1Why Do Some Firms Spend So Much on Medical Care? Accounting for Variation

We are engaged in a long-term project to analyze the determinants of health care cost differences across firms. An important first step is to summarize the nature of expenditure differences across plans. The goal of this article is to de-velop methods for identifying and quantifying those factors that account for the wide differences in health care expenditures observed across plans. We consider eight plans that vary in average expenditure for individuals filing claims, from a low of $1,645 to a high of $2,484. We present a statistically consistent method for decomposing the cost differences across plans into com-ponent parts based on demographic characteristics of plan participants, the mix of diagnoses for which participants are treated, and the cost of treatment for particular diagnoses. The goal is to quantify the contribution of each of these components to the difference between average cost and the cost in a given firm. The demographic mix of plan enrollees accounts for wide differ-ences in cost ($649). Perhaps the most noticeable feature of the results is that, after adjusting for demographic mix, the difference in expenditures accounte