How will provider-focused payment reform impact geographic variation in Medicare spending?

The Institute of Medicine has recently argued against a value index as a mechanism to address geographic variation in spending and instead promoted payment reform targeted at individual providers. It is unknown whether such provider-focused payment reform reduces geographic variation in spending.

We estimated the potential impact of 3 Medicare provider-focused payment policies-pay-for-performance, bundled payment, and accountable care organizations-on geographic variation in Medicare spending across Hospital Referral Regions (HRRs). We compared geographic variation in spending, measured using the coefficient of variation (CV) across HRRs, between the baseline case and a simulation of each of the 3 policies.

Policy simulation based on 2008 national Medicare data combined with other publicly available data.

Compared with the baseline (CV, 0.171), neither pay-for-performance nor accountable care organizations would change geographic variation in spending (CV, 0.171), while bundled payment would modestly reduce geographic variation (CV, 0.165).

In our models, the bundled payment for inpatient and post acute care services in Medicare would modestly reduce geographic variation in spending, but neither accountable care organizations nor pay-for-performance appear to have an impact.