The Relationship between Commercial Health Care Prices and Medicare Spending and Utilization.

Health care spending varies markedly across the United States (Wennberg and Cooper 1996). Such variation raises important questions about the performance of the health care system and the design of public policy. Some areas may deliver good value, that is, high-quality care at low cost. Under current policy, Medicare payments to physicians and hospitals are adjusted for geographic differences in the cost of care, but not for geographic variation in value. During the debate over health reform, the Secretary of Health and Human Services agreed to a congressional request to study whether Medicare should instead set payment rates based on the value of care across areas. The study was undertaken by a special committee of the Institute of Medicine (IOM). In its report (IOM 2013), the committee recommended against the adoption of a geographic “value index,” because such an approach would punish high-value providers in low-value areas (Newhouse and Garber 2013a,b). The IOM's mandate reached beyond Medicare payment policy. In particular, the IOM was tasked with investigating variation in spending throughout the health care system, including commercial insurance, Medicaid, and the uninsured. The IOM was supported by a number of external research teams, including ours. This broader assessment of geographic variation in health care represents a significant contribution, because the existing evidence, while extensive, has focused largely on Medicare (Franzini, Mikhail, and Skinner 2010; Newhouse and Garber 2013a). Nearly, 80 percent of U.S. health spending is outside of Medicare (Centers for Medicare and Medicaid Services 2014), and there may be important linkages across sectors of the overall system (Baker 1997; Yip 1998; Rice et al. 1999; Matlock et al. 2013; McWilliams, Landon, and Chernew 2013). For example, physicians with many Medicare patients tend to provide shorter office visits to their patients with commercial insurance (Glied and Zivin 2002). Linkages between Medicare and commercial insurance could operate through payment levels. Reductions in Medicare payments have been met by concerns that providers will simply raise the prices they charge to the commercially insured; a recent review of the literature found some evidence of such “cost shifting,” albeit at a low rate (Frakt 2011). During the period studied by the IOM, Medicare did not implement significant payment reductions. However, information developed as part of the IOM study has created an opportunity to explore whether the price paid by commercial health plans in a particular region is related to spending and utilization in Medicare. Specifically, the IOM measured the prices that commercial health plans paid for services and pharmaceuticals, and concluded that there is substantial geographic variation in the “markup” of price over cost, potentially due to differences across areas in competition levels among commercial plans and providers. One might hypothesize that lower commercial price markups cause providers to shift service volume and health care dollars out of the commercial sector and into Medicare (McGuire and Pauly 1991; McGuire 2000; Newhouse and Garber 2013a). This study investigates the association between commercial health care prices and Medicare spending and utilization.