Causes and Consequences of Regional Variations in Health Care11This chapter was written for the Handbook of Health Economics (Vol. 2). My greatest debt is to John E. Wennberg for introducing me to the study of regional variations. I am also grateful to Handbook authors Elliott Fisher, Joseph Newhouse, Douglas Staiger, Amitabh Chandra, and especially Mark Pauly for insightful comments, and to the National Institute on Aging (PO1 AG19783) for financial support.

There are widespread differences in health care spending and utilization across regions of the US as well as in other countries. Are these variations caused by demand-side factors such as patient preferences, health status, income, or access? Or are they caused by supply-side factors such as provider financial incentives, beliefs, ability, or practice norms? In this chapter, I first consider regional health care differences in the context of a simple demand and supply model, and then focus on the empirical evidence documenting causes of variations. While demand factors are important—health in particular—there remains strong evidence for supply-driven differences in utilization. I then consider evidence on the causal impact of spending on outcomes, and conclude that it is less important how much money is spent, and far more important how the money is spent—whether for highly effective treatments such as beta blockers or anti-retroviral treatments for AIDS patients, or ineffective treatments such as feeding tubes for advanced dementia patients.