Hospital and Regional Variation in Medicare Payment for Inpatient Episodes of Care

Health care spending varies widely between geographic regions, but there is disagreement regarding the appropriate policy response. Regional policies include reducing Medicare payment rates in high-spending regions, limiting the supply of health care facilities using certificate-of-need criteria, and implementing care-improvement collaboratives. The Institute of Medicine opposed regional policies in favor of hospital- and health care professional-focused policies, such as bundled payments, accountable-care organizations, and value-based payments. Their concern was that substantial variation in Medicare spending occurs within geographic regions and high-performing hospitals and health care professionals in low-performing regions would be unfairly penalized by regional policies. To further inform this debate, we compared the amount of spending variation that occurs between regions vs between hospitals.