Solving One Social Problem of Medicare on a Macro Level

Solving One Social Problem of Medicare on a Macro Level

Introduction

There is widespread disagreement on how Medicare should be fixed. One approach is to make incremental changes in Medicare policy and hope for moderation in future Medicare expenditures, either because of cost-containment mechanisms within the Medicare system or favorable spillover effects from private-sector cost-cutting initiatives. The recent balanced-budget agreements reached by President Clinton and the Congressional leadership followed this approach: across-the-board reductions in hospital and managed care reimbursements along with unspecified future cost saving.

The second approach is to encourage the migration of Medicare enrollees to managed care, and thereby reduce the role of Medicare to one of simply negotiating risk-adjusted annual capitation payments, with perhaps a residual role in the fee-for-service market. A third approach proposes turning Medicare into a financial assistance or "voucher" program (Aaron and Reischauer, 1995). In this approach, competition for Medicare dollars among private insurance companies would hold back cost increases and offer a menu of health plans to enrollees.

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We argue that none of these three proposals deals directly with a fundamental problem in the Medicare program--the enormous geographic disparity in Medicare spending across the United States. Average 1994-5 Medicare reimbursements per enrollee were $8,537 in Miami but only $3,300 in Minneapolis. There are a number of perfectly good reasons why such disparities exist, including differences in general costs of living, the age structure of the population, and health status. We show, however, that even after adjusting for age, sex, race, price, and illness related factors, major variations in Medicare spending persist. Thus, we focus on the "supply side" of how physicians and hospitals in different regions provide very different levels of resources to people with what appear to be similar health problems.

While such variations have...