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Will Medicare Fixes Lead to Hospital Mergers?

Author: Peter R. Orszag, Adjunct Senior Fellow
August 7, 2013


Improving the U.S. health-care system requires encouraging low-value doctors and hospitals to practice as well as high-value ones do. The gap between the two is wide, but that only shows how much room we have for improvement.

Costs vary wildly across regions, among hospitals within a region, and even among doctors within a given hospital. Because this variation doesn't appear to be reliably correlated with differences in quality, value seems to be much higher in some settings than in others. What is causing this, and what might we do about it?

A new report from the Institute of Medicine provides some answers. A blue-ribbon panel, asked by Congress to examine whether Medicare should pay more in high-value areas of the country than in low-value ones, concluded that would be unwise; instead, the agency should reward value provided by individual doctors and hospitals. In studying this question, the panel also provided new answers to why spending varies across the country.

The report confirmed that Medicare spending varies widely, as Dartmouth College researchers had found earlier. In some areas, spending per beneficiary was found to be about 40 percent higher than in others. And the same amount of variation was found among commercial health insurers. This persisted over decades; regions that spent the most in 1992 tended to remain big spenders in 2010.

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