One of the most influential ideas in all of health policy comes from researchers at Dartmouth, who have shown year after year that there are large variations in Medicare spending across the states, with no apparent effects on health outcomes. The implication: if doctors in the high spending states could learn how to practice medicine the way it is practiced in the low spending states, we could save billions of dollars with no adverse effects on the health of the patients.

For example, when he was director of the Office of Management and Budget (OMB), Peter Orszag wrote an editorial on this very subject in the Wall Street Journal. Referring to the Dartmouth work, Orszag noted:

If we can move our nation toward the proven and successful practices adopted by lower-cost areas and hospitals, some economists believe health-care costs could be reduced by 30% or about $700 billion a year without compromising the quality of care.

Sounds great. But what if it isnt true?

Louise Sheiner of the Brookings Institution has produced a study that challenges the Dartmouth way of thinking from top to bottom. And if the study stands up to academic scrutiny (as I think it will), the entire health policy community is going to have to change the way it has been thinking about health care.

Missing from the Dartmouth analysis, according to Sheiner, is a full appreciation for the way in which states differ. For example, some states are healthier than others and this clearly has an effect on health spending. (See the figure.) Also, states that have a larger portion of the population uninsured or on Medicaid are more likely to shift the fixed costs of an MRI scanner and other equipment to Medicare. Sheiner writes:

places with poor health, high rates of uninsurance, and a large black populationlike Mississippi and Louisianahave high Medicare spending and low non-Medicare spending. Conversely, places with the opposite characteristicslike Vermont and Minnesotahave relatively high non-Medicare spending and low Medicare spending.

So what happens when we adjust for these important differences among the states? A lot of what we thought we knew turns out to be wrong:

Many states that appear to be high-cost, like New York and New Jersey, no longer are once the price, demographic and health variables are included; similarly, Colorado and Montana, which are on the low end of the distribution of unadjusted Medicare spending, appear to be relatively high spenders once the adjustments have been taken into account. [These results] suggest that the cross-state variation in Medicare spending is tightly associated with the characteristics of state populations, and that, once these characteristic are controlled for, the variation in spending is fairly small.

The Sheiner study is similar to an earlier study by Andrew Rettenmaier and Thomas Saving (a former trustee of Medicare). That 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 10 percent. For all health care spending, how much could be saved if every state matched the performance of the five lowest-spending states? Answer: about 5 percent.

More:

Is The Variation In Health Care Spending Among The States A Myth?