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Variation in Healthcare Spending: Medicare vs. Private Insurance

Posted Apr 04 2013 12:00am

Is regional variation in health care spending larger for Medicare beneficiaries or those enrolled in private health plans?

Before answering that question, one should better understand the sources of this variation.  Regional variation in spending can be due to variation in the utilization, variation in prices, or both.  A paper by Philipson et al. (2010) hypothesizes that the sources of variation are likely to differ across the Medicare and commercially insured populations.

In particular, our analysis implies that utilization controls within regions in the private sector should lead to lower regional variation in the private sector than in Medicare. However, the implications for variation in spending are less clear, because Medicare may also be able to better control prices through its greater monopsony power. If the private sector controls utilization while the public sector controls prices, the result is an ambiguous prediction for variation in spending.

The study uses data from a large private insurance and the Medicare Current Beneficiary Survey ( MCBS ) to examine whether or not this is true.  They find the following results:

…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.


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