Acumen Medicare Medicaid

NOTE:
These materials were prepared by subcontractors for consideration

by the Committee on Geographic Variation in H ealth Care Spending
and Promotion of High-value Care . These analyses were
commissioned and overseen by the Committee. However, the
findings and views expressed in the subcontractor reports do not
necessarily reflect those of the NRC/IOM or the Committee.
Neither the methodology nor the subcontractor reports have been
subject to formal institutional review for the Interim Report. As the
committee continues to review the findings from the analyses
contained herein, we invite you to provide feedback on the content of
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Geographic Variation in Spending,
Utilization and Quality:
Medicare and Medicaid Beneficiaries
May 2013
Thomas MaCurdy
Jay Bhattacharya
Daniella Perlroth
Jason Shafrin
Anita Au-Yeung
Hani Bashour
Camille Chicklis
Kennan Cronen
Brandy Lipton
Shahin Saneinejad
Elen Shrestha
Sajid Zaidi
Acumen, LLC
500 Airport Blvd., Suite 365
Burlingame, CA 94010
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EXECUTIVE SUMMARY
A large body of research indicates that there exists significant regional variation in health
care spending, utilization, and quality. For instance, the Dartmouth Atlas found that per capita
Medicare reimbursements in Miami were more than twice as high as in Minneapolis.1 Other
studies have also found significant variation in expenditures for end-of-life care and in the
likelihood that individuals are diagnosed with a specific disease.2 In the popular media, Atul
Gawandes article in the New Yorker magazine further advanced the notion that variation in
physicians chosen practice patterns drives variation in Medicare costs observed even in cities
close to one another.3 Gawande uses the Texan cities of McAllen and El Paso to highlight this
point. By first identifying the source of this geographic variation, policymakers can potentially
develop and implement initiatives to alter practice patterns in high-cost areas.
This study contributes to this debate by examining geographic variation in the volume
and intensity of per capita health care services and spending for both Medicare and Medicaid
beneficiaries. This project was undertaken under the direction of the Institute of Medicine
(IOM) and includes the analyses performed at their behest. This study does not necessarily
reflect Acumens own analytic approach but rather was designed to follow specifications
required by IOM to promote consistency across contractors. This report therefore presents a
comprehensive set of results that examine myriad issues underlying regional differences in
Medicare and Medicaid spending. Specifically, this report aims to answer the following research
questions:
1. How much geographic variation exists in per capita volume of healthcare services?
2. Are regions with high utilization levels likely to have high utilization rates in the
future?
3. Is the variation in the volume of medical services greater within or across regions?
4. Do regions that provide a high volume of medical services when treating beneficiaries
for a given disease also provide a high volume of medical services when treating all
other diseases?
5. What types of services are the primary drivers of regional variation in the utilization
of medical services?
6. Are areas with high utilization levels more likely to have high quality care?
1
The Center for the Evaluative Clinical Services and Dartmouth Medical School, The Dartmouth Atlas of Health
(Chicago: American Hospital Publishing, Inc., 1996).
2
Y Song et al., "Regional Variations in Diagnostic Practices," New England Journal of Medicine 2010, no. 363
(2010).
3
Atul Gawande, "The Cost Conundrum: What a Texas town can teach us about health care," New Yorker(June
2009), http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande.
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7. Are regions with high utilization levels in Medicare likely to have high utilization
levels in Medicaid?
To answer these questions, this report relies on claims data covering the universe of Medicare
and Medicaid fee-for service beneficiaries. In addition to producing a wealth of statistics that
researchers can use for future studies, this report also directly evaluates the eight research
questions posed above.
Methodological Approach
This study measures each regions average per capita Medicare and Medicaid
expenditures and utilization of medical services between 2007 and 2009. Calculating these
values requires four steps:
1. Measuring healthcare spending and utilization

2. Identifying beneficiary cohorts of interest
3. Defining a region
4. Accounting for regional variation in patient case mix.
Although the following discussion describes how this study applies these steps to the analysis of
regional variation in Medicare spending, the methodology used for the Medicaid analysis relies
on a similar approach.
To quantify the amount of geographic variation in the provision of health care services,
this study first examines regional variation in both health care expenditures and utilization.
Expendituresmeasured on a per capita basisinclude cost incurred by both Medicare and the
beneficiary. To evaluate regional differences in utilization patterns, this study measures regional
variation in price-standardized spending levels. Input price standardization removes geographic
variation in the price of inputs, such as labor costs, and allows for an assessment of changing
patterns of utilization overall. In addition to analysis of the overall input price adjusted
expenditures, this study also analyzes the input price adjusted expenditures stratified by seven
medical service categories, such as acute hospitalization or diagnostic services, to determine if
regional variation overall is similar to regional variation for specific types of services.
After defining the spending and utilization measures of interest, the second step of the
methodology next defines the beneficiary of interest as both an aggregate cohort and cohorts of
beneficiaries with specific health conditions. The aggregate cohort includes all Medicare
beneficiaries that enrolled in Medicare fee-for-services (FFS). In addition to the aggregate
cohort, this study includes 15 condition cohorts selected by the Institute of Medicine (IOM)
Committee based on a variety of factors including disease prevalence, disease incidence, costs of
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treatment, and the likelihood of regional variation in the course of treatment due to variation in
demand-side or supply-side factors. The chosen conditions include both acute and chronic
conditions and three incident cancers. The acute conditions include acute/ischemic stroke, acute
myocardial infarction (AMI), pneumonia, cataracts, and cholecystectomy. The acute condition
cohorts cholecystectomy and cataracts are defined, in part, using procedures. The chronic
conditions include diabetes, rheumatoid arthritis, depression, congestive heart failure (CHF),
coronary heart disease (CHD), chronic obstructive pulmonary disease (COPD), and low back
pain. The three cancer cohortsbreast cancer, lung cancer, and prostate cancerinclude
beneficiaries newly diagnosed with cancer.
To measure regional variation in spending and utilization levels for each of these cohorts,
the third step defines a region as a hospital referral region (HRR). The Dartmouth Atlas
defines 306 HRRs based on referrals for surgical procedures and neurosurgery. Each HRR
contains at least one city where both major cardiovascular surgical procedures and neurosurgery
are available. To assign beneficiaries to regions, the analysis uses the beneficiary ZIP code at the
beginning of a given year. If the beneficiarys ZIP code changes during an episode, all claims are
assigned to the ZIP code at the beginning of the episode because moving is considered to be
within the set of treatment options for beneficiaries in the original ZIP code. Beneficiary-level
data is aggregated to the ZIP code level and then to the HRR level. Regional variation in
expenditures and utilization is also examined by hospital service area (HSA) and metropolitan
statistical area (MSA); however, these results are not included in this report.
Although many of the analyses in this study use the first three steps to create measures of
geographic variation in spending and utilization, in the fourth and final step this study applies a
risk adjustment methodology to control for regional differences in patient case mix. The risk
adjustment framework accounts for differences in beneficiary demographics and severity of
illness andin certain specificationsmarket-level factors as well. The general risk adjustment
methodology uses a linear ordinary least squares regression model to predict the value of the
outcome variable given a set of observable beneficiary characteristics. This study gathers
beneficiary-level information from Medicare claims to account for patient case mix. The risk
adjustment model includes the following independent variables: beneficiary age, sex, health
status (HCCs), income/pharmacy benefit, partial-year enrollment, the interaction between age
and sex, a new enrollee indicator, and an indicator for the year of analysis. The region-level
value of the risk-adjusted outcome value equals the average difference between the observed
levels of the outcome value and the values predicted by the risk adjustment model.
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Not only does there exist significant variation in healthcare service utilization across
regions, but high-cost regions are likely to remain high-cost over time. Between 2007 and 2009,
relative utilization levels across HRRs are stable over time for both the Medicare and Medicaid
programs. The correlation between an HRRs per capita Medicare utilization ranking for a given
year and its per capita Medicare utilization ranking in subsequent years ranges from 0.95 to 0.97.
Medicaid utilization also is fairly stable over time, but year-to-year correlations are weaker for
Medicaid than for Medicare. The year-to-year correlations of an HRRs Medicaid utilization
range from 0.74 to 0.90. To better illustrate the stability of HRR utilization levels over time,
Figure 3 plots each HRRs mean Medicare utilization rank in 2007 against the HRRs mean
Medicare utilization rank in 2008; Figure 4 plots the same information for each HRRs average
per capita Medicaid utilization level. These figures clearly indicate that relative medical service
volume across HRRs is stable over time; random variation is unlikely to generate outlier HRR
average per capita utilization levels.
Figure 1: HRR Utilization Rank 2007-2008, Medicare
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Figure 2: HRR Utilization Rank 2007-2008, Medicaid
Larger Variation in Utilization Levels Within HRRs than Across HRRs
Within-HRR variation in spending and utilization is significantly larger than the across-
HRR variation for both Medicare and Medicaid. The average standard deviation of per-capita
utilization for beneficiaries within each HRR is $1,621, whereas the standard deviation of
average Medicare utilization levels across HRRs is $84. In other words, variation in utilization
levels for beneficiaries within an HRR is over nineteen times greater than the variation in
utilization for the average patient across HRRs. The findings from the Medicaid analysis are
comparable. The average standard deviation within HRRs of price-standardized risk-adjusted
Medicaid expenditures is $2,446, whereas the standard deviation of average Medicaid costs
across HRRs is $334. For Medicaid, variation in patient utilization for patients within an HRR is
over seven times greater than the variation in utilization for the average patient across HRRs.
Variability both within- and across-HRR is larger for an HRRs Medicaid per capita utilization
figures than the corresponding Medicare per capita utilization figures.
High Cost Users are the Key Drivers of Regional Variation in Spending
This report presents two pieces of evidence indicating that regional variation in spending
is due primarily to the relative amount of resources used to treat the most expensive beneficiaries
rather than the cost of treating a typical beneficiary. The first piece of evidence is that
Medicare and Medicaid cost distributions are highly right-skewed. The median Medicare cost
($310) is far below the mean cost ($964). The right-skewed nature of the Medicare per capita
spending level persists even after removing variation due to regional differences in prices, patient
demographics, and observed beneficiary severity of illness. For the aggregate Medicare cohort,
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the median price-standardized monthly cost is $729, while the average cost is $958, showing that
adjusted Medicare spending levels are still heavily right-skewed, but not as much as the
unadjusted numbers. Similarly, the median Medicaid cost ($309) is far below the mean cost
($1,096) and the median price-standardized monthly Medicaid cost is $733, while the mean cost
is $1,094.
Not only are median costs significantly below mean costs for both Medicare and
Medicaid, but an HRRs average per capita utilization levels are much more highly correlated
with the utilization levels of high-cost beneficiaries in that HRR than the utilization of the typical
beneficiary in that HRR. For the period 2007 to 2009, Figures 5 and 6 plot each HRRs rank by
mean utilization level against its rank by median utilization levels for Medicare and Medicaid
respectively; Figure 7 and Figure 8 plot HRR rank by mean utilization level versus its rank by its
resource use intensity for treating beneficiaries at the 90th percentile. Although there is a
moderate level of correlation between an HRRs mean and median Medicare utilization levels,
the relationship is weak in general. The relationship between the mean and the 90th percentile
rank, however, is much stronger. The same qualitative relationship exists for the Medicaid
analysis as well. These figures illustrate that stability of average HRR utilization levels across
years is due to the persistence in the cost of treating the highest-cost beneficiaries rather than the
cost of treating beneficiaries at the median.
Figure 3: Medicare Utilization Levels by HRR, Mean vs. Median
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Figure 4: Medicaid Utilization Levels by HRR, Mean vs. Median
Figure 5: Medicare Utilization Levels by HRR, Mean vs. 90th Percentile
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Figure 6: Medicaid Utilization Levels by HRR, Mean vs. 90th Percentile
The Importance of Post-Acute Care
The use of post-acute care services is the main driver of HRR-level variation in
utilization levels for both Medicare and Medicaid. To demonstrate that this is the case, Figures 9
and 10 plot total cost residuals against post-acute and acute care (i.e., inpatient) residuals for
Medicare and Medicaid, respectively. These figures calculate the residual utilization levels as the
difference between the observed per capita utilization on each service category and the expected
per capita utilization levels based on patient case mix. A positive residual for a given service
indicates that utilization of that service is higher than expected based on patient case mix, while a
negative residual indicates that utilization of that service is lower than expected. From left to
right on the x-axis, the HRRs are ordered from lowest to highest (risk-adjusted) utilization levels.
Based on these graphs, one can clearly see that HRRs that have the lowest total cost
residuals (on the left) are more likely to have the lowest post-acute cost residuals, and HRRs that
have the highest total cost residuals (on the right) are more likely to have the highest post-acute
cost residuals. The relationship between overall spending and acute care services is not only
much weaker, but the residuals are of a smaller magnitude. Figure 10 shows that post-acute
services are also the main driver of regional variation in Medicaid utilization levels. Additional
analysis indicates that the use of home health services is the key driver of regional variation in
Medicare post-acute spending.
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Figure 7: Post-Acute and Acute Average Price-Standardized Residuals, Medicare
Figure 8: Post-Acute and Acute Average Price-Standardized Residuals, Medicaid
Regional Variation in Medicare Advantage Expenditures
This report also examines regional variation in Medicare expenditures for beneficiaries
enrolled in Medicare Advantage (MA). The following summarizes the main findings of the
Medicare Advantage analysis:
Average per capita MA expenditures are higher than average per capita FFS
expenditures ($986 and $958, respectively).
MA expenditures per person are less variable than FFS expenditures (with standard
deviations of $414 and $1,695, respectively).
Regions that are high- or low-cost in one year tend to be similarly high- or low-cost in
the next. The correlation between an HRRs per capita MA expenditures in 2007 and
its per capita MA expenditures in 2009 is 0.94.
HRRs with more MA plan competition do not necessarily have lower MA premiums.
The correlation between an HRRs per capita FFS and MA expenditures is 0.66
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Figure 11 shows the average monthly price-standardized risk adjusted expenditures for each
HRRs MA and FFS beneficiaries between 2007 and 2009. The close relationship between an
HRRs FFS and MA spending is due to the fact that CMS relies, in part, on countys historical
FFS spending to determine current MA plan reimbursement.
Figure 9: Average Monthly Price-Standardized Risk Adjusted Spending, MA vs. FFS
No Consistent Relationship between Quality and Utilization of Medical Services
An HRRs average use of medical resources, at an aggregate level, has no relationship to

quality. Consider the relationship between aggregate quality measured using Agency for
Healthcare Research and Quality (AHRQ) quality indicator composite scores. A correlation
analysis indicates the regions with high per-capita Medicare utilization are likely to have lower
inpatient mortality rates, but higher levels of avoidable hospital admissions and slightly higher
levels of avoidable complications and iatrogenic events. Figure 12 below displays this latter
relationship between the number of risk-adjusted potentially avoidable complications and
iatrogenic eventsmeasured using AHRQs Patient Safety Indicators (PSI) composite score
and Medicare price-standardized risk-adjusted spending. For Medicaid beneficiaries, there also
is no consistent relationship between quality of care and resource use across a variety of quality
measures.
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Figure 10: Positive Correlation between Medicare Utilization and Avoidable Complications
Medicare and Medicaid Utilization Levels are Uncorrelated
Regions that exhibit high utilization of Medicare services do not necessarily have high
utilization levels of Medicaid services. Using the price-standardized, risk adjusted cost from
2007 through 2009, Figure 13 presents each HRRs per capita resource use level rankings for
Medicare beneficiaries on the horizontal axis and resource use ranks for Medicaid beneficiaries
on the vertical axis.4 The graph shows almost no relationship between Medicare and Medicaid
utilization levels. In fact, the correlation between an HRRs Medicare and Medicaid resource
use is -0.07, indicating that HRRs with high per capita Medicare utilization levels are no more
likely to have high per capita Medicaid utilization levels than any other HRR.
4
The size of the bubble that represents each HRR is proportional to the number of Medicaid episodes in the
aggregate cohort in that HRR from 2007 through 2009.
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Figure 11: Comparing Medicare and Medicaid Utilization by HRR
Summary of Findings
This report presents several interesting findings regarding regional variation in Medicare
and Medicaid spending and utilization. Variation in spending and utilization across regions is
large, but variation among beneficiaries within each HRR is substantially larger than variation
across HRRs. For both Medicare FFS and Medicaid beneficiaries, an HRRs average per capita
resource utilization level is relatively stable over time; high utilization regions tend to remain so
across years. This strong year-to-year correlation, however, is not driven by similar treatment
patterns for the typical patient over time; rather the correlation is due in large part to
persistence in the cost of treating the highest-cost beneficiaries over time. Further, areas with
high resource intensity overall do not necessarily use more of all types of services. Despite this
fact, the use of post-acute care is a key predictor of HRR utilization levels for both the Medicare
FFS and Medicaid analysis. Finally, there exists practically no relationship between the
utilization levels of an HRRs Medicare FFS beneficiaries and the utilization levels of an HRRs
Medicaid beneficiaries. Table 1 presents some key statistics that support the major findings of
this report.
Table 1: Regional Variation in Spending, Utilization and Quality, Medicare vs. Medicaid
Research
Question Research Question Description Medicare Findings Medicaid Findings
Number
Variation in Spending Across All Average Cost : $958 Average Cost: $1,094
1
Beneficiaries Standard Deviation: $1,695 Standard Deviation: $2,767
Correlation: HRR Utilization
2 0.97 0.90
Levels Over Time (2007 - 2008)
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Research
Number
Standard Deviation Within vs. Within: $1,621 Within: $2,446
3
Across HRRs Across: $84 Across: $334
Spending Correlation Across
4 0.23 - 0.95 0.17 - 0.94
Cohorts (Range of Correlations)
Primary Service Type Driving Post-acute care
5 Post-acute care
Regional Variation (including all nursing home)
Correlation: Utilization and Patient
6 -0.09 0.24
Safety Indicator composite score5
Correlation: Medicare and
7 -0.07
Medicaid Utilization by HRR
5
Positive numbers indicate higher spending is correlated with higher quality
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TABLE OF CONTENTS
Executive Summary ....................................................................................................................... i
1 Introduction ........................................................................................................................... 1
2 Construction of Aggregate and Condition-Specific Beneficiary Cohorts ........................ 4
2.1 Medicare Data Sources, Exclusions, and Population........................................................ 4
2.1.1 Medicare Data Sources ............................................................................................... 4
2.1.2 Medicare Exclusions ................................................................................................... 5
2.1.3 Medicare Population Summary Statistics ................................................................... 6
2.2 Medicaid Data Sources, Exclusions, and Population........................................................ 7
2.2.1 Medicaid Data Sources ............................................................................................... 8
2.2.2 Medicaid Exclusions ................................................................................................... 9
2.2.3 Medicaid Population Summary Statistics ................................................................. 11
2.3 Cohort Definitions .......................................................................................................... 12
2.3.1 Criteria for Beneficiary Inclusion in Each Condition Cohort ................................... 13
2.3.2 Identifying the Start of an Episode ........................................................................... 14
2.3.3 Defining the Observation Period .............................................................................. 15
2.3.4 Challenges to Condition Cohort-Based Approach .................................................... 16
3 Measuring of Regional Variation in Health Care Spending, Utilization and
Quality .................................................................................................................................. 19
3.1 Measurement of Health Care Expenditures .................................................................... 19
3.2 Measurement of Health Care Utilization ........................................................................ 21
3.2.1 Price Standardized Cost ............................................................................................ 21
3.2.2 Counts of Service Utilization .................................................................................... 23
3.3 Measurement of Health Care Quality ............................................................................. 23
3.4 Defining a Region ........................................................................................................... 25
4 Accounting for Differences in Patient Case Mix .............................................................. 26
4.1 Risk Adjustment Model Framework ............................................................................... 26
4.2 Independent Variables Used in the Risk Adjustment Model .......................................... 29
4.2.1 Beneficiary-Level Characteristics ............................................................................. 29
4.2.2 Market-Level Characteristics .................................................................................... 31
5 Geographic Variation in Medicare Spending and Utilization ........................................ 33
5.1 Variation in Spending ..................................................................................................... 33
5.2 Stability of Medical Service Volume over Time ............................................................ 36
5.3 Variation in Volume of Medical Services Within and Across Regions ......................... 39
5.4 Variation in Volume of Medical Services Across Condition Cohorts ............................ 43
5.5 Variation in the Use of Specific Healthcare Services ..................................................... 45
5.5.1 Defining Service Categories ..................................................................................... 45
5.5.2 Relationship between Overall and Service-Specific Utilization Levels ................... 46
5.5.3 Relationship between Post-Acute Components ........................................................ 49
5.5.4 Regional Variation in the Use of Specific Healthcare Services................................ 50
6 Geographic Variation in Medicaid Spending and Utilization ........................................ 52
6.1 Variation in Spending ..................................................................................................... 52
6.2 Stability of Medical Service Volume over Time ............................................................ 54
6.3 Variation in Volume of Medical Services Within and Across Regions ......................... 59
6.4 Variation in Volume of Medical Services across Condition Cohorts ............................. 61
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6.5 Variation in the Use of Specific Healthcare Services ..................................................... 63
6.5.1 Defining Service Categories ..................................................................................... 63
6.5.2 Relationship between Overall and Service-Specific Utilization Levels ................... 64
6.5.3 Regional Variation in the Utilization of Specific Healthcare Services..................... 67
6.6 Variation in Volume of Medical Services between Medicare and Medicaid ................. 68
7 Summary of Findings ......................................................................................................... 70
7.1 Geographic Variation in the Use of Medicare Services.................................................. 70
7.2 Geographic Variation in the Use of Medicaid Services.................................................. 71
References .................................................................................................................................... 73
Appendix A : Cohort Definitions ............................................................................................... 79
A.1 Clean Period Requirements............................................................................................. 79
A.2 Condition Algorithms ..................................................................................................... 80
A.3 Condition Codes.............................................................................................................. 82
A.4 Cancer Cohort Methodology........................................................................................... 88
A.5 Medicare Exclusion Restrictions .................................................................................... 90
Appendix B : Outcome Measure Specification ........................................................................ 92
B.1 Medicaid Input Price Standardization Methodology ...................................................... 92
B.1.1 Inpatient and Long Term Care Files ......................................................................... 92
B.1.2 Other Therapy File .................................................................................................... 92
B.1.3 Prescription Drug File ............................................................................................... 93
B.2 Service Categories .......................................................................................................... 94
B.3 Utilization Counts ........................................................................................................... 96
B.4 Condition-Specific Quality Measures ........................................................................... 100
B.5 Composite Quality Measures ........................................................................................ 108
Appendix C : Risk Adjustment Specifications ....................................................................... 109
C.1 Composition of Risk Adjustment Clusters for Medicare Analysis ............................... 109
C.2 Composition of Risk Adjustment Clusters for Medicaid Analysis............................... 110
C.3 Beneficiary-Level Characteristics ................................................................................. 111
C.4 Market-Level Characteristics ........................................................................................ 113
Appendix D : Supplementary Statistics For AMI, CHD, Diabetes, and Stroke
Cohorts Medicare........................................................................................................... 114
D.1 Variation in Medicare Spending Across the Nation ..................................................... 114
D.2 Stability of Medicare Service Volume over Time ........................................................ 117
D.3 Variation in Volume of Medicare Services Within and Across Regions ..................... 118
D.4 Service Categories Driving Medicare Results .............................................................. 119
D.5 Variation in Volume of Medicare Services Across Cohorts ......................................... 121
D.6 Variation in Medicare Quality of Care across Cohorts ................................................. 122
D.7 Relationship between Medicare Utilization and Quality of Care ................................. 124
Appendix E : Supplementary Statistics For AMI, CHD, Diabetes, and Stroke
Cohorts Medicaid ........................................................................................................... 126
E.1 Variation in Medicaid Spending Across the Nation ..................................................... 126
E.2 Stability of Medicaid Service Volume over Time ........................................................ 127
E.3 Variation in Volume of Medicaid Services Within and Across Regions ..................... 129
E.4 Service Categories Driving Medicaid Results .............................................................. 130
E.5 Variation in Volume of Medicaid Services Across Cohorts ......................................... 132
E.6 Variation in Medicaid Quality of Care Across Cohorts................................................ 132
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E.7 Relationship between Medicaid Utilization and Quality of Care ................................. 135
Appendix F : Geographic Variation in Spending for Medicare Advantage
Beneficiaries....................................................................................................................... 137
F.1 Medicare Advantage Payment Policy Overview .......................................................... 137
F.1.1 Medicare Advantage Enrollment and Spending ..................................................... 138
F.1.2 Payments to Medicare Advantage Plans ................................................................. 139
F.2 Methodology for Measuring Regional Variation in MA Spending .............................. 141
F.2.1 Data Sources ........................................................................................................... 141
F.2.2 Beneficiary Cohort Definitions ............................................................................... 142
F.2.3 Measures of Health Care Expenditures................................................................... 145
F.2.4 Risk Adjustment Econometric Specification .......................................................... 148
F.3 Results of Medicare Advantage Analysis ..................................................................... 151
F.3.1 Spending Variation is Smaller for MA Beneficiaries than FFS Beneficiaries ....... 151
F.3.2 MA Expenditures Stable over Time........................................................................ 156
F.3.3 Relationship between Plan Competition and MA Expenditures............................. 158
F.3.4 Positive Correlation between an HRRs MA and FFS Expenditures ..................... 161
F.4 Summary of Medicare Advantage Findings ................................................................. 162
F.5 MA References ............................................................................................................. 162
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1 INTRODUCTION
A large body of research indicates that there exists significant regional variation in health
care spending, utilization and quality. For instance, the Dartmouth Atlas found that per capita
Medicare reimbursements in Miami were more than twice as high as in Minneapolis.6 Other
studies have also found significant variation in expenditures for end-of-life care and in the
likelihood that individuals are diagnosed with a specific disease.7 In the popular media, Atul
Gawandes article in the New Yorker magazine further advanced the notion that variation in
physicians chosen practice patterns drives variation in Medicare costs observed even in cities
close to one another.8 Gawande uses the Texan cities of McAllen and El Paso to highlight this
point. By first identifying the source of this geographic variation, policymakers can potentially
develop and implement initiatives to alter practice patterns in high-cost areas.
Other research has concluded that the magnitude of this regional variation in spending
and quality is not as large as indicated by the studies described above. For instance, the
Medicare Payment Advisory Commission (MedPAC) found that medical utilization in higher-
use areas (90th percentile) is only about 30 percent greater than in lower-use areas (10th
percentile).9 In fact, 45 percent of the Medicare fee-for-service (FFS)10 population lives in areas
characterized by medical utilization levels that are within five percentage points of the national
average. Further, another study found that for small areas, much of the variation in cost of
treating Medicare beneficiaries is driven by supply-induced demand, and that variation
cannot be supported when one comprehensively controls for health status and conducts
analysis at the beneficiary level11 Recent research also indicates that the observed large
difference in spending between places like McAllen and El Paso may be a phenomenon unique
to Medicare; these large geographic differences in spending may not appear for privately-insured
patients.12 Another recent paper found that the variation across regions in private health
expenditures is between 3 and 4 times less than the variation in Medicare expenditures
nationwide.13
6
The Center for the Evaluative Clinical Services and School, The Dartmouth Atlas of Health.
7
Song et al., "Regional Variations in Diagnostic Practices."
8
Gawande, "The Cost Conundrum: What a Texas town can teach us about health care".
9
Medicare Payment Advisory Commission, "Measuring Regional Variation in Service Use: Report to Congress,"
(December 2009), http://www.medpac.gov/documents/Dec09_RegionalVariation_report.pdf.
10
Medicare FFS includes Medicare Parts A and B.
11
J. D. Reschovsky et al., "Following the Money: Factors Associated with the Cost of Treating High-Cost Medicare
Beneficiaries," Health Services Research no. doi: 10.1111/j.1475-6773.2011.01242.x.
12
Luisa Franzini, Osama I. Mikhail, and Jonathan S. Skinner, "McAllen And El Paso Revisited: Medicare
Variations Not Always Reflected In The Under-Sixty-Five Population," Health Affairs 29, no. doi:
10.1377/hlthaff.2010.0492 (2010).
13
Darius Lakdawalla, Tomas Philipson, and Dana Coldman, "Addressing Geographic Variation and Health Care
Efficiency: Lessons for Medicare from Private Health Insurance," AEI Health Policy Outlook 2, no. July (2010),
http://www.aei.org/docLib/2010-7-No-2-g.pdf.
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This study contributes to this debate by examining geographic variation in the volume
and intensity of per capita health care services and spending for both Medicare and Medicaid
beneficiaries. This project was undertaken under the direction of the Institute of Medicine
(IOM) and includes the analyses performed at their behest. This study does not necessarily
reflect Acumens own analytic approach but rather was designed to follow specifications
required by IOM to promote consistency across contractors. This report therefore presents a
comprehensive set of results that examine myriad issues underlying regional differences in
Medicare and Medicaid spending. Specifically, this report aims to answer the following research
questions:
2. Are regions with high utilization levels likely to have high utilization rates in
subsequent years?
other diseases?
of medical services?
levels in Medicaid?
To answer these questions, this report relies on claims data covering the universe of
Medicare and Medicaid FFS beneficiaries. Sections 2 through 4 describe how this study uses
these data to answer the questions above. Section 2 identifies the data sources used for the
analysis and the beneficiaries that are included in the aggregate cohort and 15 condition-specific
cohorts. Section 3 defines the three outcome measures. Section 4 describes the methodology,
including the risk adjustment regression specifications and the geographic region definitions.
In addition to producing a wealth of statistics that researchers can use for future studies,
this report also directly evaluates the six research questions posed above. Section 5 addresses
each of these questions for Medicare FFS beneficiaries, and Section 6 answers these questions
for Medicaid beneficiaries. The latter section also measures the correlation between an HRRs
average utilization of Medicare services and an HRRs average utilization of Medicaid services.
Section 7 presents a summary of this reports major findings. In addition to investigating
regional variation in medical spending and utilization for Medicare and Medicaid FFS
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beneficiaries, Appendix F measures regional variation in spending for Medicare Advantage
beneficiaries.

2 CONSTRUCTION OF AGGREGATE AND CONDITION-SPECIFIC
BENEFICIARY COHORTS
This study examines regional variation in spending, utilization and quality not only for an
aggregate cohort of all Medicare (and Medicaid) beneficiaries but also for cohorts of
beneficiaries with specific health conditions. The aggregate cohort includes all beneficiaries that
satisfy the enrollment restrictions and does not restrict to beneficiaries with a certain health
condition. The condition cohorts include 15 conditions selected by IOM based on a variety of
factors including disease prevalence, disease incidence, costs of treatment, and the likelihood of
regional variation in the course of treatment due to variation in demand-side or supply-side
factors. The chosen conditions include both acute and chronic conditions and three incident
cancers. The acute conditions include conditions such as stroke and acute myocardial infarction
(AMI); the chronic conditions include patients with long-term illnesses such as diabetes,
depression, and chronic obstructive pulmonary disease (COPD). Certain exclusions are also
applied to the claims data to cull the claims appropriate to the analysis.
This section describes the methodology used to transform Medicare and Medicaid claims
data into useful analytical files for the aggregate and fifteen condition cohorts. This section
proceeds in two parts. Sections 2.1 and 2.2 define the data sources, exclusions, and the
population for the Medicare and Medicaid analyses, respectively. Section 2.3 describes the steps
the analysis uses to define the aggregate and 15 condition cohorts.
2.1 Medicare Data Sources, Exclusions, and Population
To synthesize all of the medical events that comprise each Medicare beneficiarys
expenditure levels, treatments, and health history, this analysis relies on the universe of Medicare
claims data from 2005 through 2010. Although the years of analysis are 2007 through 2009, this
study uses data from 2005 through 2006 to capture additional beneficiary health history
information. This study uses 2010 data to capture claims information for episodes beginning in
2009 that end in 2010. The remainder of this section contains three parts. Section 2.1.1 presents
the Medicare data sources; Section 2.1.2 defines the exclusions applied to the Medicare
population; and Section 2.1.3 discusses the Medicare population included in the analysis.
2.1.1 Medicare Data Sources
The Medicare investigation uses the claims, enrollment, and assessment data sources
listed in Table 2.1 to produce relevant analytical files. Medicare Part A, B, and D claims files are
episodic, rather than longitudinal, data files where observations occur when Medicare
beneficiaries interact with providers who are to be paid by Medicare. The data on the claims
describe the cost for services rendered, what services were provided during the interaction, who
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provided these services, and a wide range of information regarding the beneficiarys
demographics and health condition. Next, Medicare Part A, B, C, and D enrollment data files are
historical with an observation every time a beneficiarys status changes. These files contain
detailed data on all individuals entitled to Medicare, including demographic information,
enrollment dates, third party buy-in information, and Medicare managed care (MC) enrollment.
Table 2.1: Medicare Data Sources
Data Source Years Data Files
Common Working Files (CWF) for Home Health (HH), Physician (PB),
Medicare Parts A and B 2005 -
Inpatient (IP), Skilled Nursing Facility (SNF), Outpatient (OP), Hospice
Claims 2010
(HS), and Durable Medical Equipment (DME) claims
2006 -
Medicare Part D Claims Prescription Drug Event (PDE)
2009
Enrollment Database (EDB)
Medicare Part A, B, and 2005 -
Common Medicare Environment (CME)
C Enrollment Data 2010
Enterprise Cross-Reference (ECR) Files
MARx files: Full Enrollment Files, Monthly Membership Files, Risk Scores
Medicare Part C and D 2005 -
Enrollment Data 2010 Risk Adjustment Processing System (RAPS)
HPMS Files: Beneficiary Cost, Formulary and Pharmacy Files for Part D
2.1.2 Medicare Exclusions
The Medicare analysis includes only claims for FFS beneficiaries in the months that they
are enrolled. To limit the sample in this manner, this study excludes beneficiaries only enrolled
in Medicare Advantage (also known as Part C or Medicare Managed Care) throughout the
observation period from the analysis because information on utilization of and payment for
medical services rendered is not available in the MA data.14 A Medicare beneficiary is
considered to be enrolled in FFS for a given month if the Medicare Enrollment Database shows
enrollment in Part A or B and not in Part C during that month. When a beneficiary switches
between Medicare FFS and Medicare Advantage, only the months with FFS enrollment are
included in the episode. Months where a beneficiary is not enrolled in FFS but has FFS Part D
claims are excluded from the observation window as the beneficiary is not enrolled in Medicare
FFS Parts A or B. For the condition cohorts, beneficiaries must be enrolled in Medicare Part A or
Part B during the first month of the observation window. In addition to excluding episodes with
third party payer costs on claims, the Medicare analysis also excludes episodes with the
beneficiary listed as having a third-party primary payer in the observation window in the EDB.
Appendix A.5 illustrates the number and percent of Medicare beneficiaries who are excluded
from the analysis due to each restriction criteria.
14
Beginning in 2012, CMS will collect encounter claims data from MA plans. These data, however, are not
available for this studys time frame.

The Medicare study also imposes several eligibility restrictions. In general, the
beneficiaries who are excluded from the analytic file are those for whom there is not complete
data.15 Some beneficiaries have ZIP codes on their claims that are missing, or are outside of the
United States or are likely miscoded, and as such do not map to the regional definitions
described in Section 3.4. Because one cannot identify the region in which the beneficiary is
located, these beneficiaries are excluded from the analysis. The Medicare analysis also excludes
episodes that have third party payer costs on any claims during the observation window.
Beneficiaries with third party payer costs may have additional claims outside of their Medicare
claims, so their health care data is likely to be incomplete.
In addition, beneficiaries that are dual-enrolled in Medicare and Medicaid are included in
the Medicare study but excluded from the Medicaid study. Beneficiaries are considered to be
dual-enrolled if they are enrolled in both Medicare and Medicaid in any of the twelve months
after the index date. The reasons dual-eligibles are included only in the Medicare study are: 1) to
avoid double-counting, and 2) Medicare is the primary payer for dual-eligibles for all medically
necessary Medicare-covered services. Although the Medicare study includes beneficiaries who
are simultaneously enrolled in Medicaid, the Medicare study only uses dual-eligibles Medicare
claims. The Medicare study includes dual-enrollees because Medicare is the primary payer for
dual-eligibles medical services while Medicaid is the payer of last resort, which means that
providers must seek payment from Medicare first and then bill Medicaid for any remaining
balance.16 The Medicare analysis excludes all additional Medicaid claims for these dual-enrolled
beneficiaries because Medicaid identification numbers frequently change over time, which
precludes a reliable linkage of beneficiary histories across programs. As described below, dual-
eligible Medicaid beneficiaries are completely excluded from the Medicaid study to prevent
double counting.
2.1.3 Medicare Population Summary Statistics
Because Medicare eligibility begins at age 65 for those without disabilities, the majority
of Medicare beneficiaries are age 65 and older. Table 2.2 shows the number of episodes by sex,
race, dual-eligibility status, episode end, and age in the aggregate 2007 through 2009 analysis. In
total, 78 percent of episodes are for beneficiaries who are at least 65. The majority of Medicare
beneficiaries are not eligible for Medicaid (83 percent), and most episodes do not end in death
(96 percent).
15
A very small number (less than 0.00001 percent) of beneficiaries who are missing sex or date of birth in the
enrollment files (EDB/EL) due to coding errors are excluded from this analysis.
16
Stephanie E. Anthony et al., "Medicaid Managed Care for Dual Eligibles: State Profiles," The Kaiser Commission
on Medicaid and the Uninsured 14(2000),
http://www.kff.org/medicaid/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=13759.
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Table 2.2: Medicare Demographics
# Episodes
Beneficiary Category Percent
(millions)
All Beneficiaries 104.7 100%
Female 58.2 56%
Male 46.6 44%
White 87.5 84%
Black 10.7 10%
Asian 2.0 2%
Hispanic 2.3 2%
Other 2.1 2%
Unknown 0.2 <1%
Dual-Eligible 21.7 21%
Not Dual-Eligible 83.0 79%
Living during Entire
100.1 96%
Episode
Not Living during Entire
4.6 4%
Episode
Age under 65 23.4 22%
Age 65-69 22.7 22%
Age 70-74 18.3 17%
Age 75-79 15.7 15%
Age 80-84 12.6 12%
Age 85-89 7.7 7%
Age 90 and over 4.4 4%
2.2 Medicaid Data Sources, Exclusions, and Population
Paralleling the Medicare analysis, the Medicaid analysis relies on the universe of
Medicaid claims data from 2005 through 2010. Medicaid is a publicly-financed health care
coverage program for low-income people. Like the Medicare analysis, this study uses data from
2005 through 2006 to capture additional beneficiary health history information and uses 2010
data to capture claims information for episodes beginning in 2009 that end in 2010. The
remainder of this section contains three parts. Section 2.2.1 presents the Medicaid data sources,
and Section 2.2.2 defines the exclusion applied to the Medicaid population. Section 2.3.2
describes the Medicaid population included in the analysis.

