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Congress is concerned about the health care spending burden facing the Federal Employees Health Benefits Program (FEHBP), the largest private health insurance program in the country. Health care spending per person varies geographically, and the underlying causes for the spending variation have not been fully explored. Understanding market forces and other factors that may influence health care spending may contribute to efforts to moderate health care spending. Health care spending varies across the country due to differences in its components, the utilization and price of health care services. A wide body of research describes extensive geographic variation in utilization. However, less is known about private sector geographic variation in prices. This report examined prices and spending in FEHBP Preferred Provider Organizations (PPOs) to determine (1) the extent to which hospital and physician prices varied geographically, (2) which factors were associated with geographic variation in hospital and physician prices, and (3) the extent to which hospital and physician price variation contributed to geographic variation in spending. We analyzed claims data from several large national PPOs participating in FEHBP. We used 2001 data, the most current data available at the time of the study.

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