Tuesday, December 30, 2014

Patient migration between high and low health care utilization regions

National Bureau of Economic Research
December 2014
NBER Working Paper 20789
Sources of Geographic Variation in Health Care: Evidence from Patient
By Amy Finkelstein, Matthew Gentzkow, and Heidi Williams


We study the drivers of geographic variation in US health care
utilization, using an empirical strategy that exploits migration of
Medicare patients to separate the role of demand and supply factors. Our
approach allows us to account for demand differences driven by both
observable and unobservable patient characteristics. We find that 40-50
percent of geographic variation in utilization is attributable to
patient demand, with the remainder due to place-specific supply factors.
Demand variation does not appear to result from differences in past
experiences, and is explained to a significant degree by differences in
patient health.

From the Introduction

Health care utilization varies widely across the United States.
Adjusting for regional differences in age, sex, and race, health care
spending for the average Medicare enrollee in Miami, FL was $14,423 in
2010, but just $7,819 for the average enrollee in Minneapolis, MN. The
average enrollee in McAllen, TX spent $13,648, compared to $8,714 in
nearby and demographically similar El Paso, TX.

In this paper, we exploit patient migration to separate variation due to
patient characteristics such as health or preferences from variation due
to place-specific variables such as doctors' incentives and beliefs,
endowments of physical capital, and hospital market structure. As a
shorthand, we refer to the former as "demand" factors and the latter as
"supply" factors.

Like past decompositions, ours is not sufficient to draw strong
conclusions about the efficiency of observed geographic variation.
Though it may be tempting to see supply-driven heterogeneity as evidence
of waste, such variation could reflect different allocations of physical
or human capital, and so be consistent with efficiency. Conversely,
demand-driven heterogeneity could reflect patient misinformation, and so
contribute to inefficiency. We view our findings as both a first step
toward a more welfare-relevant understanding and a clarification of an
influential body of existing evidence.


We find robust evidence that 40 to 50 percent of geographic variation in
the log of health care utilization is due to fixed characteristics of
patients that they carry with them when they move. Our examination of
mechanisms suggests that a large part of this demand-side heterogeneity
may be due to patient health. The remaining 50 to 60 percent of
variation is due to place-specific factors, possibly including doctor
practice patterns and characteristics of health care organizations.

These results suggest that demand-side factors play a larger role in
geographic variation than conventional wisdom might suggest. This does
not translate immediately into conclusions about efficiency. The
correlation of utilization with demand-side factors (and with patient
health in particular) may reflect differences in the marginal impact of
treatment or the marginal utility from a given impact, and so be
consistent with efficiency. But it could also reflect differences in
other demand drivers, such as patient information or beliefs. A more
careful examination of the efficiency implications of the geographic
variation is an important direction for further work.

Our findings have implications beyond our patient-place decomposition.
The fact that habit formation seems limited implies that demand-side
differences in utilization are unlikely to change quickly in response to
policy, at least among the 65 and over population, a population that
accounts for about a third of total annual health care spending. The
fact that a large part of demand-side geographic variation reflects
variation in patient health may also point to limits to the
effectiveness of demand-side policies aimed at changing patient beliefs
or preferences. At the same time, the sharp adjustment we observe around
moves suggests policies that affect the supply-side can have immediate

While we have taken a first step toward understanding the origins of the
patient component we measure, it remains for future work to better
understand the mechanisms behind the place component. Particularly
interesting questions concern the role of physicians' training and
practice patterns, and the role of health care organizations.



Comment by Don McCanne

Although this article is technically challenging to read and absorb, and
the authors caution that more work is needed to understand better the
implications of their initial results, nevertheless, this is a very
important article because it improves our understanding of geographic
variations in health care utilization as related to "patient
characteristics such as health or preferences" (demand-side) and to
"place-specific variables such as doctors' incentives and beliefs,
endowments of physical capital, and hospital market structure"
(supply-side). Because of concerns over global health care spending,
many important demand-side and supply-side policies are being put in
place without an adequate regard of the policy science behind those
decisions, both known and unknown.

On the demand side, it appears that the health of the patient is far
more important in patient decisions on utilization than are patients'
beliefs, preferences and habits. This is as it should be. The health
care system should be there to serve the health care needs of the
patient. Yet the leading efforts to control demand-side over-utilization
include measures that impair access, particularly financial barriers
such as high deductibles and tiered layers of coinsurance, and provider
barriers established through the use of narrow- and ultra-narrow
networks. Policies that prevent patients from getting the care they need
should be rejected. The claim that these policies control excess patient
demand is based on the fiction that patients are demanding excessive
care; they are not.

On the supply side, much has been written about excess capacity that
results in excessive utilization, including the alleged excessive supply
of high-tech specialized services. The authors of this study state that
we need to learn more about the role of physicians' training and
practice patterns, and the role of health care organizations. Yet the
leading efforts to control supply-side over-utilization include the use
of accountable care organizations, in spite of the lack of evidence of
their effectiveness, and the use of dubious pay-for-performance levers
to guide physicians' practice patterns. Many contend that about
one-third of care provides marginal benefits that could be done away
with, since the the overall negative impact would be small (but not
zero). But it is very difficult to prospectively select the care that
could be omitted. That is what the accountable care organizations are
supposed to be doing, yet, to date, there has been very little reduction
in spending under these programs, and often that reduction is erased by
the performance rewards.

We already know of very effective policies that could control excesses
on the supply side. Our prices are created on the supply side, and they
are too high. They could be brought into line through public policies
that would ensure adequate funding of services and products while
reducing the waste of excessive pricing. The complexity of the
supply-side administrative services wastes tremendous resources. That
waste could be dramatically reduced through an administratively
simplified single payer financing infrastructure. Excess capacity that
invites over-utilization could be reduced through central planning and
budgeting of capital improvements - a step that would also address our
even greater need to improve capacity in regions wherein services are

So let's get to the basics. Demand side? Remove barriers to care. Supply
side? Begin by replacing our dysfunctional health care financing system
with a single payer national health program. Once we have those in
place, then we can sit around and have intellectual discussions about
physicians' training and practice patterns, and the role of health care
organizations. But we can't waste our time with decades of esoteric
policy studies when we have important work to do right now.

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