist consultations, and hospitalizations, particularly for those with chronic illnesses or in their last six months of life. Also, higher spending does not result in more effective care, elevated rates of elective surgery, or better health outcomes. To improve the quality and efficiency of care, we propose a new approach to Medicare reform based on the principles of shared decision making and the promotion of centers of medical excellence. We suggest that our proposal be tested in a major demonstration project.
IN SOME REGIONS OF THE UNITED STATES Medicare pays more than twice as much per person for health care as it pays in other regions. For example, age-, sex-, and race-adjusted spending for traditional, fee-for-service (FFS) Medicare in the Miami hospital referral region in 1996 was $8,414-nearly two and a half times the $3,341 spent that year in the Minneapolis region.1
Even after differences in price levels across regions are adjusted for, there are no obvious patterns that suggest why some areas spend more than others. Spending in urban areas in the Northeast tends to be higher than average, but spending in rural regions in the South and urban areas in Southern California is as high or even higher. And the dollar transfers involved are enormous. The difference in lifetime Medicare spending between a typical sixty-five-year-old in Miami and one in Minneapolis is more than $50,000, equivalent to a new Lexus GS 400 with all the trimmings.2
Regional differences in spending have a more immediate consequence for the elderly who are enrolled in Medicare health maintenance organizations (HMOs), since capitated Medicare payments to HMOs under the Medicare+Choice (M+C) program are tied directly to local FFS per capita costs.3 Thus, HMOs in high-cost areas get paid more per subscriber and can therefore provide their clients with, drug benefits and prescription eyeglasses, services that HMOs in low-cost regions cannot provide.4 Efforts by the federal government to raise...