2.2.1 Medicaid Data Sources
Medicaid data come in two basic forms: as MAX (Medicaid Analytic eXtract) files, and
as elements from MSIS (Medicaid Statistical Information System). MAX data is a subset of
MSIS data that is produced after verification and enhancement of the MSIS files and arranged by
beneficiary in an annual time frame. The MSIS data, on the other hand, comprise raw claims and
beneficiary enrollment information uploaded from states on a quarterly/monthly basis. The
MAX/MSIS data consist of five types of files: personal summary (PS), inpatient hospital (IP),
long-term care (LT), other services/therapy (OT), and prescription drugs (RX). While 1999 to
2009 MAX files are currently available for all but a few small states, files for year of service
2010 are only being released now. In contrast, MSIS contains the most recent data submitted by
each state, with updates usually done at least quarterly. Since claims in MSIS come from states
exercising different submission protocols, adjustments must be made for some data elements to
create common formats and definitions. When combined, MAX and MSIS supply a
comprehensive set of Medicaid enrollment and claims information covering 1999 to the present
time. Table 2.3 presents the Medicaid data sources and Medicare equivalents.
Table 2.3: Medicaid Data Sources and Medicare Equivalents
Medicaid Data Files Medicare Equivalent(s)
Inpatient stays (IP) IP
Long-term care stays (LT) SNF
Other therapy (OT) HH, DME, PB, OP
Prescription drugs (RX) PDE
Eligibility records (EL) (MSIS) EDB
This report relies on both MAX and MSIS data. For claims information in 2009 or
before, MAX data is used. There are 3 states, however, without complete MAX information at
the time of the publication of this report. States with limited coverage in the 2009 MAX data
include: Idaho, Maine, Missouri and Wisconsin. For these states, we supplemented the MAX
data with MSIS claims information.17 Additionally, for the condition cohorts, episodes that
begin in 2009 can spill over into 2010. For instance, a 12 month episode that begins on
December 1, 2009 would include all claims through November 30, 2010. Because MAX data
was not currently available at the time of this reports publication, this report relies exclusively
on MSIS for all 2010 information.
Working with Medicaid data presents a number of unique challenges compared to the
Medicare data. Although most Medicaid states programs now use HCPCS/CPT codes to report
procedures and equipment in OT, ICD-9 procedure codes in IP claims and report prescription
drug use in the RX file using 11-digit NDC codes, states deviate from national coding standards,
17
MSIS data was used for: Idaho (2009 for all file types), Maine (2005-2009 for the IP, LT and OT files), Missouri
(2009 for RX file type), and Wisconsin for 2009 for all file types.
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for instance, by reporting local provider identification numbers or DEA numbers to identify
service providers and insurers in place of NPI. Also, several states, including Maine and New
York, report a significant number of procedures on their claims using unique local coding
systems rather than HCPCS/CPT codes. Thus, identifying providers and procedures in Medicaid
claims is complicated by the lack of unified, nationwide databases containing all local Medicaid
provider identification numbers or local procedure codes.
Medicaids heterogeneous coverage system makes the calculation of summary

variablessuch as annual expenditure levelssignificantly more complex than in Medicare.
Unlike Medicare data, knowing a beneficiarys enrollment status as reported in the EL file, for
instance, does not exclusively determine the claim types reported for that beneficiary due to state
waivers and carve outs. Waivers, such as Section 1915(c) for home and community based
services (HCBS), allow states to adopt unique payment systems specifically for these services.
Carve outs occur when a state reimburses providers for certain services on a FFS basis regardless
of whether the beneficiary is enrolled in a FFS or MC plan. In 2007, 20 states with full-risk MC
plans implemented carve-outs for at least some drug classes, and 11 of these states included all
drugs in the carve-out.18 In 2007, over 64 percent of enrolled Medicaid beneficiaries were at
least partially covered by an MC program. Table 2.4 describes the number of beneficiaries in
various enrollment classifications in more detail.
Table 2.4: Size of Potentially Recoverable FFS Medicaid Population (2007)

Medicaid Enrollment
Number of Beneficiaries
Classification
Full FFS care 22,060,890
Mixed type of care 13,332,548
Sporadic FFS participation 10,805,605
MC with encounter claims 1,400,215
Ineligible 1,126,728
Full MC care 20,010,031
2.2.2 Medicaid Exclusions
Like the Medicare study, the Medicaid analysis applies several eligibility restrictions to
require complete data for each beneficiary.19 The Medicaid analysis also excludes beneficiaries
with missing ZIP codes; with third party payer costs; and who are simultaneously enrolled in
18
"2007 State Perspectives Medicaid Pharmacy Policies and Practices," National Association of State Medicaid
Directors.
19
A very small number (less than 0.00001 percent) of beneficiaries are missing sex or date of birth in the enrollment
files (EDB/EL) due to coding errors and are excluded from this analysis.

Medicare. The section below provides additional information on exclusion restrictions specific to
the Medicaid analytic samples.
First, most Medicaid MC beneficiaries are excluded because the encounter and capitation
claims submitted on their behalf are not reliably reported, and encounter claims do not report an
amount paid.20 MC beneficiaries are only included if they are enrolled in Primary Care Case
Management (PCCM) or in partial managed care. PCCM programs charge a small capitated
fee but cover all services on a FFS basis, so beneficiaries enrolled in PCCM programs are
included in the investigation. Beneficiaries enrolled in partial managed care have some services,
such as psychiatric services or dental work, covered through a MC organization, but all other
services are covered through FFS. As a result, the analysis includes beneficiaries in partial
managed care as well. Table 2.5 indicates which beneficiaries are excluded or included based on
enrollment status. Excluding MC beneficiaries who are not enrolled in PCCM or partial MC
programs reduces the number of beneficiaries available for the 2008 analysis by 46 percent.
Excluding these MC beneficiaries may bias the analysis and limit national generalizability
because healthy children and families make up the majority of Medicaids MC enrollees.21
Table 2.5: Medicaid Enrollment Type Restrictions
Included in Excluded from
Enrollment Type Medicaid Cohort Medicaid Cohort
FFS X
Partial MC Behavioral X
Partial MC Prenatal/Delivery X
Partial MC Long-Term X
Partial MC Dental X
PCCM X
Comprehensive MC X
PACE X
Other MC X
Second, beneficiaries who are not covered for the full set of Medicaid services are
excluded because their claims record likely contains an incomplete picture of their healthcare
spending and utilization levels. The Medicaid data identifies these beneficiaries using a benefit
restrictions indicator variable. For example, the Family Planning Access Care and Treatment
(PACT) waiver in California provided comprehensive family planning services through
20
Daniel R. Levinson, Inspector General, "Medicaid Managed Care Encounter Data: Collection and Use," 12, no.
OEI-04-07-00240 (2009), http://oig.hhs.gov/oei/reports/oei-07-06-00540.pdf.
21
"Medicaid - A Primer: Key information on Our Nations Health Coverage Program for Low-Income People," The
Kaiser Commission on Medicaid and the Uninsured, http://www.kff.org/medicaid/upload/7334-04.pdf.
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Medicaid to 2.6 million beneficiaries in 2009 not otherwise eligible for Medicaid. Because these
beneficiaries only received coverage for family planning services through Medicaid, they are
indicated with benefit restriction flags and excluded from the analysis as each may have an
incomplete health history. Third, the Medicaid study excludes all dual-enrolled beneficiaries
because their costs are first covered by Medicare then by Medicaid. Thus, to avoid double-
counting, only the Medicare analysis includes dual-enrolled beneficiaries.
2.2.3 Medicaid Population Summary Statistics
Different eligibility groups can receive different Medicaid benefits within a state or
county, but there are nationally mandated minimums that mainly cover limited-income families
with children and pregnant women.22 For example, infants born to Medicaid-eligible women as
well as pregnant women whose family income is at or below 133 percent of the federal poverty
line are covered by Medicare. As a result, the Medicaid population is much younger and includes
a larger share of females than the Medicare population. Table 2.6 below presents the number of
Medicaid episodes in the 2007 through 2009 analysis by sex, race, and age.
The composition of Medicaid enrollees is significantly more heterogeneous than the

Medicare population. Although some Medicare beneficiaries qualify for coverage due to health
status (e.g., disability, end-stage renal disease (ESRD)), most beneficiaries are elderly. Medicaid
beneficiaries, qualify for coverage based on a complex interaction of individual attributes
including income, household composition, health status (e.g., pregnant), age, and other factors.
Further, the penetration of managed care is much higher in Medicare than Medicaid. Whereas
Medicare Advantages average market share is 27 percent,23 average managed care penetration
for Medicaid is 66 percent, where Medicaid managed care includes both managed care
organizations (MCOs) Primary Care Case Management (PCCM) programs.24
22
Ibid.
23
"State Health Facts," Kaiser Family Foundation, http://www.statehealthfacts.org/.
24
"Medicaid Managed Care: Key Data, Trends, and Issues," Kaiser Commission on Medicaid and the Uninsured,
http://www.kff.org/medicaid/upload/8046-02.pdf.

Table 2.6: Medicaid Demographics
Beneficiary # Episodes
Percent
Category (millions)
All Beneficiaries 19.3 100%
Female 13.8 71%
Male 5.5 29%
White 9.4 49%
Black 4.5 23%
Asian 0.4 2%
Hispanic 2.5 13%
Other 0.5 2%
Unknown 2.1 11%
Age under 20 2.0 10%
Age 20-24 3.5 18%
Age 25-29 2.9 15%
Age 30-34 2.1 11%
Age 35-39 1.8 9%
Age 40-44 1.6 8%
Age 45-49 1.5 8%
Age 50-54 1.4 7%
Age 55-59 1.2 6%
Age 60-64 0.8 4%
Age 65-69 0.2 1%
Age 70-74 0.10 1%
Age 75-79 0.09 0.5%
Age 80-84 0.06 0.3%
Age 85-89 0.04 0.2%
Age 90 and over 0.03 0.1%
2.3 Cohort Definitions
This report examines regional variation in cost, utilization, and quality for the aggregate
Medicare and Medicaid cohorts and for 15 condition cohorts. The aggregate cohort includes all
beneficiaries and counts those beneficiarys claims during the months they are enrolled over the
observation period, which is a calendar year. The condition cohorts include beneficiaries with
certain health conditions and count their claims during the months they are enrolled. The chosen
conditions include both acute and chronic conditions and three incident cancers. The acute
conditions include acute/ischemic stroke, acute myocardial infarction (AMI), pneumonia,
cataracts, and cholecystectomy. The acute condition cohorts cholecystectomy and cataracts are
defined, in part, using procedures. The chronic conditions include diabetes, rheumatoid arthritis,
depression, congestive heart failure (CHF), coronary heart disease (CHD), chronic obstructive
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pulmonary disease (COPD), and low back pain. The three incident cancer cohorts include breast
cancer, lung cancer, and prostate cancer.
Each condition cohort algorithm follows a three step procedure. These steps include:
1. Selecting diagnostic and procedural criteria for inclusion in each cohort,
2. Identifying the start of an episode using a clean period requirement (if any), and
3. Defining the observation period for each episode.
Sections 2.3.1 through 2.3.3 describe each of these three steps in detail. Section 2.3.4 discusses
challenges to the cohort-based approach, and outlines the restrictions that are applied to both the
aggregate and condition cohorts.
2.3.1 Criteria for Beneficiary Inclusion in Each Condition Cohort
This study defines beneficiaries as members of a given condition cohort using diagnosis,
procedure, and prescription drug codes. Medical experts on the IOM Committee selected the
codes deemed most predictive of the conditions represented by each of the twelve chronic and
acute condition cohorts using a consensus process. This study, in consultation with IOM and
Peter Bach of the Sloan Kettering Cancer Center, selected the diagnosis, procedure, and
prescription drug codes to predict membership in the three incident cancer cohorts using an
empirical approach based on the academic literature. Appendix A.1 classifies the cohorts as
acute or chronic and gives their clean period requirements, which are discussed below. Appendix
A.2 provides a full listing of the condition cohort algorithms, and Appendix A.3 has a full listing
of the condition cohort codes. Appendix A.4 describes the methodology used to determine the
cancer condition cohort specifications.
To reduce the number of false-positives included in the condition cohorts, the analysis
applies a number of restrictions to refine the cohort definitions. Diagnosis and procedure codes
on claims made up entirely of laboratory services are not eligible to qualify a beneficiary for a
cohort.25 This restriction aims to reduce the likelihood that rule-out diagnoses affect
beneficiary health status measures. Rule-out diagnoses occur when providers indicate whether
the beneficiary received a test for a given disease rather than indicating whether he or she has the
given condition. The analysis also excludes claims reporting zero Medicare payments. If no
payment was made, it is unlikely that a service was rendered.26 The analysis also excludes
25
Lab codes are defined using HCPCS codes. HCPCS codes that begin with EKABCLV, codes that have a
BETOS code that begins with I or T, codes that are in the range 70010-76999 or 78000-78999, and codes that are
included in the 2010 clinical lab fee schedule are included in the labs category.
26
PB claims must have a valid line item where a valid line item has a pricing indicator of A, R, or S indicating the
claim was paid.

interim inpatient claims because finalized claims contain the latest available information, and
thus are generally more accurate. For instance, an interim claim may indicate that the beneficiary
suffers from a specific disease, but further diagnostic testing may subsequently reveal that an
alternative disease is the true cause of the beneficiarys symptoms. The updated diagnostic
information would appear on the finalized claim but not necessarily the interim claim. Finally,
claims with a non-clinician listed in the physician specialty field are not used to determine a
beneficiarys eligibility in a cohort.27 For example, a claim for ambulance transportation may
contain a diagnosis code, but this study prohibits that claim from determining beneficiary
membership in a cohort. This requirement ensures diagnoses used to determine cohort
membership are reported by clinicians.
2.3.2 Identifying the Start of an Episode
To identify the beginning of a new episode of care, the cohort definitions for the acute
conditions acute/ischemic stroke, acute myocardial infarction, and pneumonia and all
incident cancers breast cancer, prostate cancer, and lung cancer require a clean period.
During the clean period, claims must not contain diagnosis or procedure codes related to the
condition in question, as determined in step 1. If a beneficiarys claims submitted during the
clean period do contain a combination of codes determined in step 1, this suggests the
beneficiary developed the condition prior to the index date, the date of the first claim
containing a condition-relevant code during the period of analysis. Since this study aims to
analyze the costs of incident acute conditions, beneficiaries with claims violating the clean
period requirement are excluded from the acute condition cohorts and the incident cancer
cohorts. For example, if claims with diagnosis, procedure, or prescription drug codes associated
with acute myocardial infarction (AMI) are observed for a given beneficiary on March 1, 2008
and March 20, 2008, the clean period approach assumes that these claims are related to the same
episode of care since the AMI clean period is 60 days. The clean period requirement ensures
these claims are grouped together in the same episode of care if both claims are submitted during
the period of analysis. If claims for AMI are observed for a given beneficiary on March 1, 2008
and subsequently on August 1, 2008, it is assumed that these claims are related to separate
episodes of care and the clean period requirement ensures they are analyzed separately.
Appendix A.1 lists the clean period requirement, if any, for each cohort. For cohorts with clean
periods, the Medicare analysis does not require that beneficiaries be continuously enrolled during
the clean period to be eligible for the cohort. The Medicaid analysis, however, does require
continuous enrollment during the clean period to ensure that the clean period is valid.
27
The physician specialty field must contain a code that is eligible for risk adjustment: "Acceptable Physician
Specialty Types for Risk Adjustment Data Submission," Centers for Medicare & Medicaid Services,
http://www.csscoperations.com/internet/Cssc.nsf/files/Risk-Adjust-Physn-Spec-
Types031511_040811.pdf/$FIle/Risk-Adjust-Physn-Spec-Types031511_040811.pdf.
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There are several advantages to the use of a clean period requirement. First, the clean
period requirement is straightforward to implement using the Medicare claims data.
Implementing the clean period approach requires a list of diagnostic and procedural codes for
inclusion in the cohort and a choice of the length of the clean period for each cohort. For this
project, the IOM Committee selected the length of the clean period using a consensus-based
approach. In addition, the use of a clean period has widespread use in both commercial and
governmental applications. Commercial grouping software developed by Ingenix and Thomson
Reuters uses a clean period as does the medical spending per beneficiary measure CMS uses
within Hospital Compare.28
Although imposing a clean period restriction has several advantages, meeting this
requirement is imperfectly correlated with having an incident rather than prevalent condition.
Beneficiaries with no evidence of a given condition during the clean period may have a prevalent
condition with past treatment of the condition occurring outside of the clean period or they may
simply have not sought treatment for their condition. In this case, the methodology incorrectly
assigns these beneficiaries to the given condition cohort. Beneficiaries with evidence of a given
condition during the clean period may have multiple incident cases of that condition, each
requiring its own episode of care. In this case, the methodology incorrectly eliminates these
beneficiary episodes from the given condition cohort.
To determine the beginning of a new episode of care for cohorts without a clean period
requirement, the date of the first claim containing a condition-relevant code is used as the index
date. Clean periods are not required for the acute condition cohorts cholecystectomy and
cataracts because these cohorts represent procedures, and the majority of costs related to these
conditions will be incurred in the immediate period before (pre-operative costs) and after (post-
operative costs) the procedure. For example, the costs related to cataracts surgery include a
physicians consultation and examination prior to surgery, the costs of the surgery, prescription
eye drops to prevent infection after surgery, physician visits post-surgery to monitor
complications such as infection, persistent inflammation, or changes in eye pressure, and the
costs of treating any complications that may occur. In addition, because chronic conditions recur
and subside on a frequent basis, a clean period is not required for the chronic condition cohorts.
2.3.3 Defining the Observation Period
Once the start of an episode is identified, this study implements an observation period for
each condition cohort to capture the relevant costs associated with an episode of care. The
observation period is the length of the period of analysis, which begins on the index date. IOM
28
T. MaCurdy et al., "Optimal Pay-for-Performance Scores: How to Incentivize Physicians to Behave Efficiently,"
http://www.cms.gov/reports/downloads/MaCurdy_Incentivize_Physicians_Optimal_P4P_Scores_Feb_2011.pdf.

Committee clinicians selected the observation period for each cohort using a consensus process.
All the beneficiarys claims during the observation period are included in the episode regardless
of the diagnosis or procedure information on the claim.
The methodology implements different observation periods for each condition cohort to
reflect differences in the expected length of the disease episode. For example, most cases of
pneumonia resolve within a matter of months whereas diabetes a chronic condition is often a
lifelong condition.29 Appendix A.2 lists the observation period for each of the fifteen condition
cohorts. The observation period for the acute conditions analyzed ranges from 3 months
(pneumonia) to 12 months (acute/ischemic stroke and acute myocardial infarction). The
observation period for the cholecystectomy cohort, which represents a procedure, is 90 days
prior to and 90 days after the index date because a patient receiving a cholecystectomy likely
incurs related costs prior to surgery (e.g., physician consultation, diagnosis of symptomatic
gallstones, lab tests). The length of the observation period for all chronic conditions is one year.
Furthermore, once a beneficiary meets the requirements for membership in a chronic condition
cohort, the study methodology then assigns that beneficiary to that cohort in all future years of
the analysis, based on the assumption that chronic conditions by definition rarely resolve
themselves quickly.
2.3.4 Challenges to Condition Cohort-Based Approach
Conducting the analysis at the condition cohort level allows for examination of the
regional variation in costs, utilization, and quality for individuals with similar health profiles;
however, this approach presents several challenges. First, diagnosis and procedure codes may be
reported differently across regions. The same patient may receive a different diagnosis
depending on which physician he or she sees, and if physicians in certain regions diagnose
patients in systematically different ways than physicians in other regions, the results of a cohort-
based analysis of regional variation in health care may be biased. For example, if upcoding
diabetes diagnoses is common in the Northeast, then beneficiaries included in the diabetes cohort
residing in the Northeast will be relatively healthy since some of these individuals may not meet
the criteria for a diabetes diagnosis in other regions. If upcoding occurs, these beneficiaries
costs and utilization will be relatively low compared to other regions not due to treatment choice
but due to the cohort to which this study classifies them. Second, regions may also differ in the
propensity to screen for certain conditions. If some regions are more likely to identify certain
conditions at an earlier stage, these conditions may be less expensive to treat and treatment may
29
According to a study published in the Journal of General Internal Medicine, while the majority of patients rated
symptoms of fatigue (79%) and cough (80%) as moderate to severe at the time of diagnosis, a minority of patients
rated symptoms as moderate or severe at the day 30 or day 90 follow-ups. J. P. Metlay et al., "Measuring
symptomatic and functional recovery in patients with community-acquired pneumonia," J Gen Intern Med 12, no. 7
(1997).
16 Acumen, LLC
be more likely to result in a successful outcome in these regions. Although risk adjustment can
control for various beneficiary level characteristics including comorbidities, it is not possible to
perfectly control for the severity of a beneficiarys condition. Third, using diagnosis codes to
define condition cohorts may lead to an endogeneity problem: the lowest cost beneficiaries are
less likely to visit a physician, and therefore the methodology will assign fewer low cost
beneficiaries to a given condition cohort. If low cost beneficiaries are more common in certain
regions, the methodology will overstate costs in these regions for the condition cohorts. Finally,
this study does not have access to beneficiary medical records, and thus it is not possible to
independently verify diagnostic information. Previous research, however, has compared
diagnosis codes on Medicare claims against diagnosis codes included in medical records and
found a high positive predictive value (PPV).30,31,32
There are two possible methods of calculating beneficiary outcomes using the cohort-
based approach: including all claims within the observation window of the cohort and including
only claims that are related to each condition. Using all claims captures all health costs of a
beneficiary in a given cohort during the observation window. Including only claims that are
related to a condition requires the use of an episode grouper. Episode groupers use complex
algorithms to create clinically cohesive episodes of care that group treatment associated with a
single condition during the observation window. Because beneficiaries may have multiple
concurrent conditions, episode groupers must either divide claims among multiple episodes or
allocate claims to more than one episode.
This analysis includes all of a beneficiarys claims in the observation window. Using all
claims takes a holistic view by assuming that beneficiaries conditions affect all aspects of their
health, which may be particularly appropriate for chronic conditions. Though the all-claims
approach creates a single measure of a beneficiarys health, it produces false positives when
used with cohorts by including claims that are not necessarily related to each cohort. This
analysis attenuates the number of false positives by shortening the observation period for several
of the acute cohorts. Including claims unrelated to a given condition can be thought of as a
source of noise, but the large number of cases in each region ensures that it is unlikely that one
region will have more unrelated claims than another. The all-claims approach also double-
counts claims across cohorts when beneficiaries have concurrent conditions. Although double-
counting claims can overestimate total beneficiary outcomes, this analysis also creates an
30
Yuka Kiyota et al., "Accuracy of Medicare Claims-Based Diagnosis of Acute Myocardial Infarction: Estimating
Positive Predictive Value on the Basis of Review of Hospital Records," American Heart Journal 148(2004).
31
Wolfgang C Winkelmayer et al., "Identification of Individuals with CKD from Medicare Claims Data: A
Validation Study," American Journal of Kidney Diseases 46(2005).
32
Elena Birman-Deych et al., "Accuracy of ICD-9-CM Codes for Identifying Cardiovascular and Stroke Risk
Factors," Medical Care 43.

aggregate cohort in which claims are not double-counted. Episode grouping, on the other hand,
will produce fewer false positives than including all claims but may produce more false
negatives by excluding claims that are related to a condition from the analysis. If the episode
grouper divides claim cost among episodes, for instance, costs that are related to more than one
condition can be misallocated. For example, a beneficiary with diabetes may be treated for a
stroke; in this case, it is difficult to determine whether the costs for the stroke treatment should
be included in a stroke episode or a diabetes episode. Because episode grouping algorithms
affect which claims are counted during the observation window in addition to which
beneficiaries are included in each cohort, episode grouping will exacerbate the effects of regional
differences in coding. For example, a region that tends to upcode diagnoses to a diabetes
diagnosis will include more beneficiaries in the diabetes cohort and will count more of those
beneficiaries claims during the observation period. Finally, implementation of the all-claims
approach is simpler and more direct than implementation of the episode grouping approach.
18 Acumen, LLC
3 MEASURING OF REGIONAL VARIATION IN HEALTH CARE
SPENDING, UTILIZATION AND QUALITY
To quantify the amount of geographic variation in the provision of health care services,
this study examines regional variation in health care expenditures, utilization, and quality of care.
Healthcare expenditures measure the actual costs incurred by each beneficiary, which includes
payments by insurers and beneficiaries. Geographic variation in expenditures, however, depends
on regional variation in both price and quantity. To more narrowly evaluate regional differences
in utilization patterns, this study measures regional variation in utilization as well. Utilization is
measured alternatively as a price-standardized spending levels (i.e., spending statistics that
control for regional differences in prices) or as a series count variables that measure differences
in the number of events per person (e.g., physician visits per capita) across regions. Areas where
beneficiaries incur high medical costs or use a large amount of services may not necessarily be
inefficient, however, if the increased use of medical services produces better health outcomes.
To determine whether or not this is the case, this study also uses a variety of quality measures to
assess the relationship between utilization of medical services and quality. Although this report
does not examine regional variation in quality measures directly, quality metrics for each HRR,
HSA and MSA are included in a supplemental appendix.
The following discussion presents the approach this study uses to measure regional
variation in these three outcome variables of interest. Sections 3.1, 3.2, and 3.3 describe how
this study defines health care spending, utilization, and quality outcomes, respectively. To
determine how the average values of these outcome measures varies across regions, the study
uses three definitions of a region. These definitions include Hospital Service Area (HSA),
Hospital Referral Region (HRR), and Metropolitan Statistical Area (MSA). Section 3.4
describes how these regions are constructed in detail.
3.1 Measurement of Health Care Expenditures
The expenditure analysis examines regional variation in the costs of health care. With
health expenditures comprising 17.9 percent of the national Gross Domestic Product in 2010,
rising healthcare costs are a significant issue.33 Identifying areas that are high cost or low cost
may help policymakers implement initiatives to encourage low cost practice patterns. Regional
differences in healthcare spending per capita are due to two factors: differences in the price of
medical care and differences in the utilization of medical services. The expenditures analysis
investigates the overall change in spending but does not assess which of these two reasons is the
33
"National Health Expenditure Data," Centers for Medicare & Medicaid Services,
https://www.cms.gov/NationalHealthExpendData/downloads/tables.pdf.

driving factor. The utilization analysis, described in Section 3.2, separates out these two causes
of spending variation.
This study calculates all-source expenditures using three steps.
1. Sum the expenditures included in each episode,
2. Adjust the costs for inflation, and
3. Calculate per beneficiary, per month expenditures.
The first step calculates the total raw cost during the beneficiary episodes. The total raw cost in
the Medicare analysis is calculated as the sum of the claim payment, coinsurance, and deductible
from the Inpatient, Outpatient, Hospice, Home Health, Skilled Nursing, Carrier, Durable Medical
Equipment, and Part D claim types. Expenditure calculations from the Inpatient claim type
remove the add-on Indirect Medical Education (IME) and Disproportionate Share (DSH)
payments. For Medicaid, total raw cost is calculated as the sum of the claim payment on FFS
claims found in the Inpatient, Prescription Drug, Long Term Care, and Other file types. In
addition, the Medicaid analysis excludes the costs from partial capitation claims, which appear
for beneficiaries in Primary Care Case Management (PCCM) programs.
Second, for all analyses, the expenditures variable adjusts raw costs for inflation between
years of analysis. The IOM Committee uses the average Consumer Price Index to adjust for
inflation, which takes into account the changing prices paid by consumers for all goods and
services.34 To inflate expenditures to costs in 2009, expenditures incurred in 2006 (for condition
cohorts that have a look-back period) are multiplied by 1.059; expenditures in 2007 are
multiplied by 1.032; expenditures in 2008 are multiplied by 0.995; and expenditures in 2010 are
multiplied by 0.986.
Finally, the analysis calculates per beneficiary, per month expenditures by dividing the
total costs for each beneficiary during his or her enrolled months by the number of months of
enrollment.35 A Medicare beneficiary is only considered enrolled during the months he or she is
enrolled in Parts A or B, and a Medicaid beneficiary is only considered enrolled during the
months he or she is FFS enrolled and with no benefit restrictions, as described in Section 2.2.5.
34
"Consumer Price Index - Chained Consumer Price Index," United States Department of Labor: Bureau of Labor
Statistics, http://bls.gov/data/.
35
In addition, the beneficiarys per month expenditures are weighted by the number of months of enrollment during
the risk adjustment analysis, which is described in Section 4.
20 Acumen, LLC
3.2 Measurement of Health Care Utilization
Examining utilization in addition to expenditures can reveal whether high cost regions are
expensive because of increased utilization of services rather than higher prices for these services.
This analysis measures regional variation of utilization in two ways:
Price standardized cost
Utilization of specific medical services.
Input price adjustment removes geographic variation in the price of inputs, such as labor costs,
and allows for an assessment of changing patterns of utilization overall. In addition to input-price
standardized cost, this study also measures the utilization of specific medical services as counts
of services. Input price adjustment gives a more comprehensive assessment of utilization than the
utilization counts by combining utilization from all sources and assigning appropriate relative
costs to each service (i.e., inpatient stays count for more than a physician visit does). Although
utilization counts are a less comprehensive measure than price-standardized cost, examining
specific service counts can better reveal regional variation for specific services that are most
likely to depend on patient or provider discretion. Section 3.2.1 defines the input price
standardized cost measure. Section 3.2.2 describes the counts of service utilization measures
included in this study.
3.2.1 Price Standardized Cost
Input price standardized cost assigns a standardized price for each service, so that the
price paid for each service is identical across all geographic regions. The analysis, in essence,
removes regional variation in Medicare and Medicaid payment rules to determine a base rate for
each service. For example, the Medicare analysis adjusts physician payments using the
Geographic Practice Cost Index (GPCI). The GPCI measures the relative cost of the inputs
physicians require to provide medical services against the national average input cost. The
Medicare analysis closely follows the standardization methodology developed in conjunction
with CMS as part of the Hospital Value-Based Purchasing (HVBP) program.36 Price
standardization occurs at the file type-year level, and prices are renormalized after
standardization so that the sum of the unadjusted and standardized costs are equal for a given file
type and a given year. Renormalization allows for the standardized costs to reflect the real prices
paid by CMS. For a technical description of Medicare input price standardization for all file
36
"Measure Methodology Reports: Medicare Spending Per Beneficiary (MSPB) Measure," QualityNet,
http://www.qualitynet.org/dcs/ContentServer?c=Page&pagename=QnetPublic%2FPage%2FQnetTier4&cid=122877
2057350.

types, please refer to the attached price standardization memo. Appendix B.1 presents the
technical specifications for the Medicaid input price standardization methodology.
While other subcontractors for the IOM geographic variation project calculate output
adjusted prices in addition to input adjusting costs, neither the Medicare nor Medicaid analysis
output-adjusts prices. Output price adjustment assigns each service the same cost regardless of
where it is performed by assigning services an average payment using Diagnosis-Related Groups
(DRGs) and CPTs. Medicares geographic adjustments are budget neutral and generally adjust a
standard national payment level for regional variation in the cost of providing each service.
Thus, because Medicares final prices are based on regional variation in input costs, using
separate output and input price adjustment is unnecessary. The final step renormalizes the
standardized price on each claim so that the total standardized payment for all claims equals the
total actual payment (excluding IME and DSH for inpatient)37 for each claim type in each year.
Medicaid price standardization also price-standardizes using input prices only. Although
Medicaid payments differ across the country because states have different payment systems, the
Medicaid analysis does not output-adjust prices for several reasons. First, about one third of
state Medicaid programs do not use DRGs to reimburse hospital providers, which precludes
output-standardizing prices using DRGs for those states.38 In addition, eight states do not
consistently utilize CPT codes but rely on local coding systems.39 The local coding systems do
not directly map to any nationally-used coding system, which prevents the analysis from
comparing specific services between geographic locations.
In addition to the overall input price adjusted expenditures, the input price adjusted
expenditures are also stratified by service categories. Stratifying by service category allows
analysis of different types of care, such as acute hospitalization or diagnostic services, to
determine if regional variation overall is similar to regional variation for specific types of
services. Appendix B.2 lists the service category specifications.
37
There are other special payments, such as those for Medicare Dependent Hospitals, Sole Community Hospitals,
Low Volume Hospitals, etc. Since these will all be part of total actual payment, but are not part of the standardized
price methodology, the renormalization will have the effect of uniformly raising the standardized price of inpatient
claims. Similar payments in other claim types, such as the add-on for physicians in shortage areas, will have similar
effects.
38
"Medi-Cal DRG Project: Frequently Asked Questions," California Department of Health Care Services,
http://www.dhcs.ca.gov/Documents/MCDrgProjectFAQs.pdf.
39
This analysis calculated the percentage of each states claims that are CPT claims and flagged eight states with
consistently low percentages of CPT use from 2008 through 2010. These states are New York, Connecticut, Idaho,
Maine, North Carolina, Ohio, Vermont, and Washington.
22 Acumen, LLC
3.2.2 Counts of Service Utilization
To analyze the geographic variability of utilization, this analysis also examines the
utilization counts of specific services. Price standardization can assess utilization across regions
by accounting for differences in input prices. Measuring utilization with count-based variables is
better able to measure regional variation in specific services that may be sensitive to supply- or
demand-side factors.
This methodology relies on codes from Medicare and Medicaid claims to calculate
measures such as the number of inpatient days with a surgical admission. For utilization
measures that rely on CPT or HCPCS codes, Medicaid data is underreported in states with
prevalent use of local coding systems, as discussed above. In addition, because of the structure of
Medicaid claims data, some related utilization measures are combined. For example, the
Medicaid methodology combines the number of inpatient surgical days and number of inpatient
medical days measures because medical and surgical admissions are defined by DRG, and
Medicaid claims in some states do not include DRGs. Appendix B.3 presents definitions of all
the utilization measures.
3.3 Measurement of Health Care Quality
To analyze variation in the quality of care across geographic regions, the study utilizes a
broad range of well-established quality measures. The 18 measures chosen for this analysis are
all supported or developed by established institutions such as the National Committee for Quality
Assurance (NCQA), the Physician Consortium for Performance Improvement (PCPI), and the
Agency for Healthcare Research and Quality (AHRQ), in addition to other organizations. The
quality measures apply to specific conditions to determine how the quality of care for those
conditions varies. The methodology calculates separate quality measures for each cohort and for
the aggregate of beneficiaries in each region. For the aggregate cohort, this analysis employs
AHRQ composite quality indicators. Using these variables, this study can determine whether
areas with high utilization levels also have high quality medical care. Appendix B.4 lists the
condition-specific quality measures for the cohort analysis, and Appendix B.5 lists the composite
quality measures for the aggregate analysis.
Implementing these quality measures in the Medicaid analysis presents several

challenges. First, like the utilization measures, any quality measure that uses HCPCS or CPTs
may be underreported for Medicaid in states with prevalent local coding system usage. In
addition, the composite quality measures that rely on diagnosis-related groups (DRGs) are also
underreported for Medicaid in some states. Second, because the admission date on Medicaid
claims is unreliable, quality measures employing the admission date must instead use the
beginning date of service on claims. A final challenge is that on drug claims, the Medicaid days

supply and quantity of service variables often are not reliable. For instance, the value of the
quantity of service variable could be recorded as the number of pills or the number of
milligrams. Although this report does not directly address regional variation in quality,
supplemental spreadsheets that calculate average quality measures by HRR, HSA, and MSA are
available.
Because certain states underutilize the DRG coding system in Medicaid, the composite
PSI measure is calculated differently for the Medicaid analysis than for the Medicare analysis.
Specifically, the individual PSI measures 8, 13, and 14 are left out of the composite regressions
and totals for Medicaid because they have an insufficient number of beneficiaries included in the
denominators of the measures. The remaining individual measures are reweighted. In addition,
for certain states, the composite PSI measure has an insufficient number of total beneficiaries in
the denominator to report meaningful rates. Thus, this analysis does not include in the regression
HRRs in states that do not utilize DRGs sufficiently. To determine the threshold of beneficiaries,
Figure 3.1 presents the ratio of the number of beneficiaries included in the composite PSI
measure denominator to the total number of beneficiaries by state. The percent of beneficiaries
included in the composite PSI measure denominator drops sharply after 18 percent to 5 percent.
Thus, this analysis considers states with fewer than 18 percent of their beneficiaries included in
the composite PSI denominator to have inadequate measure denominators to reliably represent
the quality of care, measured by the composite PSI, in that state.
Figure 3.1: Percent of Beneficiaries in Composite PSI Measure Denominator by State
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3.4 Defining a Region
Each of the analyses described in this report are performed using three different
geographic region definitions. These include:
Hospital Service Area (HSA)
Hospital Referral Region (HRR)
Metropolitan Statistical Area (MSA)

HSA and HRR region definitions were developed by the Dartmouth Atlas of Health Care.
Dartmouth created HSAs, local health care markets for hospital care, by assigning ZIP codes to
the hospital area where the greatest proportion of each ZIP codes Medicare residents were
hospitalized. Most of the 3,436 nationwide HSAs contain only one hospital. HRRs represent
regional health care markets for tertiary medical care that generally require the services of a
major referral center. Specifically, Dartmouth defines HRRs by assigning HSAs to the region
where the greatest proportion of major cardiovascular surgical procedures were performed with
minor modifications to achieve geographic contiguity. Each of the 306 HRRs thus has at least
one city where major cardiovascular surgical procedures are performed.40 Finally, MSAs are
relatively freestanding Metropolitan Areas, or large population nucleuses, typically surrounded
by nonmetropolitan counties. Each of the 366 MSAs contains either a place with a minimum
population of 50,000 or a Census Bureau-defined urbanized area and a total Metropolitan Area
population of at least 100,000 (75,000 in New England).41 All areas within each state that do not
satisfy the MSA definition are aggregated into a separate category labeled rest of state.
The analyses assign beneficiary location using the first available beneficiary ZIP code in
each year. If the beneficiarys ZIP code changes during the observation period, all claims are
assigned to the ZIP code at the beginning of the year because moving is considered to be within
the set of treatment options for beneficiaries in the original ZIP code. Beneficiary-level data is
aggregated to the ZIP code level and then to each of the three geographic region levels defined
above. The studies map ZIP code level data directly to HSA and HRR levels. MSAs are county-
based, however, and the studies use a ZIP-to-county-to-MSA mapping despite the presence of
county codes in the EDB. Some ZIP codes cross county lines, but these are mapped to the county
that includes a majority of the ZIP code area using the ZIP code crosswalk provided by IOM.
The studies use ZIP code when defining MSAs to enforce consistency across geographical
region definitions.
40
"Research Methods: Dartmouth Atlas of Health Care," Dartmouth Atlas of Health Care,
http://www.dartmouthatlas.org/tools/faq/researchmethods.aspx.
41
United States Census Bureau, "Metropolitan and Micropolitan Statistcal Areas Main,"
http://www.census.gov/population/metro/.

4 ACCOUNTING FOR DIFFERENCES IN PATIENT CASE MIX
Regional differences in healthcare spending, utilization and quality can be due to a
number of factors including regional differences in patient case mix. To account for differences
in beneficiary demographics and severity of illness as well as market level factors, this study
applies a risk-adjustment methodology to all outcome variables described above. Risk
adjustment controls for factors that can influence the dependent variables but typically are
outside of providers control. The general risk adjustment methodology uses a linear ordinary
least squares (OLS) regression model to predict the value of the outcome variable given a set of
observable beneficiary (and in some cases market-level) characteristics. The region-level value
of the risk-adjusted outcome value equals the average difference between the observed levels of
the outcome value and the values predicted by the risk adjustment model.
The remainder of this section provides a more detailed discussion of this studys risk
adjustment model. Section 4.1 contains a formal presentation of the risk adjustment model used.
Section 4.2 describes the set of beneficiary-level and market-level variables that are used in
different regression specifications.
4.1 Risk Adjustment Model Framework
To account for geographic variation in beneficiary and market level characteristics, the
methodology risk adjusts all the outcome measures described above. The outcome measures are
treated as the dependent variable, and regional variation in the dependent variables is analyzed
using the residuals from the risk adjustment analysis. The risk adjustment analysis relies on an
average residuals approach. To implement this approach, the following specification is estimated
for each year of analysis:
(4.1)
In equation (4.1), , represents the dependent variable (expenditures, quality, or utilization) for
beneficiary i, represents the coefficients estimating the relationship between the dependent and
the independent variables represented by , and represents the error term. The dependent
variable represents the outcomes described in Section 3. This study uses an ordinary least
squares (OLS) regression methodology at the beneficiary level (or the event level for the disease
cohort analysis) to estimate the coefficients in equation (4.1).
The outcome variable, Yi, is calculated on a monthly basis. For example, in the
expenditure analysis, Yi represents average spending per month. Calculating average per-month
costs removes the effect of increased expenditures or utilization at different points in the
treatment of a condition, such as at the beginning. Weighting the outcomes gives more influence
26 Acumen, LLC
to beneficiaries who are enrolled for a longer period, in essence counting beneficiaries for each
of their months of enrollment. Although all risk adjustment models use this weighting scheme,
the discussion below assumes all observations are equally weighted for expositional clarity.
After estimating using OLS, the average residual is computed for each region in each
year using the following formula:

(4.2)
In equation (4.2), represents the average residual for region R, represents the residual for
beneficiary (or event) i, and NR represents the number of beneficiaries (or events) in region R.
The residual for individual i, , is calculated as the difference between the observed (or actual)
value of the dependent variable, , minus the predicted value of the dependent variable,
where denotes the OLS estimates of the coefficients, . The sum is
calculated for all beneficiaries in region R.
These risk adjustment factors are added to average spending to create a risk adjusted
value of spending for each region in each year, , which can be expressed as follows:
(4.3)
In equation (4.3), Y is equal to the average predicted value of the dependent variable across all
regions.
This approach is analogous to running a two-stage model. In the first stage, one runs the
regression in equation (4.1). In the second stage, one uses the individual level residuals, e, from
the first stage as the dependent variables in the second stage. The second stage regresses these
residuals on a series of HRR dummy variables.42
Several regression specifications (clusters, defined below) risk-adjust utilization to

account for the market level independent variables found in Appendix C.4. These risk adjustment
analyses are calculated using two regressions. First, the set of beneficiary-level independent
variables for a given cluster is used to calculate average residual utilization values for each
region as described above. Second, to estimate the effects of the market-level variables on
spending, the average residual for each region, , is regressed on the market-level independent
variables. For this analysis, the second step is performed only on the pooled 2007 through 2009
42
According to the Frisch-Waugh-Lovell Theorem, the regional spending estimates are equivalent to the regional
spending estimates, , from a fixed effects regression, (i.e,. ) if the risk adjusters, X, are linearly
unrelated to the regional dummy variables.

aggregate analysis at the HRR level. The following specification is used to perform the second
regression:
(4.4)
In equation (4.4), represents the dependent variable (the average utilization residual) for
region R, represents the coefficients for the market level independent variables represented by
for the beneficiaries region R, and represents the error term. Equation (4.4) is estimated
at the HRR region level.
To test model sensitivity and the impact of beneficiary and market level independent
variables on each dependent variable, the studies separately risk adjust dependent variables for
ten unique clusters43 of independent variables, which can be found in Appendix C.1 for the
Medicare analysis and Appendix C.2 for the Medicaid analysis. Cluster 2, the baseline model,
includes the following independent variables: beneficiary age, sex, health status (HCCs),
income/pharmacy benefit, partial-year enrollment, the interaction between age and sex, a new
enrollee indicator, and an indicator for the year of analysis. The baseline model independent
variables are chosen to be available to all subcontractors and promote consistency across
analyses. The cluster analyses allow researchers flexibility to evaluate model sensitivity and
answer diverse research questions when interpreting results of the aggregate analysis. For
example, the choice of whether to compare the risk-adjusted dependent variables using the
baseline model versus cluster 5, which includes additional race and income variables, depends on
whether the impact of race and income on those dependent variables is of interest. In addition,
certain independent variables are only accessible to particular IOM subcontractors as a result of
differential data sources and other factors, so various clusters are constructed with a common set
of variables to facilitate comparisons across subcontractor analyses while other clusters isolate
variables specific to selected subcontractors. For example, cluster 9 includes all independent
variables common to each subcontractor while cluster 10 includes independent variables unique
to the Medicare and Medicaid analysis. The results in this report use cluster 10 for the Medicare
analysis and cluster 5 for the Medicaid analysis.
Only the quality measures that are outcome measures are risk-adjusted. Outcome
measures assess the ultimate results of health care and must be risk adjusted to take into account
beneficiary factors. For example, the COPD admission rate should be adjusted for beneficiary
health status to avoid penalizing regions with beneficiaries that are sicker. Process measures
assess procedures that should be performed for all beneficiaries with a given condition, and thus,
they should not be adjusted for beneficiary factors. For example, all beneficiaries with diabetes
should have a screening for diabetic retinal disease, regardless of their gender or health status.
43
The term cluster in this report refers to regression specifications.
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The classifications of each quality measure can be found in Appendix B.4 and B.5. All quality
measures that are risk adjusted, other than the PQI measure for the aggregate cohort, use the
baseline model applied to a logistic regression rather than an OLS regression because the
outcomes are binary. The reported risk adjusted values for each episode are the observed
measure divided by the expected measure multiplied by the measure national mean across all
episodes. The HRR level mean for each quality measure is the average of these risk-adjusted
quality outcomes for each measure. The PQI composite measure, on the other hand, uses OLS
because the outcome is a count of events during the course of the observation window, while the
IQI and PSI composite measures use logistic regression in the same manner as the cohort
specific quality measures. The composite quality measures are not weighted to account for
precision due to the number of events in a region (as the AHRQ software does), so that the
analysis can observe all variation in quality.
4.2 Independent Variables Used in the Risk Adjustment Model
This analysis risk adjusts spending, utilization, and quality across regions to control for
differences due to variation in patient case mix and in the price of medical care. Risk adjustment
controls for factors that can influence spending but are outside the providers control. The
independent variables used for risk adjustment were chosen in consultation with IOM and were
designed to be as consistent as possible across the Medicare and Medicaid analyses as well as the
commercial analyses performed by other subcontractors to IOM. To account for patient case
mix, the methodology employs a set of beneficiary-level characteristics which are described in
Section 4.2.1. In addition, some factors in the market can also affect spending and quality in a
region, such as the percent of people uninsured or the supply of physicians. Section 4.2.2
describes the set of market-level characteristics that this analysis uses for a separate set of
regression specifications.
4.2.1 Beneficiary-Level Characteristics
The methodology gathers beneficiary-level information from Medicare and Medicaid

claims to account for patient case mix. The Medicare analysis includes the following beneficiary-
level characteristics:
Age
Sex44
Age-sex interaction
Race and ethnicity
Income
44
The prostate cancer cohort is not risk adjusted for beneficiary sex.

