IOM also  found that price is a major determinant of geographic variation in the  private sector, and estimated that, after adjusting for underlying costs,  price accounted for 70 percent of the geographic variation in private  sector spending. In addition, IOM found that private  sector utilization varied more for some service types than others. Variation in the prices  and volume of physician and other services together accounted for less  than one-tenth of the variation in episode spending. Episode Spending Was 74 to 94 Percent Higher in Highest- Compared with Lowest-Spending Areas, with High- Spending Areas Generally High for All Three Procedures Episode Spending Was 74 to 94 Percent Higher in the Highest- Compared with Lowest-Spending Areas, Depending on Procedure

We noted variation in episode spending across MSAs for all three  procedures, even after adjusting for geographic differences in the cost of  doing business and differences in demographics and health status of  enrollees in each MSA. Average adjusted episode spending for MSAs in the  highest-spending quintile was about 84 percent and 74 percent higher  than for MSAs in the lowest-spending quintile, respectively. High-Spending Areas Generally Were High- Spending for All Three Procedures

MSAs with higher spending on one procedure generally had higher  spending on the other two procedures. 2.) Price per Initial Inpatient Admission Was Largest Contributor to Geographic Differences in Episode Spending

The price of the initial hospital inpatient admission was the largest  contributor to differences in private sector episode spending across  MSAs. Differences in the price of the initial admission accounted for   91 percent or more of the difference in average adjusted episode  spending between the lowest- and highest-spending quintiles. First,  the price of the initial admission represented the largest percentage of  adjusted episode spending. For  example, for total hip replacement, the price of the initial admission was  $17,134, representing 76 percent of the $22,463 in total episode  spending for MSAs in the lowest-spending quintile and $30,332,  representing 82 percent of the $36,969 in total episode spending for  MSAs in the highest-spending quintile. Second, the average price of the  initial inpatient admission varied considerably across MSAs.difference in the price of the initial inpatient admission in MSAs in the  lowest- and highest-spending quintiles ranged from 77 percent to 121  percent, depending on the procedure. Agency Comments

We provided a draft of this product to the Department of Health and  Human Services, which did not comment on our findings but provided  technical comments. Creating Episodes of Care from Private Health Insurance Claims Data

We created episodes of care based on inpatient admissions for three  procedures—coronary stent placement, laparoscopic appendectomy, and  total hip replacement—using private health insurance claims and  enrollment data from the Truven Health Analytics MarketScan®  Commercial Claims and Encounters Database for 2009 and 2010. We also examined whether MSAs in  the lowest- and highest-spending quintile were concentrated in particular  regions of the nation. Analyzing Volume, Intensity, and Price of Services

To examine how the other components of spending contribute to variation  in episode spending for private payers, we analyzed volume, intensity,  and price of services for hospital inpatient and professional services. Appendix III: Distribution of Episode Spending

Number of metropolitan statistical areas (MSA)

Appendix IV: Episode Spending, by Procedure, for Metropolitan Statistical Areas in Lowest- and Highest-Spending Quintiles

This appendix presents average adjusted episode spending for each of  the three procedures we analyzed—coronary stent placement,  laparoscopic appendectomy, and total hip replacement—by service  category for metropolitan statistical areas (MSA) in the lowest- and  highest-spending quintiles.
Why GAO Did This Study

Research shows that spending on health care varies by geographic area and that higher spending in an area is not always associated with better quality of care. While a substantial body of research exists on geographic variation in spending in Medicare, less research has been done on variation in private sector health care spending, although this spending accounts for about a third of overall health care spending. As U.S. health expenditures continue to rise, policymakers and others have expressed interest in better understanding spending variation and how health care systems can operate efficiently—that is, providing equivalent or higher quality care while maintaining or lowering current spending levels.
GAO was asked to examine geographic variation in private sector health care spending. GAO examined (1) how spending per episode of care for certain high-cost procedures varies across geographic areas for private payers, and (2) how the mix of service types, and the volume, intensity, and price of services contribute to variation in episode spending across geographic areas for private payers. Using a large private sector claims database for 2009 and 2010, GAO examined spending by MSA for episodes of care for three commonly performed inpatient procedures and examined spending by hospital inpatient, hospital outpatient, postdischarge, professional, and ancillary service categories. For inpatient and professional services, GAO examined the volume, intensity, and price of services. GAO's findings may not be generalizable to all private insurers due to data limitations.

What GAO Found

Spending for an episode of care in the private sector varied across metropolitan statistical areas (MSA) for coronary stent placement, laparoscopic appendectomy, and total hip replacement, even after GAO adjusted for geographic differences in the cost of doing business and differences in enrollee demographics and health status. MSAs in the highest-spending quintile had average adjusted episode spending that was 74 to 94 percent higher than MSAs in the lowest-spending quintile, depending on the procedure. MSAs with higher spending on one procedure generally had higher spending on the other two procedures. High- or low-spending MSAs were not concentrated in particular regions of the nation.
The price of the initial hospital inpatient admission accounted for 91 percent or more of the difference in episode spending between MSAs in the lowest- and highest-spending quintiles. The price of the initial admission was the largest contributor to the difference for two reasons. First, it represented the largest percentage of adjusted episode spending. For example, for total hip replacement, the average price of the initial admission was $17,134, representing 76 percent of the $22,463 in total episode spending for MSAs in the lowest-spending quintile and $30,332, representing 82 percent of the $36,969 in total episode spending for MSAs in the highest-spending quintile. Second, the price of the initial admission varied considerably across MSAs. For MSAs in the highest-spending quintile, the average price of the initial admission for total hip replacement was 77 percent higher than for MSAs in the lowest-spending quintile. Professional services—office visits and other services provided by a physician or other health professional—were the second largest contributor to geographic differences in episode spending, but accounted for 7 percent or less of the difference in episode spending between MSAs in the lowest- and highest-spending quintiles. (See table.) MSAs in the highest-spending quintile had higher average prices and intensity (a measure of the resources needed to provide a service) but fewer services (volume) than MSAs in the lowest-spending quintile for all three procedures.
The Department of Health and Human Services provided technical comments on a draft of this report, which were incorporated as appropriate.