Fiscal Fitness: How States Cope

A great divide in dollars: Wide variation in health care spending across states

The wide variety in cost and quality across states is a signal that much stronger policies will be needed to achieve high performance on access, quality, and efficiency, according to a commentary by Commonwealth Fund president Karen Davis and senior vice president for research and evaluation Cathy Schoen. Their Health Affairs commentary was on a Centers for Medicare & Medicaid Services (CMS) study also published in Health Affairs that found that eight of the top 10 states in per capita personal health care spending were in the New England and Mideast regions, while states with the lowest per capita spending were typically located in the Southwest and Rocky Mountain regions.

CMS economist Anne Martin and colleagues reported that in 2004, the top 10 states with the highest per capita personal health care spending were Massachusetts, Maine, New York, Alaska, Connecticut, Delaware, Rhode Island, Vermont, West Virginia, and Pennsylvania. Those states consumed an average of $6,345 per person in 2004, nearly 20% higher than the U.S. average of $5,283.

The researchers say some of the 10 states' characteristics influenced how much was spent on health care. Thus, Massachusetts, New York, Connecticut, and Delaware ranked among the highest in the nation in per capita personal income. And Massachusetts, New York, Connecticut, Rhode Island, Vermont, and Pennsylvania ranked among the highest in concentration of physicians to population. Also, the uninsured share of the population was among the lowest in the nation for some of the top 10 per capita health-spending states.

"This suggests that residents in these states may receive more comprehensive employer-based health insurance benefit packages, or that the states are in a stronger financial position to provide expanded benefits through Medicaid or other state initiated programs," Ms. Martin says.

However, the researchers also found differences in the mix of health care services and goods used and in funding sources. For example, Massachusetts, which had the highest per capita health care spending in 2004 ($6,683), nearly 27% above the U.S. average, ranked near the top for per capita hospital, nursing home, and home health spending and for total per enrollee Medicare and Medicaid spending. Ms. Martin says hospital spending in the state may be driven by higher-than-average use of services such as diagnostic treatments and more intensive services commonly used in teaching hospitals. Massachusetts also has an expansive Medicaid program that could contribute to its higher-than-average Medicaid and overall health spending.

Maine's per capita spending on physician services was second highest in the nation, while per capita physician spending in Connecticut and Massachusetts ranked lower. Also, Maine had higher per capita spending on other personal health care services, including expanded Medicaid coverage for services provided under home- and community-based waivers, than for any other state in 2004. Maine also provides greater coverage of long-term care services and support of those with disabilities through its Medicaid program. The authors say that Connecticut's low percentage of the population that is uninsured and recent expansion of hospital services offered may contribute to comparably high per capita health spending relative to the rest of the United States.

Per capita personal health care spending in New York and Alaska was greatly influenced by Medicaid spending. New York's per capita Medicaid spend was among the highest in the nation ($10,173 in 2004) and accounted for 32% of total state health care spending. Alaska per enrollee Medicaid spending was the highest in the nation at $10,417. It spent the most in the nation per Medicaid enrollee on hospital, doctor, and dental services, possibly because of the state's relative isolation, which decreases access to alternative and more cost-efficient sources of care.

Lowest per capita spending

The states with the lowest per capita personal health spending in 2004 were Utah, Arizona, Idaho, New Mexico, and Nevada. They accounted for an average of $4,244 per person, nearly 20% lower than the U.S. average. Those states tended to have lower-than-average per enrollee Medicare and Medicaid spending. And because of their less populous nature, there could be less access to and availability of doctors and hospitals. Also, demographic similarities such as lower median age of state residents and a smaller proportion of the population older than age 65 may lead to less health care use.

Ms. Davis and Ms. Schoen say in their commentary that the spending information is especially timely given the renewed interest in state health reforms. They say most of the reforms enacted so far are primarily designed to improve health insurance coverage, but also have some features aimed at controlling costs or improving quality.

They note that in line with the state-by-state variations, the Commonwealth Fund Commission on a High Performance Health System state scorecard found two- to threefold or greater spread from top-ranked states to bottom-ranked states on 32 indicators across five dimensions of health system performance—access, quality, potentially avoidable use of hospitals and costs of care, equity, and ability to lead healthy lives.

