CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

A

PAPER

MAY 2005

High-Cost 

Medicare

Benefi ciaries

CBO

© Royalty-free/bxp2598/Brand X

The Congress of the United States O Congressional Budget Office

CBO

High-Cost Medicare Beneficiaries

May 2005

A

PAPER
Notes

All years referred to in this paper are calendar years.

Numbers in the text and tables may not add up to totals because of rounding.

All dollar amounts are expressed in 2005 dollars (having been converted using the GDP price 

deflator).
Preface

Total Medicare spending exceeded $300 billion in 2004 and is expected to grow significantly in the coming decades. In response to those financial pressures, policymakers have considered a number of strategies for slowing the growth of Medicare spending, including 

increasing the share of spending paid by beneficiaries and enhancing competition in the provision of services. 

This Congressional Budget Office (CBO) paper, prepared at the request of the Senate Majority Leader, explores an additional approach: focusing on the small group of beneficiaries that 

accounts for a large share of the program’s spending. Possible intervention strategies would 

aim to reduce that spending. The paper analyzes the concentration of Medicare spending in a 

given year and over time using data from Medicare claims and considers illustrative methods 

for identifying beneficiaries who are likely to incur high future costs. In keeping with CBO’s 

mandate to provide objective, nonpartisan analysis, this paper makes no recommendations.

Julie Lee and Todd Anderson of CBO’s Health and Human Resources Division prepared the 

paper under the supervision of Bruce Vavrichek, James Baumgardner, Steve Lieberman, and 

Mark Miller. (Todd Anderson, Steve Lieberman, and Mark Miller have since left CBO). 

Susan Labovich provided computer programming support and coordinated CBO’s access to 

the data used in this analysis. Tom Bradley, Philip Ellis, and Allison Percy, also of CBO, provided thoughtful comments on drafts, as did Amber Barnato of the University of Pittsburgh 

and Jeffrey Kelman of the Centers for Medicare and Medicaid Services. (The assistance of 

external reviewers implies no responsibility for the final product, which rests solely with 

CBO.) Dr. Barnato and Jennifer Bowman, formerly of CBO, helped to draft portions of an 

earlier version of the paper.

Christine Bogusz edited the paper, and Loretta Lettner proofread it. Maureen Costantino 

prepared the paper for publication and designed the cover. Lenny Skutnik printed copies of 

the paper, and Annette Kalicki produced the electronic version for CBO’s Web site 

(www.cbo.gov).

