The Practice Variation Opportunity for Health Care Payers

The Practice Variation Opportunity for Health Care Payers

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The Practice Variation Opportunity for Health Care Payers

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  • The Problem of Practice Variation

    Variation in medical treatments, or practice variation, is very common. Some studies reveal more than a fivefold variation in treatment decisions. Most studies compare regions with the highest and the lowest rates for particular modes of treatment; however, they do not necessarily correct for population differences such as age, gender, and socioeconomic status; failing to do so can lead to overestimates. We used data corrected for these population differences and evaluated differences between regions—in multiple countries—in the tenth and ninetieth percentiles for the use of particular treatment modes, in order to exclude extreme outliers.

    Using this more conservative approach, we still found that treatment intensity for a given condition routinely varies by a factor of two or more among regions. For instance, a Medicare patient suffering from back pain who lives in Salt Lake City (a region in the ninetieth percentile for treatment intensity for back pain) will be 2.1 times more likely to receive back surgery than a comparable Medicare patient living in Napa, California (in the tenth percentile). And these differences are just as common and significant in other developed markets across the world.

    These practice variations can be seen in the case of most diseases. The exception is where treatment is unavoidable, where the treatment choice is clear, and where differences in provider judgment are negligible, such as in hospital admission rates for hip fractures. However, these scenarios account for only about 15 percent of provided care.

    The 2014 Organisation for Economic Co-operation and Development (OECD) report Geographic Variations in Health Care confirms the existence of significant variations in treatment between and within 13 OECD member countries. (See Exhibit 1.) Certain cardiac procedures (such as coronary bypass and angioplasty) vary by more than threefold across countries—and even more across regions. For instance, the number of coronary artery bypass graft (CABG) procedures per 100,000 inhabitants in Belgium and Germany is more than twice that in France and Spain. The number of percutaneous transluminal coronary angioplasty procedures in Germany is twice as high as that in Italy.


    Perhaps even more striking are the differences among regions within a single country. For every 100,000 people in some parts of Germany, for example, 45 patients will undergo CABG, whereas in other regions the number is nearly twice as high (87 treatments). In Switzerland, the regional variation in CABG treatment is more than threefold.

    The OECD report shows similar variation for a number of other treatments, including knee replacements, cesarean sections, and hysterectomies. Knee replacement rates are four times higher in some countries than in others, and these rates can vary threefold across regions within a single country. This variation is not limited to surgical procedures; the report documents similar variations in diagnostic procedures (such as MRI and CT scans) and hospital admissions. The report’s conclusion: “While some of these variations reflect differences in patient needs and/or preferences, others do not. Instead, they are due to variations in medical practice styles, the ability of providers to generate demand beyond what is clinically necessary, or to unequal access to health care services. These unwarranted variations raise concerns.”

    Substantial regional practice variation indicates overuse, underuse, or misuse of medical services. Patients who are over- or undertreated are likely to experience suboptimal outcomes. Overtreatment unnecessarily exposes them to the risk of complications and drives up health care costs. In the U.S. alone, overtreatment is responsible for an estimated $750 billion in avoidable costs each year. Undertreatment can cause unnecessary suffering and may lead to very high health-care costs down the road if the patient’s condition progresses and hospital admission and acute care are required.

    Our analysis indicates that a reduction in practice variation would lead to better outcomes, improved patient experience, and significantly lower health-care costs. Of the 20 to 40 percent of estimated “waste” in the health care system, practice variation accounts for approximately half. We also estimate that about half of that, or 5 to 10 percent of total costs, can be eliminated if payers systematically address practice variation. (See Exhibit 2.)


    However, this does require payers to take the next step in their evolution from passive reimburser to active health-care facilitator. Through benchmarking data, they can analyze whether care is being delivered efficiently (high quality at a good price) and effectively (the right level of treatment). And they may even become active in prevention themselves (to reduce the need to treat). (For a look at the ways that leading payers have become more active in extracting value for their beneficiaries, see “The Shifting Role of Health Care Payers.”)

    Ashley N. Corallo, et al., “A Systematic Review of Medical Practice Variation in OECD Countries,” Health Policy 114, No. 1 (January 2014): 5–14.
    John E. Wennberg. Tracking Medicine: A Researcher’s Quest to Understand Health Care, Oxford University Press, 2010.
    Mark Smith, et al., eds., Best Care at Lower Cost: The Path to Continuously Learning Health Care in America, National Academies Press (2012).


    Payers have historically focused on a very narrow definition of their core business: reimbursement and administration of health care costs. However, some are now broadening their role to ensure that their members receive optimal outcomes for all spending. Leading payers are changing from passive health-care reimbursers to active health-care facilitators—and rightfully so. (See the exhibit below.) By focusing only on reimbursement and administration, payers can optimize just 3 to 10 percent of their business, but by addressing the value of care delivered, they cover the full scope of what they pay for on behalf of their members. Leading payers are becoming more active in three areas:

    • Doing Things Right. They are demanding more value in delivery of care by assessing prices relative to the quality of treatment. This comparative data helps to inform discussions with providers and allows patients to better understand qualitative differences between providers.
    • Doing the Right Things. Payers are also creating incentives for providers to make better and more consistent treatment decisions. This is the next frontier, where massive gains can be achieved by addressing overtreatment and undertreatment, and it is the focus of this report.
    • Preventing the Need to Treat. Finally, payers are taking steps toward prevention. In theory, prevention represents the biggest prize of all, but in practice it is very difficult for payers to make headway on this front. However, a well-known prevention initiative, Vitality, sponsored by the health insurer Discovery in South Africa, has achieved excellent results by rewarding its members for healthy behaviors.

    To gauge which measures can best be used to reap this potential, payers need to better understand what drives practice variation in the first place.