Date:  July 24, 2013




Medicare Spending Rates Based on Regional Cost Variations Unlikely to Improve Health Care, Says New IOM Report


WASHINGTON -- A "geographic value index" that would tie Medicare payment rates to the health benefits and costs of health services in particular regions of the country should not be adopted by Congress, says a new congressionally mandated report from the Institute of Medicine.  The committee that wrote the report concluded that decisions about health care generally are made at the level of the physician or organization, such as a hospital, not at the regional level.  Because individual physician performance varies, sometimes even within a single practice group, an index based on regions is unlikely to encourage more efficient behavior among individual providers, and therefore, is unlikely to improve the overall value of health care.  The new report reiterates the findings of the committee's interim report released in March 2013.  


Variation in Medicare spending across geographic areas is driven largely by differences in the use of post-acute care, which includes home health services, skilled nursing facilities, rehabilitation facilities, long-term care hospitals, and hospices, the committee said.  If regional variation in post-acute care spending did not exist, Medicare spending variation would fall by 73 percent, and it would fall by 89 percent if there was no variation in both acute and post-acute care.  However, an overall explanation for geographic variation in spending remains elusive.  The statistical analyses that the committee examined accounted for factors such as beneficiary health status and demographics, insurance plans, and factors related to health care markets, but much of the variation could not be explained by such factors.   


The committee also examined the differences in spending at a variety of levels progressively smaller than geographic regions, such as hospital referral regions, hospital service areas, hospitals, and individual providers.  Spending varies greatly across all these levels, and providers even at a small level do not practice the same way or perform similarly.  Consequently, a geographic value index would reward low-value providers for practicing in areas that are on average high-value and punish high-value providers in low-value regions.  As a result, area-level performance calculations would likely mischaracterize the actual value of services delivered by many providers and hospitals, resulting in unfair payments and inappropriate incentives. 


The committee found that in contrast to Medicare, variations in spending in the commercial insurance market are due mainly to differences in price markups by providers rather than differences in the use of health care services.  Medicare spending is weakly correlated with commercial insurance across regions, and total spending by all payers in a region is not strongly correlated with either Medicare spending or spending by commercial insurers. 


To improve care, payment reforms need to create incentives for behavioral change by decision makers, whether they are at the level of individual providers, hospitals, health care systems, or stakeholder collaboratives.  The committee recommended that the Centers for Medicare & Medicaid Services (CMS) continue to test Medicare payment reforms that incentivize the clinical and financial integration of health care delivery systems to encourage coordination of care among individual providers, real-time sharing of data and tracking of service use and health outcomes, receipt and distribution of provider payments, and assumption of risk managing their populations' care continuum.  CMS should also evaluate the effects of test payment reforms on health care quality by measuring Medicare spending and beneficiaries' clinical health outcomes and use the results to improve the payment models.  If these evaluations demonstrate increased quality, Congress should give CMS the flexibility to accelerate the adoption of the new Medicare payment models. 


Established in 1970 under the charter of the National Academy of Sciences, the Institute of Medicine provides independent, objective, evidence-based advice to policymakers, health professionals, the private sector, and the public.  The National Academy of Sciences, National Academy of Engineering, Institute of Medicine, and National Research Council make up the National Academies.  A committee roster follows.



Jennifer Walsh, Senior Media Relations Officer

Rachel Brody, Media Relations Assistant

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Additional resources:
Full Report

Project Page

Report Brief

Briefing Slides

Data Sets

Subcontractor Reports, Commissioned Papers, and Quality Control Reports

Interim Report

Listen to the Briefing: Realplayer | Windows Media

Pre-publication copies of Variation in Health Care Spending: Target Decision Making, Not Geography are available from the National Academies Press on the Internet at or by calling 202-334-3313 or 1-800-624-6242. Reporters may obtain a copy from the Office of News and Public Information (contacts listed above).

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Board on Health Care Services


Committee on Geographic Variation in Health Care Spending and Promotion of High-Value Care

Joseph P. Newhouse, Ph.D. (chair)

John D. MacArthur Professor of Health Policy and Management

Harvard School of Public Health and Harvard Kennedy School

Harvard Medical School

Faculty of Arts and Sciences



Alan M. Garber, M.D., Ph.D. (vice chair)

Harvard University, and

Mallinckrodt Professor of Health Care Policy

Harvard Medical School



Peter B. Bach, M.D.

Director, Center for Health Policy and Outcomes

Department of Epidemiology and Biostatistics

Memorial Sloan-Kettering Cancer Center

New York City


Joseph R. Baker, J.D.


Medicare Rights Center

New York City


Amber E. Barnato, M.D., M.P.H., M.S.

Associate Professor of Medicine, and of Clinical and Translational Science, Health Policy, and Management, and

Director, Clinical Scientist Training Program and Doris Duke Clinical Research Fellowship

University of Pittsburgh



Robert M. Bell, M.S., Ph.D.

Lead Member, Technical Staff

Statistics Research Department

AT&T Labs Research

Florham Park, N.J.

Karen Davis, Ph.D.

Eugene and Mildred Lipitz Professor and Director

Roger C. Lipitz Center for Integrated Health Care

Department of Public Health Policy and Management

Johns Hopkins Bloomberg School of Public Health



A. Mark Fendrick, M.D.


Departments of Internal Medicine and Health Management and Policy, and

Director, Center for Value-Based Insurance Design

University of Michigan

Ann Arbor


Paul B. Ginsburg, Ph.D.


Center for Studying Health System Change

Washington, D.C.


Douglas A. Hastings, J.D.

Chair of the Board of Directors

Epstein Becker & Green, P.C.

Washington, D.C.


Brent C. James, M.D.

Chief Quality Officer and Executive Director

Institute for Health Care Delivery Research

Intermountain Healthcare Inc.

Salt Lake City


Kimberly Johnson, M.D.

Assistant Professor of Medicine

Division of Geriatrics and Center for Palliative

Duke University Medical Center

Durham, N.C.


Emmett B. Keeler, Ph.D.

Senior Mathematician

RAND Corp.

Santa Monica, Calif.

Thomas H. Lee, M.D.

Professor of Medicine

Harvard Medical School and Harvard School of Public Health, and

CEO and Medical Director

Partners Community Healthcare Inc.



Mark B. McClellan, Ph.D., M.D.

Director, Engelberg Center for Health Care Reform, and

Leonard D. Schaeffer Director's Chair in Health Policy Studies

The Brookings Institution

Washington, D.C.


Sally C. Morton, Ph.D., M.S.

Professor and Chair

Department of Biostatistics

Graduate School of Public Health

University of Pittsburgh



Robert D. Reischauer, Ph.D.

Distinguished Institute Fellow and President Emeritus

The Urban Institute

Washington, D.C.


Alan Weil, J.D.

Executive Director

National Academy for State Health Policy

Washington, D.C.


Gail R. Wilensky, Ph.D.

Senior Fellow

Project HOPE

Bethesda, Md.




Robin Graham, Ph.D., M.P.H.

Study Director