A Test of Supply-side Explanations of Geographic Variation In Healthcare Use

The existence of significant regional variation in health care utilization has been well documented over the past 40 years. Yet considerable uncertainty persists about whether this variation is primarily the result of supply-side or demand-side forces. We use a model of physician market power to derive an empirical test of supply-side explanations. Specifically, we examine changes in the use of healthcare by the near-elderly across regions that differ in Medicare spending levels as they transition from being uninsured into Medicare. Estimates indicate that gaining Medicare coverage in an above-median spending region is associated with a 48% increase in the probability of at least one hospital visit and a 26% increase in the probability of having more than five doctor visits relative to similar individuals in below-median spending regions. These estimates suggest that supply-side factors can explain much of the observed geographic variation in Medicare spending.