Health status
Institutionalization status
Dual enrolled status
New enrollee indicator
Partial year enrollment
Supplemental Medicare insurance
DRG and other inpatient claim information (only used for IQI and PSI quality measures)
Appendix C.3 contains a complete listing of the definitions of beneficiary-level

independent variables. Several adjustments are made for the Medicare and Medicaid analysis to
account for the specific features of the program and data structure. First, Medicare claims data
does not have information about beneficiary income beyond low-income status, and the
Medicaid analysis does not risk-adjust using the beneficiarys income at all because this
information is not available in the enrollment or claims files. Second, because all dual-enrolled
beneficiaries are included only in the Medicare analysis, the Medicaid analysis does not risk-
adjust for dual-enrolled status. Third, the Medicaid analysis does not risk-adjust using
supplemental Medicare insurance because enrollment in Medicaid is considered supplemental
Medicare insurance; thus, all Medicaid beneficiaries would have the same value for this
indicator. Finally, the Medicaid analysis additionally includes a state indicator for each
beneficiary for certain levels of the analysis.
Risk adjusting for health status allows the methodology to account for the change in cost
associated with beneficiaries varying levels of health. The analysis utilizes CMS 2008
definition of Hierarchical Condition Categories (HCCs) as an indicator of health status. CMS
uses HCCs within its risk adjustment model used to determine capitation payments to Medicare
Advantage plans.45 HCCs aggregate ICD-9 diagnosis codes into clinical categories to determine
beneficiaries health status and comorbidities. Like the CMS-HCC model, this analysis examines
beneficiaries claims for the 12-month period prior to their observation start date to identify their
health status. Areas with higher utilization levels will also have more HCCs, as beneficiaries in
those areas have diagnoses recorded more often. Thus, beneficiaries in high-use areas will appear
somewhat sicker, and risk adjustment may bias the regression estimates toward a better (i.e.,
lower cost, higher quality) result.46 The Medicare analysis does not include the HCC interaction
terms that use dual-enrollment status. Though dual-enrollment status may be predictive of health
45
Gregory C. Pope et al., "Evaluation of the CMS-HCC Risk Adjustment Model," RTI International and the
Centers for Medicare & Medicaid Services(March 2011),
https://www.cms.gov/MedicareAdvtgSpecRateStats/downloads/Evaluation_Risk_Adj_Model_2011.pdf.
46
Medicare Payment Advisory Commission, "Regional Variation in Medicare Service Use: Report to Congress,"
(January 2011), http://www.medpac.gov/documents/Jan11_RegionalVariation_report.pdf.
30 Acumen, LLC
status, it is not, in itself, a health status indicator. Thus, the Medicare analysis includes a dual-
enrollment indicator in certain clusters but does not tie it to the health status indicators.
Applying the HCC model to the Medicaid population has a number of benefits and
disadvantages. Using the same approach to measure health status across payers increases the
consistency of the analysis. CMS designed the HCCs, however, to capture spending variation in
the Medicare population. It is likely that major diseases that affect the Medicare population also
affect many Medicaid beneficiaries as well. The diagnostic codes that trigger HCCs for the
Medicare population, however, may not necessarily be the ones that drive variation in cost for
the Medicaid population, since Medicaid beneficiaries are more likely to be younger and also
disabled. The degree of overlap between the diseases that Medicare beneficiaries suffer from
compared to those that Medicaid beneficiaries suffer from is largely outside the scope of this
project.
Finally, to account for other factors that influence the price of medical care, the
commercial subcontractors to the IOM utilize beneficiary-level employer and insurer
characteristics. However, because the Medicare and Medicaid claims data do not have
information regarding employer characteristics, the risk adjustment approach does not include
employer information.
4.2.2 Market-Level Characteristics
To account for differences in spending, utilization, and quality due to the differing prices
of care across regions, the risk adjustment employs a set of market-level variables. These market-
level characteristics include:
Hospital competition
Percent of population uninsured
Supply of medical services per capita
Malpractice environment risk
Physician composition per capita
Access to care
Payer mix
Medicaid penetration
Health professional mix per capita
Percent of beneficiaries with supplemental Medicare insurance
These variables are meant to capture the underlying causes of the variation in prices of care. The
market-level characteristics are listed in Appendix 0. The market-level variables are drawn from
the following data sources:

Medicare Enrollment Database (EDB)
Area Resource File (ARF)47
Medicare Physician Fee Schedule (MPFS)48
InterStudy Health49
American Hospital Association (AHA)50
National Association of County and City Health Officials (NACCHO).51
This analysis uses an adjustment factor to calculate the per-capita health professional mix
variable from the ARF. Though the ARF includes a population estimate for most counties for
each year, some counties do not have a population estimate for a given year. For counties with
no population estimate for a year of analysis, the methodology inflates the countys 2000 United
States Census population count (which can be found in the ARF) assuming a growth rate equal to
the average national population growth rate:
,
(4.5) . , ,
,
In equation (4.5), Adj. Popj,t represents the adjusted population for county j in year t. Popj, t
represents the population estimate for county j as found in the ARF for year t, and jPopj,t
indicates the sum of the ARF population estimates for all counties, or the national population
estimate in the ARF, for year t. For example, for a county with no population estimate in 2007,
the analysis would calculate the adjusted population for that county as that countys population
in 2000 multiplied by the national population in 2007 and divided by the national population in
2000. This adjustment avoids underestimating the population of counties that do not have a
population estimate for a given year of analysis. In addition, if a county does not have data for a
given year for any market-level variable, the methodology uses the most recent data available.
As a result, an areas market-level variable could be the same for multiple years of analysis. For
example, if a county has data for 2008 but not for 2009 for a given market-level variable, the
2009 analysis will assign that variable the same value as the 2008 analysis.
47
"Area Resource File (ARF)," US Department of Health and Human Services, Health Resources and Services
Administration, Bureau of Health Professions, http://arf.hrsa.gov.
48
"Medicare Physician Fee Schedule (MPFS)," Centers for Medicare & Medicaid Services,
https://www.cms.gov/apps/physician-fee-schedule/overview.aspx.
49
HealthLeaders-InterStudy, http://hl-isy.com/.
50
American Hospital Association, http://www.aha.org.
51
"The National Profile of Local Health Departments Study Series," National Association of County & City Health
Officials, http://www.naccho.org/topics/infrastructure/profile/index.cfm.
32 Acumen, LLC
5 GEOGRAPHIC VARIATION IN MEDICARE SPENDING AND
UTILIZATION
Using the methodology described in the previous three chapters, this section answers six
research questions posed at the start of these report.
2. Are regions with high Medicare utilization levels likely to have high utilization levels
in subsequent years?
3. Is the variation in the volume of Medicare services greater within or across regions?
4. Do regions that provide a high volume of Medicare services when treating
beneficiaries for a given disease also provide a high volume of medical services when
treating all other diseases?
of Medicare services?
Although the empirical analyses define regions alternatively as HRRs, MSAs and HSAs and
defines many clusters of analysis, for brevity this section only discusses analysis of regional
variation at the HRR level using cluster 10. The following six sections answer each of these
research questions in turn. Appendix D contains information describing the relationship between
Medicare quality and spending.
5.1 Variation in Spending
The distribution of Medicare spending across beneficiary criteria parallels that of other
major payers. Table 5.1 presents per capita monthly spending levels before price-standardization
or risk adjustment by beneficiary criteria for the aggregate cohort in the 2007 through 2009
analysis period.52 The distribution is heavily right-skewed as the median cost ($310) is far below
the mean cost ($964). In addition, there exist a large number of beneficiaries that do not incur
any Medicare expenditures over the year. In fact, over ten percent of all beneficiaries have $0
spending per month. The large number of beneficiaries with $0 spending and the right-skewed
52
Expenditures are calculated for each episode as average monthly expenditures. Each beneficiary may have more
than one episode per period of analysis. All analyses use expenditures weighted by the number of months the
beneficiary is enrolled during the observation window. For simplicity, the remainder of this report refers to the
episode-month as the beneficiary.

distribution of Medicare spending levels are similar to findings of previous studies of Medicare
spending and of healthcare spending in other settings.53,54
Table 5.1: Medicare Average Monthly Cost by Beneficiary Characteristic

# Percentile
Std. 90-10
Category Episodes Avg. Min Max
Dev. 10th 50th 90th Difference
(millions)
All 104.7 $964 $2,032 $0 $0 $310 $2,565 $1,624,496 $2,565
Female 58.2 $991 $1,928 $0 $16 $351 $2,619 $538,869 $2,604
Male 46.6 $931 $2,155 $0 $0 $257 $2,490 $1,624,496 $2,490
White 87.5 $940 $1,945 $0 $2 $312 $2,501 $1,624,496 $2,499
Black 10.7 $1,190 $2,592 $0 $0 $304 $3,333 $491,706 $3,333
Asian 2 $828 $1,909 $0 $0 $299 $1,883 $260,717 $1,883
Hispanic 2.3 $1,153 $2,405 $0 $0 $353 $3,133 $403,307 $3,133
Other 2.1 $818 $1,985 $0 $0 $214 $2,070 $336,245 $2,070
Unknown 0.2 $833 $2,470 $0 $0 $109 $2,302 $448,033 $2,302
Dual 21.7 $1,594 $2,724 $0 $48 $689 $4,174 $1,597,797 $4,125
Non-Dual 83.1 $803 $1,778 $0 $0 $252 $2,100 $1,624,496 $2,100
Alive
During
100.2 $857 $1,712 $0 $0 $297 $2,273 $1,624,496 $2,273
Entire
Episode
Died
During 4.6 $5,214 $5,761 $0 $442 $3,742 $11,394 $1,320,817 $10,952
Episode
The right-skewed nature of the Medicare per capita spending levels persists even after
removing variation due to regional differences in prices, patient demographics, and observed
beneficiary severity of illness. Table 5.2 displays per capita spending levels after price-
standardization and risk adjustment. Because this analysis applies an OLS regression, risk
adjustment standardizes the average monthly cost across beneficiaries types identified as
explanatory variables in the model; this modeling produces an average monthly risk-adjusted
cost that is equal for all beneficiary criteria (except death/non-death, as this methodology did not
risk-adjust for episode outcome as a beneficiary-level variable). For the aggregate cohort, the
average price-standardized monthly cost is $958, while the median is $729, showing that
spending levels are still heavily right-skewed, but not as much as the unadjusted figures. The
skewness of the distribution can also be seen by contrasting the most extreme values with the top
and bottom 10th percentile; the difference between the 10th percentile and the minimum is under
53
Amy Finkelstein and Robin McKnight, "What did Medicare do? The initial impact of Medicare on mortality and
out of pocket medical spending," Journal of Public Economics 92, no. 7 (2008).
54
Naihua Duan et al., "A Comparison of Alternative Models for the Demand of Medical Care," Journal of Business
& Economic Statistics 1, no. April 1983, http://www.jstor.org/stable/1391852.
34 Acumen, LLC
$17,000, while the difference between the 90th percentile and the maximum is over $1,620,000.
Similar results can be found for the AMI, CHD, diabetes, and stroke episode cost distributions,
which are presented in Appendix D.1.
Table 5.2: Medicare Average Price-Standardized Risk Adjusted Monthly Cost

# Percentile
Std. 90-10
(millions)
All 104.7 $958 $1,695 -$16,820 -$28 $729 $2,089 $1,631,068 $2,117
Female 58.2 $958 $1,600 -$15,432 -$26 $718 $2,138 $525,144 $2,164
Male 46.6 $958 $1,808 -$16,820 -$31 $750 $2,026 $1,631,068 $2,057
White 87.5 $958 $1,654 -$16,820 -$12 $727 $2,096 $1,631,068 $2,108
Black 10.7 $958 $2,018 -$16,778 -$213 $716 $2,208 $487,355 $2,421
Asian 2 $958 $1,477 -$12,950 $140 $843 $1,648 $255,445 $1,509
Hispanic 2.3 $958 $1,905 -$15,031 -$150 $727 $2,163 $404,324 $2,312
Other 2.1 $958 $1,567 -$13,125 $101 $851 $1,707 $290,941 $1,605
Unknown 0.2 $958 $2,135 -$12,096 $100 $707 $1,792 $516,429 $1,692
Dual 21.7 $958 $2,259 -$16,820 -$414 $486 $2,823 $1,595,705 $3,237
Non-Dual 83.1 $958 $1,518 -$16,778 $96 $754 $1,919 $1,631,068 $1,823
Alive
During
100.2 $923 $1,484 -$13,705 $6 $727 $1,969 $1,631,068 $1,963
Entire
Episode
Died
During 4.6 $2,336 $5,259 -$16,820 -$1,932 $1,134 $7,811 $1,317,830 $9,743
Episode
Although the effect of death on episode costs is uncertain, this analysis concludes that
death episodes are among the most expensive Medicare episodes. Episodes ending in death are
truncated and thus Medicare may avoid paying for services that the beneficiary would have
otherwise incurred had they lived through the entire year; on the other hand, beneficiaries who
die during the year may experience an increase in the utilization of intensive, high-cost
treatments that may be performed in an attempt to prolong the beneficiarys life. On average,
however, death episodes are high-cost; although only 4.4 percent of beneficiary episodes end in
death each year, over half of these beneficiaries fall into the top decile of unadjusted Medicare
spending. Although controlling for patient case mix decreases the share of death episodes in the
top decile of overall episode costs, death episodes still cost much more on average ($2,336) than
non-death episodes ($923).
The variability in the aggregate cost distribution across beneficiary criteria, measured
using the standard deviation and 90-10 difference, is highest among beneficiaries who died
during their episodes andto a lesser extentamong dual-eligible beneficiaries. Whereas the

standard deviation in costs for all beneficiaries is $1,695, the standard deviation for beneficiaries
whose episodes ended in death is $5,259. Similarly, the 90-10 differencewhich is defined as
the difference in spending levels for beneficiaries at the 90th and 10th percentiles of the episode
cost distributionis $2,117, while the 90-10 difference for beneficiaries whose episodes ended
in death is $9,743. Dual-eligible beneficiaries who are enrolled in Medicare and Medicaid also
have higher variability in costs, but the variability is not as large as for patients that die during
the episode. The standard deviation of average Medicare spending for dual-eligibles is $2,259
and the 90-10 difference is $3,237. These figures are 49 percent and 78 percent higher,
respectively, than the corresponding variability statistics for non-dual beneficiaries.
Although not shown, this study reveals that the average monthly cost and variability for
beneficiaries with acute conditions generally is higher than for beneficiaries who have chronic
conditions. The average monthly cost in the year after a beneficiary has an AMI or stroke are
$5,591 and $5,047, respectively, and the average monthly costs for beneficiaries with CHD and
diabetes are $1,960 and $1,632, respectively, as presented in Appendix D.1. The standard
deviations of AMI and stroke are $4,710 and $3,928, and the standard deviation of CHD and
diabetes are considerably lower, at $2,538 and $2,260. Though the acute cohorts have higher
averages and more variability, the chronic cohorts have more high-cost outliers. These high-cost
outliers are more likely to occur for chronic episodes because the number of chronic episodes is
almost 18 times the number of acute episodes. In addition, though chronic conditions that are
well-managed can be low-cost, chronic conditions that are not well-managed can result in
extremely high costs.
5.2 Stability of Medical Service Volume over Time
If the same HRRs remain low volume regions across years, this finding suggests that
there exist persistent differences in provider practice patterns, beneficiary treatment preferences
or other time-invariant factors. On the other hand, if the lowest volume regions in one year are
high-volume the next, then variation in utilization rates may be the result of random noise rather
than any time-invariant cultural or institutional characteristics. To determine whether or not
medical service utilization is constant over time, the following analysis measures the correlation
of HRR average expenditures and rankings over time.
Within the years 2007 through 2009, relative utilization levels across HRRs are stable
over time. Figure 5.1 provides a scatterplot of each HRRs rank by price-standardized risk
adjusted cost for the aggregate cohort in 2007 and 2008. The figure indicates a strong
persistence of HRR utilization levels across time. Tables 5.4 and 5.5 quantify the strength of this
relationship. Table 5.3 shows that the Pearson correlation coefficients are above 0.95 for all
year-to-year comparisons of mean price-standardized, risk adjusted costs. Although not shown,
36 Acumen, LLC
the Pearson correlations are above 0.92 when using the median cost. The Spearman rank
correlation coefficients presented in Table 5.4 are similarly high. For all mean year-to-year
comparisons of the aggregate cohort the Spearman rank correlation coefficients are above 0.94.
Using median HRR cost, the Spearman rank correlations are above 0.91. This evidence indicates
that relative medical service volume across HRRs is stable over time; random variation is
unlikely to be generating outlier HRR utilization levels.
Figure 5.1: Medicare Utilization Rank by HRR, 2007-2008
Table 5.3: Pearson Correlation for Standardized Risk-Adjusted Medicare Costs

2007 2008 2009
2007 1.000 0.967 0.953
2008 0.967 1.000 0.971
2009 0.953 0.971 1.000
Table 5.4: Spearman Rank Correlation for Standardized Risk-Adjusted Medicare Costs
2007 2008 2009
2007 1.000 0.963 0.942
2008 0.963 1.000 0.965
2009 0.942 0.965 1.000

The average HRR-level volume of services used by Medicare beneficiaries in specific
cohorts also is highly persistent over time, but beneficiaries with chronic conditions have higher
correlations over time than beneficiaries with acute conditions. Figure 5.5 presents the 2007
HRRs relative ranking based on utilization compared to its relative ranking in 2008 measuring
utilization as monthly price-standardized risk adjusted cost. This figure indicates a high level of
persistence for the diabetes cohort, which has a Pearson correlation score of 0.971, and Figure
5.6 presents the same figure for the cholecystectomy cohort, which has one of the lowest Pearson
correlation scores, at 0.456. Whereas the diabetes graph shows a near-linear relationship between
2007 rank and 2008 rank, the cholecystectomy graph appears much more scattered and shows a
weaker relationship, especially for HRRs with fewer episodes. Appendix D.3 presents the
weighted Pearson and Spearman rank correlation coefficients for the AMI, stroke, CHD, and
diabetes cohorts.
Figure 5.2: Medicare Utilization Rank by HRR, 2007-2008 (Diabetes Cohort)
38 Acumen, LLC
Figure 5.3: Medicare Utilization Ranks by HRR 2007-2008 (Cholecystectomy Cohort)
Though the correlation of costs and ranks over time is high for some cohorts, this analysis
cannot determine whether the correlation is due to provider culture, beneficiary preferences, or
other factors. Further, for the chronic cohort, the high levels of correlation may be due in part to
the fact that the same beneficiaries may appear in multiple chronic cohorts. Beneficiaries with
chronic conditions will have chronic conditions for life. Thus, the beneficiaries who have a
chronic condition in one year are largely the same beneficiaries who had the condition the year
before, whereas for acute conditions the cohorts are largely different sets of beneficiaries each
year. Although HRR utilization rankings are stable across the time period of this study, 2007
through 2009, further study is needed to identify whether these patterns persist over a longer time
frame.
5.3 Variation in Volume of Medical Services Within and Across Regions
Although the relative rankings of average HRR medical service utilization are persistent
over time, there exists substantial variation in health care expenditures and utilization within
regions. Specifically, health care expenditures and utilization differ across regions on average,
but regional differences in average spending and utilization are significantly smaller than
variation in beneficiary utilization levels within a given region. Throughout this section,
variation in spending and utilization calculated using data for beneficiaries residing in a given
region is referred to as within-HRR variation whereas across-HRR variation refers to
dispersion in average HRR spending and utilization across the nation. Average HRR spending
and utilization refers to the average over all beneficiaries residing in an HRR. The finding that
within-HRR variation is significantly larger than across-HRR variation indicates that it may be

more productive to target high-cost beneficiaries regardless of location rather than focus efforts
on reducing utilization for the average beneficiary in a high cost region.
One measure of within-HRR variationthe variation in HSA spending within an HRR

indicates that the highest cost HSA within an HRR on average spends 30 percent more than the
lowest cost HSA within the HRR. Table 5.5 presents the ratio of highest- to lowest-spending
HSAs within an HRR for HRRs that contain at least 3 HSAs.55 The highest-spending HSA in an
HRR spends between 2 and 349 percent more than the lowest-spending HSA in that HRR
Similarly, the HSA with the highest utilization levels within an HRR utilizes between zero and
408 percent and an average of 21 percent more than the HSA with the lowest utilization level.
Table 5.5: Ratio of Highest-Spending to Lowest-Spending HSA by HRR (Medicare)

10th 25th 50th 75th 90th
Mean Min Max
Percentile Percentile Percentile Percentile Percentile
Expenditures 1.30 1.02 1.09 1.15 1.24 1.36 1.53 3.49
Utilization 1.21 1.00 1.06 1.11 1.18 1.26 1.37 4.08
While variation in spending and utilization within an HRR is considerably higher than
variation across HRRs, average HRR spending does explain a large share of variation in average
HSA spending. To estimate the share of variation in spending at the HSA level attributable to
HRRs, this analysis performs an OLS regression of HSA average spending on HRR indicator
variables, weighted by beneficiary-months enrolled in each HSA.56 The R2 value from this
regression represents the share of variation at the HSA level explained by HRR spending. An R2
value close to 0.0 would indicate that variation in HSA-level average spending is not at all
attributable to the HRR in which it is contained. An R2 value close to 1.0 would indicate that the
average spending is identical for each HSA in an HRR.
According to this methodology, more than three quarters of the variation in HSA
spending and utilization is explained by HRR spending. Table 5.6 presents the R2 value from the
regressions for expenditures and for utilization for the aggregate 2007 through 2009 analysis.
Seventy seven percent of the variation in HSA utilization is explained by the variation in HRR
utilization; 81 percent of the variation in HSA expenditures is explained by the variation in HRR
expenditures. Thus, the variation that remains in HSA-level average spending even after
controlling for HRR characteristics is less than 23 percent. This analysis does not take into
account, however, the variation in individual-level or provider-level expenditures and utilization
55
The analysis is limited to HRRs that contain 3 or more HSAs. In total, 285 out of 306 HRRs contain at least 3
HSAs.
56
In total, 285 out of 306 HRRs contain at least 3 HSAs.
40 Acumen, LLC
within an HSA. Thus, the high R2 on the regressions cannot be interpreted to indicate that HRR-
level spending adequately captures variation at the beneficiary or provider level.
Table 5.6: Proportion of HSA-Level Variation Explained by HRR, (Medicare)
Expenditures Utilization57
R-squared 0.809 0.766
To further measure within- and across-HRR variation, this analysis employs two
measures of dispersion: standard deviation and the 90-10 difference. To determine within-HRR
variation, this analysis calculates the standard deviation and 90-10 difference using beneficiary
observations for beneficiaries residing in a given HRR. The standard deviations and 90-10
differences for each HRR are then averaged over all HRRs to generate two measures of within-
HRR dispersion. To determine across-HRR variation, this analysis calculates average spending
and utilization within each region using beneficiary observations for beneficiaries residing in that
region and measures the standard deviation and 90-10 difference of these HRR averages. Table
5.7 presents several measures of within- and across-HRR variation for unadjusted, price-
standardized, and price-standardized risk-adjusted expenditures. Unadjusted measures of
dispersion are misleading because they do not adjust for important differences across regions,
including differences in Medicare payment levels and in beneficiary characteristics. Risk
adjustment reduces variation due to beneficiary characteristics, resulting in lower within- and
across-region variation for the risk-adjusted costs.
Within-HRR variation in spending and utilization is an order of magnitude larger than the
across-HRR variation. The average standard deviation within HRRs of price-standardized risk-
adjusted expenditures is $1,621, whereas the standard deviation of average costs across HRRs is
$84. Similarly, the average 90-10 difference within HRRs is $2,094, while the 90-10 difference
across HRRs of the average HRR cost is $208. The weighted averages of the standard deviation
and 90-10 differences (which weight HRRs based on the count of beneficiary-months contained
in the HRR rather than treating each HRR equally) are even higher than the unweighted
averages. Within-region variation is also higher than across-region variation for unadjusted and
price-standardized expenditures.
The qualitative relationship between within-HRR and across-HRR variation also holds
for all condition cohorts; in particular, the AMI, stroke, CHD, and diabetes cohorts have
considerably higher within-HRR variation than across-HRR variation. Appendix D.4 presents
57
As in the remainder of this report, Medicare utilization is risk-adjusted using Cluster 10. Performing the
regression using Cluster 2 has similar results.

within- and across-HRR variation for each of these condition cohorts. Of the condition cohorts,
the acute conditions tend to have both larger within-region variation and larger across-region
variation, though the cataract cohort, an acute procedure cohort, has the lowest within- and
across-region variation of all cohorts. The cholecystectomy, cataract, and pneumonia cohorts
have shorter observation periods, which may result in more variability in monthly episode costs.
Table 5.7: Dispersion of Medicare Service Utilization Within and Across Regions
Price-
Price-
Unadjusted Standardized
Standardized
Risk-Adjusted
Average of HRR Standard Deviations $1,903 $1,900 $1,621
Standard Deviation of HRR Means $129 $135 $84
Average of HRR 90-10 Differences $2,479 $2,498 $2,094
90-10 Difference of HRR Means $304 $322 $208
To reconcile the observations that (i) there exists significant stability in HRR rank across
years and (ii) within-HRR variation is an order of magnitude larger than the across-HRR
variation, one can examine whether the typical or outlier beneficiaries are causing the
persistence in HRR utilization levels across time. Figures 5.7 and 5.8 present the rank of the
HRRs by mean price-standardized risk adjusted cost versus the rank by median and by the 90th
percentile cost, respectively, for the aggregate cohort for three years of analysis. While there is a
moderate level of correlation between an HRRs mean and median utilization levels, and mean
and median rank is somewhat high for the highest- and lowest-ranked HRRs, the relationship is
weak in general. The relationship between the mean and the 90th percentile rank, however, is
strong for all HRRs. These figures illustrate that stability of average HRR utilization levels
across years is due to the persistence in the cost of treating the highest-cost beneficiaries rather
than the cost of treating beneficiaries at the median.
42 Acumen, LLC
Figure 5.4: Medicare Utilization Levels by HRR, Mean vs. Median
Figure 5.5: Medicare Utilization Levels by HRR, Mean vs. 90th Percentile
5.4 Variation in Volume of Medical Services Across Condition Cohorts
To determine whether regions that have high utilization levels when treating beneficiaries
with a certain condition also have high utilization levels for treating beneficiaries with other

conditions, the following analysis measures the correlation of utilization across beneficiary
cohorts. The correlation across cohorts can be measured using a Pearson correlation or Spearman
rank correlation. The unweighted correlations give all HRRs the same weight, regardless of the
number of episodes in the HRR, which allows the correlations to be influenced by all HRRs
equally and allows observation of the full range of variability.
Overall, the highest unweighted Pearson correlation across HRRs of the average monthly
price-standardized risk-adjusted cost is between the COPD and CHF cohorts, at 0.947; the lowest
correlation is between the prostate cancer and cataract cohorts, at 0.230. Table 5.8 shows the
Pearson correlation coefficients across HRRs of the average monthly price-standardized residual
costs for the aggregate, AMI, stroke, CHD, and diabetes cohorts. The correlations between CHD,
diabetes, and the aggregate cohort are higher than the correlations between the AMI and stroke
cohorts. Table 5.9 displays the Spearman rank correlations for the same cohorts across HRRs,
ranked by the average monthly price-standardized residual cost, which show similar results. The
full comparison of Pearson correlations between all cohorts is presented in Appendix D.6.
Table 5.8: Correlation (Pearson) of Medicare Utilization Levels across Cohorts
Aggregate AMI Stroke CHD Diabetes
Aggregate 1.000 0.712 0.803 0.910 0.957

AMI 0.712 1.000 0.780 0.742 0.741
Stroke 0.803 0.780 1.000 0.777 0.804
CHD 0.910 0.742 0.777 1.000 0.912
Diabetes 0.957 0.741 0.804 0.912 1.000
Table 5.9: Correlation (Spearman) of Medicare Utilization Levels across Cohorts
Aggregate 1.000 0.720 0.782 0.889 0.962

AMI 0.720 1.000 0.794 0.732 0.778
Stroke 0.782 0.794 1.000 0.748 0.828
CHD 0.889 0.732 0.748 1.000 0.923
Diabetes 0.962 0.778 0.828 0.923 1.000
The results indicate a higher correlation between beneficiaries with different chronic
conditions compared to beneficiaries with different acute conditions. The highest Pearson
correlation between chronic conditions is 0.947, between the COPD and CHF cohorts, while the
lowest correlation is 0.766, between the CHF and arthritis cohorts. Medicare beneficiaries often
have multiple chronic conditions, and the costs associated with each chronic illness will be
44 Acumen, LLC
counted toward all chronic episodes that are triggered. Beneficiaries with chronic conditions also
have them for multiple years, so the same beneficiaries are often included across years. In
addition, a single provider may care for a beneficiarys multiple chronic conditions, or a
beneficiary may see the same type of provider for his or her chronic conditions, such as a general
practitioner.
The HRR-level correlation of utilization levels for beneficiaries with acute conditions,
however, is typically much lower than the HRR-level correlation for chronic condition cohorts.
The lowest acute-condition correlation is 0.331, between the cataract and pneumonia cohorts.
Certain acute conditions do have higher correlations between HRRs; for instance the HRR-level
correlation between the AMI and pneumonia cohorts is 0.843. In general, the highest
correlations occur between conditions that are cared for by similar providers; for example,
beneficiaries with AMI and CHF are often treated by emergency room inpatient or outpatient
physicians and show a high correlation of 0.833. Although AMI and CHD are both diseases of
the heart, and the correlation between AMI and CHD is lower, at 0.742. This lower correlation
for these two heart-related diseases may occur because AMI and CHF are treated in the inpatient
setting whereas CHD is typically treated in the outpatient setting. This trend suggests that the
persistence in region spending is due, in part, to the high utilization levels of beneficiaries with
particular diseases who are cared for by the same types of providers.
5.5 Variation in the Use of Specific Healthcare Services
To determine whether regional differences in expenditures are driven by spending on

particular services, this analysis stratifies price-standardized, risk adjusted expenditures by
service categories. Section 5.3 presents results implying that the costs of various conditions are
correlated within regions. This section expands the results of Section 5.3 by examining the
correlation between the costs of particular service categories and total costs within regions. This
section proceeds as follows. Section 5.6.1 describes how risk-adjusted service categories are
created, Section 5.6.2 analyzes the relationship between total average monthly risk-adjusted costs
and the monthly risk-adjusted costs of each of the service categories, and Section 5.6.3 presents
the correlations between the service categories.
5.5.1 Defining Service Categories
This analysis examines seven service categories, which include:
Acute care
Post-acute care
Prescription drugs
Diagnostic

Procedures
Emergency department/ambulance
Other
Acute care includes care provided in an inpatient setting, excluding inpatient psychiatric and
rehabilitation facilities; the post-acute care category is mostly home health, skilled nursing and
hospice care; and prescription drugs include drugs purchased under both the Medicare Part B and
Part D programs. The diagnostic service category includes physician visits to evaluate the
patient condition as well as medical test and imaging procedures. The procedures and
emergency department/ambulance categories are fairly self-explanatory and the other category
contains any claim not included in the first six groups. Appendix B.2 provides further details
about these groupings, which impose a hierarchy to create mutually exclusive classifications.
To create risk adjusted costs for each service category, this study re-estimates the OLS
risk model separately for each service category. The service-specific risk adjustment model uses
the same explanatory variables as the cross-service model. The risk adjusted costs for each
service category obtained from the risk model are weighted by the number of beneficiary-months
enrolled in the HRR. These weights allow HRRs with a greater number of observations to have
a larger impact on the results.
5.5.2 Relationship between Overall and Service-Specific Utilization Levels
The post-acute and acute care risk adjusted costs have the strongest relationship with the
total average monthly risk adjusted costs. Figure 5.9 presents a series of charts of the average
monthly price-standardized cost residuals for each service category for the aggregate cohort. The
horizontal axis represents the HRRs sorted by their total average residual cost, with HRRs
furthest left being the lowest cost and HRRs furthest right being the highest cost. The vertical
axis shows the average monthly cost residual for the service category. If service utilization is
positively correlated with overall utilization, then it is expected that the graph will show a near-
linear relationship with a positive slope.
The results indicate that the utilization of post-acute care services is main driver of HRR-
level variation in utilization levels. Post-acute residual costs are closely related to total average
monthly residual costs; HRRs that have the lowest total cost residuals (on the left) also have the
lowest post-acute cost residuals, and HRRs that have the highest total cost residuals (on the right)
also have the highest post-acute cost residuals. The post-acute care service category also makes
up the largest share of the total cost residual, followed by the acute care service category. The
other categories make up small portions of the total cost residual and show little relationship with
total residual cost. Regional variation in the utilization of acute services also contributes to
46 Acumen, LLC
HRR-level variation in utilization levels, but regional variation in diagnostic, prescription drug,
procedure, ER/ambulance, and other monthly residual costs have little effect on HRR utilization
rankings.
Figure 5.6: Medicare Service Category Average Price-Standardized Residual

48 Acumen, LLC
5.5.3 Relationship between Post-Acute Components
Post-acute care makes up the largest contribution to HRR-level variation in utilization

levels. To determine which type of post-acute drives the variation in utilization, this analysis
examines four subcategories of post-acute care:
1. Skilled nursing care
2. Home health care
3. Hospice care
4. Other care (including psychiatric and long-term rehabilitation care).
Table B.2.1 in Appendix B defines these categories in more detail. This study estimates the OLS
risk adjustment model for each post-acute care category separately using the same set of
beneficiary-level covariates as the full model. As in the service category regressions, the risk
adjusted costs for each post-acute care type are weighted by the number of beneficiary-months
enrolled in the HRR.
Home health care has the largest geographic variation in spending of all types of post-
acute care. Table 5.10 presents the average monthly cost residual for each care category by
quintile. In Table 5.10, the HRRs are ranked by total utilization and categorized into quintiles
such that quintile 1 includes the 61 HRRs with the lowest total price-standardized, risk adjusted
spending, and each quintiles average residual is calculated for each post-acute care category.
Figure 5.10 graphically represents these results. Although skilled nursing care makes up the
largest share of post-acute spending, it has relatively low variability. Monthly home health care
costs, on average, less than half of monthly skilled nursing facility care, but the variability in
home health spending is much greater. To quantify the variability in each care setting, the final
column in Table 5.10 shows the range of the average monthly cost residual at the highest-cost
quintile (quintile 5) to the lowest-cost quintile (quintile 1). The high variability in home health
spending can also be seen graphically in Figure 5.10 as the difference between the absolute
values of the average monthly residual at the lowest-cost quintile and the average monthly
residual at the highest-cost quintile. Unlike other post-acute care settings, to be eligible for the
home health benefit, beneficiaries are not required to be hospitalized beforehand. Beneficiaries
become eligible for home health if they are confined to their home and require skilled nursing
care or physical or speech therapy on a part-time basis. Beneficiaries in home health do not pay
any cost-sharing and can receive an unlimited number of episodes of care as long as they are

eligible for home health. The finding that home health has the largest geographic variation in
spending echoes the conclusions from MedPACs March 2012 report to the Congress.58
Table 5.10: Post-Acute Care Category Residuals by Quintile

Average Average Monthly Residual Range: Top
Monthly
Quintile Quintile Quintile Quintile Quintile to Bottom
Utilization
1 2 3 4 5 Quintile
Level
All Spending $957.87 -$117.19 -$53.31 -$13.00 $23.97 $113.88 $231.07
Post-Acute $212.21 -$52.24 -$27.78 -$14.04 $8.38 $75.66 $127.90
Skilled Nursing $90.51 -$11.89 -$5.53 $0.56 $5.11 $4.59 $16.48
Home Health $43.79 -$18.02 -$13.50 -$9.68 -$0.80 $38.65 $56.67
Hospice $33.34 -$5.86 -$1.15 -$0.45 $3.71 $7.40 $13.26
Other $44.56 -$16.47 -$7.60 -$4.47 $0.36 $25.02 $41.49
Figure 5.7: Graph of Post-Acute Care Category Residuals
5.5.4 Regional Variation in the Use of Specific Healthcare Services
HRRs with high utilization levels in one service category do not necessarily have high
utilization levels in other service categories. Although the correlation between the seven types of
58
Medicare Payment Advisory Commission, "Report to the Congress: Medicare Payment Policy," (March 2012),
http://www.medpac.gov/chapters/Mar12_Ch08.pdf.
50 Acumen, LLC
service categories is positive, it is fairly low. In fact, correlations between service category costs
are below 0.40. Table 5.9 presents the Pearson correlation of the average price-adjusted residuals
between each service category for the aggregate cohort in 2007. Table 5.9 reports the correlation
between each category and all other costs (the Remaining Costs category). The Remaining
Costs category is the total costs minus the costs of the corresponding service category for which
the correlation is reported in the cell. For example, the correlation between acute care costs and
remaining costs is defined as the correlation between acute care costs and total costs net of
acute care costs. If the Remaining Costs category had been reported as simply the total cost, its
correlation with the categories that are high-cost and make up a large share of the total cost
would appear artificially high. For the aggregate cohort, the other cost and prescription drug cost
categories tend to have lower correlation with other categories; the acute care and ER/ambulance
categories tend to have higher correlations. Appendix D.6 presents the Pearson correlations for
AMI, stroke, CHD, and diabetes. The chronic cohorts tend to have higher correlations overall
than the acute cohorts. The chronic cohorts also have patterns of correlation similar to the
aggregate cohort, a trend which is related to the high correlation between chronic cohorts and the
aggregate cohort described above.
Table 5.11: Medicare Service Category Utilization across HRRs, Pearson Correlation
(2007)
Prescription Drugs
Remaining Costs
Post-Acute Care
ER/Ambulance
Acute Care
Procedures
Diagnostic
Other
Remaining Costs . 0.28 0.06 0.21 0.24 0.12 0.31 0.08
Acute Care 0.28 1.00 0.03 0.13 0.27 0.04 0.29 0.05
Prescription Drugs 0.06 0.03 1.00 0.19 -0.01 0.16 0.02 0.05
Diagnostic 0.21 0.13 0.19 1.00 0.01 0.38 0.12 0.10
Post-Acute Care 0.24 0.27 -0.01 0.01 1.00 0.01 0.19 0.03
Procedures 0.12 0.04 0.16 0.38 0.01 1.00 0.05 0.08
ER/Ambulance 0.31 0.29 0.02 0.12 0.19 0.05 1.00 0.04
Other 0.08 0.05 0.05 0.10 0.03 0.08 0.04 1.00

