Health care expenditures are a function of both price and quantity of services purchased. The Health Care Cost Institute's (HCCI) National Chartbook of Health Care Prices--2015 provides extensive documentation of geographic variation in prices at the health care service level for the commercially insured. Geographic variation in health care spending is well documented in health services research literature. For decades, The Dartmouth Institute for Health Policy and Clinical Practice has found significant variation in spending in the Medicare program. Their research has shown that the variation is largely attributable to differences in utilization, since Medicare prices are administratively determined for the entire country with only small local adjustments. The Institute of Medicine (IOM), in its 2013 Variation in Health Care Spending: Target Decision Making report, concluded that "variation in spending in the commercial insurance market is due mainly to differences in price markups by providers rather than to differences in the utilization of health care services." In an initial effort to explain why price variation exists, the IOM analysis found that "70 percent of variation in total commercial spending is attributable to price markups, most likely reflecting the varying market power of providers across hospital referral regions (HRRs)." The IOM report went on to find that prices are negatively correlated with the quantity of services used and spending is highly correlated with price, but not with quantity. They noted that "this finding highlights the importance of further examining variation in commercial prices to understand its relationship to total commercial spending." The Health Care Cost Institute is fortunate to hold timely, commercial claims data, with the allowed payment amounts (the actual payments to providers, which include copayments, deductibles, and coinsurance) for three of the largest national health insurance companies in the United States (Aetna, Humana, and UnitedHealthcare). With the need to better understand variation in commercial prices and the scale and scope of these available data, HCCI has produced this report on the state-level variation in average prices paid for common health care services.
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