qotd: Dartmouth studies sending us in the wrong direction?

Brookings Institution
September 2014
Why the Geographic Variation in Health Care Spending Can't Tell Us Much
about the Efficiency or Quality of our Health Care System
By Louise Sheiner

Abstract

This paper examines the geographic variation in Medicare and
non-Medicare health spending and finds little support for the view that
most of the variation is likely attributable to differences in practice
styles. Instead, I find that socioeconomic factors that affect the need
for medical care, as well as interactions between the Medicare system
and other parts of the health system, can account, in an econometric
sense, for most of the variation in Medicare health spending.

The paper also explores the econometric differences between controlling
for health attributes at the state level (the method used in this paper)
and controlling for them at the individual level (the approach used by
the Dartmouth group.) I show that a state-level approach can explain
more of the state-level variation associated with omitted health
attributes than the individual-level approach, and argue that this
econometric difference likely explains much of the difference between my
results and those of the Dartmouth group.

More broadly, the paper shows that the geographic variation in health
spending does not provide a useful way to examine the inefficiencies of
our health system. States where Medicare spending is high are very
different in multiple dimensions from states where Medicare spending is
low, and thus it is difficult to isolate the effects of differences in
health spending intensity from the effects of the differences in the
underlying state characteristics. I show, for example, that previous
findings about the relationships between health spending, the share of
physicians who are general practitioners, and quality, are likely the
result of omitted factors rather than the result of causal relationships.

I. Introduction

It is well known that Medicare spending per beneficiary varies widely
across geographic areas. The conventional wisdom from the leaders in
this research area, the Dartmouth group, is that little of this
variation is accounted for by variation in income, prices, demographics,
and health status, and, instead, most of the variation represents
differences in "practice styles." Further, the Dartmouth research
suggests that the additional health spending of the high-spending areas
does not improve the quality of health care, and, indeed, might even
diminish it.

One of the implications of the Dartmouth work is that health care
spending can be reduced without significant effects on health outcomes.
For example, Sutherland, Fisher, and Skinner (2009) argue "Evidence
regarding regional variations in spending and growth points to a more
hopeful alternative: we should be able to reorganize and improve care to
eliminate wasteful and unnecessary service." This view was promoted by
the Obama Administration as part of the effort to reform health care. In
a Wall Street Journal op-ed, then OMB-director Peter Orszag, referring
to the Dartmouth work, noted "If we can move our nation toward the
proven and successful practices adopted by lower-cost areas and
hospitals, some economists believe health-care costs could be reduced by
30% -- or about $700 billion a year -- without compromising the quality
of care.

The Dartmouth group has also argued that this geographic variation holds
the key to reducing excess cost growth in health care. According to
Fisher, Bynum, and Skinner (2009), "By learning from regions that have
attained sustainable growth rates and building on successful models of
delivery-system and payment system reform, we might... manage to "bend
the cost curve." ....... Reducing annual growth in per capita spending
from 3.5% (the national average) to 2.4% (the rate in San Francisco)
would leave Medicare with a healthy estimated balance of $758 billion, a
cumulative savings of $1.42 trillion."

In this paper, I reexamine the geographic variation in health spending
at the state level and find little support for the Dartmouth views. I
find that most of the geographic variation in Medicare spending is
explainable, at least in an econometric sense, by differences in
socioeconomic factors that affect the need for medical care and the
resources available in the nonelderly population to finance it. Although
it is not possible to rule out the Dartmouth view that the differences
in spending reflect differences in practice styles, I show that there
are other explanations for the variation in spending that seem to be
better supported by the data. Furthermore, I show that the relationships
between health spending (both Medicare and non-Medicare), physician
composition, and quality are likely the result of omitted factors rather
than the result of causal relationships.

More broadly, the paper shows that the geographic variation in health
spending does not provide a useful way to examine the inefficiencies of
our health system. States where Medicare spending is high are very
different from states where Medicare spending is low, and thus it is
difficult to isolate the effects of differences in health spending
intensity from the effects of the differences in the underlying state
characteristics. Insights into the relationship between health spending
and outcomes are more likely to be provided by natural experiments such
as that analyzed by Doyle (2007), who showed that among visitors to
Florida who had heart attacks, outcomes were better at hospitals with
higher spending, the true experiment run in Oregon in which a group of
uninsured low-income adults was selected by lottery to be given the
chance to apply for Medicaid (Finkelstein et al, 2011), or the recent
paper by Finkelstein et al which focuses on Medicare beneficiaries who
move (Finkelstein, 2013).

It is important to note at the outset that nothing in this paper
suggests that improvements in our health system are unattainable.
Rather, the paper suggests that comparisons of spending between high
cost states and low costs states are unlikely to provide a measure of
how much we can hope to gain by efforts to improve health system efficiency.

