Geographic Cost Variation

Geographic Practice Cost Index (GPCI)

CMS divides the United States into 112 Medicare payment localities, each with its own set of Geographic Practice Cost Indices. GPCIs adjust the national RVU-based fee schedule to reflect local cost differences across three components:

• Work GPCI -- adjusts for local physician compensation levels. Ranges from approximately 1.000 (national average) to 1.093 in high-cost areas like Manhattan. Reflects the cost of attracting and retaining physicians in a given market. Congress has historically applied a floor of 1.000 to the Work GPCI, meaning no locality pays less than the national average for the work component.
• Practice Expense GPCI -- adjusts for differences in office rent, staff wages, medical equipment costs, and utilities. This is the most variable component, ranging from 0.814 in rural Mississippi to 1.577 in San Francisco. It directly reflects the cost-of-living differences that drive healthcare overhead.
• Malpractice GPCI -- adjusts for regional variation in professional liability insurance premiums. States with high tort costs (e.g., Illinois, New York) have significantly higher malpractice GPCIs than states with tort reform (e.g., Texas, California).

The GPCI-adjusted Medicare rate provides the geographic baseline. We use this to normalize prices across regions -- a facility charging 200% of Medicare in San Francisco is not the same as one charging 200% in rural Tennessee, because the Medicare base rate itself differs substantially.

Regional Medicare Adjustments

Beyond GPCIs, CMS applies additional geographic adjustments through payment system mechanisms:

• Wage Index -- the OPPS and IPPS use a hospital-specific wage index to adjust the labor-related share of payment (approximately 60% of the total). This means two hospitals billing the same DRG in different cities receive different Medicare payments.
• Disproportionate Share Hospital (DSH) Adjustment -- hospitals serving a high proportion of low-income patients receive supplemental payments that affect their overall cost structure and pricing behavior.
• Indirect Medical Education (IME) Adjustment -- teaching hospitals receive a per-case payment increase to account for the costs of training residents. This partially explains why academic medical centers tend to price higher than community hospitals.
• Outlier Payments -- extremely high-cost cases receive additional Medicare reimbursement, which can influence a hospital's average pricing for complex procedures.

Cost-of-Living Factors

While GPCIs capture much of the geographic variation in healthcare costs, they do not fully explain commercial price differences. We supplement GPCI data with:

• BLS Medical CPI by MSA -- the Bureau of Labor Statistics publishes medical care price indices for major metropolitan statistical areas. We use these to calibrate our commercial price expectations in areas where transparency data is sparse.
• Market Concentration (HHI) -- the Herfindahl-Hirschman Index for hospital market share in each metro area. Highly concentrated markets (HHI above 2,500) correlate with higher commercial prices, independent of cost-of-living. A monopoly hospital system can price aggressively because employers and insurers have no alternative to include in their networks.
• KFF Employer Survey Data -- the Kaiser Family Foundation's annual employer health benefits survey provides regional benchmark data on average premiums, deductibles, and employer contributions by firm size and geography.

Price Fairness Index

For each facility, we compute a Price Fairness Index that compares its actual negotiated rates to the expected rate for its geographic area and procedure mix. The index answers the question: "Is this facility priced fairly relative to its local cost environment, or is it charging a premium beyond what geography explains?"

A fairness index of 1.0 means the facility charges exactly what you would expect given its location. Values above 1.2 indicate pricing that exceeds geographic norms, while values below 0.8 suggest a facility pricing below expectations -- potentially a strong value option.

Travel-Worthy Savings Detection

For expensive procedures like joint replacements, bariatric surgery, or cardiac procedures, traveling to a lower-cost facility in a nearby metro area can save thousands of dollars. Our system flags "travel-worthy savings" when:

• A facility within 100 miles is priced more than $2,000 below the user's local median
• The remote facility has a QACS score equal to or higher than local options
• The estimated travel + accommodation cost (modeled from IRS mileage rates and GSA per diem) is less than 25% of the savings

Medical tourism within the US is growing as price transparency data makes these comparisons possible. For a $30,000 procedure where a facility 60 miles away charges $18,000 with comparable quality, the $12,000 savings dwarfs the $200-400 travel cost.