Why Do Some States Spend More on Health Care?

A version of this Health Alert (co-authored with Tom Saving) appeared at the Health Affairs Blog.

Health care spending varies radically across the 50 states. Massachusetts (at $9,278 per person) spends 84% more that Utah ($5,031), for example.

Another way to compare the states is the way international comparisons are usually made: How much does each state spend on health care as a percent of state income? For example, health care spending in three states — Maine, West Virginia and Mississippi — accounts for one out of every five dollars of state GDP. Conversely, Wyoming spends less than 9 percent. (See the table at the end of this post.) If every state were like Wyoming, the United States as a whole would be spending less of its income on health care than about three-fourths of the other developed countries.

One reason why this may be important is that under the Affordable Care Act reform basically takes place at the state level. Yet the states are clearly very different.

By conventional measures, the United States spends considerably more on health care than other countries (although these measures have been challenged). Many believe that the key to why the U.S. spends more lies in the way private sector medicine is practiced across the different states. Among the 50 states, however, a study by the National Center for Policy Analysis finds that the public sector exhibits much more variability from state to state than the private sector; public sector medicine, rather than private sector medicine, may be the culprit.

For example, over a 40-year period:

  • The variation in Medicaid spending across the 50 states, as a percent of state domestic product, was from two to three times greater than the variation in private sector spending.
  • The variation in Medicare spending was from one and a half to two times greater that the variation in private sector spending.

In general, private sector spending is much more similar from state to state than government spending. Overall:

  • Medicare spending ranges from $11,903 per enrollee in New Jersey to $7,576 in Arizona.
  • Medicaid spending ranges from $11,569 per enrollee in Alaska to $4,569 in California.

The two programs also operate very differently from state to state. For example:

  • While 43 percent of beneficiaries are in Medicare Advantage plans (mainly managed care) in Minnesota, the figure is less than 10 percent in Alaska, Delaware, Vermont, Wyoming and New Hampshire.
  • While South Carolina and Tennessee have 100 percent of their Medicaid enrollees in managed care programs, Alaska, New Hampshire and Wyoming have no Medicaid managed care enrollment.

The Limitations of Generalizing From Medicare Data

Another issue raised by the study is the tendency on the part of some policy analysts to generalize from Medicare data. Researchers at Dartmouth find widespread variation in per capita Medicare reimbursements across the country. Atul Gwande made a similar observation in a New Yorker article, comparing high Medicare spending in McAllen, Texas, with lower Medicare spending in El Paso. In both cases, commentators used these facts to infer that we could save an enormous amount of money if doctors in the high-spending areas practiced medicine the same way as doctors in the low-spending areas.

The NCPA study, however, suggests that different types of spending may substitute for each other. In states where there are more uninsured and therefore more unpaid bills, for example, Medicare spending per enrollee is higher. In some states where Medicare spending is high, private sector spending is low and vice versa. For example, Texas is fifth from the top in Medicare spending per enrollee, but the state is fourth from the bottom in per capita private health care spending. On the other hand, Wyoming is seventh from the bottom in Medicare spending per enrollee, but the state is twelfth from the top in per-capita private sector spending.

As for McAllen, Texas, part of the reason for its high Medicare spending is that it has almost four times the national average in “disproportionate share” spending (to compensate for a high volume of uninsured and Medicaid patients). In the private sector, McAllen actually spends less per person than El Paso does.

Challenging an Article of Faith

For some time, an article of faith among many health reformers has been the idea that we can substantially reduce health care spending by having providers in high-spending areas practice medicine the way it is practiced in low-spending areas. The evidence reviewed here suggests that if we want the high-spending states to emulate the low-spending states, the place to start is with the public sector, not the private sector.

But it’s more likely that the entire idea is misdirected. Another NCPA 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.

And remember, you don’t even get the 5 percent unless you copy perfectly.

This finding is consistent with other research. A new paper by Louise Sheiner, an economist at the Board of Governors of the Federal Reserve System, concludes that health and socioeconomic factors — e.g., the prevalence of smoking, obesity and diabetes — best explain why health spending in some regions of the country is higher. This is also the view of Richard “Buz” Cooper of the University of Pennsylvania.


Comments (16)

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  1. Jacob Druisdael says:

    Maine, Mississippi, and West Virginia. Dens of overweight, diabetic, smokers..

    Okay well I get Miss. and West Virginia, they’re both high on smoking and overweight populations. But Maine tops the list, really?

  2. Ralph Weber @ MediBid says:

    Maybe because Maine does not produce a whole lot like Rhode Island?

  3. Desai says:

    I feel like consumption of health care varies from state to state in part because socio-economic and demographic factors.

  4. Patel says:

    Desai brings up a good point, for example Mississippi takes up the highest portion of the budget on health care spending, but lets not forget that Mississippi also has a high poverty rate as well as a high obesity rate.

  5. Kumar says:

    Wow, what is in Wyoming? What are they doing that is right, or what is that they might be doing wrong?

  6. Benedict P. says:

    It is not what is in Wyoming, but what isn’t. And that’s people. And a large government. The population is less than 600,000. Wyoming is also a profitable state for shale gas, meaning tax takes are large considering the population. Also, the state has a great high school graduation rate, low taxes and the least state debt per capita.

    I’m sure what is right in Wyoming correlates highly with the other states that top the list. Those that are missing these characteristics are probably lower on the list.

  7. Gabriel Odom says:

    I concur with Benedict’s assessment. Additionally, as I have mentioned before, Wyoming has very few medical specialists. A large majority of critical patients from Wyoming are flown into Denver or Salt Lake City for care.

  8. Sandeep says:

    I am surprised that California is only 12.5%, considering they tend to go crazy with all kind of expenditures!

  9. Devon Herrick says:

    What I found interesting about the study is that per capita Medicare spending is not highest in the states with the highest per capita medical spending. In other words, the high cost isn’t necessarily just related to regions with higher medical prices or more intensive practice patterns.

  10. Sandeep says:

    I interesting how managed care goes in line with better price point.

  11. Ralph Weber @ MediBid says:

    Devon, Is it per capita, or is it per enrollee? Here’s why I ask….per capita can be misleading. If Montana has 10% medicare eligible and Florida has 20%. Then you have 10 people paying for one vs 5 people paying for one. It makes it a 3 dimensional model.

  12. Ralph Weber @ MediBid says:

    Sandeep, the reason is that CA has so many mandates on individual health insurance, and once someone is approved EVERYTHING must be covered that they have a much greater decline rate than a state which is permitted to rider out a condition or medication

  13. Singh says:

    Public cost varies from state to state because state politics changes more frequently, private health care is mostly immune of politics, or atleast more so than Public health care providers.

  14. Ryan says:

    An overhaul of the entire system is necessary because no state is a model when comparing costs

  15. Ronald says:

    Informative post, thanks John. I wonder what price variances will look like in the next decade or so, assuming the ACA remains in place.

  16. Wanda J. Jones says:

    John and Friends–This is a very useful update. It’s frustrating to hear liberals jump on hospital prices as though they and they alone explain high insurance premiums.

    Really–not ony do policy people not know these facts, but the public knows many facts that are just wrong. Can you aim this at more general leadership than us nerds of policy?

    Another factor worth comparing is labor costs among the various states–especially across right to work states and unionized states.

    And another is the ratio of physicians to population–the more you have the more they will work to generate income in a saturated market.

    On another note: it’s fun to see the crumbling Democratic support for the PPACA.

    Pray for repeal…

    Wanda J. Jones, President
    New Century Healthcare Institute
    San Francisco