On June 1, the Institute of Medicine (IOM) released a report examining geographic differences in Medicare reimbursements, noting that Medicare adjusts its fee-for-service (FFS) reimbursements to reflect regional cost disparities but arguing that the current adjustment system is flawed.  To properly address payment adjustment problems, the IOM concludes that Medicare must make significant changes to its method for assessing these cost differences.  In particular, the authors found that some of Medicare’s 89 payment areas include both expensive urban areas and less expensive outlying areas.  IOM’s report offers recommendations for adjusting those areas and improving calculations of provider costs to more accurately provide reimbursements and avoid overspending.

From the report:

Medicare is the largest health insurer in the United States, providing coverage for 39 million people aged 65 and older and eight million people with disabilities. In 2010, the program made up approximately 15 percent of the federal budget, at an estimated cost of $500 billion.

Although Medicare is a national program, it adjusts fee-for-service payments to hospitals, physicians, and other clinical practitioners according to the geographic locations in which they practice. This adjustment accounts for differences in the price of doing business, such as staff compensation and rent, that vary between urban and rural areas and by region.

Full Report: Geographic Adjustment in Medicare Payment (PDF | 307 KB)

Institute of Medicine. (2011). Geographic adjustment in Medicare payment.