Standardizing Medicare payment information to support examining geographic variation in costs

Examination of efficiency in health care requires that cost information be normalized. Medicare payments include both geographic and policy-based facility type differentials (e.g., wage index and disproportionate share hospital), which can bias cost comparisons of hospitals and averages across geographic areas. Standardizing payment information to remove the area- and policy-based payment differentials should normalize much of the observed geographic variability in payments, allowing for a more accurate comparison of resource use between providers and across geographic regions. Use of standardized payments will ensure that observed payment variation is due to differences in practice patterns and service use, rather than Medicare payment differences over which the providers have no control. This paper describes a method for standardizing claim payments, and demonstrates the difference in actual versus standardized payments by geographic region.

We used a nationwide cohort of Medicare patients hospitalized with an acute myocardial infarction (AMI) in 2007, then limited our study to those with Medicare Part A and Part B fee-for-service (FFS), and Part D coverage (n = 143,123). Standardized payment amounts were calculated for each Part A and Part B claim; standardized and actual payments were summed for all services for each patient beginning with the index hospitalization through 12 months post discharge.

Without standardization of payments, certain areas of the country are mischaracterized as either high or low healthcare resource-consuming areas. The difference between actual and standardized payments varies by care setting.

Standardized payment amounts should be calculated when comparing Medicare resource use across geographic areas.