Defining geographic areas to adjust payments to physicians, hospitals, and HMOs.

Defining geographic areas for the purpose of paying health care providers has been difficult and is an issue that Congress continues to address. Employment-based insurance programs are starting to face this same issue in paying HMOs. Because input prices are related to population density, payment levels could be related to density. This paper offers a new measure of density that represents the population density for the average person. Using zip-code-level data, this measure calculates density of a county weighted by the population of the zip code. Payment areas can be devised by using the measure to categorize counties. This approach can be applied to paying physicians, hospitals, and HMOs.