Health Status and Hospital Prices Key to Regional Variation in Private Health Care Spending

Originally published as NIHCR Research Brief No. 7 by the National Institute for Health Care Reform (NIHCR). NIHCR was affiliated with the Center for Studying Health System Change (HSC), a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Health Status and Hospital Prices Key to Regional Variation in Private Health Care Spending

Wide geographic variation in private health care spending had long been documented, but the relative contributions of prices, service utilization, and population health status to that variation remained poorly understood. This research brief examined spending patterns among autoworkers across multiple communities, finding that workers in high-spending areas received roughly 50 percent more services than their counterparts in low-spending areas -- but that the additional services did not appear to produce better health outcomes.

Decomposing the Spending Gap

The analysis decomposed regional spending variation into its component parts: differences in the prices paid for services, differences in the quantity of services used, and differences in the health status of the population being served. Two factors stood out as the most important drivers of spending variation. First, hospital prices varied dramatically across communities -- the same procedure could cost two or three times more at a hospital in one city compared with another. These price differences reflected local market conditions, including the degree of hospital consolidation, the bargaining leverage of health plans, and historical payment patterns. Second, population health status played a significant role: communities with sicker populations naturally consumed more health care resources.

Implications for Policy and Cost Containment

The findings carried important implications for efforts to contain health care costs. Since hospital prices were a major driver of spending variation, strategies to moderate price growth -- including antitrust enforcement to prevent excessive hospital consolidation, greater transparency in negotiated prices, and the development of reference pricing models -- could have significant impact. The finding that higher-spending communities did not achieve better outcomes suggested that a substantial portion of the additional spending was wasteful, supporting efforts to identify and reduce low-value care. For policymakers, the research reinforced the importance of addressing both prices and utilization rather than focusing exclusively on one or the other.

Sources and Further Reading

This Research Brief was published by the National Institute for Health Care Reform (NIHCR). The analysis used claims data from a national automaker's health benefits program, which provided a unique opportunity to study spending variation across communities for a population with uniform insurance benefits. Related research on geographic variation in Medicare spending from the Dartmouth Atlas provided additional context.