Critical Condition

Examining Medicare Spending Variations

The president spoke last night of finding “half of the money for health-care reform” from the reallocation of money from other places “in the health-care system.” Numbers Congress and the White House have used have ranged from $400 billion to $950 billion (the latter is from Health and Human Services Secretary Kathleen Sebelius’s piece last week). 


These savings will come from decreasing spending in states where Medicare spending per person is more than the “average.” The Congressional Budget Office published a review of health-care spending variations based upon 2004 data. It is worth scrolling through all of the graphs and charts, but here are two highlights.

This figure tells us that, in fact, the amount of variation in the amount spent in Medicare has decreased by nearly half over the last 30 years. In other words, in spite of the huge advances in surgery, technology, and pharmaceuticals, spending on Medicare has become more consistent across the nation, not less. The president and Democrats in Congress have repeatedly talked about “unnecessary tests” and treatments. But it is as likely, and perhaps more truthful, to say that advances in, and greater access to, medical technology have HELPED make health care more consistent.

This is worth spending one more moment on, since, while confusing, is the entire basis of, in the president’s words “50%” of the changes to health care he wants to make.

There are many reasons why Medicare spending can vary based upon location — perhaps the population is sicker and needs more care, perhaps in lower government-spending areas people are spending more non-Medicare money on health care (everything from out of pocket expenses to state Medicaid dollars).  This is why the light-blue line does not match the dark-blue line — since the Medicare data alone is only seeing a part of the picture.

Variations by geography are also natural — housing prices, food prices, gasoline prices, and the prices of nearly every product and service can vary based upon local conditions. Not only is that reasonable, market rates and utilization are fundamental to our free-market economy — and are healthy, not something to be squashed into some “one-size-fits-all” system.  


This next figure should give every elected representative from the states on the bottom half of Medicare spenders serious concern:

This is average spending per Medicare patient in 2004. The near complete entirety of the president’s savings plan involves moving those states that spend the most and force them to only spend at the level of the “low cost” states. 


Of the 20 biggest spending states listed — again, these states are targeted to lose money under the president’s plan:

(a) Fourteen of the 20 voted for Obama in 2008 — they can all expect to lose Medicare dollars under the president’s plan.

(b) Democratic senator Ben Nelson from Nebraska needs to worry his state will lose Medicare funding.

(c) Democrat senator and Finance Committee co-chair Kent Conrad from North Dakota needs to worry his state will lose Medicare funding.

What must be made clear to these elected officials, and the public, is that in their communities, at a time when nearly 3 million jobs have been lost since the president has been inaugurated, the health-care industry nationwide has actually shown slightly increased employment. Cuts to Medicare will hurt this vital industry so by signing on to the president’s plan for “instant savings” — his new slogan could be “just add rationing!” — these lawmakers are further condemning their constituents to worsening job losses, increasing unemployment, and even more untenable state budget shortfalls. 


Eric Novack is a senior fellow in health policy for Americans for Prosperity and chairman of Arizonans for Health Care Freedom.