The paper is organized as follows. I first give a brief overview of the
literature on geographic variation. Then I present the basic results
from the Medicare regressions, and show that the cross-state variation
in average Medicare spending is well explained by differences in
population characteristics across states. I compare my results to those
of the Dartmouth group and suggest a number of reasons why my results
differ. I show that, econometrically, there is a difference between
controlling for attributes at the individual level (the Dartmouth
approach) and controlling for them at the state level (the approach used
here), and that this difference is likely to be empirically important
when it comes to health care. I argue that my state-level approach
better controls for the variation in health and other socioeconomic
variables that affect health demand. In addition, to the extent that
there are area differences in practice styles, I show that these too
likely reflect systemic differences across states, and thus would likely
be difficult to alter.

I then explore the relationships between Medicare and non-Medicare
spending across the states, and show that the two appear to be somewhat
negatively correlated. This correlation is quite important in thinking
about the relationship between provider workforce characteristics,
quality, and health spending. In particular, I show that taking into
consideration some of the demographics and health insurance variables by
state changes the conclusions one gets from previous studies. Finally, I
show that the growth rates of Medicare spending are negatively related
to the level of health spending—that is, low spending states tend to
have higher growth rates than high-spending states. The conclusion
assesses the implications of this work for Medicare policy.

VIII. Conclusions

The evidence presented in this paper shows that most of the variation in
Medicare spending across states is attributable to factors that affect
health and health behaviors, rather than to random variation in practice
styles. Isolating the exact channels through which differences in health
affect Medicare spending is difficult, however, because both the need
for health spending and provider practice styles will likely be affected
by variations in population health and variables that are correlated
with it.

But the paper has several findings that suggest that the variation in
Medicare spending does not represent wasteful spending that could be
easily eliminated without significant effects on the health system.
First, population characteristics have more explanatory power for
Medicare spending than measures of social capital, indicating that the
variation in patient characteristics is more important than variation in
provider characteristics. Second, health measures are significantly more
correlated at the state level than at the individual level, making it
likely that state level regressions do a better job of controlling for
unobserved variation in population health. Third, there does not seem to
be a significant relationship between the use of "preference- sensitive
procedures" and the level Medicare spending. Fourth, states with high
levels of Medicare spending tend to have lower levels of non-Medicare
spending. Providers in these states may face greater financial
difficulties, and may "volume shift" to Medicare patients in order to
cover costs.

The paper also shows that conclusions about the relationships between
health spending, physician composition, and quality are sensitive to the
inclusion of variables like the share of the population uninsured,
black, or diabetic. What this sensitivity demonstrates is the difficulty
of using the geographic variation in spending for hypothesis testing. It
is not surprising that states in the South spend more on Medicare and
have worse outcomes. These states perform significantly worse in
numerous areas, including high school graduation rates, test scores,
unemployment, violent crime, and teenage pregnancy. There are many ways
that such differences can affect health utilization and outcomes,
including differences in underlying health, social supports and social
stressors, patient self-care and advocacy, ease of access to services,
capabilities of hospital and physician nurses and technicians, and
cultural differences in attitudes toward care. A comparison of health
spending in Mississippi with health spending in Minnesota is not likely
to provide a useful metric of the "inefficiencies" of the health system
in isolation; rather, the difference in spending likely mirrors broader
societal problems unrelated to the health system per se.

Finally, the evidence also suggests that low-cost states are not
low-growth states. Thus, the geographic variation in Medicare spending
is probably not the key to finding ways to slow spending growth while
continuing to improve quality over time.

http://www.brookings.edu/~/media/projects/bpea/fall%202014/fall2014bpea_sheiner.pdf

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Comment by Don McCanne

Did this paper really say what it seems like it said? Wow! It is
important because it seems to be a highly credible challenge to the
principle that much of the waste in health care spending is due to
variation in practice styles, as allegedly demonstrated by the Dartmouth
group.

According to this Brookings paper by Louise Sheiner, "The evidence
presented in this paper shows that most of the variation in Medicare
spending across states is attributable to factors that affect health and
health behaviors, rather than to random variation in practice styles."
Further, "But the paper has several findings that suggest that the
variation in Medicare spending does not represent wasteful spending that
could be easily eliminated without significant effects on the health
system."

Double wow! This suggests that the efforts of reducing waste through
accountable care organizations (ACO) that are designed based on the
Dartmouth studies of waste are mostly for naught. It also explains why
to date the experiments with ACO models have had very little impact on
either efficiency or quality.

Of particular concern is the finding that areas in the South with high
Medicare spending have worse outcomes, and they also "perform
significantly worse in numerous areas, including high school graduation
rates, test scores, unemployment, violent crime, and teenage pregnancy."
You cannot help but think that more resources need to be directed toward
these societal ills. It is not just health care that needs our attention.

For us, the important take-home point of this paper is that we should
turn our attention away from puff programs such as ACOs that hold little
promise of delivering on higher quality and lower costs, and turn
instead to policies that have been proven in other nations to be
effective. Of course we're referring to a single payer national health
program. We already know that it works.