Solving One Social Problem of Medicare on a Macro Level

Introduction

There is far-flung disagreement on how Medicare should be fixed. One approach is to crystallise incremental changes in Medicare policy and hope for moderation in future Medicare expenditures, either because of court-containment mechanisms within the Medicare system or sociable spillover effects from private-sector cost-cutting initiatives. The recent balanced-budget agreements reached by President Clinton and the Congressional leadership followed this approach: across-the-board reductions in hospital and managed care reimbursements a foresightful with unspecified future cost saving.

The second approach is to encourage the migration of Medicare enrollees to managed care, and thereby reduce the billet of Medicare to unitary of simply negotiating risk-adjusted annual capitation payments, with perhaps a residual role in the fee-for-service market. A third approach proposes turning Medicare into a financial assistance or voucher program (Aaron and Reischauer, 1995). In this approach, competition for Medicare dollars among private insurance companies would hold back cost increases and offer a menu of health plans to enrollees.

We argue that none of these three proposals deals directly with a primitive problem in the Medicare program--the enormous geographic disparity in Medicare spending across the United States. Average 1994-5 Medicare reimbursements per enrollee were $8,537 in Miami and only $3,300 in Minneapolis.



There are a flesh of perfectly good reasons why such disparities exist, including differences in everyday costs of living, the age structure of the population, and health status. We show, however, that even subsequently adjusting for age, sex, race, price, and illness related factors, major variations in Medicare spending persist. Thus, we heighten on the supply side of how physicians and hospitals in different regions raise very different levels of resources to people with what appear to be comparable health problems.

While such variations have long been recognized in the health services research literature, a different question is, how important are...

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