Unbiased Analysis of Today's Healthcare Issues

Variation in Healthcare Spending: Medicare vs. Private Insurance

Written By: Jason Shafrin - Apr• 04•13

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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  1. This is a little bit confusing.

    It seems that in once case we are dealing with averages and in another with variances.

    So, let’s step backwards and start with epidemiology. Let’s assume that the incidence of illness and injury in a population is fixed.

    Medicare does not have the ability to underwrite its beneficiaries. Ergo, it is likely to have high risk/high cost beneficiaries that would not be accepted by a private insurer that can underwrite its policyholders. It has greater variation in utilization because it has higher risk beneficiaries.

    Private insurers have greater latitude to delay and deny benefits to their policyholders than Medicare. Even though Medicare can set price limits – the likely affect of setting a maximum claim size is that providers will adjust their billing practices to reach the arbitrary limit, leaving relatively little variation in costs.

    Private insurers may deny coverage completely, pay partial amounts, or pay excessive amounts on an almost whimsical basis. If you have a friend, who has a friend in a private insurer they may cover your costs as a PR endeavor. Absent the arbitrary limit on claim payment size imposed by Medicare there should be a much greater disparity in size between the smallest and largest claims made by providers.

    But the increased variation in paid costs for private insurers reflects the fact that private insurer claims settlement policies and procedures result are probably far less consistent than those of Medicare, not exactly a plus in a rarely used service.

    Certainty of claim payment is a desirable feature of insurance systems. The degree that private insurers profit from delaying and denying benefits suggests a market imperfection since if policyholders knew that their claims were more likely to be denied they would not buy insurance.

  2. […] Shafrin, aka The Healthcare Economist, takes a look at whether Medicare or private health insurance has more regional variation in healthcare spending.  His article notes that the private sector tends to control utilization, while the public sector […]

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