Why the Geographic Variation in Health Care Spending Cannot Tell Us Much about the Efficiency or Quality of Our Health Care System

Examining the geographic variation in Medicare and non-Medicare health spending, I find little support for the view that most of the variation can be attributed to differences in practice styles. Instead, I find that socioeconomic factors that affect the need for medical care, as well as interactions between the Medicare system and other parts of the health system, can account for most of the variation in spending. I also find that controlling for health attributes at the state level explains more of the state-level variation associated with omitted health attributes than controlling for them at the individual level, an econometric difference that likely explains much of the difference between my results and those of the Dartmouth group. More broadly, I find that geographic variations in health spending do not provide a useful way to examine the inefficiencies of our health system. States where Medicare spending is high differ in multiple ways from states where it is low, and it is difficult to isolate the effects of health spending intensity from the effects of the underlying state characteristics. I show, for example, that previous findings about the relationships between health spending, the share of physicians who are general practitioners, and health care quality, are likely the result of omitted factors rather than the result of causal relationships.