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DataWatch

High Out-Of-Pocket Health Care Spending By The Elderly

Abstract

 
We use data from the Health and Retirement Study to examine the elderly’s out-of-pocket health care spending. We find that Medicare HMOs, employer supplements, and Medicaid effectively insulate against the risk of high expenditures. At the ninetieth percentile, Medicare beneficiaries with employer supplements or enrolled in Medicare HMOs spend $1,600 less out of pocket than beneficiaries with traditional Medicare spend. For the poor elderly, Medicaid offers similar protection. Among the near-poor elderly, there is little employer coverage, so Medicare HMOs provide most of the protection against financial risk. There is evidence that Medicare HMO benefits have eroded since 1998, raising the question of whether the near-poor have lost financial protection since then.

Medicare health maintenance organizations (HMOs) may provide a financially attractive alternative. In return for beneficiaries’ agreement to abide by administrative constraints on health care delivery, Medicare HMOs offer benefits that are more comprehensive than those of traditional Medicare Parts A and B and less costly than additional insurance through a Medigap policy. The result is that Medicare HMO beneficiaries have lower average out-of-pocket spending than Medicare beneficiaries overall have.² The question remains, however, how well these insurance alternatives protect the elderly against high (and perhaps catastrophic) expenses, which is a story about the tail of the distribution.

This study examines the distribution of out-of-pocket health care spending by elderly Medicare beneficiaries. Our primary goals are to determine how well supplemental insurance or managed care protects against high out-of-pocket spending and to examine how this protection differs for the low-wealth elderly.

Data And Methods

Top Data And Methods Study Results Disturbing Trends NOTES

 
Data source. The Health and Retirement Study (HRS) is a biennial panel survey of the elderly and near-elderly; this study uses data from the fourth survey wave fielded in 1998 for respondents age sixty-five and older (n = 7,836).

The HRS is particularly attractive because of its high-quality data on wealth and income. Bias in these measures can lead to overestimates of the true burden of out-of-pocket spending.³ We assign respondents to one of five insurance categories to capture the most salient arrangements: (1) Medicare Parts A and B only, (2) Medicare managed care, (3) Medicare and Medigap, (4) Medicare and employer-sponsored insurance, and (5) Medicare and Medicaid.

The HRS has information on eight types of health services grouped into categories for reporting out-of-pocket spending: (1) nursing home, hospital; (2) doctor, outpatient surgery, dental; (3) prescription drugs; and (4) in-home medical care, special care center. Out-of-pocket medical expenditures (except for prescription drugs) are reported for the time period since the last interview (two years on average or two years exactly for those responding for the first time). Spending on prescription drugs is reported as average monthly spending since the last interview. If a respondent does not provide a precise estimate, he or she is asked a series of questions to bracket the expenditure. We impute the amount of out-of-pocket spending using a nearest-neighbor, within-bracket approach. The data on out-of-pocket spending compare favorably with those from other surveys.

Methods. We estimate a quantile regression model to determine the effect of supplemental insurance on out-of-pocket spending for people with median and higher spending levels. Quantile regression fits a line that minimizes the sum of the absolute residuals. The object is to estimate the median (seventy-fifth, ninetieth percentile) of the dependent variable conditional on the independent variables. Standard errors are obtained by bootstrapping. We also use an ordinary least squares (OLS) model to compare mean results with those at the other points in the distribution.

We also examine the effect of supplemental health insurance on the probability of service use to distinguish the impact of benefit design from supply-side effects. We examine whether differences in drug coverage are the primary reason for differences in beneficiaries’ out-of-pocket spending by estimating the effect of insurance on out-of-pocket spending less spending on prescription drugs.

Study Results

Top Data And Methods Study Results Disturbing Trends NOTES

 
A majority (64 percent) of Medicare beneficiaries in 1998 had additional coverage either through an employer or through a Medigap plan (Exhibit 1). Another 15 percent were insured with an HMO, which provided coverage for benefits not covered by Medicare at a premium lower than if they had purchased a Medigap plan. In contrast to high drug coverage rates among beneficiaries with Medicaid and Medicare managed care, only 27 percent of seniors in Medigap plans and 71 percent with employer plans had drug coverage. While 24 percent of low-wealth elderly were covered by Medicaid, 22 percent had no supplemental coverage. Low-wealth elderly had low rates of supplemental coverage, and the likelihood of having supplemental insurance rose with wealth. In contrast, insurance coverage through managed care was generally unchanged across the wealth distribution.

Spending by insurance type. As expected, people with Medicaid spent the least out of pocket at all reported percentiles of the distribution (Exhibit 3). Most elderly people do not have access to Medicaid; thus, we focus on the protective effects of supplemental insurance and Medicare managed care.

