Why Does Healthcare Spending Vary Across the U.S.?

Per capita healthcare spending is higher in the U.S. than in other countries (this is one of the reasons for Obamacare).

But per capita healthcare spending is also highly variable within America. Differences in typical spending for identical conditions of 4 to 1 are not uncommon.

Why is that so? Answering this question might go some way towards figuring out how to improve healthcare finance.

The way that healthcare was financed for the 85% of Americans with some sort of coverage prior to Obamacare was that most procedures received fixed payments, either from Medicare, Medicaid, or private insurers. This means that regional variation in spending had to be the result of regional variation in the number of procedures rather than the charges for them.

And procedures are ordered because either the doctor wants them, or the patient wants them. So who’s ordering all the spending, and why?

Cutler, Skinner, Stern, and Wennberg [2013] addresses this question. What did they find?

• Patients have little regional variation in what procedures they desire.
• Doctors have a lot of regional variation in what procedures they order.
• The profitability of procedures explains little of what doctors actually order.
• Some of what doctors order is about making the patients happy (i.e., a “the customer is always right” behavior)
• Some of what doctors orders is about making other doctors happy (i.e., a “my colleague sent this patient to me so I would do something they can’t or won’t” effect)
• They can’t rule out that some doctors are “cowboys” who order more procedures because they know more and can make them work. This is possible on an individual, but inconsistent with poor outcomes for many conditions.
• Most of the regional variation in what doctor’s order can’t be linked to observable variables or recommended treatment protocols (i.e., basically an “our inputs are determined by gut feeling, and then no one checks our output” effect). 

What’s the takeaway? Obamacare is mostly about changing the way healthcare is financed, not about how healthcare is performed. So it isn’t really focused on the right thing.