The Risk of High Out-of-Pocket Health Spending among Older Americans
Traditional Medicare imposes significant cost-sharing on beneficiaries. Most but not all beneficiaries obtain supplemental insurance through Medigap, Medicare Advantage, Medicaid, or employer-sponsored retiree coverage, which may vary in how well they protect against the risk of high spending. This paper uses data from the Health and Retirement Study for the years 2002 through 2016 to document how supplemental coverage for Medicare beneficiaries 65 and older has changed over time, and to estimate the distribution of out-of-pocket spending for enrollees with different coverage types. I find that the shares of beneficiaries with employer-sponsored supplemental coverage or Medigap declined between 2002 and 2016, whereas the shares with Medicare Advantage or no supplemental coverage for doctor and hospital bills have increased. The majority of those with no supplemental coverage for doctor and hospital bills have Medicare Part D, which covers prescription drug expenses. I find that all supplemental coverage types are associated with lower observed dispersion in out-of-pocket medical care spending, measuring dispersion as the ratio of the 90th to the 50th percentile or the standard deviation. All supplemental insurance types are associated with a lower probability that out-of-pocket medical care spending exceeds 10% of household income, while all but Medicaid are associated with a significantly higher probability that total out-of-pocket health spending (that is, medical care plus health insurance premiums) exceeds this threshold. Thus, all supplemental insurance forms effectively function as insurance, translating uncertain medical costs into more predictable — although still potentially burdensome — premiums.
- Supplemental health insurance for Medicare beneficiaries 65 and older changed substantially between 2002 and 2016. Fewer beneficiaries have employer-sponsored coverage or Medigap, and more have Medicare Advantage. More also have no source of supplemental coverage for doctors’ and hospital bills, although many of these do have Medicare Part D, which covers prescription drugs.
- Median out-of-pocket medical care spending depends on what type of supplemental coverage beneficiaries have. Median spending is lowest for beneficiaries with Medicaid coverage and highest for those with Medigap or Part D only. Those with no supplemental coverage, employer-sponsored coverage, or Medicare Advantage are somewhere in between. These gradients by type of coverage have been largely stable over time.
- The dispersion of out-of-pocket medical spending is highest for those with no supplemental coverage. This research measures dispersion in two different ways: (1) the ratio of the 90th percentile to the 50th percentile of the distribution of observed spending, and (2) the distribution’s standard deviation. Both measures support the same conclusion.
- Beneficiaries with supplemental coverage face less risk but pay more in premiums. Beneficiaries with any type of supplemental coverage are less likely than those with no supplemental coverage to spend more than 10% of their household income on out-of-pocket medical care spending. On the other hand, any type of coverage except for Medicaid increases the share who spend more than 10% of their income on medical care plus health insurance premiums.
Levy, Helen. 2020. “The Risk of High Out-of-Pocket Health Spending among Older Americans.” Ann Arbor, MI. University of Michigan Retirement and Disability Research Center (MRDRC) Working Paper; MRDRC WP 2020-409. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp409.pdf
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Paper IDWP 2020-409