Among low-wealth elderly, the ratio of out-of-pocket spending to mean wealth was the largest for those without supplemental insurance. Both employer-sponsored supplements and HMOs protect these elderly against high expenditures. Two-year average out-of-pocket expenditure for an HMO enrollee was $1,549 (10 percent of mean wealth) and for a person with employer-sponsored insurance, $1,658 (11 percent of mean wealth). In contrast, the two-year average out-of-pocket expenditure for a person without supplemental coverage (Medicare A and B only) was $2,627 (25 percent of mean wealth). The protection afforded to low-wealth elderly by managed care is especially noticeable at the tails of the distribution. At the ninetieth percentile of the health care distribution, an elderly HMO enrollee spent 26 percent of his or her annual wealth out of pocket for a two-year period, compared with 56 percent spent by an elderly person with no supplemental coverage.⁵ Medicare HMOs, employer supplements, and Medic-aid are very effective in insulating elderly people against high expenditures. Medicaid, however, is only available to the very poor elderly, and only a small fraction of the near-poor elderly have employer-sponsored insurance.

Mean spending. Adjusting for many characteristics, ordinary least squares regression results showed that elderly people enrolled in HMOs spent $809 (31 percent) less out of pocket than did people with traditional Medicare only (Exhibit 4). Medigap coverage results in slightly lower out-of-pocket spending than among people with traditional Medicare only (the reference group), although the effect is not statistically different from zero at the 5 percent level. People with employer insurance spent $837 less than did people in the reference group, and Medicaid enrollees spent $1,754 less. Socioeconomic status, as measured by income and wealth, has an independent effect on out-of-pocket spending for those in the highest income and wealth quartiles. The poorest elderly use fewer health-related services, although the effect is not statistically different from that of the middle-income elderly.

At the fiftieth and seventy-fifth percentiles, people with Medigap plans had out-of-pocket expenditures that were 35 percent and 10 percent, respectively, higher than those of the reference group (p < .01 at the fiftieth percentile only). At the ninetieth percentile, those with Medigap plans had expenditures that were 10 percent lower than the reference group (p < .05). These results suggest that Medigap plans may protect against high out-of-pocket spending only at the upper tail of the spending distribution.

As with Medicare managed care, employer-sponsored insurance reduces out-of-pocket spending compared with the reference group. At the fiftieth, seventy-fifth, and ninetieth percentiles, elderly people with employer supplements had significantly lower expenses than did those in traditional Medicare (22 percent, 31 percent, and 29 percent, respectively; p < .01). Not surprisingly, those with Medicaid experienced the largest reduction in out-of-pocket spending relative to the reference group. Similar to the effect at the mean, the poorest elderly use fewer health care services and the wealthiest, more health care services, than do the elderly with middle income and wealth.

Service use. We did additional analyses to see how supplemental coverage status affected service use. The results are not shown here, but, those with more insurance coverage were generally more likely to use services. HMO enrollees were more likely to have a doctor visit and outpatient surgery and to use prescription drugs but less likely to have a hospital admission than were elderly people with only Medicare Parts A and B. We find that the reduction in out-of-pocket spending for HMO enrollees is not primarily attributable to lower hospital admissions. In a regression of expenditures less hospital expenditures, we find that at each point in the distribution, HMO enrollees had lower expenditures than the reference group had.

Prescription drugs. Because prescription drug coverage is commonly offered by HMOs and not covered by traditional Medicare, some of the reduction in out-of-pocket spending associated with HMOs is likely associated with this benefit. When we examined spending excluding prescription drugs, we still find that HMO enrollees had significantly lower non-drug-related medical expenditures at all points in the distribution.

Self-selection. One issue is whether our results may reflect preferential selection into Medicare HMOs by the healthiest elderly and adverse selection into Medigap. This selection, however, has not been observed after controlling for detailed socioeconomic and health status measures, or has been found to be of a small magnitude.⁶ Also, we do not observe any evidence for selection using a bivariate probit model relating Medicare HMO choice to the likelihood of high (above $3,000) out-of-pocket spending. In technical terms, there is no significant correlation (.03) between these outcomes after controlling for observed health status; interestingly, there is a significant correlation (.34) when health status and wealth are not included. All of these findings suggest that any bias attributable to selection is small.

Disturbing Trends

Top Data And Methods Study Results Disturbing Trends NOTES

 
Controlling for confounding factors known to influence out-of-pocket spending such as health status, income, and wealth, we find that at the upper tail of the distribution (ninetieth percentile), the elderly with employer supplements or Medicare managed care spent approximately $1,600 less over two years than did those with traditional Medicare. The elderly in the lowest wealth quartile were the most at risk of incurring a large financial loss due to high expenditures, but the burden was lowest in this group for those in managed care.

Erosion of managed care. For the near-poor—who rely most on Medicare HMOs—benefits have probably eroded since the inauguration of Medicare+Choice (M+C) in 1997. Medicare HMOs provided increasingly generous benefits throughout the 1990s, but by 2000 this trend reversed sharply. Most plans that remained in the market began charging higher premiums and decreasing the generosity of their benefits. Copayments for primary and speciality physician visits have risen, and some plans have started charging copayments for inpatient and outpatient hospital services.⁷ The proportion of plans offering supplemental benefits such as dental or vision services has also declined.

