Why Do Some States Spend More on Health Care?

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from NCPA, by John Goodman

Health care spending varies radically across the 50 states. Massachusetts (at $9,278 per person) spends 84% more that Utah ($5,031), for example.

Another way to compare the states is the way international comparisons are usually made: How much does each state spend on health care as a percent of state income? For example, health care spending in three states — Maine, West Virginia and Mississippi — accounts for one out of every five dollars of state GDP. Conversely, Wyoming spends less than 9 percent. If every state were like Wyoming, the United States as a whole would be spending less of its income on health care than about three-fourths of the other developed countries.

One reason why this may be important is that under the Affordable Care Act reform basically takes place at the state level. Yet the states are clearly very different.

Among the 50 states, however, a study by the National Center for Policy Analysis finds that the public sector exhibits much more variability from state to state than the private sector; public sector medicine, rather than private sector medicine, may be the culprit.

For example, over a 40-year period:

• The variation in Medicaid spending across the 50 states, as a percent of state domestic product, was from two to three times greater than the variation in private sector spending.

• The variation in Medicare spending was from one and a half to two times greater that the variation in private sector spending.

In general, private sector spending is much more similar from state to state than government spending.

Another issue raised by the study is the tendency on the part of some policy analysts to generalize from Medicare data. Researchers at Dartmouth and in a New Yorker article find widespread variation in per capita Medicare reimbursements across the country. In both cases, commentators used these facts to infer that we could save an enormous amount of money if doctors in the high-spending areas practiced medicine the same way as doctors in the low-spending areas.

As for McAllen, Texas, part of the reason for its high Medicare spending is that it has almost four times the national average in “disproportionate share” spending (to compensate for a high volume of uninsured and Medicaid patients). In the private sector, McAllen actually spends less per person than El Paso does.

The evidence reviewed here suggests that if we want the high-spending states to emulate the low-spending states, the place to start is with the public sector, not the private sector.

But it’s more likely that the entire idea is misdirected. Another NCPA study found that 80 percent of the variation in Medicare spending per enrollee could be explained by demographics (age, race, sex, etc.), income, and the uninsured rate. After making adjustments for these variables, the study asked how much money Medicare could save if every state matched the performance of the five lowest-spending states? The answer: about 5-10 percent. And remember, you don’t even get the 5-10 percent savings unless you copy perfectly.

This finding is consistent with other research. A new paper by Louise Sheiner, an economist at the Board of Governors of the Federal Reserve System, concludes that health and socioeconomic factors — e.g., the prevalence of smoking, obesity and diabetes — best explain why health spending in some regions of the country is higher. This is also the view of Richard “Buz” Cooper of the University of Pennsylvania.

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Why Do Some States Spend More on Health Care?