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TOMAS J. PHILIPSON
University of Chicago
SETH A. SEABURY
RAND Corporation
LEE M. LOCKWOOD
University of Chicago
DANA P. GOLDMAN
University of Southern California
DARIUS N. LAKDAWALLA
University of Southern California
ABSTRACT The Dartmouth Atlas of Health Care has documented substantial regional variation in health care utilization and spending, beyond what would be expected from such observable factors as demographics and disease severity. However, since these data are specific to Medicare, it is unclear to what extent this finding generalizes to the private sector. Economic theory suggests that private insurers have stronger incentives to restrain utilization and costs, while public insurers have greater monopsony power to restrain prices. We argue that these two differences alone should lead to greater regional variation in utilization for the public sector, but either more or less variation in spending. We provide evidence that variation in utilization in the public sector is about 2.8 times as great for outpatient visits (p < 0.01) and 3.9 times as great for hospital days (p = 0.09) as in the private sector. Variation in spending appears to be greater in the private sector, consistent with the importance of public sector price restraints.
There is considerable variation in health care utilization and spending across geographic areas in the United States, but little evidence of corresponding differences in health outcomes or satisfaction with care.1 This variability is often cited as evidence that current levels of health care spending reflect "flat-of-the-curve" medicine, that is, treatment for which the marginal benefit of an additional unit of care is approximately zero. Interpreted this way, these findings have dramatic implications for the potential to increase the productivity of health care spending, and for this reason they have figured prominently in the policy debate.
However, the evidence on regional variation is almost exclusively limited to the public sector, because it relies on Medicare data. Less is known about the corresponding patterns in the private sector. A venerable literature in economics has argued that private firms and their managers have stronger incentives to restrain costs and boost efficiency than their public counterparts.2 In the health insurance context, Medicare does not face competition over premiums that might otherwise restrain its costs, and unlike private sector firms, Medicare...