Evidence of Inefficiencies in Practice Patterns: Regional Variation in Medicare Medical and Drug Spending

Several studies have explored the causes and magnitude of geographic variation in Medicare spending and service use, but most of these studies have not taken into account that pharmaceuticals may substitute for medical service use. We address this issue using Medicare medical and pharmaceutical administrative claims data to explore the correlation between medical and pharmaceutical spending and utilization; we also examine medical and pharmaceutical use for subsets of the Medicare population with certain chronic conditions often treated with drugs. Beneficiary-level regressions with controls for health status and demographics were used to construct standardized medical spending and pharmaceutical spending and utilization measures for each region and patient cohort. Areas with higher medical spending tend to have higher pharmaceutical spending in general. However, areas with higher medical spending also tend to have lower pharmaceutical spending for conditions for which prescription drugs may substitute for additional medical care. Both of these patterns are consistent with less efficient medical practices in higher-spending areas. Likewise, more expensive drugs and more broad-spectrum antibiotics, which are often considered discretionary and overused, are more likely to be prescribed in higher-spending areas. Our results suggest that care may be provided more efficiently in some regions than in others. However, additional research is needed to investigate relationships between spending and health care outcomes, and what types of policies may create incentives for higher-spending regions to reduce spending without a loss in quality.