Geographic Variation in Health Care: The Role of Private Markets

The Dartmouth Atlas of Health Care has documented substantial
regional variation in health care utilization and spending, beyond what
would be expected from such observable factors as demographics and disease
severity. However, since these data are specific to Medicare, it is unclear to
what extent this finding generalizes to the private sector. Economic theory
suggests that private insurers have stronger incentives to restrain utilization
and costs, while public insurers have greater monopsony power to restrain
prices. We argue that these two differences alone should lead to greater
regional variation in utilization for the public sector, but either more or less
variation in spending. We provide evidence that variation in utilization in the
public sector is about 2.8 times as great for outpatient visits (p < 0.01) and
3.9 times as great for hospital days (p = 0.09) as in the private sector. Variation
in spending appears to be greater in the private sector, consistent with the
importance of public sector price restraints.