Patient health causes substantial portion of geographic variation in Medicare costs.

Key findings. (1) Substantial geographic variation exists in Medicare costs, but to determine the source and extent of this variation requires proper accounting for population health differences. (2) While physician practice patterns likely affect Medicare geographic cost variations, population health explains at least 75 to 85 percent of the variations—more than previously estimated. (3) Policy strategies should consider the magnitude of the impact of beneficiary health status on Medicare costs in order to address geographic variation.