Wide variation in episode costs within a commercially insured population highlights potential to improve the efficiency of care.

Reforming payment methods to move away from fee-for-service reimbursement is widely seen as a crucial step toward controlling health care costs. Although there is a good deal of evidence about variability in costs under Medicare, little has been published about the variability of costs for care that is financed by private insurance. We examined both quality and actual medical costs for episodes of care provided by nearly 250,000 US physicians serving commercially insured patients nationwide. Overall, episode costs for a set of major medical procedures varied about 2.5-fold, and for a selected set of common chronic conditions, episode costs varied about 15-fold. Among doctors meeting quality and efficiency benchmarks, however, costs for episodes of care were on average 14 percent lower than among other doctors. Some markets exhibited much higher variation in episode costs, but there was essentially no correlation between average episode costs and measured quality across markets. The overall analysis suggests that changing incentives through payment reforms could help to improve performance, but providers are at different stages of readiness for such reforms and thus will often need support in order to succeed.