Variation in Medicare Spending Narrows as Top-Spenders Cut Costs

Healthcare spending variation has been a major challenge for the industry, but a new study in Health Affairs has found that the gap between high- and low-cost regions is getting smaller based on Medicare spending.

The study conducted by researchers at Weill Cornell Medical College showed that the difference in Medicare price- and risk-adjusted per capita spending between hospital referral regions (HRRs) in the top decile and those in the bottom decile declined from $3,388 in 2007 to $2,916 in 2017— a reduction of $472, or 14 percent.

Reductions in Medicare spending variation observed using HRR-level data from CMS also almost entirely occurred between 2009 and 2014, otherwise known as the early years of the Affordable Care Act (ACA).

“The decline in mean Medicare per capita spending between 2010 and 2014 among both high- and low-spending HRRs, with a steeper decline among high-spending HRRs, may indicate improved efficiency in health care delivery and decreased unnecessary health care use that previously contributed to well-documented geographic variation in spending,” wrote Weill’s research associate Yongkang Zhang and Jing Li, an assistant professor in the Department of Population Health Sciences.

Changes in Medicare spending variation were largely driven by reductions in geographic variation in spending among physician, inpatient, and post-acute care settings, Zhang and Li added.

Additionally, HRRs with a greater supply of post-acute care providers, especially hospice providers, significantly predicted lower spending growth across regions after ACA implementation.

However, the gap between high- and low-spending HRRs stabilized after 2014, which may indicate that health policies enacted after the early years of ACA implementation have been less successful at reducing Medicare spending variation compared to previous reforms.

“For instance, the strong negative association between home health resources and growth rate between 2009 and 2014 likely reflects the effect of several ACA provisions that specifically targeted post-acute settings, including payment cuts and more stringent requirements for home health care,” Zhang and Li explained in the study.

“The fact that this association was no longer significant after 2014 could suggest that these policies may have approached their maximum impact in terms of slowing down the growth rate in post-acute care settings,” the duo continued.

The study’s findings could impact how the next administration crafts health policy reforms aimed at lowering Medicare spending.

As researchers pointed out, early healthcare reform efforts after ACA implementation focused on reducing post-acute care spending, which has been a significant source of Medicare spending variation and higher healthcare costs in general.

Accountable care organizations (ACOs) and other value-based providers have also prioritized the reduction of post-acute care utilization in order to successfully reduce costs and succeed under alternative payment models coming out of the ACA, such as the Medicare Shared Savings Program.

While providers agree that there is still work to be done in post-acute care, efficiencies may have been achieved in that space, creating a need for another look at healthcare reform policies and programs.

CMS is already committed to overhauling the value-based care efforts undertaken by previous administrations.

Only five alternative payment models run by the agency have shown statistically significant savings and only a “handful” have resulted in significant quality improvements, CMS Administrator Seema Verma reported at the Health Care Payment Learning & Action Network’s Virtual Summit last month.

The agency is working on modifying or developing new models that include downside financial risk and more transparent data sharing to make CMS efforts more successful at lowering Medicare spending while improving care quality, the head of the agency stated.

CMS has already started this shift by overhauling the Medicare Shared Savings Program with Pathways to Success and introducing new models, such as Directing Contracting, in which providers and other stakeholders are fully on the line for the total costs of patient populations.

Whether increasing risk levels – which providers have been hesitant to do in the past – can jumpstart further Medicare spending variation reductions remains to be seen.