NCPA - National Center for Policy Analysis


February 14, 2008

Medicare spending varies dramatically among the 306 Hospital Referral Regions (HRRs) across the United States, representing a substantial transfer of federal dollars, say the authors of a study published in Health Affairs.

For example:

  • The present value of projected lifetime Medicare costs for a sixty-five-year old in Los Angeles is $84,000 greater than for a sixty-five-year old in Seattle.
  • The difference between Portland and Miami is $125,000.
  • The majority of these differences in spending are driven by the volume of inpatient care delivered to patients with chronic diseases in different regions, not differences in local prices.


  • Prevalence of illness doesn't drive spending; only about 4 percent of the variation in Medicare spending among HRRs is associated with the regional variation in the prevalence of severe chronic illness.
  • Among academic medical centers (AMCs), which care for the sickest of the sick, we see the same pattern; equally sick patients received very different care depending upon which AMC they routinely used for care.

Improving the overall efficiency of Medicare can be achieved through several interrelated strategies, say researchers.  For instance:

  • The federal government should fund a crash research program designed to rapidly build the scientific basis for managing chronic illness.
  • The Centers for Medicare and Medicaid Services (CMS) should at the same time offer a partnership with providers to organize and coordinate the care of their chronically ill patients and participate in a shared savings program to correspond to benchmarks of relatively efficient providers.
  • CMS should transition to a pay for performance system for seriously ill Medicare patients based on validated clinical pathways and an actuarially fair (and risk-adjusted) price for such care.

Finally, the CMS could eventually impose a nonparticipation penalty on providers not willing to join, with increasing penalties for high-cost, high-use providers.  Eventually, the CMS would change its conditions of participation to include only providers capable of such evidence-based care. 

Source: John E. Wennberg et al., "Extending The P4P Agenda, Part 2: How Medicare Can Reduce Waste And Improve The Care Of The Chronically Ill," Health Affairs, November/December 2007.

For study abstract: 


Browse more articles on Health Issues