Geographic Variations in Healthcare

In this paper we provide a testable theory of geographic variations in health care expenditure and utilization that reconciles the stylized facts on geographic variations. Our model is rather straightforward yet provides insight into the underlying phenomena of variations, its potential causes and the welfare and consequences of different policy initiatives. We model imperfectly competitive, capacity constrained and altruistic providers as facing two different patient populations: privately insured and Medicare. Providers face fixed prices for treating Medicare population while they negotiate reimbursement rates for their privately insured patients. In our model, payers have different technologies for monitoring provider behavior. Unlike the widely held hypothesis that geographic differences are driven by differences in provider culture, our model focuses on differences in provider incentives that lead to differences in the care that is delivered. Specifically, in our framework, variation in health care utilization and expenditures is generated by underlying geographic variation in the model’s primitives of provider market structure and productivity. These differences, in turn, lead to different incentives for physicians to treat based on the type of insurance of the patient.