Analyzing the state spending data, Ms. Davis and Ms. Schoen found that personal health spending per capita does not appear to be correlated with mortality amenable to medical care. They also found an inverse relationship between states spending more on personal health care and state rankings on quality of care. Also, state rankings on Medicare spending per capita are highly correlated with preventable hospitalization, including 30-day Medicare hospital readmission rates.

"These relationships affirm previous research that has documented either no relationship or a negative relationship between spending and quality," the two wrote. "They point to promising strategies for improving health system performance by reducing preventable hospitalizations and improving insurance coverage….The variations show that every state has room to improve its health care system, and states can learn by critically observing innovative strategies at work."

Reasons state costs converging

The Commonwealth Fund analysts say the most important implication of the new analysis that finds that state costs are converging because of relatively rapid increases in low- as well as high-cost states is that states cannot afford to concentrate only on insurance coverage when considering reforms. "Improving insurance coverage is likely to improve access to care, but the issue of cost will require specific policy strategies—some of which could be built into the design of insurance coverage," they say. "These efforts will also require coherence across payers to improve whole system performance."

Ms. Davis and Ms. Schoen say states have the chance to "test drive" promising approaches designed to meet the needs of their populations. They suggest there might be 50 solutions as diverse as the states themselves or a few innovative strategies flexible enough to be spread across the country.

They assert that ultimately federal leadership will be needed, if only to help finance insurance expansion, set high standards of performance, urge public-private collaboration, and help coordinate public-private payment and other policies. But in the meantime, state initiatives serve as valuable learning laboratories.

In another commentary on the CMS data, Urban Institute director of health policy John Holahan says the variation among states on Medicaid spending actually is greater than that for Medicare or for overall health spending.

There are many reasons spending per Medicaid enrollee can vary, Mr. Holahan says, including the extent of benefits states choose to cover and whether the state is actively involved in ways to take advantage of upper payment limits and disproportionate share programs. Spending per enrollee also varies because of differences in the price and quantity of services provided, and because states cover very different shares of their low-income populations.

"In the end," he says, "state spending is determined by federal matching rates that vary inversely with state per capita income and with states' willingness to spend from their own resources….The incentives in Medicaid to have low-income states spend more by having federal payments offset lower state per capita incomes have simply not been successful."

While some variation is inevitable and also exists in Medicare and private coverage, Mr. Holahan says the policy question is whether the very large variation in Medicaid spending is acceptable. "We have shown elsewhere that states with lower levels of spending have lower levels of access and worse health outcomes," he says. "Thus, the spending variations have consequences that are felt at the national level."

It can be argued, Mr. Holahan says, that while there is considerable flexibility given states in their Medicaid programs, the federal government picks up more than half the cost of Medicaid and SCHIP and there is a national interest in how these programs work. And if there is a strong national interest, he says, then wide state variations are problematic. "The large federal contribution to Medicaid and SCHIP and the fact that state matching rates vary inversely with state per capita income seems to recognize a national interest in extending coverage to low-income groups, regardless of where they live," he says. "Moreover, the recent interest in extending subsidies to low-income people through federal tax credits suggests that even those who oppose expanding government insurance programs in general accept the need to extend health insurance coverage to low-income Americans, regardless of where they live."

Mr. Holahan says it is ironic that the recent interest in state health reform actually is likely to make current inequities worse. Some progressive states such as Massachusetts, New York, Connecticut, Vermont, Pennsylvania, and Illinois have enacted or are seriously considering proposals to extend coverage to all residents. "In American politics today," he says, "it is likely that only these more progressive states can achieve the political consensus necessary to substantially extend coverage. Other states will be left with the current mix of programs. Coverage of individuals and spending on health services will be subject to state officials' willingness to pay, regardless of the generosity of federal matching payments available to them."

National solution needed

Mr. Holahan insists a national solution will be needed to eliminate the extensive variations that the current system has produced. But, he says, such a solution would have huge costs to the federal government and political agreement on an approach to extending coverage to all will be difficult to achieve.

"The result of a stalemate," he says, "will be that low-income people will continue to be treated very differently depending on where they live. This not only will have consequences for the states in which they reside, but because poor access to health care will affect health outcomes, it will have implications for the nation as well."

Download the CMS report at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.26.6.w651. Download the Commonwealth Fund commentary at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.26.6.w664. Download Mr. Holahan's commentary at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.26.6.w667. Contact Ms. Martin at anne.martin@cms.hhs.gov, Ms. Davis at kd@cmwf.org, and Mr. Holahan at jholahan@ui.urban.org.