Modeling per capita state health expenditure variation: state-level characteristics matter.

Objective: In this paper, we describe the methods underlying the econometric model developed by the Office of the Actuary in the Centers for Medicare & Medicaid Services, to explain differences in per capita total personal health care spending by state, as described in Cuckler, et al. (2011). Additionally, we discuss many alternative model specifications to provide additional insights for valid interpretation of the model.

Data source: We study per capita personal health care spending as measured by the State Health Expenditures, by State of Residence for 1991-2009, produced by the Centers for Medicare & Medicaid Services' Office of the Actuary. State-level demographic, health status, economic, and health economy characteristics were gathered from a variety of U.S. government sources, such as the Census Bureau, Bureau of Economic Analysis, the Centers for Disease Control, the American Hospital Association, and HealthLeaders-InterStudy.

Principal findings: State-specific factors, such as income, health care capacity, and the share of elderly residents, are important factors in explaining the level of per capita personal health care spending variation among states over time. However, the slow-moving nature of health spending per capita and close relationships among state-level factors create inefficiencies in modeling this variation, likely resulting in incorrectly estimated standard errors. In addition, we find that both pooled and fixed effects models primarily capture cross-sectional variation rather than period-specific variation.