6 GEOGRAPHIC VARIATION IN MEDICAID SPENDING AND
UTILIZATION
To characterize regional variation in Medicaid spending and utilization, this section
answers the research questions posed at the start of this report. The questions addressed are as
follows:
2. Are regions with high Medicaid utilization levels likely to have high Medicaid
utilization rates in subsequent years?
3. Is the variation in the volume of Medicaid services greater within or across regions?
4. Do regions that provide a high volume of Medicaid services when treating
beneficiaries for a given disease also provide a high volume of Medicaid services
when treating all other diseases?
of Medicaid services?
The first six questions are answered in the body of this text; Appendix E answers the seventh
research question regarding the relationship between quality and cost. After creating a detailed
picture of regional variation in Medicaid spending, utilization and quality, this section then
compares these results against the findings from the Medicare analysis. Specifically:
levels in Medicaid?
The HRR-level results presented in this chapter rely on the methodology described in Sections 2
through 4 above.59 The following sections answer each of the above research questions in turn.
6.1 Variation in Spending
Beneficiaries that are female, Asian, or Hispanic are likely to have lower spending levels
than the average beneficiary. Table 6.1 presents per capita monthly spending levels before price-
standardization or risk adjustment by beneficiary criteria for the aggregate cohort during the
2007 through 2009 analysis period. The average cost per month for beneficiaries is $1,096,
implying that Medicaid beneficiaries cost $13,152 per year on average. Medicaid spending for
female beneficiaries, however, is about 60 percent of the spending levels for males. This result is
59
To be consistent with the Medicare analysis, cluster 5 is presented for the Medicaid analysis because it includes a
similar set of explanatory variables as the Medicare cluster 10.
52 Acumen, LLC
due in part to the fact that the average female enrollee is healthier than the average Medicaid
enrollee. For instance, state Medicaid programs are mandated to cover all pregnant women with
incomes up to 133 percent of the federal poverty line (FPL) and pregnant women represent a
generally healthier population than other Medicaid-eligible beneficiaries (e.g., the disabled). The
table below shows that women have 13.3 million episodes in the Medicaid cohort compared to
only 5.4 million episodes for men. In addition, Asian and Hispanic beneficiaries tend to have
lower average monthly expenditures than other racial groups. Similar to the Medicare cost
distribution, the overall Medicaid cost distribution is variable and right-skewed. As shown in the
table below, the standard deviation of monthly expenditures is $3,057. The spending
distributions right-skewed nature is demonstrated by the fact that the median cost for
beneficiaries in the aggregate cohort ($309) is far below the mean cost ($1,096). These patterns
holds for all beneficiary subgroups defined in the table below.
Table 6.1: Medicaid Average Monthly Cost by Beneficiary Characteristic

# Percentile
Std. 90-10
(millions)
All 18.7 $1,096 $3,057 $0 $26 $309 $2,645 $1,819,633 $2,619
Female 13.3 $905 $2,281 $0 $28 $297 $2,075 $1,819,633 $2,047
Male 5.4 $1,515 $4,261 $0 $21 $345 $4,120 $1,224,291 $4,099
White 9.2 $1,108 $2,906 $0 $27 $342 $2,687 $1,819,633 $2,660
Black 4.3 $1,166 $3,369 $0 $26 $275 $2,953 $1,224,291 $2,928
Asian 0.4 $814 $2,378 $0 $21 $210 $1,818 $639,080 $1,797
Hispanic 2.4 $834 $2,702 $0 $20 $235 $1,772 $456,349 $1,752
Other 0.5 $1,004 $2,983 $0 $36 $330 $2,200 $569,357 $2,165
Unknown 2.0 $1,237 $3,441 $0 $27 $340 $3,044 $716,080 $3,017
The Medicaid cost distribution remains highly variable and right-skewed even after price
standardization and risk adjustment. After removing variation due to regional differences in
prices, patient demographics, and observed beneficiary severity of illness, this skewness
becomes less pronounced (see Table 6.2). The average price-standardized monthly cost is
$1,094, while the median is $733. The long right tail of the Medicaid cost distribution is also
evident from the comparison of the difference between the 90th percentile cost and the maximum
cost and the difference between the 10th percentile and minimum cost; the largest difference for
any beneficiary category between the 90th percentile and the maximum is $1,805,090, while the
largest difference between the 10th percentile and the minimum is $21,780 (both for females).
Because this analysis applies an OLS regression including explanatory variables that identify

beneficiary type, risk adjustment produces an average monthly cost that is equal across
beneficiary types.60
Table 6.2: Medicaid Average Price-Standardized Risk Adjusted Monthly Cost

# Percentile
Std. 90-10
(millions)
All 18.7 $1,094 $2,767 -$21,479 $76 $733 $2,101 $1,807,021 $2,025
Female 13.3 $1,094 $2,012 -$21,479 $301 $794 $1,931 $1,807,021 $1,630
Male 5.4 $1,094 $3,944 -$20,383 -$234 $431 $2,742 $1,223,794 $2,976
White 9.2 $1,094 $2,650 -$18,373 $71 $729 $2,146 $1,807,021 $2,075
Black 4.3 $1,094 $3,042 -$21,479 $15 $735 $2,131 $1,223,794 $2,116
Asian 0.4 $1,094 $2,115 -$14,364 $307 $800 $1,864 $631,388 $1,557
Hispanic 2.4 $1,094 $2,454 -$17,890 $248 $813 $1,822 $469,208 $1,573
Other 0.5 $1,094 $2,736 -$15,719 $129 $732 $2,072 $549,763 $1,944
Unknown 2.0 $1,094 $3,065 -$15,716 $1 $661 $2,281 $717,016 $2,280
Similar to the aggregate cohort cost distribution, the cost distributions for the AMI,
stroke, CHD, and diabetes condition cohorts are right skewed. Further, average monthly cost
and variability for beneficiaries with acute conditions generally is higher than for beneficiaries
who have chronic conditions. Appendix E.1 displays the results for these four condition cohorts.
The average monthly cost in the year after a beneficiary has an AMI or stroke is $5,344 or
$4,737, respectively, and the average monthly cost for beneficiaries with CHD or diabetes is
$2,873 or $2,008, respectively. The standard deviations of AMI and stroke are $19,537 and
$15,701, and the standard deviation of CHD and diabetes are lower, at $12,236 and $8,674.
6.2 Stability of Medical Service Volume over Time
Medicaid utilization is fairly stable over time, but year-to-year correlations are much
weaker for Medicaid than for Medicare. Figure 6.1 provides a scatterplot of HRR rank by price-
standardized risk adjusted cost for the Medicaid aggregate cohort in 2007 and 2008, and Table
6.3 and Table 6.4 quantify the strength of this relationship. For all mean price-standardized, risk
adjusted cost year-to-year comparisons, the Pearson correlation coefficients range from 0.74 to
0.90 and range from 0.46 to 0.82 when using the median cost, which is not shown. For all mean
year-to-year comparisons, the Spearman rank correlation coefficients, presented in Table 6.4, are
between 0.74 and 0.91. Though not shown, the Spearman rank correlation coefficients using
median HRR cost range from 0.53 to 0.80. In contrast, the Pearson and Spearman correlation
coefficients for Medicare HRR rankings across all year combinations are all between 0.91 and
60
For some of the condition cohorts, the average monthly cost that is presented in Appendix E.1 is not equal across
beneficiary types. The beneficiaries in HRRs with fewer than 12 episodes for a given condition cohort are excluded
from the averages presented in these figures.
54 Acumen, LLC
0.98 when using either mean or median price-standardized, risk-adjusted HRR costs. This
evidence indicates that relative medical service volume across HRRs is far less stable over time
in the Medicaid program then in the Medicare program. Further analysis is needed to identify
whether this pattern of positive correlations and weaker Medicaid stability persists over a longer
time frame.
Figure 6.1: Medicaid Utilization Rank by HRR, 2007-2008
Table 6.3: Pearson Correlation for Standardized Risk-Adjusted Medicaid Costs

2007 2008 2009
2007 1.000 0.901 0.742
2008 0.901 1.000 0.765
2009 0.742 0.765 1.000
Table 6.4: Spearman Rank Correlation for Standardized Risk-Adjusted Medicaid Costs
2007 2008 2009
2007 1.000 0.905 0.738
2008 0.905 1.000 0.789
2009 0.738 0.789 1.000
Although regional Medicaid utilization levels are fairly stable over time, they are less
stable than Medicare utilization rates. There are a number of reasons for this finding. First, the
Medicaid data have smaller sample sizes in each HRR which may lead to increased volatility due
to outliers. Second, the Medicaid eligibility rules vary across States and are more likely to
change over time. For instance, eligibility levels for pregnant women currently range from the

minimum requirement of 133% FPL in 9 states to 300% FPL in the District of Columbia, Iowa,
and Wisconsin.61 Third, the types of services covered by Medicaid also vary across regions and
over time. State Medicaid programs can exercise a number of waivers such as Section 1115
research and demonstration waivers, Section 1915(b) Managed Care Waivers, or Section 1915(c)
home and community-based services waivers among other methods. Variability in wavier
specifications over time across states likely would reduce the stability of the Medicaid utilization
levels. For instance, in 2008 Rhode Island received approval for a waiver to cap federal funding
at a fixed dollar amount in exchange for increased flexibility to make changes to their State
Medicaid program rules.62
Similar to the Medicare results, however, year-to-year stability in HRR rank is driven
primarily by the spending on the highest cost Medicaid beneficiaries rather than the typical
Medicaid beneficiaries. Figure 6.5 and Figure 6.6 plot HRR rank by mean price-standardized risk
adjusted cost versus the rank by median and by the 90th percentile cost, respectively, for the
aggregate cohort over the 2007 to 2009 period of analysis. These figures show that there is little
correlation between an HRRs mean and median utilization levels. The relationship between the
mean and the 90th percentile rank, however, is strong and positive, much like the Medicare
cohort. These figures illustrate that the stability of average HRR utilization levels across years is
due to the persistence in the cost of treating the highest-cost beneficiaries rather than the cost of
treating beneficiaries at the median of the cost distribution.
61
"Medicaids Role for Women Across the Lifespan: Current Issues and the Impact of the Affordable Care Act,"
The Henry J. Kaiser Family Foundation, http://www.kff.org/womenshealth/upload/7213-03.pdf.
62
"The Role of Section 1115 Waivers in Medicaid and CHIP: Looking Back and Looking Forward," The Henry J.
Kaiser Family Foundation, http://www.kff.org/medicaid/upload/7874.pdf.
56 Acumen, LLC
Figure 6.2: Medicaid Utilization Levels by HRR, Mean vs. Median
Figure 6.3: Medicaid Utilization Levels by HRR, Mean vs. 90th Percentile
Turning the focus to beneficiary subpopulations, HRR utilization levels for specific
beneficiary condition cohorts are positively correlated, butsimilar to the Medicare study
resultscorrelations are higher for beneficiaries with chronic conditions than for beneficiaries
with acute conditions. Figure 6.7 presents relative HRR rankings based on average monthly

price-standardized risk adjusted cost for the diabetes cohort in 2007 and 2008. The diabetes
cohort, a chronic condition, has a Pearson correlation score of 0.88. Figure 6.8 presents the same
figure for the cholecystectomy cohort. This acute condition has one of the lowest Pearson
correlation scores (0.47) among all cohorts. The relationship between 2007 rank and 2008 rank is
much stronger for the diabetes cohort than for the cholecystectomy cohort, especially for HRRs
with fewer episodes. Appendix E.3 presents the Pearson and Spearman rank correlation
coefficients for the AMI, stroke, CHD, and diabetes cohorts. For chronic cohorts, the higher
correlations may be due in part to the fact that the same beneficiaries often appear in multiple
years because beneficiaries with chronic conditions typically have chronic conditions for life.
The acute condition cohorts, on the other hand, have largely different sets of beneficiaries each
year. For instance, individuals in the AMI cohort would need to suffer from an AMI in two
consecutive years to be included in the 2007 and 2008 cohorts.
Figure 6.4: Medicaid Utilization Rank by HRR, 2007-2008 (Diabetes Cohort)
58 Acumen, LLC
Figure 6.5: Medicaid Utilization Ranks by HRR, 2007-2008 (Cholecystectomy Cohort)
6.3 Variation in Volume of Medical Services Within and Across Regions
The highest-cost HSA within an HRR on average spends more than three times more per
Medicaid beneficiaries than the lowest cost HSA within that HRR. Table 6.5 displays the ratio of
highest- to lowest-spending HSAs within an HRR for HRRs that contain at least 3 HSAs.63 At
minimum, the lowest-spending or lowest-utilizing HSA uses only 1 percent more than the
highest-spending or highest-utilizing HSA within that HRR. At maximum, the highest-spending
(or highest utilizing) HSA in an HRR spends over 244 times more than the lowest-spending (or
lowest utilizing) HSA in that HRR. The variation in HSA-level spending within an HRR is
generally higher for Medicaid than for Medicaid.
Table 6.5: Ratio of Highest-Spending to Lowest-Spending HSA by HRR (Medicaid)

10th 25th 50th 75th 90th
Mean Min Max64
Percentile Percentile Percentile Percentile Percentile
Expenditures 2.79 1.01 1.29 1.58 2.09 3.04 4.79 33.58
Utilization 3.20 1.02 1.20 1.30 1.66 2.24 3.17 32.73
Despite the large variation in HSA-level spending within certain HRRs, average HRR-
level spending on Medicaid beneficiaries explains more than half of the variation in HSA
spending. To reach this conclusion, this report estimates an OLS regression of HSA-level
average spending on HRR indicator variables weighted by beneficiary-months enrolled in each
63
The analysis is limited to HRRs that contain 3 or more HSAs. In total, 285 out of 306 HRRs contain at least 3
HSAs. The utilization range analysis also excludes an additional 6 HRRs with HSAs that have negative risk-adjusted
spending.
64
The maximum reported excludes one HRR with an HSA whose risk-adjusted spending was only $7, causing the
ratio of the highest to lowest spending to be inflated to a figure of more than 200.

HSA to determine the share of variation in spending at the HSA level that is attributable to
HRRs.65 Applying this approach reveals that 64 percent of the variation in HSA spending is
explained by HRR spending, while about 52 percent of variation in HSA utilization is explained
by HRR utilization. Table 6.6 presents the R2 value from the regressions for expenditures and for
utilization for the aggregate 2007 through 2009 analysis. The variation that remains in HSA
spending after controlling for the HRR is less than 36 percent. Because this analysis does not
account for differences in individual- or provider-level expenditures and utilization within an
HSA, the moderate R2 on the regressions cannot be interpreted to indicate that HRR-level
spending reflects the variation at the beneficiary or provider level.
Table 6.6: Proportion of HSA-Level Variation Explained by HRR (Medicaid)

Expenditures Utilization66
R-squared 0.638 0.524
Although HSA-level average spending levels have moderate levels of variability within
an HRR, Medicaid expenditures and utilization vary much more for beneficiaries within HRRs
and HSAs than across these regions. Table 6.8 presents several measures of within- and across-
HRR variation for unadjusted, price-standardized, and price-standardized risk-adjusted Medicaid
expenditures. The average standard deviation within HRRs of price-standardized risk-adjusted
expenditures is $2,446, whereas the standard deviation of average costs across HRRs is $334.
Similarly, the average 90-10 difference within HRRs is $2,229, while the 90-10 difference across
HRRs of the average HRR cost is $795. When examining unadjusted and price-standardized
expenditures, Table 6.8 shows that within-region variation also is higher than across-region
variation.67
Both within-HRR and across-HRR variation are higher for the Medicaid beneficiaries
than for Medicare beneficiaries. In particular, for the aggregate cohort, the average of HRR
standard deviations is over fifty percent higher for Medicaid than for Medicare and the standard
deviation of HRR average costs is over four times higher for Medicaid than for Medicare when
costs are price standardized and risk adjusted. Further, mean per-month Medicaid spending is
higher than mean Medicare spending.
For beneficiaries in specific condition cohorts, the within-HRR variation in utilization

levels is much higher than the across-HRR variation. In particular, the AMI, stroke, CHD, and
65
In total, 285 out of 306 HRRs contain at least 3 HSAs.
66
As in the remainder of this report, Medicaid utilization is risk-adjusted using Cluster 5. Performing the regression
using Cluster 2 has similar results.
67
The weighted averages of the standard deviation and 90-10 differences (which weight HRRs based on the number
of beneficiary-months contained in the HRR rather than treating each HRR equally) are similar in magnitude to the
unweighted averages.
60 Acumen, LLC
diabetes cohorts have considerably higher within-HRR variation than across-HRR variation. For
example, the weighted average of HRR standard deviations for the AMI cohort is $16,973 while
the standard deviation of HRR mean costs is $1,632. Appendix E.4 presents within- and across-
HRR variation for each of these condition cohorts. Of the condition cohorts, the acute conditions
tend to have both larger within-region variation and larger across-region variation.
Table 6.7: Dispersion of Medicaid Service Utilization Within and Across Regions
Price-
Price-
Statistic Unadjusted Standardized
Standardized
Risk-Adjusted
90-10 Difference of HRR Means $1,126 $1,136 $795
6.4 Variation in Volume of Medical Services across Condition Cohorts
Although HRRs that treat one beneficiary condition in a resource intensive manner are
likely to treat other beneficiary conditions cohorts in a resource intensive manner as well, this
finding is much more robust when comparing the treatment of chronic diseases rather than acute
diseases. To determine whether an HRR consistently uses above (or below) average level of
utilization levels to treat beneficiaries with specific conditions, the following analysis calculates
Pearson and Spearman rank correlations using the average monthly price-standardized residual
costs over all three years of analysis. Correlations between the chronic conditions range from
0.736 to 0.937; correlations between the chronic and acute conditions are generally smaller,
ranging from 0.522 to 0.744; and correlations between the acute conditions are generally the
smallest, ranging from 0.454 to 0.672. The highest correlation between chronic conditions is
between the low back pain and depression cohorts, at 0.937; the highest correlation between the
chronic and acute cohorts is between low back pain and cataract, at 0.744. The highest
correlation between acute conditions is between pneumonia and AMI, at 0.672. Table 6.9
presents selected correlation coefficients across HRRs for the aggregate, AMI, stroke, CHD, and
diabetes cohorts.68 Of the four condition cohorts, the highest correlation occurs between the two
chronic cohorts (CHD and diabetes); the lowest is between a the two acute cohorts (AMI and
stroke). Table 6.10 displays the Spearman rank correlation coefficients for these four conditions
and the aggregate cohort. The diabetes and CHD cohorts have the highest Spearman rank
correlation, at0.847, whereas the diabetes and AMI cohorts have the lowest, at 0.594.
68
Appendix E.6 presents a table of correlations between each cohort.

Table 6.8: Correlation (Pearson) of Medicaid Utilization Levels across Cohorts
Aggregate 1.000
AMI 0.502 1.000
Stroke 0.515 0.568 1.000
CHD 0.651 0.693 0.607 1.000
Diabetes 0.794 0.576 0.611 0.831 1.000
Table 6.9: Correlation (Spearman) of Medicaid Utilization Levels across Cohorts
Aggregate 1.000
AMI 0.420 1.000
Stroke 0.466 0.625 1.000
CHD 0.613 0.719 0.666 1.000
Diabetes 0.800 0.594 0.615 0.847 1.000
Condition pairs with similar patterns of geographic variation in relative utilization levels
for Medicare beneficiaries are also likely to exhibit similar patterns of relative resource intensity
for Medicaid beneficiaries. To illustrate this point, Figure 6.9 plots the Medicare correlation for
a given condition pair against the Medicaid correlation for that same condition pair. For example,
the correlation between AMI and stroke is 0.781 for Medicare and 0.568 for Medicaid; thus, the
point plotted at (0.781, 0.568) represents the relationship across Medicare and Medicaid of the
correlation between these two conditions. If the Medicare and Medicaid correlations were
identical, the points would lie on the 45 degree line shown in the graph. In general, the Medicaid
correlations are often lower than the Medicare correlations, but the graph shows a positive and
linear relationship, especially for condition pairs with higher correlations. The Pearson
correlation coefficient between the Medicare and Medicaid condition-pair correlations is 0.644,
indicating that there is a strong relationship between the condition correlations in Medicare and
Medicaid.
62 Acumen, LLC
Figure 6.6: Medicare vs. Medicaid Condition Correlations
6.5 Variation in the Use of Specific Healthcare Services
HRRs with high resource intensity overall may not have an above average level of
resource utilization across all services. To determine whether or not high utilization HRRs can
be considered consistently high resource-intensity across all services, this analysis stratifies
price-standardized, risk adjusted expenditures by service category for each HRR. The following
analysis divides medical services into seven mutually exclusive, exhaustive categories. Section
6.6.1 defines each of these service categories and explains the methodology used to risk-adjust a
beneficiaries use of each of these medical services. Next, Section 6.6.2 examines which service
categories are the most important drivers of regional variation in overall resource intensity.
Finally, Section 6.6.3 examines whether geographic variation in overall utilization is correlated
with regional variation in the use of specific medical services.
6.5.1 Defining Service Categories
This analysis decomposes Medicaid services into seven service categories. These
categories include:
Acute care
Post-acute care
Prescription drugs
Diagnostic
Procedures

Emergency department/ambulance
Other
Acute care includes care provided in an inpatient setting, excluding inpatient psychiatric and
rehabilitation facilities. The post-acute care category is mainly nursing home, home health,
hospice care, and care provided at rehabilitation and psychiatric facilities. Post-acute care in the
Medicaid setting is perhaps a misnomer because a large share of the cost in this service category
is from Medicaid residents of long-term care facilities, which may or may not be needed as a
result of care provided in the inpatient setting. For consistency across the Medicare/Medicaid
analyses, however, we have maintained the same naming conventions. Like in the Medicare
analysis, the diagnostic service category includes physician visits to evaluate the patient
condition as well as medical tests and imaging procedures. The groupings also impose a
hierarchy for the Medicaid analysis to create mutually exclusive classifications. Appendix B.2
provides the detailed definitions of these groupings, including the differences between the
Medicaid and Medicare specifications.
Risk adjustment for a beneficiarys use of medical services in each of these seven
categories follows the same approach as is used for the Medicare analysis. Specifically, this
study re-estimates the OLS risk model for each service category using the same explanatory
variables as the cross-service model. Because the aggregate and service-specific risk adjustment
models are linear and because the services are defined to be mutually exclusive and exhaustive,
the sum of the risk adjusted cost for each service category will be equal to the estimate risk
adjusted cost for overall spending.69
6.5.2 Relationship between Overall and Service-Specific Utilization Levels
Post-acute care is the main driver of regional variation in Medicaid spending. To

demonstrate that this is the case, Figure 6.10 shows a series of charts that compare the service
category average monthly price-standardized residual cost by HRR ranked by total average
monthly price-standardized cost. The HRRs furthest to the left are the lowest-cost HRRs, while
the HRRs furthest to the right are the highest-cost HRRs. The vertical axis shows the average
monthly cost residual for the service category and shows the full range of values that the total
average monthly cost residual takes for all HRRs. A positive value on the vertical axis indicates
that the region has more utilization for that service than expected given the adjustment for input
prices and the health characteristics of the beneficiaries in the region, while a negative value
indicates that the region has less utilization for that service category than expected. The graph
will show a positive, near-linear relationship if service utilization is positively correlated with
69
The risk adjusted costs are weighted by the number of beneficiary-months enrolled in the HRR, which allows
HRRs with greater numbers of beneficiary-months to have a greater influence on the results.
64 Acumen, LLC
total utilization. Of all the service categories, the post-acute care graph clearly shows the
strongest positive linear relationship with total utilization.
In addition to having the strongest relationship with total utilization, post-acute care has
the highest variation in expenditure levels across HRRs. To illustrate the variation in post-acute
care spending, an HRR in the 10th percentile of post-acute care spending spends $100 less than
average on post-acute care, whereas an HRR at the 90th percentile of post-acute spending spends
$157 more than average. Furthermore, the graph suggests that areas that are high spending in the
post-acute category are also high-spending overall.
Post-acute services are a main driver of regional variation in total Medicaid utilization
levels, but there does exist a weaker positive relationship between regional variation in the use of
specific types of medical services and overall service utilization in an HRR. For the highest cost
HRRs, the use of prescription drugs and medical services in the other category make up a large
share of an HRRs overall utilization levels. In general, compared to the Medicare results, the
Medicaid results show that a number of service categories affect the total cost residual, and the
service categories that drive high costs in HRRs are not the same service categories that drive
low costs in HRRs.
Figure 6.7: Medicaid Service Category Standardized Risk Adjusted Residual, by HRR

66 Acumen, LLC
6.5.3 Regional Variation in the Utilization of Specific Healthcare Services
To change practice patterns for high cost HRRs, policymakers need to determine if above
average resource intensity is driven by the practice patterns of all providers or driven by a subset
of providers supplying specific medical services. To determine whether high cost areas have
consistently high utilization levels across all service categories, Table 6.11 shows the Pearson
correlation of the average price-adjusted residuals between each service category for the
aggregate cohort in 2007. The remaining costs category in Table 6.11 is the total costs in the
HRR minus the costs of the service category with which the correlation is reported. Examining
the correlation of each service category with the remaining costs service category prevents
artificially inflating the estimated correlations for service categories that make up a large share of
total cost.
HRRs that have high utilization levels do not necessarily have high utilization levels
across all service categories. The correlations between the seven service categories are always
positive and range from 0.005 to 0.311, indicating that there is some relationship between service
categories. The diagnostic and procedures categories tend to have the highest correlations with
other categories overall. Post-acute care has some of the lowest correlations with other
categories even though it makes up the largest share of the expected cost residual. The results
are similar for the 2008, 2009 and 2007-2009 specifications as well. Appendix E.5 presents the
Pearson correlations for the AMI, stroke, CHD, and diabetes cohorts, which show similar results.

Table 6.10: Medicaid Correlation of Service Category Utilization across HRRs (2007)
Prescription Drugs
Remaining Costs
Post-Acute Care
ER/Ambulance
Acute Care
Procedures
Diagnostic
Other
Remaining Costs .
Acute Care 0.08 1.00
Prescription Drugs 0.05 0.01 1.00
Diagnostic 0.31 0.23 0.09 1.00
Post-Acute Care 0.02 0.01 0.02 0.01 1.00
Procedures 0.22 0.18 0.09 0.28 0.00 1.00
ER/Ambulance 0.07 0.05 0.02 0.26 0.01 0.12 1.00
Other 0.05 0.02 0.07 0.06 0.00 0.06 0.02 1.00
Overall, the relationships between service categories tend to be stronger for Medicare
than Medicaid. In addition, Medicaid post-acute care utilization has a lower correlation with
other services than does Medicare post-acute care utilization. This finding is likely due to the
fact that Medicare only pays for short-term skilled nursing home care following a hospital stay,
whereas Medicaid does not have this requirement. Although the acute care and ER/ambulance
categories have the highest correlations in Medicare, the diagnostic and procedures categories
have the highest correlations in Medicaid. Correlations across the service categories tend to be
higher for the chronic cohorts than for the acute cohorts in both Medicare and Medicaid.
6.6 Variation in Volume of Medical Services between Medicare and Medicaid
Regions that are high-cost for Medicare beneficiaries are not necessarily high-cost for
Medicaid beneficiaries. Using the price-standardized risk-adjusted cost from 2007 through 2009,
Figure 6.11 presents the ranks of each HRR in Medicare on the horizontal axis and their ranks in
Medicaid on the vertical axis.70 To quantify the relationship between Medicare and Medicaid
utilization, Table 6.12 calculates the Pearson correlation and Spearman rank correlation
coefficients between the price-standardized, risk-adjusted expenditures in Medicare and
Medicaid for each HRR. Both correlation statistics produce slightly negative estimates; the
Pearson is -0.07, and the rank correlation is -0.06. The finding that correlation is near zero
indicates that regions with high expenditures in Medicare do not necessarily have high
expenditures in Medicaid.
70
The size of the bubble that represents each HRR is proportional to the number of Medicaid episodes in the
aggregate cohort in that HRR from 2007 through 2009.
68 Acumen, LLC
Figure 6.8: Medicare versus Medicaid Ranks
Table 6.11: Medicare versus Medicaid Correlations

Medicare versus Medicaid Correlations
Correlation -0.07
Rank Correlation -0.06

7 SUMMARY OF FINDINGS
The Institute of Medicine charged Acumen to conduct a study on geographic variation
and growth in the volume and intensity of services and in per capita health care spending for
Medicare and Medicaid beneficiaries. Specifically, this report aims to answer the following
research questions:
2. Are regions with high utilization levels likely to have high utilization rates in
subsequent years?
other diseases?
5. What types of services are the primary drivers of regional variation in the utilization of
medical services?
levels in Medicaid?
The following two sections present a summary of findings for the Medicare and Medicaid
investigations respectively.
7.1 Geographic Variation in the Use of Medicare Services
This analysis reveals that even after adjusting for geographic price variation and
beneficiary health status, costs vary significantly across regions. Whereas the average Medicare
patient uses $958 worth of services each month, patients in Rochester, NY, use only $784 of
medical services. If Medicare could reduce utilization levels to those of the most efficient HRR
(i.e., Rochester, NY), it would reduce costs by $68 billion per year. Even if Medicare could
reduce average beneficiary utilization levels to those of the HRR at the 25th percentile (St.
Cloud, MN), it would save Medicare $24.5 billion per year.
Not only is there significant variation in the utilization of healthcare services in Medicare,
high utilization regions tend to remain so over time. The correlation of HRR-level utilization in
Medicare between 2007 and 2008 is 0.97. This strong year-to-year correlation, however, is not
driven by similar treatment patterns for the typical patient over time; rather the correlation is
70 Acumen, LLC
due in large part to persistence in the cost of treating the highest-cost beneficiaries across
regions. The correlation of average and 90th percentile utilization levels is 0.93 whereas the
correlation of average and median utilization levels is only 0.70.
Nevertheless, broad-based policies created to reduce regional variation in medical

utilization may not be successful as the causes of high utilization levels vary across the country.
Variation in utilization among patients within an HRR is an order of magnitude greater than the
variation across regions. Thus, simply observing that beneficiaries in an HRR have high resource
utilization levels overall does not mean that the HRR has significantly above-average resource
use for treating all patients. For example, utilization for the CHD and diabetes cohorts is
correlated strongly (0.92) while the cataract and prostate cancer cohorts are more weakly
correlated (0.23). Further, areas with high resource intensity overall do not use more of all types
of services. For example, correlation across service types ranges from the weak negative
correlation of -0.01 between post-acute care and prescription drug utilization to a weak positive
correlation of 0.37 for procedures and diagnostic utilization. Medicare beneficiaries in high-cost
HRRs, however, did use significantly more post-acute services than beneficiaries in low-cost
HRRs, and much of the variation in post-acute spending is due primarily to home health care
spending.
7.2 Geographic Variation in the Use of Medicaid Services
Like Medicare, HRRs that have high intensity of resource use in one year are likely to
have high intensity of resource use in the following year. The year-to-year correlation of HRR-
level utilization for Medicaid (0.90) is comparable, although somewhat smaller than for
Medicare (0.97). Like Medicare, the variability of Medicaid expenditures and utilization is
significantly higher among beneficiaries within a given HRR than for the average beneficiary
across HRRs. The standard deviation of Medicaid spending for patients within a given HRR is
over 5 times larger than the standard deviation of Medicaid spending for the average beneficiary
across HRRs. Finally, like Medicare, a broad-based approach to achieving cost savings will fail
to take into account that high cost areas are not necessarily high cost for treating patients with all
diseases.
Although the geographic variation in Medicaid resource use exhibits similar features as
the geographic variation in Medicare use, there exists practically no statistical relationship
between an HRRs Medicare utilization levels and their Medicaid utilization levels. The
correlation between an HRRs Medicare and Medicaid utilization levels is -0.07. Table 7.1
provides a high-level comparison of key statistics results of this reports analysis of regional
variation in Medicare and Medicaid spending and utilization.

Table 7.1: Regional Variation in Spending, Utilization and Quality, Medicare vs. Medicaid
Research
Number
Variation in Spending Across All Average Cost : $958 Average Cost: $1,094
1
Beneficiaries Standard Deviation: $1,695 Standard Deviation: $2,767
Correlation: HRR Utilization
2 0.97 0.90
Levels Over Time (2007 - 2008)
Standard Deviation Within vs. Within: $1,621 Within: $2,446
3
Across HRRs Across: $84 Across: $334
Spending Correlation Across
4 0.23 - 0.95 0.17 - 0.94
Cohorts (Range of Correlations)
Primary Service Type Driving Post-acute care
5 Post-acute care
Regional Variation (including all nursing home)
Correlation: Utilization and Patient
6 -0.09 0.24
Safety Indicator composite score71
Correlation: Medicare and
7 -0.07
Medicaid Utilization by HRR
71
Positive numbers indicate higher spending is correlated with higher quality.
72 Acumen, LLC
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Appendix A: COHORT DEFINITIONS
A.1 Clean Period Requirements
The table below classifies each condition as chronic or acute and lists the clean period
requirement. Section A.2 lists the source of the codes used to identify beneficiaries in each
cohort and describes the definition of the index date, the length of the observation period, and the
length of the clean period if there is a clean period requirement. Section A.3 lists all codes
relevant to each condition cohort definition.
Condition Condition Type Clean Period Requirement
Acute/ Ischemic Stroke Acute 60 days
Diabetes Chronic None
Pneumonia Acute 90 days
Rheumatoid Arthritis Chronic None
Depression Chronic None
Congestive Heart Failure Chronic None
Acute Myocardial
Acute 60 days
Infarction
Coronary Heart Disease Chronic None
COPD Chronic None
Cataract Acute (Procedure) None
Low Back Pain Chronic None
Cholecystectomy Acute (Procedure) None
Breast Cancer Incident Cancer 6 months
Lung Cancer Incident Cancer 2 years
Prostate Cancer Incident Cancer 6 months

A.2 Condition Algorithms
The table below contains the algorithms for specifying the condition cohorts for the
Medicare study. The Medicaid study utilizes identical algorithms in most cases, however certain
CPT and HCPCS codes are not reported using uniform coding across states, and cohort
definitions utilizing these codes may underreport the number of beneficiary members of these
cohorts in the Medicaid analysis.
Code
Condition Medicare Study Cohort Algorithm
Source
Acute/ ICD-9 Dx Index date: At least 1 hospital inpatient admission with Dx code.
Ischemic Need 60 day clean period prior to index date.
Stroke Observation period: 12 months after index date.
Position: 1
Age: 18+
Diabetes ICD-9 Dx, Index date: 1 inpatient or 2 outpatient with Dx code OR 1 outpatient
NDCs and drugs
Observation period: 12 months after index date.
Position: 1
Age: 18+
Pneumonia ICD-9 Dx Index date: 1 inpatient or 2 outpatient Dx codes; 90 day clean period
prior to incident.
Observation period: 90 days after index date.
Position: 1
Age: 18+
Rheumatoid ICD-9 Dx, Index date: 1 inpatient or 2 outpatient with Dx code
Arthritis DRG Observation period: 12 months after index date
Position: 1-3
Age: 18+
Depression ICD-9 Dx Index date: 1 inpatient or 2 outpatient with Dx code
Observation period: 12 months.
Position: 1-3
Age: 18+
Congestive ICD-9 Dx Index date: Inpatient or 2 outpatient Dx code
Heart Observation period: 12 months
Failure Position: 1-3
Age: 18+
Acute ICD-9 Dx Index date: 1 inpatient with Dx code. Need 60 day clean period
Myocardial prior to index date.
Infarction Observation period: 12 months
Position: 1-3
Age: 18+
Coronary ICD-9 Dx Index date: 1 inpatient or 2 outpatient with Dx code
Heart Observation period: 12 months.
Disease Position: 1-3
Age: 18+
COPD ICD-9 Dx, Index date: 1 inpatient or 2 outpatient with Dx code or HCPCs
CPT Codes, Observation period: 12 months
& HCPCS Position: 1-3
Age: 18+
80 Acumen, LLC
Code
Condition Medicare Study Cohort Algorithm
Source
Cataract ICD-9 Index date: First occurrence of procedure code
Procedure, Observation period: 3 months after the first (or second) procedure
CPT, ICD-9 code. Thus, the observation period could range anywhere from 3 to 6
Dx months.
Position: 1-3
Age: 18+
Low Back ICD-9 Dx, Index date: 1 inpatient or 2 outpatient Dx codes
Pain ICD-9 Observation period: 12 months
Procedure Position: 1-3
codes Age: 18+
Chole- ICD-9 Index date: 1 inpatient procedure code
cystectomy Procedure, Observation period: 90 days prior to and after the index date.
CPT Codes, Position: 1-3
DRG Age: 18+
Breast ICD-9 Dx, Index date: 1 Medpar, Outpatient, or Carrier Claim Dx code and 1
Cancer ICD-9 procedure code from Medpar, Outpatient, or Carrier Claims within a
Procedure, window of 90 days before or after the first Dx (Diagnosis) date.
CPT Codes, Observation period: 12 months
& HCPCS Position: 1-3
Age: 18+
Prostate ICD-9 Dx, Index date: 2 Medpar, Outpatient, or Carrier Claim Dx code with
Cancer HCPCS, & different dates of service and 1 procedure code from Medpar,
CPT Codes Outpatient, or Carrier Claims within a window of 30 days before or
after the first Dx (Diagnosis) date.
Observation period: 12 months
Position: 1-3
Age: 18+
Female beneficiaries are excluded from this cohort.72
Lung ICD-9 Dx Index date: At least one Dx code on at least two claims with
Cancer different dates of services, at least one of which is primary, within
the index year anywhere on the Medpar.
Observation period: 12 months
Position: 1-3
Age: 18+
72
Out of 224,580 Medicare beneficiaries in the aggregate prostate cancer cohort, 10 female beneficiaries were
removed from the cohort due to this restriction. Out of 3,510 Medicaid beneficiaries in the prostate cancer cohort, 2
female beneficiaries were removed.

