iProtean—New Information on Differences in Health Spending

The Institute of Medicine (IOM) released a report Wednesday on the results of a three-year study by an “A-list” of 19 researchers to analyze variations in health spending. The researchers concluded that big health spending variations are largely driven by differences in the use of post-acute services (e.g., skilled nursing, home health, etc.) by Medicare beneficiaries and by higher prices that some hospitals and doctors charge commercial insurers.


Regional variations have long been noted as the culprit when examining big health spending variations, primarily because of research from Dartmouth Medical School in the early 1970s. This research has been analyzed and, recently, questioned in academic journals.  The IOM report affirms the Dartmouth research, but found that a large amount of variation remains unexplained. The 178-page report delved deeply into questions such as why it costs more to treat patients in some areas of the country than in others. The researchers did not provide definitive answers about regional variation, but did focus on areas they said warrant more inquiry.



In Medicare, most of the variation, according to the panel, was due to spending in post-acute services such as skilled nursing facilities, home health care and long-term-care hospitals. The panel found that if variations among those providers were eliminated, the overall variation between different parts of the country would drop by 73 percent.


Removing the spending variation among hospitals, by contrast, would eliminate only 27 percent of the differences. Tests and procedures each explained only 14 percent of the variation between areas, and use of emergency departments and ambulances played no role.


Because Medicare has fixed prices for what It pays, differences among regions are due to more people being enrolled in certain services such as home health, getting care for longer periods, or being channeled into more expensive treatment options (for example, going into an inpatient rehab facility).


Commercial Market

The panel commissioned Harvard economist Michael Chernow to study the commercial market. He found that higher prices negotiated by hospitals, doctors and other medical providers were the key factor in regional variations, not increased use of medical services, and noted that 70 percent of commercial spending variation is due to different prices set by hospitals and doctors in different markets. The panel noted in its report that this is “most likely reflecting the varying market power of providers.”


IOM Recommendations

The IOM panel recommended that Medicare continue to use its financial leverage to make hospitals, doctors and other providers work more closely to either be rewarded or penalized based on how well and efficiently they care for their patients. Both bundled payments and accountable care organizations are payment mechanisms that encourage care coordination and both are either in the pilot stage or moving toward full implementation.


“A growing body of evidence leads to the conclusion that clinical and financial integration best positions healthcare systems to manage the continuum of care for their complex populations efficiently,” the report said. However, the authors noted that merging doctors and hospitals into larger groups—a trend that is being accelerated by Medicare’s pilot programs—carries the risk that those providers will use their increased market power to demand higher prices from commercial insurers.


(IOM Finds Differences in Regional Health Spending Are Linked to Post-Hospital Care and Provider Prices, Kaiser Health News, July 24, 2013.)



iProtean subscribers, the iProtean advanced Finance course Transforming Your Organization into an Integrated Delivery System featuring Marian Jennings, Lisa Goldstein and Dan Grauman helps put the variations in health spending discussion in context. If you haven’t taken the course yet, put it on your to-do list for this month.



For a complete list of iProtean courses, click here.



iProtean Symposium & Workshop

Mark the Date!! October 2 – 4, 2013 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Michael Irwin (Citigroup), Todd Sagin, M.D., J.D. (Sagin Healthcare Consulting), Dan Grauman (DGA Partners), Pam Knecht (ACCORD LIMITED), Barry Bader (Bader & Associates), Ed Kazemek (ACCORD LIMITED).  For more information, click here.


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