Declines in drug coverage. Although prescription drug coverage does not fully explain the protection afforded by Medicare HMOs, it is an important component. The share of M+C enrollees in plans with drug coverage declined from 84 percent in 1999 to 71 percent in 2002, and many existing plans imposed more cost sharing. Copayments have increased, and the fraction of enrollees in plans covering generic drugs only more than tripled from 2000 to 2001.⁸ Perhaps most alarmingly, the share of enrollees in M+C plans with drug coverage facing an annual dollar maximum or "cap" to limit their exposure increased steadily from 79 percent in 1999 to 98 percent in 2002.⁹ These caps transfer financial risk from the party best able to bear it (the insurer) to the party least able to afford it (the beneficiary).

Cuts in retiree benefits. Disturbing trends have also been observed among employer-sponsored retiree benefits. Such plans are the major source of supplemental coverage for more-affluent beneficiaries. Because of rising health care costs and a 1992 accounting rule requiring employers to classify future retiree benefits as a balance-sheet liability, the provision of retiree benefits declined steadily throughout the 1990s. Although larger firms are more likely than smaller firms are to offer Medicare supplemental coverage to retirees, coverage rates have declined across all firm sizes.¹⁰

Accompanying this decline has been a decrease in the generosity of benefits. In fact, between 2000 and 2002, 29 percent of large private employers increased physician office visit copayments, and 49 percent increased drug copayments and coinsurance.¹¹

With the erosion of market areas and the generosity of Medicare HMO benefits, the risks of large catastrophic expenses have likely increased among a group least able to afford it. In addition to imposing additional private costs on less affluent seniors, these changes may also impose public costs. They will make Medicaid a more attractive option to the near-poor elderly, and some may spend down assets to qualify. This will increase Medicaid’s costs, while exposing other elderly people to more financial risk.

Editor's Notes

 
Dana Goldman is a senior economist and director of health economics at RAND in Santa Monica, California. Julie Zissimopoulos is an associate economist at RAND.

This study was supported by Grant no. 2P01AG08291-09 from the National Institute on Aging. The authors thank Hongjun Kan for excellent research assistance.

NOTES

Top Data And Methods Study Results Disturbing Trends NOTES

 

1. J. Rogowski, L. Lillard, and R. Kington, "The Financial Burden of Prescription Drug Use among Elderly Persons," Gerontologist 37, no. 4 (1997): 475–482.[Abstract]
2. J. Kasten, M. Moon, and M. Segal, "What Do Medicare HMO Enrollees Spend Out-of-Pocket?" Pub. no. 303 (Washington: Urban Institute, 2000).
3. D. Goldman and J. Smith, "Methodological Biases in Estimating the Burden of Out-of-Pocket Expenses," Health Services Research 35, no. 6 (2001): 1357–1365.[Medline]
4. Mean wealth for people in the bottom quartile of the wealth distribution is $11,583, and for those in the top quartile, it is $885,744.
5. The ratios of out-of-pocket spending to mean income in the lowest income quartile are similar to the wealth ratios. Two-year average out-of-pocket spending for HMO enrollees is 15 percent of mean income. Two-year average spending for a person without supplemental coverage is 25 percent of mean income. These within-group ratios of average expenditures to average income are much lower than estimates in the literature, even when we use two-year expenditures. In part, this is because the literature first takes ratios and then takes averages.
6. Several studies note the absence of adverse selection among the elderly. See, for example, M. Hurd and K. McGarry, "Medical Insurance and the Use of Health Care Services by the Elderly," JournalofHealthEconomics 16, no. 2 (1997): 129–154; and L. Lillard and J. Rogowski, "Does Supplemental Private Insurance Increase Medicare Costs?" RAND Labor and Population Working Paper (Santa Monica, Calif.: RAND, 1995). Other research finds this type of selection to be minimal. See, for example, J. Wolfe and J. Goddeeris, "Adverse Selection, Moral Hazard, and Wealth Effects in the Medigap Insurance Market," Journal of Health Economics 10, no. 4 (1991): 433–459.[Medline]
7. See L. Achman and M. Gold, "Medicare+Choice: Beneficiaries Will Face Higher Cost-Sharing in 2002" (New York: Commonwealth Fund, March 2002), for a discussion of benefit erosion since the passage of Medicare+Choice.
8. Ibid.
9. Ibid.; E.R. Cox et al., "Medicare Beneficiaries’ Management of Capped Prescription Benefits," Medical Care (March 2001): 296–301; and Henry J. Kaiser Family Foundation, "The Medicare Program: Medicare+ Choice" (Menlo Park, Calif.: Kaiser Family Foundation, September 2001).
10. F. McArdle et al., "Retiree Health Coverage: Recent Trends and Employer Perspectives on Future Benefits" (Menlo Park Calif.: Kaiser Family Foundation, October 1999); and Henry J. Kaiser Family Foundation and Health Research and Educational Trust, "Retiree Health Benefits," in Employer Health Benefits: 2001 Annual Survey (Menlo Park, Calif.: Kaiser Family Foundation, 2001).
11. Henry J. Kaiser Family Foundation and Hewitt Associates, Retiree Health Benefits: Findings from the Kaiser/Hewitt 2002 Retiree Health Survey (Menlo Park, Calif.: Kaiser Family Foundation, December 2002).

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