A.3 Condition Codes
Condition Codes
433.01 Occlusion and stenosis of basilar artery with cerebral infarction (CI)
433.11 Occlusion and stenosis of carotid artery w/ CI
433.21 Occlusion and stenosis of vertebral artery w/ CI
433.31 Occlusion and stenosis of multiple and bilateral precerebral arteries w/ CI
Acute/ Ischemic 433.81 Occlusion and stenosis of other specified precerebral artery w/ CI
Stroke 433.91 Occlusion and stenosis of unspecified precerebral artery w/CI
434.01 Occlusion of cerebral arteries w/ CI
434.11 Embolic cerebrovascular accident
434.91 Stroke (ischemic)
436 Acute but ill-defined cerebrovascular disease
Diagnosis Codes:
250.00-03 DM without mention of complication

250.10 Diabetes w/ ketoacidosis, type II or unspecified type, not stated as uncontrolled
250.11 Diabetes w/ ketoacidosis, type I, not stated as uncontrolled
250.12 DM w/ ketoacidosis type II or unspecified, uncontrolled
250.13 Diabetes with ketoacidosis, type I, uncontrolled
250.20-.23 Diabetes with hyperosmolarity (same designations as above)
Diabetes 250.30-.33 Diabetes with other coma (same designations as above)
250.40-.43 Diabetes w/ retinal manifestations (same designations as above)
250.50-.53 Diabetes w/ ophthlamic manifestations (same designations as above)
250.60-.63 Diabetes w/ neurological manifestations (same designations as above)
250.70-.73 Diabetes w/ peripheral circulatory disorders (same designations as above)
250.80-.83 Diabetes w/ other specified manifestations (same designations as above)
250.90-.93 Diabetes w/ unspecified complication (same designations as above)
NDC Codes73
480.0 Pneumonia (Pn) due to adenovirus
480.1 Pn due to respiratory syncytial virus
480.2 Pn due to parainfluenza virus
480.3 Pn due to SARS-associated coronavirus
480.8 Pn due to other virus not elsewhere classified
480.9 Viral Pn unspecified
481 Pneumococcal Pn
482.0 Pneumonia due to klebsiella pneumoniae
482.1 Pn due to pseudomonas
482.2 Pn doe to haemophilus influenzae
Pneumonia
482.3x Pn due to streptococcus (excludes 481)
482.4x Pn due to staphylococcus
482.8x Pn due to other specified bacteria
482.9 Pn due to Bacterial pneumonia unspecified
483.0 Pn due to Mycoplasma pneumoniae
483.1 Pn due to chlamydia
483.8 Pn due to other specified organism
485 Bronchopneumonia organism unspecified
486 Pn organism unspecified
487.0 Influenza with Pn
73
HEDIS 2010 Final NDC Lists, "Table CDC-A: Prescriptions to Identify Members with Diabetes," National
Committee for Quality Assurance, http://www.ncqa.org/tabid/1091/Default.aspx.
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Condition Codes
296.20 Major depressive disorder single episode unspecified degree
296.21 Major depressive affective disorder single episode mild degree
296.22 Major depressive affective disorder single episode moderate
296.23 Major depressive affective disorder single episode severe degree without
psychotic behavior
296.24 Major depressive affective disorder single episode severe degree specified as
with psychotic behavior
296.25 Major depressive affective disorder single episode in partial or unspecified
remission
296.26 Major depressive affective disorder single episode in full remission
296.30 Major depressive disorder recurrent episode unspecified degree
Depression 296.31 Major depressive affective disorder recurrent episode mild degree
296.32 Major depressive affective disorder recurrent episode moderate degree
296.33 Major depressive affective disorder recurrent episode severe degree without
psychotic behavior
296.34 Major depressive affective disorder recurrent episode severe degree specified
as with psychotic behavior
296.35 Major depressive affective disorder recurrent episode in partial or unspecified
remission
296.36 Major depressive affective disorder recurrent episode in full remission
300.4 Dysthymic disorder
309.1 Adjustment reaction with prolonged depressive reaction
311.xx Depressive disorder not elsewhere classified
402.01 Malignant hypertensive heart disease with heart failure
402.11 Benign hypertensive heart disease with heart failure
402.91 Unspecified hypertensive heart disease with heart failure
404.01 Hypertensive heart and chronic kidney disease, malignant, with heart failure
and with chronic kidney stage i-iv, or unspecified
404.03 Hypertensive heart and chronic kidney disease, malignant, with heart failure
and chronic kidney disease state v or end state renal disease
404.13 Hypertensive heart and chronic kidney disease, benign, ...
404.93 Hypertensive heart and chronic kidney disease, unspecified,
404.11 Hypertensive heart and chronic kidney disease, benign, with heart failure and
with chronic kidney stage i-iv, or unspecified
404.91 Hypertensive heart and chronic kidney disease, unspecified, with heart failure
and with chronic kidney stage i-iv, or unspecified
425.1 Hypertrophic obstructive cardiomyopathy
425.4 Other primary cardiomyopathies
Congestive Heart
425.5 Alcoholic cardiomyopathy
Failure
425.7 Nutritional and metabolic cardiomyopathy
425.8 Cardiomyopathy in other diseases classified elsewhere
425.9 Secondary cardiomyopathy unspecified
428.0 Congestive heart failure unspecified
428.1 Left heart failure
428.20 Unspecified systolic heart failure
428.21 Acute systolic heart failure
428.22 Chronic systolic heart failure
428.23 Acute on chronic systolic heart failure
428.30 Unspecified diastolic heart failure
428.31 Acute diastolic heart failure
428.32 Chronic diastolic heart failure
428.33 Acute on chronic diastolic heart failure
428.40 Unspecified combined systolic and diastolic heart failure
428.41 Acute combined systolic and diastolic heart failure

Condition Codes
428.42 Chronic combined systolic and diastolic heart failure
428.43 Acute on chronic combined systolic and diastolic heart failure
428.9 Heart failure unspecified
410.00 AMI of anterolateral wall EOC unspecified

410.01 AMI of anterolateral wall initial episode of care (IEOC)
410.10 AMI of other anterior wall EOC unspecified
410.11 AMI of other anterior wall IEOC
410.20 AMI of inferolateral wall EOC unspecified
410.21 AMI of inferolateral wall IEOC
410.30 AMI of inferoposterior wall EOC unspecified
410.31 AMI of inferoposterior wall IEOC
410.40 AMI of other inferior wall EOC unspecified
Acute Myocardial 410.41 AMI of other inferior wall IEOC
Infarction 410.50 AMI of other lateral wall episode of care unspecified
410.51 AMI of other lateral wall IEOC
410.60 True posterior wall infarction EOC unspecified
410.61 True posterior wall infarction IEOC
410.70 Subendocardial infarction EOC unspecified
410.71 Subendocardial infarction IEOC
410.80 AMI of other specified sites EOC unspecified
410.81 AMI of other specified sites IEOC
410.90 AMI of unspecified site EOC unspecified
410.91 AMI of unspecified site IEOC
410.xx Acute myocardial infarction
411.x Ischemic heart disease
Coronary Heart 412 Old myocardial infarction
Disease 413.x Angina
414.x Other ischemic heart disease
DX codes:
491.0 Simple chronic bronchitis

491.1 Mucopurulent chronic bronchitis
491.20 Obstructive chronic bronchitis without exacerbation
491.21 Obstructive chronic bronchitis with (acute) exacerbation
491.22 Obstructive chronic bronchitis with acute bronchitis
491.8 Other chronic bronchitis
491.9 Unspecified chronic bronchitis
492.0 Emphysematous bleb
COPD 492.8 Other emphysema
496 Chronic airway obstruction not elsewhere classified
HCPCS codes:
G8093 Newly diagnosed chronic obstructive pulmonary disease (COPD) patient

documented to have received smoking cessation intervention, within 3
months of diagnosis
G8094 Newly diagnosed chronic obstructive pulmonary disease (COPD) patient
not documented to have received smoking cessation intervention,
within 3 months of diagnosis
84 Acumen, LLC
Condition Codes
Procedure Codes:
13.19 Other intracapsular extraction of lens. Surgical removal of a cataractous lens.

(Dorland, 28th ed)
13.64 Discission of secondary membrane [after cataract]
13.41 Phacoemulsification and aspiration of cataract
13.42 Mechanical phacofragmentation and aspiration of cataract by posterior route
13.43 Mechanical phacofragmentation and other aspiration of cataract
13.61, 13.62,
13.63, 13.65 Excision of secondary membrane [after cataract]
13.66 Mechanical fragmentation of secondary membrane [after cataract]
13.69 Other cataract extraction
CPT Codes:
66982 Extracapsular cataract removal with insertion of intraocular lens prosthesis, (1-
Cataract stage procedure), manual or mechanical technique (eg, irrigation and aspiration
or phacoemulsification), complex, requiring devices or techniques not generally
used in routine cataract surgery (eg, iris expansion device, suture support for
intraocular lens, or primary posterior capsulorhexis) or performed on patients in
the amblyogenic developmental stage.
66983 Intracapsular cataract extraction with insertion of intraocular lens prosthesis (1
stage procedure),
66984 Extracapsular cataract removal with insertion of intraocular lens prosthesis (1
stage procedure), manual or mechanical technique (eg, irrigation and aspiration
or phacoemulsification)
66840 Removal of lens material; aspiration technique, 1 or more stages
66850 Removal of lens material; phacofragmentation technique (mechanical or
ultrasonic) (eg, phacoemulsification), with aspiration
66852 Removal of lens material; pars plana approach, w/ or wo vitrectomy
66920 Removal of lens material; intracapsular
66930 Removal of lens material; intracapsular, for dislocated lens
66940 Removal of lens material; extracapsular (not 66840, 66850, 66852)
714.0 Rheumatoid Arthritis (RA) - does not include juvenile (714.30)
714.1 Felty's syndrome - RA with splenoadenomegaly and leukopenia
714.2 Other RA with visceral or systemic involvement
Rheumatoid 714.30 Chronic or unspecified polyarticular juvenile RA
Arthritis 714.31 Acute polyarticular juvenile RA
714.32 Pauciarticular juvenile RA
714.33 Monoarticular juvenile RA
714.89 Other specified inflammatory polyarthropathies
353.1, 353.4 Nerve root and plexus disorders
355.0 Lesion of sciatic nerve
720.0 - 720.9 Spondylitis
721.3-721.91 Spondylosis and allied disorders
722.10 Intervertebral disc disorders
722.32
Low Back Pain 722.52
722.73
722.83
722.93
724.02-03 Other and unspecified disorders of back. Excludes: collapsed
vertebra
724.2-.9

Condition Codes
733.13 Pathological fracture of vertebrae
737.20-737.29 Lordosis (acquired), (postural), postlaminectomy, Other postsurgical
lordosis, Other lordosis acquired
737.40 Unspecified curvature of spine assoc. w/ other conditions
737.42 Lordosis associated with other conditions
738.4 Acquired spondylolisthesis, Degenerative spondylolisthesis
738.5 Other acquired deformity of back or spine
739.3-739.4 Nonallopathic lesions of lumbar region, sacral region, pelvic region
not elsewhere classified
756.11 Congenital spondylolysis lumbosacral region
756.12 Spondylolisthesis congenital
805.4 Closed fracture of lumbar vertebra w/o spinal cord injury
805.5 Open fracture of lumbar vertebra w/o spinal cord injury
805.6 Closed fracture of sacrum and coccyx w/o spinal cord injury
805.7 Open fracture of sacrum and coccyx w/o spinal cord injury
805.8 Closed fract. of unspecified vertebral column w/o spinal cord injury
805.9 Open fracture ... (same as above)
806.4-806.9 Closed fracture of lumbar spine with spinal cord injury, Open
fracture of lumbar spine with spinal cord injury, Closed fracture of
sacrum and coccyx with spinal cord injury, Open fracture of sacrum
and coccyx with spinal cord injury, Closed fracture of unspecified
vertebra with spinal cord injury, Open fracture of unspecified
vertebra with spinal cord injury
839.20 Closed dislocation lumbar vertebra
839.30 Open dislocation lumbar vertebra
839.40-839.49 Closed dislocation vertebra unspecified site, coccyx, sacrum, other
vertebra
839.50-839.59 Open dislocation vertebra unspecified site, coccyx, sacrum, other
vertebra
846.x Sprains and strains of sacroiliac region
847.2 Lumbar sprain
847.3 Sprain of sacrum
847.4 Sprain of coccyx
847.9 Sprain of unspecified site of back, Back NOS
952.2-952.9 Lumbar, Sacral, Cauda equine, Multiple. Unspecified site
(respectively) of spinal cord injury without spinal bone injury
953.2-953.3 Injury to lumbar and sacral (respectively) nerve root
953.5-953.9 Injury to lumbosacral plexus, multiple sites (unspecified) of nerve
roots and spinal plexus
Procedure Codes:
51.2 Cholecystectomy
51.21 Other partial cholecystectomy
51.22 Cholecystectomy
51.23 Laparoscopic cholecystectomy
51.24 Laparoscopic partial cholecystectomy
Cholecystectomy
CPT Codes:
47562 Laparoscopy, surgical; cholecystectomy

47563 Laparoscopy, surgical; cholecystectomy with cholangiography
47564 Laparoscopy, surgical; cholecystectomy with exploration of common duct
47570 Laparoscopy, surgical; cholecystoenterostomy
47579 Unlisted laparoscopy procedure, biliary tract,
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Condition Codes
47600 Cholecystectomy
47605 Cholecystectomy with cholangiography
47610 Cholecystectomy with exploration of common duct
47612 Cholecystectomy with exploration of common duct; with
choledochoenterostomy
47620 Cholecystectomy with exploration of common duct; with transduodenal
sphincterotomy or sphincteroplasty, with or without cholangiography
DX Codes:
174 Breast Cancer

174.1-174.9 Breast Cancer
233.0 Breast Cancer
Procedure Codes
85.1-85.19 Biopsy
85.20-85.21 Lumpectomy
Breast Cancer 85.22-85.23 partial mastectomy
40.3 Lymph node dissection
85.33-85.48 Mastectomy
CPT Codes:
19000, 19001, 19100, 19101, 19110, 19112 Biopsy

19120, 19125, 19126 Lumpectomy
19160, 19162, 19301, 19302 Partial mastectomy
38740, 38745, 38525 Lymph node dissection
19180-19255, 19303-19307 Mastectomy
Diagnosis Codes:
185 Prostate Cancer
Procedure Codes:
60.11 Closed (percutaneous) (needle) biopsy of prostate

60.12 Open biopsy of prostate
CPT Codes:
G0416 Surgical pathology, gross and microscopic examination for prostate needle
Prostate Cancer
saturation biopsy sampling, 1-20 specimens
saturation biopsy sampling, greater than 60 specimens
55700 Biopsy, prostate; needle or punch, single or multiple, any approach
55705 Biopsy, prostate; incisional, any approach
55706 Biopsies, prostate, needle, transperineal, stereotactic template guided
saturation sampling, including imaging guidance
0137T Biopsy, prostate, needle, saturation sampling for prostate mapping

Condition Codes
DX Codes:
162.2 Malignant neoplasm of main bronchus

162.3 Malignant neoplasm of upper lobe, bronchus, or lung
Lung Cancer
162.4 Malignant neoplasm of middle lobe, bronchus, or lung
162.5 Malignant neoplasm of lower lobe, bronchus, or lung
162.8 Malignant neoplasm of other parts of bronchus or lung
162.9 Malignant neoplasm of bronchus and lung, unspecified site
A.4 Cancer Cohort Methodology

The analysis examines three incident cancer cohorts: breast cancer, lung cancer and
prostate cancer. It is difficult to identify beneficiaries with incident cancer from Medicare claims
data because cancer diagnosis codes appear in claims data both due to cancer screening and
cancer treatment procedures. Since periods of remission and recurrence are common, it is
difficult to distinguish between new and prevalent cancer cases. Furthermore, defining
membership in a condition cohort through procedures claims leads to an endogeneity problem:
high cost areas are more likely to perform more procedures, and therefore to diagnose an incident
cancer at an earlier, and less expensive, stage, biasing observed costs downwards.
This methodology links the Surveillance, Epidemiology, and End Results (SEER)
registry data with Medicare claims data to validate the incident cancer cohort definitions used in
the analysis. The SEER program of the National Cancer Institute (NCI) collects data from
hospitals, physicians, laboratory reports and death certificates to determine cancer status in the
United States, including diagnosis date. The SEER registry is recognized as one of most accurate
sources of cancer incidence statistics: The seventeen SEER registries capture approximately 98
percent of breast cancer cases within the SEER domain74 It is not possible to use the SEER-
Medicare linked data for the purposes of this analysis because the registry covers only 28 percent
of the U.S. population and the goal of the analysis is to examine regional variation in costs,
utilization and quality across the U.S.
To determine beneficiary membership in each cancer cohort using Medicare or Medicaid

claims data, the methodology develops an algorithm for each cohort. The prediction power of
these algorithms is tested by comparing the results of each algorithm applied to the subsample of
beneficiaries surveyed by SEER to the actual cancer status of these beneficiaries reported in
SEER.
The general algorithm for determining membership in the cancer cohorts based on the
claims data involves three basic steps: 1) Screen valid claims for the appropriate diagnosis and
74
H. T. Gold and H. T. Do, "Evaluation of three algorithms to identify incident breast cancer in Medicare claims
data," Health Serv Res 42, no. 5 (2007), http://www.ncbi.nlm.nih.gov/pubmed/17850533.
88 Acumen, LLC
procedure codes, and if a specified code combination is present, define the index date as the date
of the claim containing the first condition relevant code, 2) for the Medicaid analysis, require
continuous enrollment in Medicaid without benefits restrictions for the duration of the clean
period, and 3) Remove prevalent cases, or beneficiaries with claims dating from the clean
period that contain procedure and diagnosis codes indicating preexisting cancer. Since the
analysis aims to assess the costs in the first year after a cancer diagnosis, membership in all three
cancer cohorts requires a clean period ranging from 6 months to 2 years. Because Medicaid
beneficiaries tend to enroll and disenroll frequently, a substantial number of beneficiaries are lost
as a result of the continuous enrollment requirement. More specifics about the screening
requirement (step 1) can be found in Appendix A. The cancer cohort algorithms were developed
based on the academic literature and refined under the guidance of the IOM committee member
Peter Bach of the Memorial Sloan-Kettering Cancer Center.
The cancer cohort algorithms are assessed using Medicare data based on four criteria:
positive predictive value, negative predictive value, sensitivity and specificity. Positive
predictive value measures the percentage of beneficiaries assigned by the algorithm to a given
incident cancer cohort that are registered for that cancer incident to the index date defined in step
1 in the SEER registry. Negative predictive value measures the percentage of beneficiaries not
assigned by the algorithm to a given incident cancer cohort that are not registered for that
condition incident to the index date in the SEER registry. Sensitivity measures the probability an
individual is assigned to a given incident cancer cohort given the individual is registered for the
condition incident for the index date in the SEER registry. Specificity measures the probability
an individual is not assigned to a given incident cancer cohort given the individual is not
registered for the condition incident to the index date in the SEER registry. The table below
provides these metrics for the final breast, prostate, and lung cancer algorithms.
Table A.1: Cancer Cohort Algorithm Results
Positive Negative
Condition Cohort Sensitivity
Predictive Value Predictive Value
Specificity
Breast Cancer 92.11 99.87 71.22 99.97
Prostate Cancer 83.82 99.84 71.57 99.92
Lung Cancer 72.82 99.86 76.75 99.82

A.5 Medicare Exclusion Restrictions
The table below shows the result of imposing exclusion restrictions for the Medicare
analysis. Beneficiaries episodes will be excluded from the final analysis if:
They do not have enrollment data in the EDB (column B)
They are not enrolled in Medicare Part A or Part B during the first month of the
observation period (column C)
They have an invalid ZIP code that is missing or does not map to a HRR, HSA, and MSA
(column D)
They are listed in the EDB as the primary payer for their health care costs (column E)
They have claims with third party payer costs in the observation window (column F)
For acute cohorts, they have $0 total cost on all Part A and B claims in the observation
window.
Column A presents the total number of Medicare episodes created in the 2007-2009
period for each condition cohort and for the aggregate sample. The aggregate sample includes
over 114 million episodes, and the condition cohorts range from 151,000 episodes (for breast
cancer) to over 22.8 million episodes (for low back pain). Each of the remaining columns shows
the percent of episodes which satisfy each criterion. Because these exclusions need not be
applied in any order, some episodes will be excluded based on more than one restriction. As a
result, the total percent of episodes excluded is not necessarily equal to the sum of the episodes
lost to each restriction.
Column B presents the percent of episodes with beneficiaries whose enrollment

information is not available in the EDB. Column C shows the percent of episodes with
beneficiaries that are not enrolled in Medicare A or B in the first month of the observation
window, which results in the largest loss of episodes. The remaining beneficiaries are
beneficiaries who are only enrolled in Part C; these beneficiaries are excluded from the analysis
because not all Part C claims are available. For the condition cohorts, the percent of episodes
excluded due to this restriction varies from 1 percent (for prostate cancer) to 22 percent (for
CHF). Column D shows the percent of episodes with an invalid ZIP code. Valid ZIP codes are
not missing and map to a HRR, HSA, and MSA. A majority of the episodes that are lost due to
this restriction have international ZIP codes or are the result of coding errors. Columns E and F
ensure that all of the beneficiarys claims will be available in the Medicare claims database.
Column E shows the percent of episodes with beneficiaries who do not have a payer primary to
Medicare listed in the EDB. The start and end date of the beneficiarys enrollment with a
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primary payer must not overlap the observation period. Column F shows the percent of episodes
that do not have any claims with third party payer costs. In general, columns E and F are
comparable, which suggests that about 2 percent of episodes are excluded due to Medicare not
being the primary payer. Column G presents, for acute cohorts, the percent of episodes with $0
total cost on Parts A and B during the observation window. Acute episodes with $0 total cost are
likely miscoded or otherwise not valid episodes of care. Column H presents the final results of
applying these restrictions. The percent of episodes from the total that are ultimately excluded
from the analysis ranges from 4 percent (for prostate cancer) to 25 percent (for CHF).
A B C D E F G H
Not A or B Acute
Enrolled Medicare
Enrolled Claims
Total Not as is Not Total
in First Invalid with $0
Number of Found Primary Primary Episodes
Month of ZIP Code Total
Episodes in EDB Payer Payer for Lost
Observati Cost on A
(EDB) all Claims
on and B
Aggregate 114,778,863 0.0% 0.0% 1.9% 5.8% 2.8% N/A 8.8%
AMI 1,221,791 0.0% 14.1% 0.8% 1.1% 0.8% 0.0% 16.2%
Arthritis 1,911,765 0.0% 8.5% 0.7% 2.6% 2.9% N/A 12.9%
Breast Cancer 151,390 0.0% 6.0% 0.5% 1.9% 2.1% 0.0% 9.2%
Cataract 4,082,817 0.0% 1.9% 0.5% 1.8% 1.9% 0.1% 5.0%
CHD 22,667,833 0.0% 13.7% 0.7% 1.9% 1.9% N/A 16.8%
CHF 13,152,055 0.0% 22.3% 0.6% 1.3% 1.2% N/A 24.5%
Cholecystect-
409,482 0.0% 11.8% 0.9% 1.7% 1.3% 0.0% 14.6%
omy
COPD 13,147,737 0.0% 16.7% 0.5% 1.6% 1.5% N/A 19.2%
Depression 8,685,355 0.0% 9.4% 0.6% 2.2% 2.1% N/A 13.1%
Diabetes 21,478,295 0.0% 10.2% 0.7% 2.2% 2.1% N/A 13.7%
Low Back Pain 22,819,996 0.0% 7.2% 0.5% 2.4% 2.3% N/A 11.0%
Lung Cancer 335,482 0.0% 3.5% 0.3% 2.4% 2.7% 0.0% 7.3%
Pneumonia 2,628,307 0.0% 6.2% 0.6% 1.3% 1.1% 0.0% 8.4%
Prostate Cancer 224,580 0.0% 0.6% 0.6% 2.2% 2.6% 0.0% 4.4%
Stroke 730,743 0.0% 13.4% 1.0% 1.0% 0.8% 0.0% 15.4%

Appendix B: OUTCOME MEASURE SPECIFICATION
B.1 Medicaid Input Price Standardization Methodology
Although other subcontractors will utilize both input and output price standardization
methods, the Medicaid analysis will only use input price adjustments. For Medicare, input price-
adjustment is based on payment rules, but in Medicaid payment rules vary by state, so this study
uses proxies for the cost of living adjustments. For the Medicaid methodology, the adjustments
vary by file type. The following sections describe the methodology used in the Medicaid analysis
to input price-standardize inpatient, long-term, drug, and other expenditures to measure
utilization.
B.1.1 Inpatient and Long Term Care Files

For inpatient (IP) and long-term (LT) claims, the Medicaid study standardizes spending
to account for regional variation in labor costs. The study uses the Hospital Wage Index (HWI)
to estimate regional variation in labor costs. The methodology employs CMSs assumption that
labor costs explain 69.7 percent of hospital costs from 2006 to September 31, 2008 and 68.8
percent from October 1, 2008 through 2010.75 Medicaid IP and LT claim costs are standardized
using equations (B.1) and (B.2):
(B.1) For claims before October 1, 2008:

_ _ _ 1/ 0.697 0.303
(B.2) For claims on or after October 1, 2008:
_ _ _ 1/ 0.688 0.312
B.1.2 Other Therapy File
For Other Therapy (OT) claims, the analysis uses two distinct methodologies to
standardize costs. If an OT claim has a valid HCPCS code, the analysis standardizes costs
using Geographic Practice Cost Index (GPCI) and Relative Value Units (RVUs). GPCIs vary by
geographic region (i.e., Medicare locality), while RVUs vary by HCPCS. Both GPCIs and RVUs
can be broken down into three major components: physician work (W), practice expense (PE),
and professional liability insurance (L). For OT claims with a valid HCPCS, the study
standardizes costs using equation (B.3):
75
"IPPS Annual Proposed and Final Rules," Centers for Medicare & Medicaid Services,
http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/.
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(B.3) _ _ _ /

For OT claims without a valid HCPCS, the Medicaid study adjusts costs with the
Geographic Adjustment Factor (GAF). The GAF is a weighted average of the three GPCIs where
the cost share weights are determined by the Medicare Economic Index (MEI) 2006 base year
weights as shown in equation (B.4).76 The methodology uses equation (B.5) to standardize costs
on OT claims with no valid HCPCS code.
(B.4) 0.48266 0.47439 0.04295
(B.5) _ _ _ /
B.1.3 Prescription Drug File

For prescription drugs (RX), the methodology does not adjust costs for input prices.
Because the quantity of service and days supply variables are not reliable on Medicaid claims,
actual expenditures are used.
76
"Medicare Economic Index Web Table," Centers for Medicare & Medicaid Services,
http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-
Reports/MedicareProgramRatesStats/downloads//mktbskt-economic-index.pdf.

94
B.2 Service Categories

As part of the input price adjustment analysis, this methodology also stratifies costs by service category to examine the specific
drivers of cost. For example, an area with above-average costs may have higher acute care costs but lower diagnostic costs than other
areas. The service cost stratifications are defined by claim type and code. For the Medicare analysis, for OP and PB claims that qualify
under multiple categories, the hierarchy of assignment is as follows: Acute, ER/Ambulance, Post-acute, Procedures, Diagnostic, and
Rx. The same hierarchy is followed for Medicaid OT claims that qualify under multiple categories, except no OT claims are included
in the acute category; so for Medicaid, the hierarchy has the same order but without an acute category.
Table B.1: Service Category Definitions

Medicare /
Service
Medicaid Medicare Specification Medicaid Specification
Category
Claim Types
IP claims: third digit of Provider Number = "0" or third-
IP, PB /
Acute Care fourth digits of "13" (inpatient hospital) All IP claims
IP, OT
PB claims: Place of Service = 21 (inpatient hospital)
OP, PB, DME claims: BETOS77 IN ("D1G" (drugs OT claims: BETOS IN ("D1G" (drugs administered
OP, PB, administered through DME), "O1E" (other drugs), "O1D" through DME), "O1E" (other drugs), "O1D"
Prescription
DME, PD /
Drugs (chemotherapy)) (chemotherapy))
OT, RX
all PD claims all RX claims
OP, PB / OP and PB claims: first digit of BETOS IN ("M" (evaluation OT claims: first digit of BETOS IN ("M" (evaluation
Diagnostic
OT and management), "I" (imaging), "T" (tests)) and management), "I" (imaging), "T" (tests))
All SNF, HH, HS claims All LT claims
OP claims: Type of Service IN (4, 5, 6) AND Facility OT claims:
Type="7" (outpatient rehabilitation); Place of Service IN (31 (skilled nursing), 32
SNF, HH,
IP claims: last four digits of Provider Number:
Post-Acute HS, OP, IP, (nursing facility), 34 (hospice), 51 (inpatient
2000-2299 (long term care)
Care PB / psychiatric), 52 (psychiatric facility), 53
LT, OT 4000-4499 OR third digit of "M" OR third digit of "S"
(psychiatric) (community mental health center), 56 (psychiatric
3025-3099 OR third digit of R or T (rehab) residential treatment center), 61 (inpatient rehab),
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PB claims: Place of Service IN (31 (skilled nursing), 32 62 (outpatient rehab))
77
"Berenson-Eggers Type of Service (BETOS)," Centers for Medicare & Medicaid Services,
https://www.cms.gov/Medicare/Coding/HCPCSReleaseCodeSets/BETOS.html.
95
Medicare /
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Service
Medicaid Medicare Specification Medicaid Specification
Category
Claim Types
(nursing facility), 34 (hospice), 51 (inpatient psychiatric), 52 Type of Service in (7 (nursing facility), 13 (home
(psychiatric facility), 53 (community mental health center), health), 33 (rehab), 35 (hospice))
56 (psychiatric residential treatment center), 61 (inpatient
rehab), 62 (outpatient rehab))
OP, PB /
Procedures OP and PB claims: first digit of BETOS="P" (procedures) OT claims: first digit of BETOS="P" (procedures)
OT
OP claims: BETOS = "O1A" (ambulance) OR Revenue OT claims: BETOS = O1A (ambulance) OR
Emergency Center code 0450-0459 or 0981 (emergency room) Revenue Center code 0450-0459, or 0981 (emergency
OP, PB /
Room / PB claims: BETOS = "O1A" (ambulance) OR Place of room) OR Place-of-Service = 23 (ambulance)
OT, IP
Ambulance Service IN (23 (emergency room), 41 (land ambulance), 42 IP claims: Revenue Center code 0450-0459 or 0981
(air or water ambulance)) (emergency room)
All claim
Other Any claim not previously categorized Any claim not previously categorized
types
The Medicare analysis further divides post-acute care into categories to determine the main cause of variation. The table below
presents the substratifications of the post-acute care categories.
IOM Study of Geographic Variation | May 2013
Table B.2: Post-Acute Care Category Definitions

Post-Acute Care
Medicare Specification
Category
SNF claims
Skilled Nursing
PB claims: Place of Service in: 31 (skilled nursing), 32 (nursing facility),
Home Health HH claims
HS claims
Hospice
PB claims: Place of Service in: 34 (hospice),
OP claims: Type of Service IN (4, 5, 6) AND Facility Type="7"
(outpatient rehabilitation);
IP claims with last four digits of Provider Number 4000-4499 OR third
Other Post-Acute
digit of "M" OR third digit of "S" (psychiatric)
IP claims with last four digits of Provider Number 3025-3099 OR third
digit of R or T (rehab)
96
Post-Acute Care
Medicare Specification
Category
IP claims with last four digits of Provider Number: 2000-2299 (long term
care)
PB claims: Place of Service in: 51 (inpatient psychiatric), 52 (psychiatric
facility), 53 (community mental health center), 56 (psychiatric residential
treatment center), 61 (inpatient rehab), 62 (outpatient rehab))
B.3 Utilization Counts

Medicare Method
Utilization Count Measure Code Medicaid Method
Code Description Notes
type
IP claims (non-
interim) with
admission date in
Number of Inpatient Surgical Count of observed inpatient surgical episode window and
All valid DRGs DRG
Admissions admissions. No more than 1 per day. an acute short-
Combine categories using
term/CAH provider
IP claims; does not
number and surgical
differentiate between
MSDRG
medical and surgical
IP claims (non-
admissions. Count of
interim) with
inpatient admissions. No
admission date in
more than 1 per day.
Number of Inpatient Medical Count of observed inpatient medical episode window and
All valid DRGs DRG
Admissions admissions. No more than 1 per day. an acute short-
term/CAH provider
number and medical
MSDRG
Same specification as
Number of Inpatient Surgical Combine categories using
All valid DRGs DRG Count of inpatient surgical days Number of Inpatient
Days IP claims; does not
Surgical Admissions
differentiate between
Same specification as
Acumen, LLC
Number of Inpatient Medical medical and surgical days.

All valid DRGs DRG Count of inpatient medical days Number of Inpatient
Days Count of inpatient days.
Medical Admissions
Number of days with an 99201 CPT Office visit, E&M, new pt., minimal OP and PB claims. OT claims. (Under-
outpatient office visit 99202 CPT Office visit, E&M, new pt., minor Can have only 1 reported in states with
97
Medicare Method
Acumen, LLC

type
Office visit, E&M, new pt., low outpatient office visit prevalent local code
99203 CPT
complexity per day system usage)
Office visit, E&M, new pt., moderate
99204 CPT
complexity
Office visit, E&M, new pt., high
99205 CPT
complexity
Office visit, E&M, established pt.,
99211 CPT
minimal
99212 CPT Office visit, E&M, established pt., minor
Office visit, E&M, established pt., low
99213 CPT
complexity
Office visit, E&M, established pt.,
99214 CPT
moderate complexity
Office visit, E&M, established pt., high
99215 CPT
complexity
99241 CPT E&M, Consultation, minimal
99242 CPT E&M, Consultation, minor
99243 CPT E&M, Consultation, low
99244 CPT E&M, Consultation, moderate
99245 CPT E&M, Consultation, high
OP, PB, or DM
RX claims. (Under-
For each person/NDC/Day: =1 if days claims with HCPCs
All valid NDC reported in states with
Number of RX drug fills NDC supply <=30; =days supply/30 if days with BETOS in (D1G,
claims prevalent local code
supply >30 O1E, or O1D), and all
system usage)
Part D claims
99281 CPT Emergency dept visit, minimal OP claims with
99282 CPT Emergency dept visit, minor Revenue Center code
99283 CPT Emergency dept visit, low 0450-0459 or 0981; OT claims with Revenue
99284 CPT Emergency dept visit, moderate and IP claims with Center code 0450-0459 or
Revenue Center code 0981, or Place-of-Service
Number of Emergency
0450-0459 or 0981 = 23; and IP claims with
Department Visit Days
and restricting to Revenue Center code
99285 CPT Emergency dept visit, high Source of Admission 0450-0459 or 0981. Max 1
=7. per person per day.
Max 1 per person per
day.
98
Medicare Method
type
Maximum of 1 OT claims (Under-
Number of Imaging Diagnostic procedure of each type reported in states with
CPT
Encounters Imaging Codes on any given day. OP prevalent local code
and PB claims. system usage.)
OT and IP claims (Under-
No more than 1 test
Cardiac Stress ICD-9 reported in states with
Sentinel Services Nuclear stress tests per enrollee day. IP,
Test and CPT prevalent local code
OP, and PB claims.
system usage.)
No more than 1 OT and IP claims (Under-
Bilateral Cardiac ICD-9 procedure per enrollee reported in states with
Sentinel Services Bilateral cardiac catheterization
Catheterization and CPT day. IP, OP, and PB prevalent local code
claims. system usage.)

Hip and Knee procedure per enrollee reported in states with
Discretionary Services CPT Hip and knee replacement
Replacement day. IP, OP, and PB prevalent local code
Laparoscopic cholecystectomy as
percent of all cholecystectomy,
calculated for the cholecystectomy IP claims for the
cohort and the aggregate cohort. For the cholecystectomy ICD-9 and CPT. IP claims
cholecystectomy cohort, use only IP cohort; IP, PB, and OP for the cholecystectomy
claims because the cohort is defined claims for the cohort; IP and OT claims
ICD-9
Discretionary Services Cholecystectomy using only IP claims. For the aggregate aggregate cohort. For for the aggregate cohort.
and CPT
cohort, use IP, OP, and PB claims to the cholecystectomy (Under-reported in states
capture all cholecystectomies. cohort, only check the with prevalent local code
claims on the index system usage.)
This measure is not risk-adjusted date.
because it is a process of care quality
measure.
Acumen, LLC
procedure per enrollee reported in states with

Discretionary Services Hysterectomy CPT Hysterectomy
day. IP, OP, and PB prevalent local code
99
Medicare Method
Acumen, LLC

type

Lower Back procedure per enrollee reported in states with
Discretionary Services CPT Lower back surgery
Surgery day. IP, OP, and PB prevalent local code
Same specifications as number of days

with an outpatient office visit, but
restrict to visits to a physician
specialist78 except those to a primary Not included in analysis as
See Outpatient
Specialist encounters CPT care physician (01=General practice, Medicaid claims do not
Visits
08=Family practice, 11=Internal include specialty codes.
medicine, 37=Pediatric medicine, and
38=Geriatric medicine) and to
65=Physical therapist.
78
The analysis uses CMS definition of physician specialty code found in the Medicare claims processing manual: "Medicare Claims Processing Manual:
Chapter 26 - Completing and Processing Form CMS-1500 Data Set. Section 10.8.2: Physician Specialty Codes," The Centers for Medicare & Medicaid Services,
http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/clm104c26.pdf.
100
B.4 Condition-Specific Quality Measures

