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Using data from the Medicare Current Beneficiary Surveys we estimated models of individual spending, controlling for health and other individual characteristics, as well as area-level measures of health care supply. Unadjusted Medicare spending per beneficiary was 52% higher in regions in the highest spending quintile compared with the lowest. After controlling for observable determinants of spending, especially health, this gap was reduced to 33%. Policymakers attempting to control Medicare costs by reducing differences in spending across areas need better information about the sources of the differences, as well as better methods for adjusting for underlying differences in population health.