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High Out-Of-Pocket Health Care Spending By The Elderly
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.
Most elderly people are insured against health care expenses through Medicare, but Medicare does not provide complete insurance, and some beneficiaries potentially face large out-of-pocket costs. Existing research tends to focus on average expenditures or expenditures as a percentage of income, but these measures ignore the fact that a few people may account for a large portion of out-of-pocket spending. Supplemental insurance can mitigate this risk by capping out-of-pocket costs, lowering copayments, and covering more services. The supplemental options available to an elderly Medicare beneficiary vary with individual circumstances. Medicaid provides such coverage for elderly people with very low incomes and low wealth. Private coverage is also available to some beneficiaries through a current or former employer. Medicare beneficiaries can also purchase Medigap insurance on their own, although the premiums are costly and coverage of prescription drugs and other health services is limited.1 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 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.
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.
Out-of-pocket spending. Mean out-of-pocket spending in the HRS over two-year periods was $2,022; median spending was $920 (Exhibit 2 ). This illustrates the skewed nature of out-of-pocket medical spending: 10 percent spent $4,800 or more over two years, and the top 1 percent spent $15,248 or more. Elderly people in poor health are vulnerable to high out-of-pocket spending. Those in very good or excellent self-reported health spent approximately 50 percent less than did those in poor health, at both the mean and the upper tail of the distribution.
To assess the effect of out-of-pocket health care spending on the welfare of the elderly, we report spending levels by two measures of economic status: income and wealth. Income is most often used as a measure of economic status for the elderly. Wealth data are a valuable alternative, because for the elderly, wealth measures spending opportunities better than income does. Mean out-of-pocket spending was just slightly higher for people with high wealth or income than for those with low wealth or income in 1998. Thus, the financial burden is much greater for the elderly with low economic status. The elderly in the bottom quartile of the wealth distribution spent on average 17 percent of their annual wealth on health care over two years; those in the top quartile spent on average less than 1 percent.4 Ten percent of the elderly in the bottom quartile spent 43 percent or more of their annual wealth on health care in two years. This high level of variation results from the highly skewed nature of out-of-pocket health care spending.
Spending by insurance type.
As expected, people with Medicaid spent the least out of pocket at all reported percentiles of the distribution (Exhibit 3
Medicare managed care beneficiaries spent less out of pocket than did beneficiaries with Medicare Parts A and B only, at all points in the distribution. The protection is particularly large in the right tail, where managed care beneficiaries at the seventy-fifth percentile spent $1,300 less than traditional fee-for-service beneficiaries spent (46 percent lower). Employer coverage is also associated with lower out-of-pocket spending, and the distribution is strikingly similar to that for beneficiaries in managed care. For people in poor health, Medicare managed care provided greater protection against loss than employer-sponsored insurance provides. In contrast, the elderly with Medigap plans spent as much or more out of pocket than did the elderly with no supplemental insurance. 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
Expenditures by percentiles. Exhibit 4  also shows quantile regression results for the fiftieth, seventy-fifth, and ninetieth percentiles. At each percentile shown, Medicare HMO enrollees had significantly lower expenses than did those in traditional Medicare (the reference group) (28 percent, 37 percent, and 29 percent, respectively; p < .01). Overall, the results suggest that HMO enrollees are shielded from high expenditures at various points in the distribution compared with people with only traditional Medicare. 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.
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.
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.
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