79
Condition Quality Measure Type Specification External Source Link to measure
Acute/ Discharged on Process Programmed to American Academy of Neurology, American College of Measure 2 (Page 7):
Ischemic Antiplatelet align with Radiology, Physician Consortium for Performance http://www.ama-
Stroke Therapy: Patients AAN/ACR/PCPI/ Improvement, National Committee for Quality Assurance. assn.org/ama1/pub/uploa
aged 18 and older NCQA Stroke and stroke rehabilitation physician performance d/mm/pcpi/stroke-
with diagnosis of Performance measurement set. Chicago (IL): American Medical worksheets.pdf
ischemic stroke or Measure #2 Association (AMA), National Committee for Quality
TIA who were specifications Assurance (NCQA); 2009 Feb. 20 p.
prescribed
antiplatelet therapy
at discharge.
Diabetes Rate of Lower- Outcome Programmed in AHRQ quality indicators. Guide to prevention quality http://www.qualityindica
extremity accordance with indicators: hospital admission for ambulatory care sensitive tors.ahrq.gov/Downloads
Amputation among AHRQ Prevention conditions [version 3.1]. Rockville (MD): Agency for /Software/SAS/V41A/Te
Patients with Quality Indicator Healthcare Research and Quality (AHRQ); 2007 Mar 12. chSpecs/PQI%2016%20
Diabetes: (PQI) #16 59 p. (AHRQ Pub; no. 02-R0203). Rate%20of%20Lower-
Discharges of age specifications extremity%20Amputatio
18 and older with AHRQ quality indicators. Prevention quality indicators n.pdf
ICD-9-CM appendices [version 4.2]. Rockville (MD): Agency for
procedure code for Healthcare Research and Quality (AHRQ); 2010 Sep. 1 p.
lower extremity
amputation and AHRQ quality indicators. Prevention quality indicators:
diagnosis of technical specifications [version 4.2]. PQI #16 rate of
diabetes in any field. lower-extremity amputation among patients with diabetes.
Rockville (MD): Agency for Healthcare Research and
Quality (AHRQ); 2010 Sep. 2 p.
Acumen, LLC
79
At the recommendation of the team clinician, the chosen approach enforces all optional exclusions in the quality measures in order to give providers the benefit
of the doubt in cases where certain services may not be appropriate for beneficiaries with certain characteristics.
101
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Comprehensive Process Programmed to National Committee for Quality Assurance (NCQA). See HEDIS measure:
diabetes care: align with HEDIS HEDIS 2011: Healthcare Effectiveness Data and Comprehensive diabetes
percentage of specifications. Information Set. Vol. 1, narrative. Washington (DC): care: percentage of
members 18 through National Committee for Quality Assurance (NCQA); 2010. members 18 through 75
75 years of age with various p. years of age with
diabetes mellitus diabetes mellitus (type 1
(type 1 and type 2) and type 2) who had an
who had an eye eye screening for
screening for diabetic retinal disease.
diabetic retinal
disease.
Comprehensive Process Programmed to National Committee for Quality Assurance (NCQA). See HEDIS measure:
diabetes care: align with HEDIS HEDIS 2011: Healthcare Effectiveness Data and Comprehensive diabetes
percentage of specifications. Information Set. Vol. 1, narrative. Washington (DC): care: percentage of
members 18 through National Committee for Quality Assurance (NCQA); 2010. members 18 through 75
75 years of age with various pages. years of age with
diabetes mellitus diabetes mellitus (type 1
(type 1 and type 2) and type 2) who had a
who had a hemoglobin A1c
hemoglobin A1c (HbA1c) test during the
(HbA1c) test during measurement year.
the measurement
year.
Pneumonia Bacterial Pneumonia Outcome Programmed to AHRQ quality indicators. Guide to prevention quality http://www.qualityindica
Admission Rate: All align with AHRQ indicators: hospital admission for ambulatory care sensitive tors.ahrq.gov/Downloads
discharges of age 18 PQI #11 conditions [version 3.1]. Rockville (MD): Agency for /Software/SAS/V41A/Te
years and older with specifications Healthcare Research and Quality (AHRQ); 2007 Mar 12. chSpecs/PQI%2011%20
ICD-9-CM principal 59 p. (AHRQ Pub; no. 02-R0203). Bacterial%20Pneumonia
diagnosis code for %20Admission%20Rate.
bacterial AHRQ quality indicators. Prevention quality indicators pdf
pneumonia. appendices [version 4.2]. Rockville (MD): Agency for
Healthcare Research and Quality (AHRQ); 2010 Sep. 1 p.
AHRQ quality indicators. Prevention quality indicators:

technical specifications [version 4.2]. PQI #11 bacterial
pneumonia admission rate. Rockville (MD): Agency for
102
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Rheumatoi Rheumatoid Process Programmed to National Committee for Quality Assurance (NCQA). See HEDIS measure:
d Arthritis arthritis: Percentage align with HEDIS 2011: Healthcare Effectiveness Data and Rheumatoid arthritis:
of members who HEDIS Information Set. Vol. 1, narrative. Washington (DC): percentage of members
were diagnosed with specifications National Committee for Quality Assurance (NCQA); 2010. who were diagnosed with
rheumatoid arthritis various pages. rheumatoid arthritis and
and who were who were dispensed at
dispensed at least National Committee for Quality Assurance (NCQA). least one ambulatory
one ambulatory HEDIS 2011: Healthcare Effectiveness Data and prescription for a disease
prescription for a Information Set. Vol. 2, technical specifications. modifying anti-rheumatic
disease modifying Washington (DC): National Committee for Quality drug (DMARD).
anti-rheumatic drug Assurance (NCQA); 2010. various pages.
(DMARD).
Depression Antidepressant Process Programmed to National Committee for Quality Assurance (NCQA). See HEDIS measure:
medication align with HEDIS 2011: Healthcare Effectiveness Data and Antidepressant
management HEDIS Information Set. Vol. 1, narrative. Washington (DC): medication management
(effective acute specifications National Committee for Quality Assurance (NCQA); 2010. (effective acute phase
phase treatment): various pages. treatment): percentage of
Percentage of members 18 years of age
members 18 years of National Committee for Quality Assurance (NCQA). and older who were
age and older who HEDIS 2011: Healthcare Effectiveness Data and diagnosed with a new
were diagnosed with Information Set. Vol. 2, technical specifications. episode of major
a new episode of Washington (DC): National Committee for Quality depression, and treated
major depression, Assurance (NCQA); 2010. various pages. with antidepressant
and treated with medication, and who
antidepressant remained on an
medication, and who antidepressant
remained on an medication for at least 84
antidepressant days (12 weeks)
medication for at
least 84 days (12
weeks)
Antidepressant Process Programmed to National Committee for Quality Assurance (NCQA). See HEDIS measure:
medication align with HEDIS HEDIS 2011: Healthcare Effectiveness Data and Antidepressant
management specifications Information Set. Vol. 1, narrative. Washington (DC): medication management
Acumen, LLC
(effective National Committee for Quality Assurance (NCQA); 2010. (effective continuation
continuation phase various pages. phase treatment):
treatment): percentage of members
Percentage of National Committee for Quality Assurance (NCQA). 18 years of age and older
103
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members 18 years of HEDIS 2011: Healthcare Effectiveness Data and who were diagnosed with
age and older who Information Set. Vol. 2, technical specifications. a new episode of major
were diagnosed with Washington (DC): National Committee for Quality depression, and treated
a new episode of Assurance (NCQA); 2010. various pages. with antidepressant
major depression, medication, and who
and treated with remained on an
antidepressant antidepressant
medication, and who medication for at least
remained on an 180 days (6 months)
antidepressant
medication for at
least 180 days (6
months)
Congestive Congestive Heart Outcome Programmed in AHRQ quality indicators. Prevention quality indicators: http://www.qualityindica
Heart Failure (CHF) accordance with technical specifications [version 4.2]. PQI #8 congestive tors.ahrq.gov/Downloads
Failure Admission Rate AHRQ PQI #8 heart failure (CHF) admission rate. Rockville (MD): /Software/SAS/V41A/Te
specifications Agency for Healthcare Research and Quality (AHRQ); chSpecs/PQI%2008%20
2010 Sep. 3 p. CHF%20Admission%20
Rate.pdf
Acute Acute myocardial Process Programmed to National Committee for Quality Assurance (NCQA). See HEDIS measure:
Myocardia infarction (AMI): align with HEDIS 2011: Healthcare Effectiveness Data and Acute myocardial
l Infarction Percentage of HEDIS Information Set. Vol. 1, narrative. Washington (DC): infarction (AMI):
members 18 years of specifications National Committee for Quality Assurance (NCQA); 2010. percentage of members
age and older during various pages. 18 years of age and older
the measurement during the measurement
year who were National Committee for Quality Assurance (NCQA). year who were
hospitalized and HEDIS 2011: Healthcare Effectiveness Data and hospitalized and
discharged alive Information Set. Vol. 2, technical specifications. discharged alive from
from July 1 of the Washington (DC): National Committee for Quality July 1 of the year prior to
year prior to the Assurance (NCQA); 2010. various pages. the measurement year to
measurement year to June 30 of the
June 30 of the measurement year with a
measurement year diagnosis of AMI and
with a diagnosis of who received persistent
AMI and who beta-blocker treatment
received persistent for six months after
beta-blocker discharge
treatment for six
104
79
months after
discharge
Coronary Antiplatelet Process Programmed to American College of Cardiology, American Heart Measure 6 (Page 55):
Heart Therapy: Percentage align with Association, Physician Consortium for Performance http://www.ama-
Disease of patients aged 18 ACC/AHA/ PCPI Improvement. Clinical performance measures: chronic assn.org/ama1/pub/uploa
and older with a Chronic Stable stable coronary artery disease. Tools developed by d/mm/pcpi/cadminisetjun
diagnosis of Coronary Artery physicians for physicians. Chicago (IL): American Medical e06.pdf
coronary artery Disease Association (AMA); 2005. 8 p.
disease seen within Performance
a 12 month period Measure #6
who were prescribed specifications
aspirin or
clopidogrel
COPD Chronic Obstructive Outcome Programmed in AHRQ quality indicators. Guide to prevention quality http://www.qualityindica
Pulmonary Disease accordance with indicators: hospital admission for ambulatory care sensitive tors.ahrq.gov/Downloads
(COPD) Admission AHRQ's PQI #5 conditions [version 3.1]. Rockville (MD): Agency for /Software/SAS/V41A/Te
Rate specifications Healthcare Research and Quality (AHRQ); 2007 Mar 12. chSpecs/PQI%2005%20
59 p. (AHRQ Pub; no. 02-R0203). Chronic%20Obstructive
%20Pulmonary%20Dise
AHRQ quality indicators. Prevention quality indicators ase%20%28COPD%29
appendices [version 4.2]. Rockville (MD): Agency for %20Admission%20Rate.
Healthcare Research and Quality (AHRQ); 2010 Sep. 1 p. pdf
Acumen, LLC
AHRQ quality indicators. Prevention quality indicators:

technical specifications [version 4.2]. PQI #5 chronic
obstructive pulmonary disease (COPD) admission rate.
Rockville (MD): Agency for Healthcare Research and
Quality (AHRQ); 2010 Sep. 2 p.
105
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Pharmacotherapy Process Programmed to National Committee for Quality Assurance (NCQA). See HEDIS measure:
management of align with HEDIS 2011: Healthcare Effectiveness Data and Pharmacotherapy
chronic obstructive HEDIS Information Set. Vol. 1, narrative. Washington (DC): management of chronic
pulmonary disease specifications National Committee for Quality Assurance (NCQA); 2010. obstructive pulmonary
(COPD) various pages. disease (COPD)
exacerbation: exacerbation: percentage
Percentage of National Committee for Quality Assurance (NCQA). of COPD exacerbations
COPD HEDIS 2011: Healthcare Effectiveness Data and for members 40 years of
exacerbations for Information Set. Vol. 2, technical specifications. age and older who had an
members 40 years of Washington (DC): National Committee for Quality acute inpatient discharge
age and older who Assurance (NCQA); 2010. various pages. or ED encounter between
had an acute January 1 to November
inpatient discharge 30 of the measurement
or ED encounter year and who were
between January 1 dispensed a
to November 30 of bronchodilator within 30
the measurement days of the event
year and who were
dispensed a
bronchodilator
within 30 days of
the event
Cataract Cataracts: Outcome Programmed to American Academy of Ophthalmology, Physician Measure 3 (Page 17):
Complications align with Consortium for Performance Improvement, National http://www.ama-

within 30 Days AAO/PCPI/NCQ Committee for Quality Assurance. Eye care physician assn.org/ama1/pub/uploa
Following Cataract A Performance performance measurement set. Chicago (IL): American d/mm/pcpi/eye-care-two-
Surgery Requiring Measure #3 Medical Association, National Committee for Quality worksheets.pdf
Additional Surgical specifications Assurance; 2007 Oct. 36 p. [42 references]
Procedures
106
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Low Back Use of imaging Process Programmed to National Committee for Quality Assurance (NCQA). See HEDIS measure:
Pain studies for low back align with HEDIS 2011: Healthcare Effectiveness Data and Use of imaging studies
pain: Percentage of HEDIS Information Set. Vol. 1, narrative. Washington (DC): for low back pain:
members with a specifications National Committee for Quality Assurance (NCQA); 2010. percentage of members
primary diagnosis of various pages. with a primary diagnosis
low back pain who of low back pain who did
did not have an National Committee for Quality Assurance (NCQA). not have an imaging
imaging study (plain HEDIS 2011: Healthcare Effectiveness Data and study (plain x-ray, MRI,
x-ray, MRI, CT Information Set. Vol. 2, technical specifications. CT scan) within 28 days
scan) within 28 days Washington (DC): National Committee for Quality of the diagnosis
of the diagnosis Assurance (NCQA); 2010. various pages.
Cholecyste Laparoscopic Process Programmed to AHRQ quality indicators. Guide to inpatient quality http://www.qualityindica
ctomy Cholecystectomy align with AHRQ indicators: quality of care in hospitals - volume, mortality, tors.ahrq.gov/Downloads
Rate Inpatient Quality and utilization [version 3.1]. Rockville (MD): Agency for /Software/SAS/v41A/Te
Indicator (IQI) Healthcare Research and Quality (AHRQ); 2007 Mar 12. chSpecs/IQI%2023%20L
Measure #23 91 p. aparoscopic%20Cholecy
specifications stectomy%20Rate.pdf
AHRQ quality indicators. Inpatient quality indicators:
technical specifications [version 4.2]. IQI #23 laparoscopic
cholecystectomy rate. Rockville (MD): Agency for
Breast Percentage of Process Programmed to National Committee for Quality Assurance (NCQA). See HEDIS measure:
Cancer women 42 to 69 align with HEDIS 2011: Healthcare Effectiveness Data and Breast cancer screening:
years of age who HEDIS Information Set. Vol. 1, narrative. Washington (DC): percentage of women 40
had one or more specifications, National Committee for Quality Assurance (NCQA); 2010. to 69 years of age who
mammograms modifying age various pages. had one or more
during the range as defined mammograms during the
measurement year for measure. measurement year or the
or the year prior to year prior to the
the measurement measurement year.
year.
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Radiation therapy is Process Programmed to American Society of Clinical Oncology (ASCO) Table 1 (Page 2):
administered within align with National Comprehensive Cancer Network http://www.asco.org/AS
1 year (365 days) of ASCO/NCCN (NCCN)ASCO/NCCN quality measures, endorsed by NQF. CO/Downloads/cancer%
diagnosis for measure ASCO/NCCN quality measures: breast and colorectal 20Policy%20and%20Cli
women 18 to 69 specifications, cancers. Alexandria (VA): American Society of Clinical nical%20Affairs/NCCN/
years of age modifying age Oncology, National Comprehensive Cancer Network, Inc.; ASCO%20NCCN%20Q
receiving breast rage as defined for 2007 Apr. 5 p. uality%20Measures%20t
conserving surgery measure. able%20web%20posting
for breast cancer. %20with%20CoC%2005
07.pdf
108
B.5 Composite Quality Measures
Quality Measure Components

PSI #03 Pressure Ulcer Rate
PSI #06 Iatrogenic Pneumothorax Rate
Patient Safety Indicator PSI #07 Central Venous Catheter-Related Blood Stream Infection Rate
Composite: Patient PSI #08 Postoperative Hip Fracture Rate
Safety for Selected PSI #12 Postoperative Pulmonary Embolism or Deep Vein Thrombosis Rate
Indicators (PSI #90)80 PSI #13 Postoperative Sepsis Rate
PSI #14 Postoperative Wound Dehiscence Rate
PSI #15 Accidental Puncture or Laceration Rate
IQI #15 Acute Myocardial Infarction (AMI) Mortality Rate
Inpatient Quality IQI #16 Congestive Heart Failure (CHF) Mortality Rate
Indicator Composite: IQI #17 Acute Stroke Mortality Rate
Mortality for Selected IQI #18 Gastrointestinal Hemorrhage Mortality Rate
Conditions (IQI #91)81 IQI #19 Hip Fracture Mortality Rate
IQI #20 Pneumonia Mortality Rate
PQI #01 Diabetes Short-Term Complications Admission Rate
PQI #03 Diabetes Long-Term Complications Admission Rate
PQI #05 Chronic Obstructive Pulmonary Disease (COPD) or Asthma in Older Adults
PQI #07 Hypertension Admission Rate
PQI #08 Congestive Heart Failure (CHF) Admission Rate
Prevention Quality
PQI #10 Dehydration Admission Rate
Indicator Composite
PQI #11 Bacterial Pneumonia Admission Rate
(PQI #90)82
PQI #12 Urinary Tract Infection Admission Rate
PQI #13 Angina without Procedure Admission Rate
PQI #14 Uncontrolled Diabetes Admission Rate
PQI #15 Asthma in Younger Adults Admission Rate
PQI #16 Rate of Lower-Extremity Amputation Among Patients with Diabetes
80
"Quality Indicator User Guide: Patient Safety Indicators (PSI) Composite Measures, Version 4.4," The Agency for Healthcare Research and Quality,
Acumen, LLC
http://qualityindicators.ahrq.gov/Downloads/Modules/PSI/V44/Composite_User_Technical_Specification_PSI%20V4.4.pdf.
81
"Quality Indicator User Guide: Inpatient Quality Indicators (IQI) Composite Measures, Version 4.4," The Agency for Healthcare Research and Quality,
http://qualityindicators.ahrq.gov/Downloads/Modules/IQI/V44/Composite_User_Technical_Specification_IQI%20V4.4.pdf.
82
"Quality Indicator User Guide: Prevention Quality Indicators (PQI) Composite Measures, Version 4.4," The Agency for Healthcare Research and Quality,
http://qualityindicators.ahrq.gov/Downloads/Modules/PQI/V44/Composite_User_Technical_Specification_PQI%20V4.4.pdf.
109
Appendix C: RISK ADJUSTMENT SPECIFICATIONS

Acumen, LLC
C.1 Composition of Risk Adjustment Clusters for Medicare Analysis

Cluster
Independent Variable 2
Control 1 (Baseline)
3 4 5 683 7 8 9 10
84
Year X X X X X X X X X X
Partial Year Enrollment X X X X X X X X X X
Beneficiary-Level Variables
Age X X X X X X X X X
Sex X X X X X X X X X
Age-Sex Interaction X X X X X X X X X
Health Status X X X X X
Race X X X X X
85
Income X X X
Institutionalization Status X X
New Enrollee Indicator X X X X X
Dual Enrollment Status X X
Supplemental Medicare Insurance X X X
Hospital Competition X X X
Percent of Population Uninsured X X X
Market-Level Variables
Supply of Medical Services X X X

Malpractice Environmental Risk X X X

Physician Composition X X X
Access To Care X X X
Payer Mix X X X
Medicaid Penetration X X
Health Professional Mix X X
Supplemental Medicare Insurance X X
83
Cluster 6 is not applicable to the Medicare or Medicaid analysis.
84
The indicator variable for year of analysis is only used in the analysis of the full 2007 through 2009 data.
85
Cluster 8 does not include the income indicator because the income indicator is highly collinear with the dual enrollment status indicator.
110
C.2 Composition of Risk Adjustment Clusters for Medicaid Analysis

Cluster
Independent Variable 2 86
Control 1 (Baseline)
3 4 5 687 7 8 9 10
88
Year X X X X X X X X X
Beneficiary-Level Variables
Partial Year Enrollment X X X X X X X X X

Age X X X X X X X X
Sex X X X X X X X X
Age-Sex Interaction X X X X X X X X
Health Status X X X X X
Race X X X X X
Institutionalization Status X X X X X
New Enrollee Indicator X X X X X
State Indicator X
Hospital Competition X X X
Market-Level Variables
Percent of Population Uninsured X X X

Supply of Medical Services X X X
Malpractice Environmental Risk X X X
Physician Composition X X X
Access To Care X X X
Payer Mix X X X
Medicaid Penetration X X
Health Professional Mix X X
Acumen, LLC
86
Cluster 4 is the same as cluster 1 for the Medicaid analysis.
87
Cluster 6 is not applicable to the Medicare or Medicaid analysis.
88
The indicator variable for year of analysis is only used in the analysis on the full 2007 through 2009 data.
111
C.3 Beneficiary-Level Characteristics

Acumen, LLC
Beneficiary-Level Data Source:

Medicare Measure Medicaid Measure
Variable Medicare/Medicaid
5-year age bands tied to 20
(e.g., 20-24), one age band for
5-year age bands tied to 65 (e.g., 65-69), one age band for under 65, and
Age EDB/EL 18-19, and one age band for
one age band for over 90, indicating beneficiary age as of index date.
over 90, indicating beneficiary
age as of index date.
Sex EDB/EL Male/Female Same as Medicare
Age*Sex Interaction EDB/EL Age* Sex interaction (e.g., 65-69 and Female, 65-69 and Male, etc.) Same as Medicare
White, Black, Hispanic,
White, Black, Hispanic, Asian, Other (includes North American Native
Race and Ethnicity EDB/EL Asian, Other, Unknown
category), Unknown.
(includes Missing category)
Low Income Subsidy (LIS). Flag as LIS if beneficiary submits any LIS
Not included because this
copay or subsidy during the observation period. LIS information is
Income EDB information is not available on
available for Part D beneficiaries only, so any beneficiary who is counted
Medicaid claims.
as LIS is also enrolled in Part D.
CMS 2008 HCC health status
indicators during look-back
CMS 2008 HCC health status and enrollment indicators during look-back
period of 365 days from the
CWF/(MSIS & period of 365 days from the index date. HCCs include one originally
Health Status index date. HCC interactions

MAX) disabled indicator and an ESRD indicator. HCC interactions do not
do not include interactions
include interactions with Medicaid status.89
with Medicaid status or
disability status.
Indicator for whether
beneficiary has a full year of
New Enrollee CWF/(MSIS & Indicator for whether beneficiary has a full year of claims history claims history (FFS enrolled
Indicator MAX) (enrollment in A AND B) prior to the observation start date. with no benefits restriction)
prior to the observation start
date.
89
When risk-adjusting the composite quality measures for the aggregate analysis, the regression uses the HCCs from the prior calendar year instead of the HCCs
from the year prior to the inpatient event to assure consistency across the components of the quality measures.
112
Beneficiary-Level Data Source:

Medicare Measure Medicaid Measure
Variable Medicare/Medicaid
Indicator variable for being in
long-term care for at least 90
Institutionalization Indicator variable for being in long-term care for at least 90 consecutive
RAPS/LT cumulative days in the
Status days in the calendar year prior to the year of analysis.90
calendar year prior to the year
of analysis.
Not included because dual-
Indicator variable for enrollment in both Medicare and Medicaid at any enrolled beneficiaries are
Dual Eligibility Status EDB
time during the observation period. dropped from the Medicaid
analysis.
Cohort Analysis:
Three sets of indicator variables for enrollment during the observation
window,91 indicating if the beneficiary is enrolled in the first month, One set of indicator variables
second month, third month, etc.: for order of months enrolled in
1. Order of months alive and enrolled in Medicare Part A Medicaid during the
2. Order of months alive and enrolled in Medicare Part B
observation window. To be
Partial Year 3. Order of months alive and enrolled in Medicare (Part A OR B)
EDB/EL AND Part D considered enrolled,
Enrollment
Aggregate Analysis: beneficiary must be alive, FFS
Two indicator variables for continuous enrollment from the first month enrolled and have no benefits
of enrollment through the calendar year: restriction.
1. Continuously enrolled and alive in Medicare Part A or B
2. Continuously enrolled and alive in Medicare (Part A OR B)
AND Part D
Indicator for the presence of supplemental Medicare insurance. This
Supplemental indicator as defined in the EDB includes Medicaid enrollment. However,
EDB Not included.
Medicare Insurance because this analysis includes a dual-enrollment indicator, beneficiaries
enrolled in Medicaid are not counted as having supplemental insurance.
90
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For beneficiaries in the cholecystectomy cohort whose observation period overlaps 2006, because 2006 is the earliest year of data available for this analysis,
the institutionalization status indicator for both the Medicare and the Medicaid analysis examines the entire 2006 time period.
91
Because the observation window for the cataract cohort can vary between three and six months, the fourth through sixth indicators of the partial year
enrollment variable for cataracts are zero if either the beneficiary is not enrolled in the relevant part of Medicare for that month or the observation window has
ended.
C.4 Market-Level Characteristics
Market-Level Data
Variables
Variable Source
Herfindahl index (HHI) of competition based on the distribution of beds
in each market
Hospital Teaching hospital=1 if there is at least 1 teaching hospital in the HRR
AHA
Competition Specialty hospital=1 if there is at least 1 specialty hospital in the HRR
Government-owned hospital=1 if there is at least 1 government owned
hospital in the HRR
Percent of
Population InterStudy Population uninsured
Uninsured
Supply of Medical Number of hospitals per 1,000
ARF
Services Number of hospital beds per 1,000
Malpractice
MPFS Medicare malpractice GPCI
Environment Risk
Physicians per 1,000
Physician
ARF Active primary care physicians per 1,000
Composition
Active specialists per 1,000
Indicator for Health Professional Shortage Areas (HPSAs), weighted by
Access to Care ARF
county population.
Medicare analysis only: percent of Medicare population covered by
managed care plans
Payer Mix InterStudy
Medicaid analysis only: percent of Medicaid population covered by
managed care plans
Medicaid
InterStudy = (# Medicaid beneficiaries / total population in HRR)
Penetration
Six variables for non-physicians per capita. These variables are not
included in Harvards market-level file. This analysis has created these
variables from ARF data.
Physicians Assistants
Health Professional
ARF Active Nurse Practitioners
Mix
Nurse Anesthetists
Active Certified Nurse Midwives
Registered Nurses
Licensed Practical Nurses and Licensed Vocational Nurses
Medicare analysis only:
Percent of beneficiaries with supplemental Medicare insurance:
(Number of beneficiary-months enrolled in supplementary Medicare
insurance) / (Number of beneficiary-months alive and enrolled in
Percent of Medicare
Medicare Part A or B but not C). Beneficiaries are counted for each
Beneficiaries with
EDB month.
Supplemental
Insurance
This indicator as defined on claims includes Medicaid enrollment.
However, because this analysis includes a dual-enrollment indicator,
beneficiaries enrolled in Medicaid are not counted as having
supplemental insurance.

Appendix D: SUPPLEMENTARY STATISTICS FOR AMI, CHD,
DIABETES, AND STROKE COHORTS MEDICARE
The following sections provide supplementary statistics for Medicare beneficiaries in
four selected cohorts. These cohorts include beneficiaries with the following conditions; acute
myocardial infarction (AMI), chronic heart disease (CHD), diabetes, and stroke. To characterize
the patterns of regional variation for beneficiaries in these specific cohorts, the appendix
examines the following issues: (i) variation in spending across the nation; (ii) stability of medical
service volume over time; (iii) variation in the volume of medical services within and across
regions; (iv) key service categories driving the results, and (v) variation in the volume of medical
services across cohorts. For statistics presented for each of the first five topics is limited to
beneficiaries in the AMI, CHD, diabetes and stroke cohorts, but sixth topic examines the
correlation in the volume of medical services by HRR across all fifteen cohorts.
D.1 Variation in Medicare Spending Across the Nation

Table D.1: Price-Standardized Risk-Adjusted Monthly Medicare Cost, AMI
# Std. Percentile 90-10
Category Avg. Min Max
Episodes Dev. 10th 50th 90th Difference
All 1,024,431 $5,591 $4,710 -$20,602 $2,138 $4,697 $9,866 $258,334 $7,728
Female 512,902 $5,591 $4,567 -$20,602 $2,108 $4,744 $9,896 $229,528 $7,788
Male 511,529 $5,591 $4,844 -$16,706 $2,168 $4,651 $9,835 $258,334 $7,667
White 881,250 $5,591 $4,542 -$16,706 $2,287 $4,734 $9,717 $251,103 $7,430
Black 96,324 $5,591 $5,663 -$20,602 $1,245 $4,366 $11,152 $258,334 $9,908
Asian 12,223 $5,591 $5,850 -$12,490 $1,570 $4,274 $10,737 $132,732 $9,166
Hispanic 17,881 $5,591 $5,710 -$14,656 $1,411 $4,344 $10,900 $175,316 $9,489
Other 15,383 $5,591 $5,260 -$15,336 $1,915 $4,614 $10,019 $136,033 $8,103
Unknown 1,370 $5,591 $5,202 -$12,934 $1,631 $4,689 $9,941 $81,611 $8,310
Dual 267,748 $5,591 $5,247 -$17,176 $1,456 $4,551 $10,795 $219,416 $9,339
Non-Dual 756,683 $5,591 $4,509 -$20,602 $2,465 $4,731 $9,558 $258,334 $7,093
Alive During
651,584 $5,462 $3,354 -$12,772 $2,601 $4,703 $9,227 $229,395 $6,626
Entire Episode
Died During
372,847 $6,322 $9,133 -$20,602 -$1,599 $4,609 $15,041 $258,334 $16,640
Episode
Table D.2: Price-Standardized Risk-Adjusted Average Monthly Medicare Cost, Stroke

Category # Avg. Std. Min Percentile Max 90-10
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All 618,106 $5,047 $3,928 -$16,287 $1,767 $4,140 $9,517 $161,689 $7,751
Female 359,863 $5,047 $3,800 -$13,370 $1,734 $4,229 $9,441 $124,931 $7,707
Male 258,243 $5,047 $4,093 -$16,287 $1,810 $4,026 $9,628 $161,689 $7,818
White 506,223 $5,047 $3,716 -$12,902 $1,960 $4,177 $9,388 $161,689 $7,428
Black 83,586 $5,047 $4,817 -$16,287 $1,045 $3,923 $10,317 $124,931 $9,273
Asian 8,078 $5,047 $4,460 -$10,630 $1,521 $3,921 $9,843 $61,388 $8,322
Hispanic 11,023 $5,047 $4,729 -$9,605 $1,214 $4,002 $10,179 $100,794 $8,964
Other 8,352 $5,047 $4,221 -$10,970 $1,683 $4,062 $9,556 $75,549 $7,873
Unknown 844 $5,047 $4,053 -$5,024 $1,550 $4,237 $9,409 $64,278 $7,859
Dual 173,793 $5,047 $4,451 -$13,370 $1,090 $4,177 $10,067 $124,931 $8,977
Non-Dual 444,313 $5,047 $3,699 -$16,287 $2,177 $4,129 $9,295 $161,689 $7,118
Alive During
422,274 $4,916 $3,263 -$12,902 $2,017 $4,087 $9,021 $146,811 $7,004
Entire Episode
Died During
195,832 $5,908 $6,774 -$16,287 -$637 $4,796 $13,104 $161,689 $13,740
Episode
Table D.3: Price-Standardized Risk-Adjusted Average Monthly Medicare Cost, CHD

All 18,856,261 $1,960 $2,538 -$19,048 $240 $1,417 $4,364 $1,319,163 $4,124
Female 8,562,970 $1,960 $2,536 -$18,784 $166 $1,389 $4,498 $221,962 $4,332
Male 10,293,291 $1,960 $2,540 -$19,048 $311 $1,436 $4,253 $1,319,163 $3,941
White 16,437,459 $1,960 $2,458 -$18,854 $295 $1,426 $4,312 $1,319,163 $4,017
Black 1,443,533 $1,960 $3,237 -$19,048 -$281 $1,246 $5,040 $261,733 $5,321
Asian 305,736 $1,960 $2,493 -$16,738 $414 $1,504 $4,012 $136,316 $3,598
Hispanic 364,269 $1,960 $2,952 -$18,784 -$106 $1,297 $4,913 $180,687 $5,019
Other 284,552 $1,960 $2,606 -$16,817 $263 $1,502 $4,178 $247,687 $3,914
Unknown 20,712 $1,960 $2,743 -$10,503 $66 $1,353 $4,657 $82,031 $4,591
Dual 4,017,579 $1,960 $3,192 -$19,048 -$290 $1,173 $5,222 $1,319,163 $5,512
Non-Dual 14,838,682 $1,960 $2,336 -$18,394 $441 $1,447 $4,149 $403,953 $3,708
Alive During
17,146,365 $1,884 $2,129 -$16,096 $308 $1,408 $4,108 $403,953 $3,799
Entire Episode
Died During
1,709,896 $3,428 $6,401 -$19,048 -$1,978 $2,257 $9,682 $1,319,163 $11,660
Episode
Table D.4: Price-Standardized Risk-Adjusted Average Monthly Medicare Cost, Diabetes


All 18,533,150 $1,632 $2,260 -$16,295 $121 $1,264 $3,508 $1,686,844 $3,388
Female 10,246,929 $1,632 $2,114 -$16,295 $144 $1,262 $3,517 $215,532 $3,373
Male 8,286,221 $1,632 $2,428 -$15,821 $89 $1,268 $3,497 $1,686,844 $3,408
White 14,469,046 $1,632 $2,208 -$16,295 $157 $1,272 $3,481 $1,686,844 $3,324
Black 2,577,191 $1,632 $2,544 -$15,821 -$108 $1,196 $3,768 $400,951 $3,876
Asian 439,860 $1,632 $1,920 -$13,116 $415 $1,366 $2,935 $131,260 $2,520
Hispanic 579,711 $1,632 $2,535 -$14,727 -$71 $1,125 $3,993 $410,211 $4,064
Other 445,583 $1,632 $2,110 -$13,521 $245 $1,379 $3,140 $156,666 $2,895
Unknown 21,759 $1,632 $2,346 -$15,655 $9 $1,175 $3,731 $73,947 $3,722
Dual 5,498,487 $1,632 $2,631 -$15,821 -$239 $1,022 $4,238 $171,498 $4,477
Non-Dual 13,034,663 $1,632 $2,086 -$16,295 $320 $1,313 $3,226 $1,686,844 $2,906
Alive During
17,440,041 $1,567 $2,011 -$13,590 $167 $1,259 $3,289 $1,686,844 $3,122
Entire Episode
Died During
1,093,109 $3,419 $5,583 -$16,295 -$1,539 $2,205 $9,528 $400,951 $11,067
Episode
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D.2 Stability of Medicare Service Volume over Time
Table D.5: Pearson Correlation of HRR-Level Medicare Utilization 2007-2009 (AMI)
2007 2008 2009
2007 1.000 0.853 0.827
2008 0.853 1.000 0.868
2009 0.827 0.868 1.000
Table D.6: Spearman Correlation of HRR-Level Medicare Utilization 2007-2009 (AMI)

2007 2008 2009
2007 1.000 0.836 0.812
2008 0.836 1.000 0.863
2009 0.812 0.863 1.000
Table D.7: Pearson Correlation of HRR-Level Medicare Utilization 2007-2009 (Stroke)

2007 2008 2009
2007 1.000 0.810 0.792
2008 0.810 1.000 0.814
2009 0.792 0.814 1.000
Table D.8: Spearman Correlation of HRR-Level Medicare Utilization 2007-2009 (Stroke)

2007 2008 2009
2007 1.000 0.803 0.808
2008 0.803 1.000 0.813
2009 0.808 0.813 1.000
Table D.9: Pearson Correlation of HRR-Level Medicare Utilization 2007-2009 (CHD)

2007 2008 2009
2007 1.000 0.924 0.866
2008 0.924 1.000 0.926
2009 0.866 0.926 1.000
Table D.10: Spearman Correlation of HRR-Level Medicare Utilization 2007-2009 (CHD)

2007 2008 2009
2007 1.000 0.901 0.836
2008 0.901 1.000 0.908
2009 0.836 0.908 1.000
Table D.11: Pearson Correlation of HRR-Level Medicare Utilization 2007-2009 (Diabetes)

2007 2008 2009
2007 1.000 0.971 0.952
2008 0.971 1.000 0.957
2009 0.952 0.957 1.000

Table D.12: Spearman Correlation of HRR-Level Medicare Utilization 2007-2009
(Diabetes)
2007 2008 2009
2007 1.000 0.947 0.926
2008 0.947 1.000 0.929
2009 0.926 0.929 1.000
D.3 Variation in Volume of Medicare Services Within and Across Regions

Table D.13: Medicare Service Utilization Within and Across Regions, AMI
Price-
Price-
Standardized
Risk-Adjusted
Weighted Average of HRR Standard Deviations $5,864 $5,741 $4,644
Weighted Average of HRR 90-10 Differences $10,201 $10,045 $7,726
90-10 Difference of HRR Means $2,182 $1,618 $1,050
Table D.14: Medicare Service Utilization Within and Across Regions, Stroke
Price-
Price-
Standardized
Risk-Adjusted
Table D.15: Medicare Service Utilization Within and Across Regions, CHD
Price-
Price-
Standardized
Risk-Adjusted
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Table D.16: Medicare Service Utilization Within and Across Regions, Diabetes
Price-
Price-
Standardized
Risk-Adjusted
D.4 Service Categories Driving Medicare Results

Table D.17: AMI Medicare Service Category Utilization, Pearson Correlation (2007)
Prescription Drugs
Post-Acute Care
ER/Ambulance
Remaining Costs
Acute Care
Procedures
Diagnostic
Other
Remaining Costs . 0.15 0.02 0.05 0.13 0.04 0.16 0.05
Acute Care 0.15 1.00 0.00 0.02 0.13 0.00 0.13 0.03
Diagnostic 0.05 0.02 0.24 1.00 -0.05 0.30 0.20 0.13
Post-Acute Care 0.13 0.13 -0.04 -0.05 1.00 0.00 0.07 0.03
Procedures 0.04 0.00 0.29 0.30 0.00 1.00 0.07 0.09
ER/Ambulance 0.16 0.13 0.08 0.20 0.07 0.07 1.00 0.07
Other 0.05 0.03 0.08 0.13 0.03 0.09 0.07 1.00
Table D.18: Stroke Medicare Service Category Utilization, Pearson Correlation (2007)
Prescription Drugs
Post-Acute Care
ER/Ambulance
Remaining Costs
Acute Care
Procedures
Diagnostic
Other
Remaining Costs . 0.19 0.01 0.05 0.17 0.07 0.22 0.11

Acute Care 0.19 1.00 0.00 0.03 0.17 0.00 0.18 0.05
Diagnostic 0.05 0.03 0.21 1.00 -0.04 0.30 0.16 0.10
Post-Acute Care 0.17 0.17 -0.04 -0.04 1.00 0.05 0.12 0.10
Procedures 0.07 0.00 0.24 0.30 0.05 1.00 0.08 0.09
ER/Ambulance 0.22 0.18 0.07 0.16 0.12 0.08 1.00 0.07
Other 0.11 0.05 0.07 0.10 0.10 0.09 0.07 1.00

Table D.19: CHD Service Category Medicare Utilization, Pearson Correlation (2007)
Prescription Drugs
Post-Acute Care
ER/Ambulance
Remaining Costs
Acute Care
Procedures
Diagnostic
Other
Remaining Costs . 0.24 0.05 0.12 0.22 0.06 0.26 0.08
Acute Care 0.24 1.00 0.02 0.07 0.22 0.01 0.23 0.04
Diagnostic 0.12 0.07 0.20 1.00 -0.04 0.36 0.10 0.10
Post-Acute Care 0.22 0.22 -0.02 -0.04 1.00 0.00 0.15 0.04
Procedures 0.06 0.01 0.17 0.36 0.00 1.00 0.04 0.10
ER/Ambulance 0.26 0.23 0.03 0.10 0.15 0.04 1.00 0.04
Other 0.08 0.04 0.06 0.10 0.04 0.10 0.04 1.00
Table D.20: Diabetes Medicare Service Category Utilization, Pearson Correlation (2007)
Prescription Drugs
Post-Acute Care
ER/Ambulance
Remaining Costs
Acute Care
Procedures
Diagnostic
Remaining Costs . 0.32 0.05 0.18 0.30 0.09 0.26 Other

0.11
Acute Care 0.32 1.00 0.02 0.11 0.32 0.02 0.23 0.06
Diagnostic 0.18 0.11 0.17 1.00 0.01 0.35 0.09 0.12
Post-Acute Care 0.30 0.32 -0.01 0.01 1.00 0.01 0.18 0.06
Procedures 0.09 0.02 0.14 0.35 0.01 1.00 0.05 0.09
ER/Ambulance 0.26 0.23 0.02 0.09 0.18 0.05 1.00 0.04
Other 0.11 0.06 0.06 0.12 0.06 0.09 0.04 1.00
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121
D.5 Variation in Volume of Medicare Services Across Cohorts

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Table D.21: Pearson Correlation of Medicare Beneficiary Utilization Across Cohorts

Acute Chronic Cancer
Agg AMI Cat Chol Pneu Stroke Arthr CHD CHF COPD Depr Diab LBP Breast Lung Prost
Aggregate 1.000 0.712 0.534 0.588 0.733 0.803 0.831 0.910 0.920 0.937 0.920 0.957 0.957 0.587 0.551 0.501
AMI 0.712 1.000 0.339 0.633 0.843 0.780 0.582 0.742 0.833 0.770 0.684 0.741 0.739 0.551 0.679 0.545
Cataract 0.534 0.339 1.000 0.353 0.331 0.345 0.461 0.536 0.483 0.525 0.430 0.556 0.477 0.311 0.339 0.230
Acute CHOL 0.588 0.633 0.353 1.000 0.625 0.577 0.501 0.589 0.624 0.618 0.527 0.584 0.593 0.406 0.488 0.409
Pneumonia 0.733 0.843 0.331 0.625 1.000 0.833 0.600 0.722 0.847 0.803 0.756 0.760 0.741 0.530 0.674 0.548
Stroke 0.803 0.780 0.345 0.577 0.833 1.000 0.670 0.777 0.868 0.830 0.815 0.804 0.804 0.501 0.588 0.524
Arthritis 0.831 0.582 0.461 0.501 0.600 0.670 1.000 0.810 0.766 0.830 0.807 0.812 0.846 0.475 0.433 0.373
CHD 0.910 0.742 0.536 0.589 0.722 0.777 0.810 1.000 0.918 0.943 0.848 0.912 0.907 0.516 0.537 0.427
CHF 0.920 0.833 0.483 0.624 0.847 0.868 0.766 0.918 1.000 0.947 0.888 0.915 0.907 0.583 0.622 0.502
Chronic COPD 0.937 0.770 0.525 0.618 0.803 0.830 0.830 0.943 0.947 1.000 0.921 0.939 0.935 0.560 0.595 0.467
Depression 0.920 0.684 0.430 0.527 0.756 0.815 0.807 0.848 0.888 0.921 1.000 0.905 0.916 0.527 0.496 0.454
Diabetes 0.957 0.741 0.556 0.584 0.760 0.804 0.812 0.912 0.915 0.939 0.905 1.000 0.933 0.537 0.535 0.478
LBP 0.957 0.739 0.477 0.593 0.741 0.804 0.846 0.907 0.907 0.935 0.916 0.933 1.000 0.574 0.556 0.485
Breast 0.587 0.551 0.311 0.406 0.530 0.501 0.475 0.516 0.583 0.560 0.527 0.537 0.574 1.000 0.608 0.524
Cancer Lung 0.551 0.679 0.339 0.488 0.674 0.588 0.433 0.537 0.622 0.595 0.496 0.535 0.556 0.608 1.000 0.519
Prostate 0.501 0.545 0.230 0.409 0.548 0.524 0.373 0.427 0.502 0.467 0.454 0.478 0.485 0.524 0.519 1.000
D.6 Variation in Medicare Quality of Care across Cohorts
122
Regions that perform well on one quality metric for Medicare beneficiaries do not necessarily perform well on another quality
metric. Table D.22 displays the correlation between the composite quality measures, and Table D.23 displays the correlation between
quality of care as measured by each condition-specific quality metric.92 The correlations between the composite quality measures
ranges from -0.02 (for the PQI and PSI measures) to 0.24 (for the PSI and IQI measures). Mechanically, the potentially avoidable
complications and iatrogenic events measured by the composite PSI may result in an inpatient mortality that is captured by the IQI,
which may cause the positive correlation between quality of care for the PSI and IQI measures. The correlations between the
condition-specific measures, shown in Table D.23, range from -0.38 (for the diabetes retinal screening measure and the
cholecystectomy measure) to 0.90 (for the depression acute phase treatment measure and the depression chronic phase treatment
measure). If one treats each condition-specific measure-to-measure correlation as a single observation, the average correlation
between an HRRs quality score on one measure and its quality score on any other measure is 0.07. Intuitively, having high-quality
providers for one condition in a region does not necessarily suggest that the quality of care for another condition is also above average.
For example, while the Lake Charles, LA, HRR is the highest-performing HRR for the cataract measure, it is in the worst-performing
10th percentile for the cholecystectomy measure; cataract surgery and cholecystectomies are performed by very different types of
physicians.
Table D.22: Pearson Correlation between Composite Quality Measures for Medicare Beneficiaries
PSI IQI PQI
PSI 1.00
IQI 0.24 1.00
PQI -0.02 0.18 1.00
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92
For some quality measures, a lower score indicates better quality. The correlations in both tables have been renormalized for interpretability so that a positive
correlation always means that higher costs are associated with a higher quality of care. In addition, both tables shows Pearson correlations, and the Spearman
rank correlations show similar results.
123
Table D.23: Pearson Correlation between Condition-Specific Quality Measures for Medicare Beneficiaries
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BC BC COPD COPD Depr. Depr. Diab. Diab. Diab.

