Geographic Variation in Health Care: The Role of Private Markets

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. T 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. 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. 1. The main data source used to document regional variations is the Dartmouth Atlas of Health Care, which can be found at www.dartmouthatlas.org/ (accessed January 15, 2010). TOMAS J. PHILIPSON University of Chicago SETH A. SEABURY RAND Corporation LEE M. LOCKWOOD University of Chicago 12178-06a_Philipson-rev2.qxd 8/11/10 12:18 PM Page 325