AMI Arth. Cat. CHD CHF Chol. LBP Pneu. Str.
Rad Screen Adm. Bronch. Acute Chron. Amp. Hemo. Ret.
AMI 1.00
Arthritis 0.63 1.00
BC Radiation 0.14 0.23 1.00
BC Screening -0.04 -0.02 0.08 1.00
Cataract 0.19 0.27 0.03 0.08 1.00
CHD 0.17 0.25 0.10 0.11 0.03 1.00
CHF -0.14 -0.01 -0.01 -0.07 -0.18 -0.11 1.00
Chol. -0.12 0.00 -0.13 -0.08 -0.10 -0.05 0.10 1.00
COPD Adm. -0.25 -0.18 -0.11 -0.09 -0.28 -0.13 0.67 0.09 1.00
COPD Bronch -0.02 -0.12 0.13 -0.08 -0.18 -0.01 0.21 -0.24 0.25 1.00
Depr. Acute 0.13 0.21 0.11 0.03 0.12 0.13 0.20 -0.18 0.00 0.04 1.00
Depr. Chronic 0.20 0.25 0.16 0.00 0.09 0.17 0.19 -0.23 0.02 0.08 0.90 1.00
Diab. Amput. -0.17 -0.24 0.05 0.05 -0.30 0.05 0.29 -0.06 0.36 0.35 0.19 0.21 1.00
Diab. Hemo. 0.11 0.10 0.20 0.18 -0.01 0.30 0.00 -0.18 -0.06 0.18 0.29 0.28 0.16 1.00
Diab. Retinal 0.25 0.23 0.25 0.06 -0.02 0.14 0.01 -0.38 -0.09 0.32 0.39 0.41 0.13 0.40 1.00
LBP 0.03 0.01 0.04 -0.05 -0.19 -0.14 0.39 -0.08 0.31 0.36 0.19 0.21 0.28 -0.10 0.19 1.00
Pneumonia -0.36 -0.31 -0.07 -0.02 -0.27 -0.08 0.47 0.11 0.60 0.37 -0.04 -0.04 0.42 0.16 -0.09 -0.18 1.00
Stroke 0.10 0.11 0.04 0.05 0.04 0.28 0.01 -0.04 0.02 0.09 0.02 0.01 -0.02 0.17 0.12 -0.08 0.03 1.00
D.7 Relationship between Medicare Utilization and Quality of Care
Regions that utilize a high level of services do not necessarily provide a higher quality of
care. Table D.24 shows the correlation between HRR-level quality indices and price-
standardized, risk adjusted costs for each quality measure. In Table D.24, positive correlations,
which are highlighted in red, indicate that higher spending on patients in that cohort is associated
with a higher quality of care for that measure.93 The average of the correlations is -0.16. The
strongest positive correlation with utilization exists for the composite IQI measure (0.24), and
the strongest negative correlation with utilization exists for the COPD bronchodilators quality
measure (-0.48).
These results must be interpreted with caution and not as evidence that increased
spending causes higher or lower quality outcomes for two reasons. First, beneficiaries who are
included in a disease cohort are sicker than the general population by default, and the risk
adjustment methodology for the quality measures that are risk adjusted may not adequately
capture these differences in health status. Second, mechanical relationships between the quality
measures and utilization may cause the correlations to be artificially strong. For example, the
outcome in the COPD admissions measure is an inpatient admission. As the rate of admissions
increases in a region, indicating a lower quality of COPD care, spending in the region will also
increase because admissions are high-cost. Thus, this relationship may induce a negative
correlation between spending and the quality of care provided.
93
For some quality measures, a lower score indicates better quality. The correlations in Table D.24 have been
renormalized for interpretability so that a positive correlation always means that higher costs are associated with a
higher quality of care. In addition, while Table D.24 presents Pearson correlations, the Spearman rank correlations
show similar results.
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Table D.24: Pearson Correlation of Medicare Quality and Utilization
Correlation
Quality Measure
with Utilization
AMI - Beta Blockers -0.186
Arthritis - DMARD 0.085
Breast Cancer - Radiation 0.005
Breast Cancer - Screening 0.036
Cataract - Complications -0.061
CHD - Antiplatelets -0.012
CHF - Admissions -0.349
Cholecystectomy -
-0.078
Laparoscopy Rate
COPD - Admissions -0.324
COPD - Bronchodilators -0.483
Depression - 12 Weeks -0.287
Depression - 6 Months -0.340
Diabetes - Amputation -0.081
Diabetes - Hemoglobin -0.203
Diabetes - Retinal Screening -0.363
LBP - Imaging -0.401
Pneumonia - Admissions -0.005
Stroke - Antiplatelets -0.061
Aggregate - PSI -0.094
Aggregate - IQI 0.240
Aggregate - PQI -0.481

Appendix E: SUPPLEMENTARY STATISTICS FOR AMI, CHD,
DIABETES, AND STROKE COHORTS MEDICAID
The following sections provide supplementary statistics for Medicaid beneficiaries in
four selected cohorts. These cohorts include beneficiaries with the following conditions; acute
myocardial infarction (AMI), chronic heart disease (CHD), diabetes, and stroke. To characterize
the patterns of regional variation for beneficiaries in these specific cohorts, the appendix
examines the following issues: (i) variation in spending across the nation, (ii) stability of medical
service volume over time, (iii) variation in the volume of medical services within and across
regions, (iv) key service categories driving the results, and (v) variation in the volume of medical
services across cohorts. The statistics presented for each of the first five topics is limited to
beneficiaries in the AMI, CHD, diabetes and stroke cohorts, but the sixth topic examines the
correlation in the volume of medical services by HRR across all fifteen cohorts.
E.1 Variation in Medicaid Spending Across the Nation

Table E.1: Price-Standardized Risk-Adjusted Average Medicaid Cost, AMI
Beneficiary Std. Percentile 90-10

# Episodes Avg. Min Max
Criteria Dev. 10th 50th 90th Difference
All 34,003 $5,344 $19,537 -$19,930 $1,107 $4,276 $10,121 $1,238,740 $9,014
Female 16,696 $5,346 $18,736 -$19,391 $1,013 $4,278 $10,189 $521,726 $9,177
Male 17,307 $5,342 $20,281 -$19,930 $1,199 $4,272 $10,052 $1,238,740 $8,853
White 17,924 $5,344 $18,643 -$19,930 $1,533 $4,449 $9,603 $1,238,740 $8,070
Black 8,215 $5,345 $20,850 -$16,856 $532 $3,942 $11,068 $521,726 $10,535
Asian 710 $5,343 $19,422 -$14,298 $755 $4,106 $10,262 $133,087 $9,507
Hispanic 2,611 $5,345 $19,496 -$12,797 $865 $4,336 $9,947 $143,875 $9,082
Other 801 $5,296 $15,023 -$12,736 $1,365 $4,349 $10,351 $82,871 $8,986
Unknown 3,742 $5,354 $21,558 -$17,809 $740 $3,867 $11,038 $399,187 $10,298
Table E.2: Price-Standardized Risk-Adjusted Monthly Medicaid Cost, Stroke
Beneficiary # Std. Percentile 90-10

Avg. Min Max
Criteria Episodes Dev. 10th 50th 90th Difference
All 19,104 $4,737 $15,701 -$12,412 $1,042 $3,581 $9,431 $186,205 $8,389
Female 10,507 $4,742 $15,377 -$12,412 $1,136 $3,622 $9,344 $129,356 $8,208
Male 8,597 $4,732 $16,089 -$10,870 $939 $3,522 $9,549 $186,205 $8,610
White 7,398 $4,733 $14,116 -$10,831 $1,277 $3,693 $9,284 $186,205 $8,007
Black 7,174 $4,740 $17,959 -$12,412 $701 $3,355 $9,772 $136,926 $9,071
Asian 463 $4,758 $14,327 -$8,505 $1,114 $3,787 $9,197 $80,140 $8,083
Hispanic 1,593 $4,734 $12,137 -$6,810 $1,462 $3,865 $9,146 $64,586 $7,684
Other 417 $4,697 $14,379 -$8,718 $1,365 $3,570 $9,051 $47,605 $7,686
Unknown 2,059 $4,750 $15,687 -$7,180 $1,259 $3,520 $9,497 $155,951 $8,238
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Table E.3: Price-Standardized Risk-Adjusted Monthly Medicaid Cost, CHD
Beneficiary # Percentile 90-10

Avg. Std. Dev. Min Max
Criteria Episodes 10th 50th 90th Difference
All 508,374 $2,873 $12,236 -$18,541 $386 $2,163 $5,796 $1,245,901 $5,409
Female 262,211 $2,873 $11,194 -$18,541 $484 $2,217 $5,694 $527,315 $5,210
Male 246,163 $2,873 $13,256 -$16,788 $284 $2,102 $5,920 $1,245,901 $5,635
White 270,318 $2,873 $11,898 -$16,215 $498 $2,219 $5,684 $1,245,901 $5,186
Black 109,348 $2,873 $13,701 -$18,541 -$55 $1,932 $6,465 $527,315 $6,520
Asian 12,770 $2,873 $10,771 -$15,438 $1,030 $2,309 $4,835 $217,268 $3,805
Hispanic 48,651 $2,873 $10,481 -$13,927 $683 $2,319 $5,291 $177,360 $4,608
Other 11,721 $2,873 $11,937 -$13,361 $698 $2,148 $5,337 $235,920 $4,639
Unknown 55,566 $2,873 $12,604 -$17,564 $372 $2,035 $5,960 $404,610 $5,587
Table E.4: Price-Standardized Risk-Adjusted Average Monthly Medicaid Cost, Diabetes
Beneficiary # Std. Percentile 90-10

Avg. Min Max
Criteria Episodes Dev. 10th 50th 90th Difference
All 1,308,102 $2,008 $8,674 -$18,723 $398 $1,485 $4,011 $337,820 $3,614
Female 841,639 $2,008 $7,901 -$15,966 $500 $1,520 $3,884 $153,783 $3,385
Male 466,463 $2,008 $9,916 -$18,723 $207 $1,414 $4,277 $337,820 $4,070
White 564,030 $2,008 $8,613 -$15,966 $391 $1,462 $4,094 $153,783 $3,703
Black 318,423 $2,008 $9,712 -$18,723 $179 $1,378 $4,338 $337,820 $4,159
Asian 33,597 $2,008 $7,001 -$14,177 $822 $1,638 $3,323 $118,246 $2,501
Hispanic 177,464 $2,008 $6,912 -$12,644 $710 $1,632 $3,491 $133,620 $2,781
Other 42,290 $2,008 $8,215 -$12,329 $635 $1,550 $3,603 $239,230 $2,968
Unknown 172,298 $2,008 $8,870 -$15,167 $427 $1,459 $3,962 $276,551 $3,536
E.2 Stability of Medicaid Service Volume over Time

Table E.5: Pearson Correlation of HRR-Level Medicaid Utilization 2007-2009 (AMI)
2007 2008 2009
2007 1.000 0.780 0.656
2008 0.780 1.000 0.639
2009 0.656 0.639 1.000
Table E.6: Spearman Correlation of HRR-Level Medicaid Utilization 2007-2009 (AMI)

2007 2008 2009
2007 1.000 0.739 0.656
2008 0.739 1.000 0.645
2009 0.656 0.645 1.000
Table E.7: Pearson Correlation of HRR-Level Medicaid Utilization 2007-2009 (Stroke)

2007 2008 2009
2007 1.000 0.537 0.532
2008 0.537 1.000 0.644
2009 0.532 0.644 1.000
Table E.8: Spearman Correlation of HRR-Level Medicaid Utilization 2007-2009 (Stroke)

2007 2008 2009
2007 1.000 0.489 0.398
2008 0.489 1.000 0.505
2009 0.398 0.505 1.000
Table E.9: Pearson Correlation of HRR-Level Medicaid Utilization 2007-2009 (CHD)

2007 2008 2009
2007 1.000 0.796 0.708
2008 0.796 1.000 0.767
2009 0.708 0.767 1.000
Table E.10: Spearman Correlation of HRR-Level Medicaid Utilization 2007-2009 (CHD)

2007 2008 2009
2007 1.000 0.842 0.710
2008 0.842 1.000 0.733
2009 0.710 0.733 1.000
Table E.11: Pearson Correlation of HRR-Level Medicaid Utilization 2007-2009 (Diabetes)

2007 2008 2009
2007 1.000 0.884 0.735
2008 0.884 1.000 0.752
2009 0.735 0.752 1.000
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Table E.12: Spearman Correlation of HRR-Level Medicaid Utilization 2007-2009
(Diabetes)
2007 2008 2009
2007 1.000 0.843 0.668
2008 0.843 1.000 0.743
2009 0.668 0.743 1.000
E.3 Variation in Volume of Medicaid Services Within and Across Regions
Table E.13: AMI Dispersion of Medicaid Service Utilization Within and Across Regions
Price-
Price-
Standardized
Risk-Adjusted
Standard Deviation of HRR Means $2,207 $2,183 $1,632
Table E.14: Stroke Dispersion of Medicaid Service Utilization Within and Across Regions
Price-
Price-
Standardized
Risk-Adjusted
Standard Deviation of HRR Means $1,804 $1,780 $1,377
Table E.15: CHD Dispersion of Medicaid Service Utilization Within and Across Regions
Price-
Price-
Standardized
Risk-Adjusted
Standard Deviation of HRR Means $1,211 $1,205 $985
Table E.16: Diabetes Dispersion of Medicaid Service Utilization Within and Across Regions
Price-
Price-
Standardized
Risk-Adjusted

Price-
Price-
Standardized
Risk-Adjusted
E.4 Service Categories Driving Medicaid Results

Table E.17: AMI Medicaid Service Category Utilization, Pearson Correlation (2007)
Prescription Drugs
Post-Acute Care
ER/Ambulance
Remaining Costs
Acute Care
Procedures
Diagnostic
Other
Remaining Costs .
Acute Care -0.08 1.00
Prescription Drugs 0.04 -0.01 1.00
Diagnostic 0.40 0.27 0.08 1.00
Post-Acute Care 0.05 0.03 0.08 0.03 1.00
Procedures 0.31 0.25 0.12 0.38 0.03 1.00
ER/Ambulance -0.12 -0.15 0.04 0.27 0.01 0.11 1.00
Other 0.01 -0.01 0.12 0.03 -0.01 0.07 0.01 1.00
Table E.18: Stroke Medicaid Service Category Utilization, Pearson Correlation (2007)
Prescription Drugs
Post-Acute Care
ER/Ambulance
Remaining Costs
Acute Care
Procedures
Diagnostic
Other
Remaining Costs .
Acute Care -0.04 1.00
Diagnostic 0.42 0.30 0.09 1.00
Post-Acute Care 0.08 0.05 0.11 0.06 1.00
Procedures 0.20 0.18 0.10 0.32 0.00 1.00
ER/Ambulance -0.08 -0.13 0.03 0.25 0.06 0.04 1.00
Other 0.01 0.00 0.14 0.03 -0.03 0.06 0.01 1.00
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Table E.19: CHD Medicaid Service Category Utilization, Pearson Correlation (2007)
Prescription Drugs
Post-Acute Care
ER/Ambulance
Remaining Costs
Acute Care
Procedures
Diagnostic
Other
Remaining Costs .
Diagnostic 0.36 0.23 0.11 1.00
Post-Acute Care 0.04 0.03 0.05 0.01 1.00
Procedures 0.28 0.22 0.12 0.36 0.01 1.00
ER/Ambulance -0.02 -0.06 0.02 0.28 0.03 0.12 1.00
Other 0.03 0.01 0.13 0.06 0.00 0.07 0.01 1.00
Table E.20: Diabetes Medicaid Service Category Utilization, Pearson Correlation (2007)
Prescription Drugs
Post-Acute Care
ER/Ambulance
Remaining Costs
Acute Care
Procedures
Diagnostic
Other
Remaining Costs .
Diagnostic 0.39 0.27 0.12 1.00
Post-Acute Care 0.06 0.04 0.05 0.02 1.00
Procedures 0.21 0.13 0.12 0.30 0.02 1.00
ER/Ambulance 0.12 0.06 0.04 0.35 0.04 0.12 1.00
Other 0.06 0.01 0.12 0.06 0.00 0.06 0.03 1.00

E.5 Variation in Volume of Medicaid Services Across Cohorts
132
Table E.21: Pearson Correlation of Medicaid Beneficiary Utilization Across Cohorts

Agg AMI Cat Chol Pneu Stroke Arthr CHD CHF COPD Depr Diab LBP Breast Lung Pros
Agg 1.00
AMI 0.502 1.00
Cat 0.586 0.567 1.00
Chol 0.459 0.508 0.548 1.00
Pneu 0.640 0.672 0.660 0.648 1.00
Stroke 0.515 0.568 0.508 0.454 0.571 1.00
Arthr 0.639 0.533 0.628 0.579 0.566 0.582 1.00
CHD 0.651 0.693 0.733 0.689 0.726 0.607 0.818 1.00
CHF 0.706 0.668 0.694 0.631 0.718 0.649 0.795 0.922 1.00
COPD 0.689 0.639 0.717 0.679 0.732 0.571 0.736 0.854 0.857 1.00
Depr 0.774 0.583 0.734 0.607 0.711 0.552 0.799 0.869 0.837 0.816 1.00
Diab 0.794 0.576 0.741 0.624 0.692 0.611 0.829 0.831 0.837 0.842 0.925 1.00
LBP 0.770 0.598 0.744 0.649 0.725 0.561 0.779 0.848 0.821 0.834 0.937 0.931 1.00
Breast 0.235 0.279 0.389 0.361 0.173 0.295 0.448 0.406 0.331 0.333 0.411 0.439 0.464 1.00
Lung 0.351 0.472 0.346 0.213 0.395 0.427 0.339 0.430 0.454 0.430 0.318 0.339 0.364 0.294 1.00
Pros 0.473 0.380 0.567 0.443 0.495 0.461 0.568 0.584 0.542 0.604 0.601 0.561 0.658 0.212 0.259 1.00
E.6 Variation in Medicaid Quality of Care Across Cohorts

Regions that provide high-quality care for one treatment for Medicaid beneficiaries do not necessarily provide high-quality
care for another treatment. Table E.22 presents the correlation between the composite quality measures.94 Correlations for the
aggregate measures are also weak and range from -0.198 (for the PSI and PQI measures) to 0.041 (for the PSI and IQI measures ,
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94
For some quality measures, a lower score indicates better quality. The correlations in both tables have been renormalized for interpretability so that a positive
correlation always means that higher costs are associated with a higher quality of care. In addition, both tables show Pearson correlations, and the Spearman rank
correlations show similar results.
133
suggesting there is little relationship between a regions overall quality of care for one metric and the regions quality of care for
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another metric for Medicaid beneficiaries. Table E.23 displays the correlation between each condition-specific quality metric. In Table
E.23, results are not shown for the breast cancer radiation, breast cancer screening, or stroke quality measures because too few HRRs
had a sufficient number of events in the denominator of the measure to be reported. The correlations between the condition-specific
measures range from -0.334 (for the COPD admissions and diabetes retinal screening measures) to 0.744 (for the two depression
measures). If each measure-to-measure correlation is treated as a single observation, the average correlation between an HRRs quality
score on one measure and its quality score on any other measure for Medicaid beneficiaries is 0.06. Intuitively, because different types
of providers treat different conditions, having providers that perform high-quality care for one condition in a region does not
necessarily imply that the region also has providers that perform above-average for another condition.
Table E.22: Pearson Correlation between Composite Quality Measures for Medicaid Beneficiaries
PSI IQI PQI
PSI 1.00
IQI 0.041 1.00
PQI -0.198 -0.131 1.00
Table E.23: Pearson Correlation between Condition-Specific Quality Measures for Medicaid Beneficiaries
134
BC BC COPD COPD Depr. Depr. Diab. Diab. Diab.

AMI Arth. Cat. CHD CHF Chol. LBP Pneu. Str
Rad Screen Adm. Bronch. Acute Chron. Amp. Hemo. Ret.
AMI
Arth. 0.413
BC Rad
BC Screen
Cat. 0.077 0.154
CHD -0.072 0.109 0.040
CHF 0.359 -0.095 0.015 -0.018
Chol. -0.253 0.001 -0.106 -0.109 0.108
COPD
0.319 0.039 0.024 -0.052 0.072 0.168
Adm.
COPD
0.706 0.208 -0.011 0.099 0.230 0.042 0.264
Bronch.
Depr.
0.277 0.293 0.188 0.065 -0.050 0.027 0.069 0.128
Acute
Depr.
0.361 0.238 0.196 0.072 -0.067 -0.008 -0.070 0.076 0.744
Chron.
Diab. Amp. 0.495 0.151 -0.111 0.000 0.252 0.117 0.012 0.348 -0.171 -0.090
Diab.
-0.103 -0.016 0.187 -0.102 0.108 -0.160 -0.170 -0.182 -0.032 0.049 -0.093
Hemo.
Diab. Ret. -0.268 -0.053 0.236 0.015 0.182 -0.114 -0.334 -0.145 -0.057 -0.013 -0.115 0.727
LBP 0.120 -0.020 -0.108 0.045 -0.032 0.048 -0.029 -0.025 -0.016 0.076 0.011 -0.156 -0.238
Pneu. -0.047 -0.146 -0.095 -0.015 0.556 0.163 -0.016 0.064 -0.150 -0.133 0.240 0.199 0.228 0.116
Str.
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E.7 Relationship between Medicaid Utilization and Quality of Care
Regions with high utilization do not necessarily provide a higher quality of care for
Medicaid beneficiaries. Table E. 24 shows the correlation between HRR-level quality indices
and price-standardized, risk adjusted costs for each quality measure. No results are shown for the
breast cancer radiation, breast cancer screening, or stroke quality measures because too few
HRRs had a sufficient number of events in the denominator of the measure to be reported. In
Table E.24, positive correlations, which are highlighted in red, indicate that higher spending on
patients in that cohort is associated with a higher quality of care for that measure.95 The average
of the correlations is weakly negative, at -0.031. The strongest positive correlation with
utilization exists for the composite PSI measure (0.24), and the strongest negative correlation
with utilization exists for the diabetes retinal screening measure (-0.267)
These results must be interpreted with caution and not as evidence that increased
spending causes higher or lower quality outcomes for two reasons. First, beneficiaries who are
included in a disease cohort are sicker than the general population by default, and the risk
adjustment methodology for the quality measures that are risk adjusted may not adequately
capture these differences in health status. Second, some mechanical relationships between the
quality measures and utilization may cause the correlations to be artificially strong. For example,
the outcome in the CHF admissions measure is an inpatient admission. As the rate of admissions
increases in a region, indicating a lower quality of CHF care, spending in the region will also
increase because admissions are high-cost. Thus, this relationship may induce a negative
correlation between spending and the quality of care provided.
95
For some quality measures, a lower score indicates better quality. The correlations in Table E.24 have been
renormalized for interpretability so that a positive correlation always means that higher costs are associated with a
higher quality of care. In addition, while Table E.24 presents Pearson correlations, the Spearman rank correlations
show similar results.

Table E.24: Pearson Correlation Medicaid Quality and Utilization
Correlation
Quality Measure with
Utilization
AMI - Beta Blockers 0.014
Arthritis - DMARD -0.147
Breast Cancer - Radiation
Breast Cancer - Screening
Cataract - Complications -0.134
CHD - Antiplatelets 0.006
CHF - Admissions -0.209
Cholecystectomy - Laparoscopy Rate -0.161
COPD - Admissions 0.170
COPD - Bronchodilators 0.017
Depression - 12 Weeks -0.062
Depression - 6 Months 0.213
Diabetes - Amputation -0.024
Diabetes - Hemoglobin -0.217
Diabetes - Retinal Screening -0.267
LBP - Imaging -0.011
Lung Cancer - NONE
Pneumonia - Admissions -0.060
Prostate Cancer - NONE
Stroke - Antiplatelets
Aggregate - PSI 0.235
Aggregate - IQI 0.091
Aggregate - PQI -0.019
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Appendix F: GEOGRAPHIC VARIATION IN SPENDING FOR
MEDICARE ADVANTAGE BENEFICIARIES
Whereas the body of this report examines only Medicare fee-for-services (FFS), this
appendix extends the analysis to investigate regional variation in spending for MA
beneficiaries.96 Specifically, this appendix addresses the following research questions:
1. How much variation is there in per capita spending in Medicare Advantage across the
nation?
2. Are regions with high Medicare Advantage premiums likely to have high Medicare
Advantage premiums in subsequent years?
3. Do beneficiaries in regions with more Medicare Advantage plan competition have

lower Medicare Advantage premiums?
4. Are regions with high Medicare Advantage spending levels also likely to have high
spending levels in Medicare fee-for-service?
The remainder of this appendix proceeds as follows. First, Section F.1 briefly describes CMS
payment policy for Medicare Advantage beneficiaries. Section F.2 describes the methodology
used to answer the five research questions posed above, including the data sources, cohort
definitions, outcome variables, and risk adjustment specifications. Finally, Section F.3 directly
evaluates each research question.
F.1 Medicare Advantage Payment Policy Overview

The Medicare Advantage program (also known as Part C), originally named the
Medicare+Choice (M+C) program, allows private insurers to contract with Medicare to provide
Medicare-covered Part A and B services to beneficiaries. CMSs goal for the MA program is to
allow market competition to incentivize insurers to provide high-quality care at a lower cost than
traditional Medicare FFS for Medicare beneficiaries.97 MA plans often include prescription drug
coverage, but beneficiaries that choose plans that do not cover prescription drugs can enroll
separately in Medicare prescription drug plans (PDP). Beneficiaries typically choose their MA
plan based on the services covered and the premiums (if any) they require beneficiaries to pay
for those services. To finance these services, Medicare Advantage Organizations (MAOs)
receive a fixed monthly payment per beneficiary, adjusted for beneficiary health status.
96
This analysis examines all Part C beneficiaries, which include those enrolled in certain private health plans,
known as cost plans, which are not technically MA plans. For simplicity, from this point forward, this report
includes cost plans when referring to Medicare Advantage unless otherwise noted.
97
Centers for Medicare & Medicaid Services, "Medicare Managed Care Manual, Chapter 1: Introduction,"
http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/mc86c01.pdf.

The following two sections provide a brief overview of the Medicare Advantage
program. Section F.1.1 describes overall MA enrollment and five different MA plan types.
Section F.1.2 discusses the steps CMS uses to determine Medicare and beneficiary payments.
F.1.1 Medicare Advantage Enrollment and Spending

The MA option has been growing in popularity in recent years. Whereas in 2001 only 15
percent of Medicare beneficiaries were enrolled in MA, in 2011 25 percent of beneficiaries chose
an MA plan. CMS spending on MA plans is projected to be $115 billion in 2012 and account for
21 percent of total Medicare spending.98 Although Congress established MA with the aim of
providing services to Medicare beneficiaries at a reduced cost than FFS, payments to MA plans
in 2012 exceed what CMS would have paid for those beneficiaries in traditional Medicare by 14
percent.99
There are five main types of health plans available to Medicare beneficiaries, including
local coordinated care, private fee-for-service, regional preferred provider organization, medical
savings account, and cost plans. First, local coordinated care plans (CCPs) include local health
maintenance organizations (HMOs) and preferred provider organizations (PPOs). Local CCPs
contract with a network of providers and are required to offer at least one plan that includes Part
D drug coverage in their service area. CCPs also generally require a primary care gatekeeper to
refer beneficiaries for certain services. Second, private fee-for-service plans (PFFS) are not
required to establish networks of providers or offer prescription drug coverage. Third, regional
PPOs are similar to local PPOs but provide coverage for an entire geographic region that is
defined by CMS.100 Fourth, medical savings account plans (MSAs) offer a high-deductible plan
with an MSA that beneficiaries can use to cover cost-sharing or non-covered services. Fifth, cost
plans are compensated based on calculated reasonable costs for the Medicare-covered services
they provide for each beneficiary instead of a fixed rate per beneficiary. Cost plans are not
technically MA plans as Congress authorized their creation under a different section of the Social
Security Act. 101Unlike traditional FFS, beneficiaries in cost plans are overseen by a network of
providers, though CMS does pay FFS rates when beneficiaries in cost plans receive services
outside of their network. In 2007, at the start of this studys analysis period, 70 percent of MA
98
"Medicare: Medicare Advantage Fact Sheet," The Henry J. Kaiser Family Foundation,
http://www.kff.org/medicare/upload/2052-15.pdf.
99
"The Medicare Advantage Program: Status Report," MedPAC Report to the Congress: Medicare Payment Policy,
100
CMS sets benchmarks for regional PPOs at the regional level differently than for county-based plans. Regional
benchmarks are a blend of a plan-bid component, based on the weighted average of the bids for regional plans in
that region, and a statutory component, consisting of the weighted average of the county capitation rates in that
region.
101
"Medicare Managed Care Manual, Chapter 1: Section 1876 Cost Plans," Centers for Medicare & Medicaid
Services, http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/mc86c01.pdf.
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beneficiaries were enrolled in a local HMO, while 5.8 percent were enrolled in another type of
local CCP. In addition, 19.4 percent were enrolled in a PFFS plan, and 4.8 percent were enrolled
in any other type of plan, including MSAs, regional PPOs, and cost plans.102 Figure F.1 presents
MA plan enrollment by type in 2007.
Figure F.1: MA Plan Enrollment by Type, 2007
F.1.2 Payments to Medicare Advantage Plans

The total payments an MA plan receives for each beneficiary is determined using the
following five steps:
1. CMS sets a benchmark for each county;
2. The MAO places a bid for the plans expected monthly costs per beneficiary;
3. The plans bid is compared to the local county benchmark, and the lower amount is
the set as the plans base rate;
4. CMS pays the plan the base rate for each enrollee, adjusted for the plans beneficiary
case mix and including a rebate if the bid is below the benchmark;
5. Enrollees may also pay a monthly premium to the plan.
MA payments are based first on the capitated rate, or benchmark, CMS sets each year for
MA plans in a given county to cover a minimum set of services per beneficiary. The benchmark
represents the maximum amount that CMS will pay any MA plan to provide this core set of
services. Benchmarks are historically based on the estimated average Medicare FFS costs in that
102
Mark Merlis, "Medicare Advantage Payment Policy," National Health Policy Forum (2007).

county.103 A countys benchmark is updated each year by the greater of a two percent increase or
the expected national growth in Medicare spending. CMS is required to rebase the benchmarks
using current FFS costs at least every three years.104 For beneficiaries with end stage renal
disease (ESRD), MA plans are paid separate state-level capitated rates set outside the bidding
process that are much higher than non-ESRD capitated rates to account for the higher expected
health expenditures of beneficiaries with ESRD.
Second, for each plan it offers, the MAO places a bid that represents the expected costs
for the plan to cover the core set of services for an average beneficiary, including administrative
fees. The plans bid does not take into account the expected enrollee case mix. CMS may
negotiate bid amounts with most plans.
Third, the plans bid is compared to the local benchmark. The benchmark represents
CMS maximum monthly payment per beneficiary. Thus, if the bid is less than the benchmark,
the base rate is set at the bid; if the bid is greater than or equal to the benchmark, the base rate is
set at the benchmark.
Fourth, to calculate the payment to the plan, the base rate is adjusted for the plans
expected beneficiary case mix using the CMS-HCC model.105 The CMS-HCC model is
estimated using FFS claims for beneficiaries in Original Medicare to predict costs based on
demographic and health factors. Because MA beneficiaries tend to be healthier than beneficiaries
in Original Medicare, the aggregate payments to MA plans after accounting for beneficiary
health status would be lower than if MA beneficiaries represented the average set of beneficiaries
on which the CMS-HCC model was developed. Thus, CMS also multiplies all base rates by a
single budget neutrality adjustment factor to prevent a decrease in payments to MA plans due to
lower risk scores.106 If the plans bid is less than the benchmark, CMS pays the plans the bid and
a rebate for part of the difference between the benchmark and bid after adjusting for health
status. CMS retains 25 percent of the difference, and the plan uses the remaining 75 percent to
cover additional benefits or reduce premiums or cost sharing paid by beneficiaries.
103
Some benchmarks in rural areas were initially set higher than FFS costs to increase plan availability.
"The Medicare Advantage Program," MedPAC Report to the Congress: Medicare Payment Policy,
104
The rebased rates are calculated using a rolling five-year average of FFS costs. "Medicare Managed Care
Manual, Chapter 8: Determination of Annual Capitation Rates," Centers for Medicare & Medicaid Services,
http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/mc86c08.pdf.
105
"Medicare Advantage Rates & Statistics: Risk Adjustment," Centers for Medicare & Medicaid Services,
https://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Risk_adjustment.html.
106
CMS began to phase out the budget neutrality adjustment in 2007, and it was completely phased out by 2011.
"Medicare Managed Care Manual, Chapter 8: Budget Neutral (BN) Risk Adjustment," Centers for Medicare &
Medicaid Services, http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/mc86c08.pdf.
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Finally, enrollees may pay a premium to the plan. Enrollee basic premiums for plans that
bid below the benchmark are always zero. These plans, however, may offer additional services,
sometimes at an increased premium for the beneficiary. If the plan bid is greater than or equal to
the benchmark, the plan will require beneficiaries to pay a premium to make up the difference
between the plans expected costs per beneficiary and what CMS will pay the plan.
F.2 Methodology for Measuring Regional Variation in MA Spending
The MA analysis measures geographic variation in spending using an approach similar to

the FFS analysis, but the scope of the analysis is limited by the fact that claims-level utilization
data is not available for MA beneficiaries. Whereas individual-level claims are available for all
services received by FFS enrollees, only monthly plan payments are available for most MA
enrollees. Because CMS only began collecting encounter data from MA plans in April 2012 and
this study is limited to the 2007-2009 time period, this analysis can only observe regional
variation in MA spending based on total premiums paid to MA plans.107 Beneficiary MA
premiums can vary due to a number of factors such as input costs, beneficiary health status, plan
competition, and other factors. This analysis controls for variation due to input costs by price
standardizing spending and controls for beneficiary health status by risk adjusting spending.
Thus, the remaining spending variation is primarily due to differences in health plan competition
and other unmeasured factors.
The remainder of this section details the methodology used by this analysis to measure
regional variation in spending. Section F.2.1 describes the data sources used in this study, and
Section F.2.2 defines which beneficiaries are included in the analysis and explains how this study
creates condition-specific beneficiary cohorts. Section F.2.3 specifies how this study calculates
health care expenditures for MA beneficiaries. Finally, Section F.2.4 defines the risk adjustment
econometric specifications. Following the precedent set for the Medicare FFS and Medicaid
analyses, this study defines a region as a Hospital Referral Region (HRR).
F.2.1 Data Sources

This analysis uses the universe of MA and FFS data from 2007 through 2009 to study
geographic variation in health care expenditures. Table F.1 presents the data sources that create
the relevant analytic files. The analysis utilizes enrollment data for Medicare Part C to determine
demographic information, enrollment dates, and third party buy-in information. To determine
monthly premiums for each MA beneficiary, this analysis uses the Part C monthly payment files
which include payments by CMS for each beneficiary, including rebates, and the beneficiarys
premium paid to the plan, if any. In addition, beneficiaries in some cost plans can receive their
107
"CMS Manual System: Pub 100-20 One-Time Notification," Centers for Medicare & Medicaid Services,
http://www.cms.gov/Regulations-and-Guidance/Guidance/Transmittals/downloads/R978OTN.pdf.

services through Original Medicare. Payment for these services is not included in the base rate
paid to the cost plan but is separately reported in the Medicare FFS claims files. To measure
these costs, this report uses all Medicare FFS claims for these beneficiaries. Finally, this report
measures MA beneficiary prescription drug costs using data from the Medicare Prescription
Drug Event (PDE) files. The PDE file includes beneficiaries enrolled in either a stand-alone Part
D plan (PDP) or a Medicare Advantage Part D (MA-PD) plan integrated into their own MA Part
C plan. Unlike the monthly MA premium data in the monthly membership files, the PDE data do
measure beneficiary utilization of specific pharmaceuticals.
Table F.1: MA Data Sources

Data Source Years Data Files
Common Working Files (CWF) for:
Medicare Parts A and 2007 - Home Health (HH), Physician (PB), Inpatient (IP), Skilled Nursing
B Claims 2009 Facility (SNF), Outpatient (OP), Hospice (HS), and Durable Medical
Equipment (DME) claims
Medicare Part D 2007 -
Prescription Drug Event (PDE)
Claims 2009
Medicare Part A, B, Enrollment Database (EDB)
2007 -
and C Enrollment Common Medicare Environment (CME)
2009
Data Enterprise Cross-Reference (ECR) Files
MARx files: Full Enrollment Files, Monthly Membership Files, Risk
Scores
Medicare Part C and 2007 -
Risk Adjustment Processing System (RAPS)
D Enrollment Data 2009
HPMS Files: Beneficiary Cost, Formulary, and Pharmacy files for Part D
F.2.2 Beneficiary Cohort Definitions

This report analyzes regional variation in costs for MA beneficiaries as a whole as well as
for specific MA beneficiaries with four conditions. Because MA data includes only monthly
capitation claims that represent the total costs paid for MA beneficiaries, this study does not
define condition cohorts using ICD-9 diagnoses codes, as is done in the FFS analysis. Instead,
the analysis defines the cohorts using CMS HCC health status indicators, which are available on
a yearly basis for Part C enrollees. CMS calculates the HCCs, however, based on the diagnosis
codes that MA plans submit to CMS each year. Table F.2 presents a mapping of ICD-9 diagnosis
codes to the HCC categories for the four condition cohorts examined in this analysis.108
108
In the FFS analysis, beneficiaries with a chronic condition are automatically enrolled in that chronic cohort in the
next year of the analysis period. Because health data for MA beneficiaries is only available yearly, however, MA
beneficiaries are only included in a chronic cohort if they have the relevant HCC for that year. The chronic cohorts
for the MA analysis include COPD, depression, and diabetes.
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Table F.2: MA Condition Cohort Definitions
2008 HCC
Condition ICD-9 Diagnosis Codes
Number(s)
Chronic
491.0, 491.1, 491.20, 491.21, 491.22, 491.8, 491.9, 492.0, 492.8,
Obstructive 108
493.20, 493.21, 493.22, 496, 518.1, 518.2
Pulmonary Disease
296.00, 296.01, 296.02, 296.03, 296.04, 296.05, 296.06, 296.10,
296.11, 296.12, 296.13, 296.14, 296.15, 296.16, 296.20, 296.21,
296.22, 296.23, 296.24, 296.25, 296.26, 296.30, 296.31, 296.32,
296.33, 296.34, 296.35, 296.36, 296.40, 296.41, 296.42, 296.43,
296.44, 296.45,296.46, 296.50, 296.51, 296.52, 296.53, 296.54,
296.55, 296.56, 296.60, 296.61, 296.62, 296.63, 296.64, 296.65,
Depression 55 296.66, 296.7, 296.80, 296.81, 296.82, 296.89, 296.90, 296.99, 297.0,
297.1, 297.2, 297.3, 297.8, 297.9, E9500, E9501, E9502, E9503,
E9504, E9505, E9506, E9507, E9508, E9509, E9510, E9511, E9518,
E9520, E9521, E9528, E9529, E9530, E9531, E9538, E9539, E954,
E9550, E9551, E9552, E9553, E9554, E9555, E9556, E9557, E9559,
E956, E9570, E9571, E9572, E9579, E9580, E9581, E9582, E9583,
E9584, E9585, E9586, E9587, E9588, E9589, E959
250.40, 250.41, 250.42, 250.43, 250.70, 250.71, 250.72, 250.73,
250.60, 250.61, 250.62, 250.63, 250.80, 250.81, 250.82, 250.83,
15, 16, 17, 250.10, 250.11, 250.12, 250.13, 250.20, 250.21, 250.22, 250.23,
Diabetes
18, 19 250.30, 250.31, 250.32, 250.33, 250.50, 250.51, 250.52, 250.53,
250.90, 250.91, 250.92, 250.93, 250.00, 250.01, 250.02, 250.03,
V5867
433.01, 433.11, 433.21, 433.31, 433.81, 433.91, 434.01, 434.11,
Stroke 96
434.91, 436
For both the aggregate and four condition-specific cohorts, this analysis applies three
exclusion restrictions to ensure that the estimated spending figures capture most (if not all) of a
beneficiarys healthcare spending. The MA approach broadly uses the same set of exclusion
criteria as the FFS analysis, although some of the institutional features of the MA data sources
require unique restrictions. Table F.3 presents the number of beneficiaries lost to each exclusion
restriction for the full 2007 through 2009 analysis. Because these exclusions need not be applied
in any order, some beneficiaries will be excluded based on more than one restriction. As a result,
the total percent of beneficiaries excluded is not necessarily equal to the sum of the beneficiaries
lost to each restriction.The analysis excludes beneficiaries whose enrollment data show that
Medicare was the secondary payer for their claims because Medicare is not paying the full cost
of these beneficiaries healthcare (column B in Table F.3). Beneficiaries who have Medicare as
the secondary payer are typically the working aged or working disabled. The analysis also
excludes beneficiaries with any negative net monthly CMS payment amount on their MA claims
because negative net payment amounts typically appear due to data errors from date mismatches
or double adjustments applied by CMS (column C). Finally, the analysis excludes beneficiaries if
their enrollment information cannot be matched to an entry in the EDB. In the aggregate cohort,
these restrictions remove 5.2 percent of Part C beneficiaries.

Table F.3: MA Beneficiary Exclusions
A B C D E
Total Medicare is Negative Total

Not Found in
Number of not Primary Monthly
EDB
Beneficiaries
Beneficiaries Payer Payment Lost
Aggregate 32,758,423 5.15% 0.10% <0.001% 5.2%

COPD 4,020,822 5.55% 0.23% <0.001% 5.8%
Depression 1,468,855 6.52% 0.13% <0.001% 6.6%
Diabetes 8,014,101 5.39% 0.17% <0.001% 5.6%
Stroke 1,041,955 4.76% 0.27% <0.001% 5.0%
In addition to general enrollment restrictions, this analysis also applies a number of MA-
specific exclusion restrictions. Table F.4 presents the results of imposing these exclusion
restrictions at the monthly level for the 2007 through 2009 analysis. As the table describes, this
report removes observations for MA beneficiaries in a given month if:
They are enrolled in a demonstration plan (column B)
They are enrolled in a PACE plan (column C)
They are in hospice care (column D)
They have no plan type listed (column E)
They have no risk model listed (column F)
They have a missing or 0 risk score (column G)
They have an invalid ZIP code (column H).
This analysis excludes months beneficiaries are enrolled in demonstration planswhich CMS
uses to study the impact of potential MA program changesbecause these plans do not operate
under the same program rules as other MA plans (column B).109 Program of All-inclusive Care
for the Elderly (PACE) plans are managed care plans that are uniquely designed to provide
services to the frail elderly who would otherwise need nursing home level of care.110 Because the
minimum required services the plan covers are greater than the minimum required services for
other MA plans and the enrollment requirements are less restrictive, this analysis also excludes
months beneficiaries are enrolled in PACE plans (column C). Beneficiaries in MA plans (other
109
"Medicare Demonstration Projects & Evaluation Reports," Centers for Medicare & Medicaid Services,
http://www.cms.gov/Medicare/Demonstration-Projects/DemoProjectsEvalRpts/index.html.
110
"PACE Fact Sheet," Centers for Medicare & Medicaid Services, https://www.cms.gov/Medicare/Health-
Plans/pace/downloads/PACEFactSheet.pdf.
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than PACE) who are in hospice have their hospice services paid for by Original Medicare instead
of through their MA plan.111 Because MA beneficiaries in hospice are de facto FFS beneficiaries,
the MA analysis excludes them (column D). Months in which a beneficiary has a missing plan
type or a missing risk model type are excluded because the risk score methodology requires plan
type and risk model information to calculate case-mix adjusted expenditures (columns E and F).
The analysis excludes months in which a beneficiary has a missing or 0 risk score because
payments for these months cannot be risk-adjusted (column G).112 Finally, the analysis excludes
months in which the beneficiary has a missing or invalid ZIP code which does not map to an
HRR (column H). Without a valid ZIP code, one cannot identify the HRR to which the
beneficiary should be assigned. In total, 14 percent of months of enrollment in Part C in the
aggregate sample are lost to these restrictions (column I).
Table F.4: MA Observation Exclusions

A B C D E F G H I
Total Missing Missing Zero Invalid Total

Demo PACE
Number of Hospice Plan Risk Risk ZIP Months
Plan Plan
Months Type Model Score Code Lost
Aggregate 372,464,592 0.70% 0.14% 0.35% 3.52% 2.79% 1.58% 3.73% 14.0%
COPD 45,459,756 0.81% 0.30% 0.84% 5.59% 3.94% 1.94% 3.95% 17.0%
Depression 16,455,408 0.96% 0.73% 0.66% 5.90% 4.58% 2.32% 10.96% 23.1%
Diabetes 90,815,328 0.72% 0.23% 0.40% 5.71% 3.83% 1.91% 6.00% 16.9%
Stroke 11,874,048 1.09% 0.39% 1.11% 6.02% 4.25% 1.93% 6.38% 21.5%
F.2.3 Measures of Health Care Expenditures

For all beneficiaries included in the cohorts defined above, this analysis calculates each
beneficiarys average monthly expenditures. This study calculates per capita expenditures in one
of two ways. The first method measures unadjusted monthly cost. Whereas the Medicare FFS
program pays providers based on the services the beneficiary incurs, per capita expenditures for
beneficiaries enrolled in MA represent a fixed monthly rate regardless of beneficiary utilization
levels. Thus, the MA analysis captures regional variation in premiums rather than regional
variation in utilization. These premiums, however, vary in part due to regional differences in the
price of the inputs used to produce healthcare services. To account for regional variation in the
price of healthcare services, the second method calculates a price-standardized measure of MA
111
"Medicare Managed Care Manual, Chapter 8: CMS' Payments to Hospice Programs," Centers for Medicare &
Medicaid Services, http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/mc86c08.pdf.
112
If a beneficiary has a missing or zero risk score in a given month, the analysis first assigns the earlier risk score in
the analysis period, if there is one available. If all earlier risk scores are missing or zero, the beneficiarys risk score
is built using HCCs.

beneficiary monthly expenditures.113 The following two sections describe both approaches in
more detail.
Measurement of Health Care Expenditures
The MA analysis calculates per capita monthly expenditures using three steps.
1. Sum all expenditures paid by CMS for beneficiaries in Part C,
2. Adjust the costs for inflation, and
3. Calculate per beneficiary, per month expenditures.
The initial step calculates expenditures for all beneficiaries enrolled in Part C. First, the
analysis sums all CMS capitated payments to MA and cost plans, any rebates the plans receive
from CMS for bidding below the benchmark, and all beneficiary premiums paid to the plans for
all months a beneficiary is enrolled in Part C. Although these premiums comprise the majority of
the spending for most MA beneficiaries, beneficiaries in cost plans may also receive FFS rates.
Thus, for cost plan beneficiaries, this analysis adds spending observed in the FFS claims. These
FFS payments are calculated as the sum of the claim payment, coinsurance, and deductible from
the Inpatient, Outpatient, Hospice, Home Health, Skilled Nursing, Carrier, and Durable Medical
Equipment claim types. For any MA beneficiary with prescription drug coverage through
Medicare, the analysis also adds all Part D spending during the months they are enrolled in Part
C. This analysis captures drug spending regardless of whether the beneficiary has prescription
drug coverage through a Medicare Advantage Prescription Drug (MA-PD) plan as part of their
MA plan or whether their coverage comes through a stand-alone prescription drug plan (PDP).
The expenditure level for a Part C beneficiary in any month is the sum of their MA premiums,
FFS payments (for cost plan beneficiaries), and prescription drug costs.
The second step adjusts these costs for inflation. As in the FFS analysis, the analysis uses
the Consumer Price Index to account for the changing prices paid by consumers for all goods and
services (not just health care).114 To inflate expenditures to costs in 2009, the analysis multiplies
expenditures incurred in 2007 by 1.032 and multiplies expenditures in 2008 by 0.995.
Finally, the third step calculates average expenditures per beneficiary per month for the
months they are enrolled in Part C. Typically, total beneficiary cost is the cost incurred during
113
Unlike FFS beneficiaries, the individual claims for each service Part C beneficiaries receive are not submitted to
CMS, except for prescription drug spending and services that beneficiaries in cost plans receive through FFS. Thus,
this analysis does not examine health care utilization counts or health care quality for Part C beneficiaries.
114
"Consumer Price Index - Chained Consumer Price Index".
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the calendar year. For partial-year enrollees, however, average spending is calculated starting
from the first month the beneficiary was enrolled in Part C until the end of the calendar year.115
Measurement of PriceStandardized Spending
This analysis examines price standardized cost to remove geographic variation in the
price of inputs. To create price-standardized figures, this methodology uses a four-step
approach. The study separately price-standardizes monthly payments to MA plans, payments for
FFS services received by beneficiaries in cost plans, and prescription drug spending. The
components are then renormalized so that the sum of price standardized expenditures equals the
sum of unadjusted expenditures.
First, monthly payments to MA plans and cost plans in a given region are price-
standardized based on the results of price standardization in that region for the Medicare FFS
analysis. Price standardized costs for region R are calculated by multiplying the unadjusted
expenditures for that region by a price standardization ratio using beneficiaries from the FFS
analysis in the aggregate cohort. The price standardization ratio is calculated as follows:

(F.1)
In equation (F.1), YSiR represents the price-standardized FFS cost for each beneficiary i in region
R for a given year, and YUiR represents the corresponding unadjusted cost for each beneficiary i in
region R.116 Cost is measured as allowed charges in Part A and Part B which includes payments
from Medicare as well as beneficiary coinsurance and deductible payments.117 Each regions
total standardized and unadjusted costs are calculated by summing costs for each beneficiary-
month of enrollment in FFS in that region. A PSR greater than one indicates that the regions
expenditures are relatively higher after accounting for input prices.
Second, the analysis price standardizes payments for beneficiaries in cost plans for
services they receive through FFS using the same price standardization methodology as the FFS
analysis. Price standardization occurs at the file type-year level for the Inpatient, Outpatient,
Hospice, Home Health, Skilled Nursing, Carrier, and Durable Medical Equipment claim types.
Third, payments for beneficiaries enrolled in Part C for prescription drugs are paid
through Part D, and this analysis price standardizes these costs using the same price
115
To assign beneficiaries to a region, this analysis utilizes the first ZIP code that appears during the beneficiarys
observation period.
116
Because this analysis price-standardizes costs on a monthly basis, beneficiaries costs are price-standardized
using the PSR of the region in which they currently reside.
117
In addition, because MA benchmarks include expected payments for indirect medical education and
disproportionate share hospitals, these costs have been included in calculating the FFS price standardization ratio.

standardization methodology as the FFS analysis. To control for regional variation in the price
of prescription drugs, the FFS approach subtracts sales tax and dispensing fees for each claim.
In the fourth and final step, the total price standardized cost for all beneficiaries is
renormalized. Renormalization causes total price standardized costs to equal total unadjusted
costs. The analysis renormalizes price-standardized expenditures at the aggregate level; thus, for
the condition cohorts, total price standardized spending is not necessarily equal to total
unadjusted spending.
F.2.4 Risk Adjustment Econometric Specification

In addition to controlling for regional variation in input prices, this analysis also risk-
adjusts beneficiary MA expenditures to account for regional variation in patient case mix. This
analysis risk adjusts all expenditures using four steps. The first step creates a standardized risk
score that reflects a beneficiarys health status relative to all other Part C beneficiaries. The
second step risk adjusts monthly capitation payments to MA plans by using the calculated risk
score to remove CMS payment adjustments for health status. The third and fourth steps use an
ordinary least squares (OLS) regression to estimate the effect of beneficiary health status
separately for prescription drug spending and for payments in FFS for beneficiaries in cost plans.
This analysis measures case mix based on the risk score CMS calculates as part of its
HCC model. The HCC model measures beneficiary demographics, enrollment status, and
severity of illness. CMSs HCC model uses separate models to calculate risk scores for different
categories of beneficiaries (e.g., community, institutional, and ESRD).118 As a result, beneficiary
risk scores represent health relative to other beneficiaries within that model. For example, a
beneficiary with ESRD may have a lower risk score than a beneficiary without ESRD, even
though the beneficiary with ESRD is likely to be relatively sicker and have higher health care
costs.
First, to standardize the risk score across models, this analysis creates a renormalized risk
score for each year. The renormalized risk score RNi for a beneficiary i in risk model M for a
given month is calculated as follows:
,
(F.2)
In equation (F.2), , represents the original risk score for beneficiary i in risk model M, and
is the average original risk score for all beneficiaries in risk model M. represents the
average monthly spending for beneficiaries in risk model M, while represents the average
118
This analysis utilizes risk scores after they are normalized by CMS to account for coding and population changes.
The normalized risk scores are used by CMS to determine payment.
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,
monthly spending for all beneficiaries. The first term, , centers the monthly risk scores within
a given risk model to 1.0, while the second term, , scales the risk scores by the average
expenditures for beneficiaries in that risk model as a proportion of total average expenditures
across all MA beneficiaries.
After renormalizing the risk scores, the second step separately risk adjusts MA premium
expenditures, cost plan FFS payments, and prescription drug expenditures, because beneficiary
health affects expenditures for these components in different ways. The risk adjustment approach
modifies capitated monthly MA payments by dividing total premiums paid for MA beneficiaries
by the renormalized risk score. CMS calculates payments to MA plans by multiplying the lower
of the unadjusted bid or the benchmark by beneficiary risk scores. By dividing the observed
premiums by the risk score, this approach, in essence, directly removes CMS adjustments for
health. Risk-adjusted spending to MA plans is then renormalized such that total risk-adjusted
spending is equal to total price-standardized spending, and risk-adjusted spending represents the
real prices paid by CMS and beneficiaries to MA plans.119
In the third and fourth steps, payments for beneficiaries in cost plans and prescription
drug spending are separately risk-adjusted using a regression-based approach. Unlike the MA
premiums, where the beneficiarys risk score directly affects CMS spending, beneficiary risk
scores affect cost plan and prescription drug spending only probabilistically (i.e., sicker
beneficiaries are more likely to have higher healthcare spending). To implement this approach,
the analysis estimates the following specification for each year of analysis:
(F.3)
In equation (F.3), represents the dependent variable for beneficiary i. represents the
coefficients estimating the relationship between the dependent and the independent variables
represented by Xi, and represents the error term. The two dependent variables that are
estimated using this method are average monthly price-standardized spending for beneficiaries in
cost plans and average monthly price-standardized spending on prescription drugs for
beneficiaries in Part C. This equation is estimated yearly at the beneficiary level using the OLS
regression method. 120
The outcome variable, Yi, is calculated on a monthly basis, or average spending per
month. Calculating average per-month costs removes the effect of increased expenditures at
119
Because the second and third steps use an OLS regression method, total risk adjusted spending is equal to total
price standardized spending.
120
To calculate risk-adjusted spending for beneficiaries in condition cohorts, each risk model is re-estimated on
those beneficiaries. In the 2007 through 2009 analysis, a year indicator is also included as an independent variable.

different points in the treatment of a condition, such as at the beginning. The regression is
weighted by the number of months the beneficiary is enrolled in MA in order for beneficiaries
with longer enrollment periods to affect the coefficient estimates more than those enrolled in MA
for a limited time. Although both the cost plan and Part D risk adjustment models use this
weighting scheme, the discussion below assumes all observations are equally weighted for
expositional clarity.
The residual for individual i, , is calculated as the difference between the observed (or
actual) value of the dependent variable, , minus the predicted value of the dependent
variable, where denotes the OLS estimates of the coefficients, . These risk
adjustment factors are added to average spending to create a risk adjusted value of spending for
each beneficiary in each year, , which can be expressed as follows:
(F.4)
In equation (F.4), is equal to the average predicted value of the dependent variable across all
beneficiaries in a given year. After determining the risk adjusted expenditures for all three
components, this analysis sums expenditures for each beneficiary to calculate total risk adjusted
spending per beneficiary.
This analysis risk-adjusts spending for beneficiaries in cost plans separately from
spending for other Part C beneficiaries because cost plans expenditures include FFS spending.
Thus, total average monthly expenditures for beneficiaries in cost plans are risk adjusted
together. The independent variable used to account for health status is the first renormalized risk
score RNi for beneficiary i during the observation period. By using the first renormalized risk
score of the observation period, this analysis imposes a prospective risk adjustment based on
beneficiary health status. This approach does not, however, account for any change in the
beneficiarys health status, including a change of risk model; for example, if a beneficiary moves
to the institutional setting, the resulting change in his or her risk model and risk score is not taken
into account.
Because prescription drug expenditures are paid at FFS rates rather than capitated rates
for beneficiaries in Part C, this analysis risk adjusts prescription drug spending separately from
both the monthly payments that MA plans receive and the costs for beneficiaries in cost plans.
The prescription drug spending risk adjustment includes all beneficiaries enrolled in Part C,
including those not enrolled in Part D. This analysis uses four independent variables to account
for patient health status and differences in enrollment. These specific variables include: (i) the
renormalized risk score (RNi); (ii) an indicator for continuous enrollment in Part D during the
entire time enrolled in Part C; (iii) a continuous Part D partial year enrollment variable, and (iv)
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an indicator to determine whether the beneficiary had any Part D enrollment during the year.
Table F.5 presents the definitions of the beneficiary-level independent variables used in the
prescription drug risk adjustment model.
Table F.5: MA Independent Variables in Part D Risk Adjustment

Beneficiary-Level
Data Source Measure
Variable
Renormalized Risk CMS payment risk score renormalized based on expenditures for
MARx/RAPS
Score beneficiaries in each risk model
Continuous Indicator variable for continuous enrollment in Part D during the
EDB
Enrollment in Part D entire period enrolled in Part C during the observation window
Continuous variable (between 0 and 1) of the share of months
Partial Year
EDB enrolled in Part D out of the total months enrolled in Part C during
Enrollment in Part D
the observation window
Any Enrollment in Indicator variable for enrollment in Part D at any point during the
EDB
Part D period enrolled in Part C in the observation window
F.3 Results of Medicare Advantage Analysis

Using the methodology described in the previous chapter, this section answers the five
research questions posed at the beginning of this appendix:
1. How much variation is there in per capita spending in Medicare Advantage across the
nation?
2. Are regions with high Medicare Advantage premiums likely to have high Medicare
Advantage premiums in subsequent years?
3. Do beneficiaries in regions with more Medicare Advantage plan competition have

lower Medicare Advantage premiums?
4. Are regions with high Medicare Advantage spending levels also likely to have high
spending levels in Medicare fee-for-service?
The remainder of this section addresses each of these questions in turn using the methodology
described in Sections F.2.1 through F.2.4.
F.3.1 Spending Variation is Smaller for MA Beneficiaries than FFS Beneficiaries

The MA spending distribution, like most healthcare spending distributions, is right-
skewed. Table F.6 presents the per capita monthly spending levels before price-standardization
or risk adjustment by beneficiary criteria for the aggregate cohort in the 2007 through 2009
analysis period. The table clearly demonstrates that the distribution is right-skewed, as monthly
spending for the median beneficiary ($719) is less than monthly spending for the average

beneficiary ($986). Although spending distribution is also skewed for certain beneficiary
categories, average spending levels for these beneficiaries can sometimes materially differ from
the overall per capita spending average. For instance, average monthly spending is highest for
beneficiaries who died during the year; average monthly spending for episodes ending in death is
more than twice as high as for episodes not ending in death. Spending for dual-enrolled
beneficiaries (beneficiaries enrolled in both Medicare and Medicaid) is about 50 percent higher
than for non-dual beneficiaries.
Table F.6: MA Average Monthly Cost by Beneficiary Characteristic

# Percentile 90-10
Category Episodes Avg. Std. Dev. Min Max
10th 50th 90th Difference
(millions)
All 29.2 $986 $900 $0 $358 $719 $1,884 $263,505 $1,526
Female 16.8 $963 $860 $0 $356 $710 $1,829 $115,703 $1,473
Male121 12.4 $1,018 $951 $0 $361 $731 $1,961 $263,505 $1,600
White 23.8 $960 $861 $0 $351 $701 $1,842 $263,505 $1,491
Black 3.3 $1,146 $1,121 $0 $395 $820 $2,180 $115,703 $1,785
Asian 0.6 $956 $864 $0 $397 $721 $1,676 $50,342 $1,279
Hispanic 0.8 $1,233 $1,003 $0 $476 $963 $2,237 $51,434 $1,761
Other 0.7 $909 $874 $0 $357 $660 $1,648 $73,539 $1,291
Unknown 0.03 $1,130 $1,004 $0 $398 $850 $2,145 $34,447 $1,747
Dual 4.5 $1,398 $1,140 $0 $515 $1,086 $2,580 $115,703 $2,064
Non-Dual 24.6 $917 $833 $0 $347 $668 $1,731 $263,505 $1,384
Alive
During
28.2 $966 $855 $0 $356 $711 $1,838 $263,505 $1,482
Entire
Episode
Died
During 1.0 $2,039 $1,963 $0 $591 $1,513 $3,878 $134,041 $3,287
Episode
The skew and variation in the distribution of MA spending is largely unaffected by MA

beneficiary utilization of healthcare services, but variation across regions in county benchmark
levels, MA plan bids, and beneficiary health status does affect MA spending levels. The amount
Medicare pays plans depends on each countys benchmark. CMS calculates this figure based on
historical FFS spending in the area rather than any measure of MA utilization. The final premium
beneficiaries pay, however, depends on plan bids. Factors such as the HRRs input prices or level
of competition can affect these plans bids. While benchmark rates and plan bids depend on the
cost factors related to the average beneficiary, CMS also adjusts MA payments based on
121
In addition, 6 beneficiaries included the analysis did not have a sex listed in their enrollment files, likely due to
coding error.
152 Acumen, LLC

beneficiary health status. None of these factors depend directly on MA utilization of services in
the years under consideration.122
Accounting for regional differences in input costs and beneficiary health characteristics
does reduce the variability in the MA spending distribution. Table F.7 shows the results of this
analysis. Because this analysis renormalizes risk adjusted MA spending for all beneficiaries, the
average monthly price-standardized risk adjusted cost is equal to the average unadjusted cost.123
The median cost, however, increases after risk adjustment from $719 to $937. Thus, the
skewness of the distribution decreases. Risk adjustment also decreases the average cost of death
episodes by almost half, although they remain the highest-cost episodes on average. Unlike the
FFS analysis, the relatively higher cost of episodes ending in death even after risk adjustment
does not indicate higher levels of health care utilization but instead mainly reflects the higher
premiums paid to MA plans for these beneficiaries. Further, risk adjustment decreases the
variation in average monthly costs; the standard deviation decreases by more than half, and the
90-10 difference decreases by two-thirds.
Table F.7: MA Average Price-Standardized Risk Adjusted Monthly Cost

# Percentile 90-10
(millions)
All 29.2 $986 $414 -$31,674 $738 $937 $1,235 $285,382 $497
Female 16.8 $998 $404 -$24,637 $750 $949 $1,249 $100,842 $499
Male 12.4 $970 $427 -$31,674 $723 $920 $1,213 $285,382 $490
White 23.8 $985 $409 -$25,017 $741 $936 $1,226 $285,382 $486
Black 3.3 $1,017 $464 -$31,674 $748 $958 $1,285 $69,703 $537
Asian 0.6 $908 $371 -$17,353 $672 $871 $1,175 $35,476 $503
Hispanic 0.8 $1,021 $391 -$14,065 $732 $955 $1,348 $32,097 $616
Other 0.7 $933 $375 -$13,684 $694 $895 $1,187 $51,951 $493
Unknown 0.03 $979 $543 -$5,134 $689 $907 $1,257 $29,185 $568
Dual 4.5 $1,081 $520 -$22,253 $748 $983 $1,454 $107,448 $705
Non-Dual 24.6 $970 $391 -$31,674 $736 $931 $1,200 $285,382 $463
Alive
During
28.2 $984 $382 -$31,674 $740 $937 $1,233 $285,382 $494
Entire
Episode
122
The exception to this rule is that utilization of healthcare services does affect spending for beneficiaries in Part C
cost plans or who are enrolled in a Part D prescription drugs plan.
123
This analysis does not, however, account for sex, race, dual-eligibility status, or death during the episode; thus,
the average risk adjusted spending is not equal for all beneficiary characteristics.

# Percentile 90-10
(millions)
Died
During 1.0 $1,085 $1,235 -$16,382 $632 $894 $1,359 $112,221 $727
Episode
Although the MA risk adjusted cost distribution is right-skewed like the FFS cost
distribution, MA expenditures have less variation, are less skewed, and have higher averages
than FFS expenditures. Table F.8 displays the distribution of average monthly unadjusted and
price-standardized risk adjusted spending for MA beneficiaries and for FFS beneficiaries. First,
partly because monthly MA expenditures are based on benchmarks set by CMS, the distribution
of average monthly MA costs has less variability than the distribution of Medicare FFS costs; the
standard deviation of average monthly costs is $900 for MA and $2,032 for FFS. Though the
MA distribution is somewhat skewed, it is less skewed than the FFS distribution, which can be
seen by contrasting the median cost with the top and bottom 10th percentile. In the FFS
distribution, the lower tail, measured by the difference between the median and the 10th
percentile ($757), is just over half the size of the upper tail, measured by the difference between
the 90th percentile and the median ($1,360). In the MA distribution, however, the lower tail
($199) is about two-thirds the size of the upper tail ($298). Finally, average risk adjusted
spending is $986 for MA beneficiaries and only $958 for FFS beneficiaries. As a result of the
capitation update system and the budget neutrality adjustment, benchmarks for MA plans are set
above Medicares FFS costs; thus, aggregate payments for MA beneficiaries are usually higher
than they would be if the beneficiaries were enrolled in FFS, even after accounting for input
prices and beneficiary health status. The finding that average spending for MA beneficiaries is
higher than for FFS beneficiaries confirms MedPACs findings in their March 2012 Report to the
Congress.124
Table F.8: MA and Medicare FFS Average Monthly Cost Distributions
Std. Percentile 90-10

Avg. Min. Max.
Dev. Difference
10th 50th 90th
Unadjusted MA $986 $900 $0 $358 $719 $1,884 $263,505 $1,526
124
"The Medicare Advantage Program: Status Report".
154 Acumen, LLC

Avg. Min. Max.
Dev. Difference
10th 50th 90th
Spending Medicare
$964 $2,032 $0 $0 $310 $2,565 $1,624,496 $2,565
FFS
Price- MA $986 $414 -$31,674 $738 $937 $1,235 $285,382 $497
Standardized
Risk Adjusted Medicare $958 $1,695 -$16,820 -$28 $729 $2,089 $1,631,068 $2,117
Spending FFS
Spending that depends on utilization, namely prescription drug spending, is not the
primary driver of regional variation in MA spending. Table F.9 presents the distribution of
unadjusted prescription drug spending alongside the distribution of total MA expenditures.
Prescription drug spending only accounts for 15 percent of total MA spending. The highest cost
MA beneficiaries, however, have a higher share of their total MA costs made up of Part D
spending. Whereas Part D spending makes up 11 percent of total spending for beneficiaries at
the median, Part D spending makes up 19 percent of total spending for beneficiaries at the 90th
percentile of total MA expenditures.125
Table F.9: MA Beneficiary Prescription Drug Average Monthly Cost

Avg. Min. Max.
PD Expenditures $148 $267 $0 $0 $79 $341 $79,841 $41

Total MA
$986 $900 $0 $358 $719 $1,884 $263,505 $1,526
Expenditures
PD Cost as a Share
15% 30% - 0% 11% 18% 30% 22%
of MA Cost
Variation in an HRRs spending is due in part to regional variation in benchmark levels.

Table F.10 displays the distribution of HRR-level average benchmarks using data from 2007
through 2009. Because benchmark levels are set based on a countys average FFS expenditures,
geographic variation in MA benchmark levels is largely due to geographic variation in FFS
costs. Like MA spending, benchmarks are slightly skewed right, with the average benchmark set
at $837 and the median set at $819.
Table F.10: MA HRR-Level Average Benchmark Distribution

Avg. Min. Max.
$837 $91 $464 $741 $819 $960 $1,366 $219
125
Note that beneficiaries at the 90th percentile for Part D expenditures are not necessarily the same beneficiaries as
those at the 90th percentile for total MA expenditures.

F.3.2 MA Expenditures Stable over Time
Across the years 2007 through 2009, MA expenditure levels are very stable. MA
expenditures are based on benchmarks, which are determined using historical FFS rates and
updated by a percentage that can vary by county. Thus, year-to-year volatility in price-
standardized risk adjusted MA expenditures could be due to changing benchmarks, changing
beneficiary case-mix, changing plan bids, or changing utilization for beneficiaries in cost plans
or PD plans. Figure F.5 provides a scatterplot of each HRRs rank by price-standardized risk
adjusted cost for the aggregate cohort in 2007 on the horizontal axis and 2008 on the vertical
axis. If relative spending by HRR did not change at all, the points on the graph would form a
perfect 45 degree line. The figures indicate a strong relationship between expenditures over time,
and Tables F.11 and F.12 quantifies the strength of this relationship. Table F.11 shows that the
Pearson correlation coefficients are above 0.972 for all one-year comparisons and above 0.937
for the two-year comparison. Table F.12 presents the Spearman rank correlation coefficients,
which are high, though slightly lower than the Pearson correlations.
Figure F.2: MA Expenditure Rank by HRR, 2007-2008
Table F.11: Pearson Correlation for Standardized Risk Adjusted MA Costs

2007 2008 2009
2007 1.000 0.972 0.937
2008 0.972 1.000 0.976
2009 0.937 0.976 1.000
Table F.12: Spearman Rank Correlation for Standardized Risk Adjusted MA Costs
2007 2008 2009
2007 1.000 0.950 0.910
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2007 2008 2009
2008 0.950 1.000 0.962
2009 0.910 0.962 1.000
Benchmark levels from 2007 through 2009 are even more stable. To determine the
stability of benchmarks at the HRR-level, Figure F.6 presents the 2007 benchmark for each HRR
against the 2008 benchmark, and Figure F.7 presents the 2008 benchmarks against the 2009
benchmarks. In 2008 CMS updated benchmarks. In years where CMS updates benchmarks,
each countys benchmark rate increases by the greater of two percent or the national per capita
MA growth percentage. Thus, county-level benchmarks are highly correlated from year to year,
and Figure F.6 illustrates that the 2007 and 2008 benchmarks are very closely related, as
indicated by the nearly perfect 45 degree line the bubbles form.126 The Pearson correlation
between 2007 and 2008 benchmarks is 0.999. In 2009, however, CMS rebased the
benchmarks. In rebasing years, CMS resets benchmark levels to the greater of the minimum
update or the per capita FFS spending in each county.127 As a result, all benchmarks increased
markedly from 2008 to 2009, as illustrated by the upward shift in Figure F.7. On average,
benchmarks increased by about 4 percent in real terms. In particular, the benchmark in Miami,
represented by the large bubble with the highest 2009 benchmark, increased 12 percent in 2009
because its FFS spending over recent years grew much faster than FFS spending at the national
level.128 Despite the fact that 2009 is a rebasing year, the Pearson correlation between 2008
and 2009 HRR-level benchmarks is 0.997.129 Thus, changes in each HRRs per capita MA
expenditure level are not due to changes in each HRRs benchmark rate.
126
After adjusting for inflation, benchmarks in 2008 are an average of 0.3 percent lower than benchmarks in 2007.
127
"The Medicare Advantage Program".
128
Though not discussed in this report, the Medicare FFS analysis found that after all claims processing completed
by June 2011, FFS expenditures in Miami actually increased 7.8 percent from 2008 to 2009. As noted by MedPAC
in their 2009 Report to the Congress cited above, Miami FFS expenditures in 2009 included millions of dollars in
payments for claims that have since been proved inappropriate.
129
After removing Miami as an outlier, the Pearson correlation between 2008 and 2009 benchmarks increases to
0.999.

Figure F.3: MA HRR-Level Benchmarks, 2007-2008
Figure F.4: MA HRR-Level Benchmarks, 2008-2009
F.3.3 Relationship between Plan Competition and MA Expenditures

To determine if regions with higher levels of market competition have lower MA
expenditure levels, this analysis measures MA plan competition in each HRR. The effect of plan
competition on MA expenditures is uncertain. More plan competition could lead to lower prices
because plans must compete for MA plan enrollees; on the other hand, less plan competition
could also lead to lower prices by making it easier for the plans to negotiate with providers.
158 Acumen, LLC

To determine which effect dominates the other, this analysis measures HRR-level MA
plan competition using a Herfindahl-Hirshman Index (HHI). The HHI takes into account the
number of plans in each HRR and their market share. Using the MA enrollment files, this report
calculates the MA plan HHI for each region, R, in each year t as follows:
(F.5)

In equation (F.5), niRt represents the number of beneficiaries in MA plan contract i in region R in
year t, and NRt represents the total number of beneficiaries in region R in year t. This analysis
calculates a single HHI for each region each year from 2007 through 2009 and then averages
these values to get a single 2007-2009 HHI value for each HRR. The MA plan HHI for a given
region ranges from zero to one. Higher HHI values indicate higher levels of market
concentration (i.e., lower levels of market competition). For instance, an HHI value of one
indicates that single plan has captured 100 percent of the HRRs market share.
Using an HRRs MA plan HHI, higher levels of market concentration have a small
negative correlation with average per capita MA expenditures. Figure F.8 presents a scatterplot
of average price-standardized, risk adjusted MA expenditures against the MA plan HHI. This
figure shows a weakly negative relationship between the HHI index and MA expenditures; that
is, less MA plan competition is associated with lower MA expenditures. The Pearson correlation
between the MA plan HHI and average monthly MA expenditures is -0.16.
Figure F.5: Average Monthly MA Expenditures versus MA Plan HHI
To determine if the weak negative relationship between MA plan concentration and MA

expenditures is due to other confounding market-level characteristics, this analysis estimates an

ordinary least squares (OLS) linear regression on MA expenditures using a set of market-level
independent variables. The market-level characteristics include the MA plan concentration HHI
and ten sets of variables used in the FFS analysis to measure market competition. The market-
level characteristics from the FFS analysis include hospital competition, population uninsured,
supply of medical services, malpractice environment risk, physician composition, access to care,
payer mix, Medicaid penetration, and health professional mix. Appendix C.4 presents the
definitions of these variables. This analysis calculated these variables as averages over the 2007
through 2009 analysis period.
Even after controlling for these market-level factors, HRRs with more concentrated MA
markets do not have higher spending levels. Table F.13 provides the coefficients and standard
errors (in parentheses) for each variable. In particular, the MA plan HHI has a negative
association with MA expenditures, indicating that even after controlling for other market-level
characteristics, more market concentration is associated with lower costs. This effect, however,
is not statistically significant and is relatively small in magnitude. Increasing an HRRs MA plan
HHI from 0.25 to 0.75 would decrease monthly per capita MA spending by about $25 or about
2.5 percent.
Table F.13: Effect of an HRRs MA Plan Competition on Per Capita MA Expenditures
Variable Coefficient
-49.76
MA Plan HHI
(36.75)
-37.41
Hospital Beds HHI
(29.43)
26.23*
Teaching Hospital in HRR
(11.13)
10.7
Specialty Hospital in HRR
(13.2)
-10.94
Government-Owned Hospital in HRR
(9.63)
371.82***
Percent of Population Uninsured
(102.33)
446.47
Number of Hospitals per 1,000
(385.32)
14.36***
Number of Hospital Beds per 1,000
(4.19)
1.05*
Medicare Malpractice GPCI
(0.62)
13.84
Physicians per 1,000
(13.31)
Active Primary Care Physicians per -87.4*
1,000 (47.65)
Health Professional Shortage Area -8.96***
(HPSA) (2.15)
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Variable Coefficient
Percent of Medicare Beneficiaries in 39.1
Medicare Managed Care (39.34)
Percent of Medicaid Beneficiaries in 61.99
Population (81.36)
-52,603*
Physicians Assistants per capita
(24,476)
107,542***
Nurse Anesthetists per capita
(33,117)
-194,840
Certified Nurse Midwives per capita
(149,436)
-3,803*
Registered Nurses per capita
(1,935)
3,864
Nurse Practitioners per capita
(11,953)
Licensed Practical Nurses and Licensed 8,472
Vocational Nurses per capita (6,296)
925.69***
Constant
(36.75)
*** p<0.01, **p<0.05, *p<0.1
F.3.4 Positive Correlation between an HRRs MA and FFS Expenditures

Because the MA benchmark rate for each county is based on each countys historical FFS
spending levels, one would expect HRRs with high-cost FFS beneficiaries to also have high
spending levels for MA beneficiaries and, for this most part, this is the case. Figure F.9 shows
average monthly price-standardized risk adjusted expenditures for MA and Medicare FFS for
each HRR from 2007 through 2009. In general, average monthly MA spending is slightly higher
than FFS spending. The Pearson correlation score between average monthly MA and FFS
spending is 0.662. The Spearman rank correlation between MA and FFS average monthly price-
standardized risk adjusted expenditures is lower than the Pearson correlation, at 0.575. The
bubble with the highest MA spending is Baton Rouge, LA, which is ranked 8th highest on FFS
spending. The larger bubble with the highest FFS spending is Miami, FL, which is ranked 8th
highest on MA spending.

Figure F.6: Average Monthly Price-Standardized Risk Adjusted Spending, MA vs. FFS
F.4 Summary of Medicare Advantage Findings

This supplemental analysis examines geographic variation in health care expenditures for
MA beneficiaries. The main findings of this analysis are the following.
Average per capita MA expenditures are higher than average per capita FFS
expenditures ($986 and $958, respectively).
MA expenditures per person are less variable than FFS expenditures (with standard
deviations of $1,373 and $5,666, respectively).
If Medicare could reduce MA expenditures to the levels of the lowest-cost HRR

(Honolulu), it would save $24 billion per year.
Regions that are high- or low-cost in one year tend to be similarly high- or low-cost in
the next. The correlation between an HRRs per capita MA expenditures in 2007 and
its per capita MA expenditures in 2009 is 0.94.
HRRs with more MA plan competition do not necessarily have lower MA premiums.
In part because CMS uses a countys historical FFS spending to determine its
benchmark rate, the correlation between an HRRs per capita FFS and MA
expenditures is fairly high (0.66).
F.5 MA References
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All cited articles that appear in Appendix F are included in the References section,
located immediately prior to Appendix A.

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1. Measuring healthcare spending and utilization

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Figure 1: HRR Utilization Rank 2007-2008, Medicare

Larger Variation in Utilization Levels Within HRRs than Across HRRs

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Figure 3: Medicare Utilization Levels by HRR, Mean vs. Median

Figure 5: Medicare Utilization Levels by HRR, Mean vs. 90th Percentile

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The Importance of Post-Acute Care

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Figure 8: Post-Acute and Acute Average Price-Standardized Residuals, Medicaid

Regional Variation in Medicare Advantage Expenditures

Acumen, LLC IOM Study of Geographic Variation | May 2013 ix

Figure 9: Average Monthly Price-Standardized Risk Adjusted Spending, MA vs. FFS

No Consistent Relationship between Quality and Utilization of Medical Services

An HRRs average use of medical resources, at an aggregate level, has no relationship to

Medicare and Medicaid Utilization Levels are Uncorrelated

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xii Acumen, LLC

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xiv Acumen, LLC

Acumen, LLC IOM Study of Geographic Variation | May 2013 xv

xvi Acumen, LLC

Acumen, LLC IOM Study of Geographic Variation | May 2013 1

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2.1 Medicare Data Sources, Exclusions, and Population

2.1.2 Medicare Exclusions

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2.2 Medicaid Data Sources, Exclusions, and Population

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Medicaids heterogeneous coverage system makes the calculation of summary

Table 2.4: Size of Potentially Recoverable FFS Medicaid Population (2007)

2.2.2 Medicaid Exclusions

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The composition of Medicaid enrollees is significantly more heterogeneous than the

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2.3 Cohort Definitions

1. Selecting diagnostic and procedural criteria for inclusion in each cohort,

3. Defining the observation period for each episode.

2.3.1 Criteria for Beneficiary Inclusion in Each Condition Cohort

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2.3.2 Identifying the Start of an Episode

2.3.3 Defining the Observation Period

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2.3.4 Challenges to Condition Cohort-Based Approach

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3.1 Measurement of Health Care Expenditures

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This study calculates all-source expenditures using three steps.

1. Sum the expenditures included in each episode,

2. Adjust the costs for inflation, and

3. Calculate per beneficiary, per month expenditures.

Price standardized cost

Utilization of specific medical services.

3.2.1 Price Standardized Cost

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3.3 Measurement of Health Care Quality

Implementing these quality measures in the Medicaid analysis presents several

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Figure 3.1: Percent of Beneficiaries in Composite PSI Measure Denominator by State