Douglas Holtz-Eakin

Director

May 2005

Summary and Introduction 1

The Concentration of Medicare Expenditures 2

Factors Affecting the Degree of Concentration 3

Characteristics of High-Cost Medicare

Beneficiaries 4

The Persistence of Medicare Expenditures 5

Expenditure Patterns Over Time 6

The Concentration of Spending Over a Five-Year 

Period 8

Prospectively Identifying Future High-Cost Beneficiaries 8

Illustrative Strategies for Identifying High-Cost 

Beneficiaries 9

Approaches to Managing Care for High-Cost

Beneficiaries 10

CONTENTS
vi HIGH-COST MEDICARE BENEFICIARIES

Tables

1. Expenditure Levels and Thresholds for Medicare Beneficiaries,

by Spending Group, 2001 and 1991 4

2. Concentration of Expenditures Among Subgroups of Medicare

Beneficiaries, by Spending Group, 2001 5

3. Characteristics of Medicare Beneficiaries in High- and Low-Cost

Spending Groups, 2001 6

4. Use of Medicare Services by High- and Low-Cost Spending

Groups, 2001 7

5. Transition of Medicare Beneficiaries Between High- and Low-Cost

Spending Groups, 1997 to 1998 8

6. Percentage and Number of Medicare Beneficiaries in High- and

Low-Cost Spending Groups with Selected Chronic

Conditions, 2001 12

7. Illustrative Criteria for Targeting Future Medicare Beneficiaries in

High-Cost Spending Groups 12

Figures

1. Concentration of Total Annual Medicare Expenditures Among

Beneficiaries, 2001 2

2. Expenditure History of Medicare Beneficiaries Who

Constituted the Top 25 Percent in 1997 9

3. Concentration of Total Cumulative Medicare Expenditures Among

Beneficiaries, 1997 to 2001 10

4. Distribution of High-Cost Months Over the 1997-2001 Period 11

Box

1. Methodology of This Analysis 3
High-Cost Medicare Beneficiaries

Summary and Introduction

Medicare’s rising demand for budgetary resources has 

been well documented, with spending for the program 

projected to grow significantly in the coming decades.1 In 

response, policymakers are exploring ways to reduce that 

potential growth in spending, perhaps by increasing beneficiaries’ cost sharing or promoting competition among 

service providers. Options that would constrain the program’s costs without reducing the quality or availability of 

care, however, are limited.

One potential avenue for reducing Medicare spending 

stems from the observation that a small fraction of Medicare beneficiaries accounts for a large share of the program’s spending in a given year. That concentration of expenditures is characteristic of insurance programs in 

general. However, it also suggests the possibility of a policy alternative: identify the relatively small group of potentially high-cost beneficiaries and find effective intervention strategies to reduce their spending. If that 

approach was successful, even a small percentage reduction in the spending of that group of beneficiaries could 

lead to large savings for the Medicare program.

The feasibility of using such a strategy depends on the answers to three key questions. First, how concentrated is 

health care spending among Medicare beneficiaries? Second, can individuals who will have high costs be identified before those costs are incurred (or at least before a 

large enough share of those costs has been incurred to still 

warrant targeting the remaining spending)? And third, assuming that future high-cost beneficiaries can be identified, can effective strategies be devised to avert the anticipated high costs?

This paper explores the first two questions in order to 

gauge the potential effectiveness of focusing on high-cost 

Medicare beneficiaries as a way to reduce the program’s 

costs. To begin with, it documents the extent to which 

Medicare expenditures are concentrated among relatively 

few beneficiaries. Analysts observe a significant degree of 

concentration in the spending of Medicare beneficiaries, 

both in a given year and over time. For example, highcost beneficiaries (those in the top 25 percent in terms of 

their spending) accounted for 85 percent of annual expenditures in 2001 and for 68 percent of five-year cumulative expenditures from 1997 to 2001. In addition, those 

high-cost beneficiaries, compared with beneficiaries in 

the bottom 75 percent in terms of their spending, were 

slightly older, more likely to suffer from chronic conditions, such as coronary artery disease and diabetes, and 

more likely to die in a given year. 

Finally, to determine whether beneficiaries with high future costs can be identified before those costs are incurred, the paper explores three simple observational 

methods for prospectively identifying beneficiaries who 

will incur extended periods of expensive medical care. 

The methods look at beneficiaries who were high cost in 

a certain year (in this case, 1997), who were admitted to a 

hospital that year, or who had multiple chronic conditions that year. The costs for all three groups are compared with those for a random sample of Medicare beneficiaries.

Spending in 1997 for all three groups was more than 

twice as high as spending for the reference group, and it 

was four times as high for the group with a hospital admission. The next year, however, the previously hospitalized group had the largest decline in its share of spending, 

whereas the share of spending by beneficiaries with multiple chronic conditions barely fell at all. Over the next 

1. See Congressional Budget Office, The Long-Term Budget Outlook 

(December 2003). CBO projects that, under current law, Medicare spending will increase from 2.6 percent of gross domestic 

product (GDP) in 2004 to 8.3 percent or more in 2050. See also 

The 2005 Annual Report of the Board of Trustees of the Federal 

Hospital Insurance and Federal Supplementary Medical Insurance 

Trust Funds (March 2005). The Medicare trustees estimate that 

Medicare spending will equal 9.3 percent of GDP in 2050 and 

13.6 percent in 2079. 
2 HIGH-COST MEDICARE BENEFICIARIES

Figure 1.

Concentration of Total Annual

Medicare Expenditures Among

Beneficiaries, 2001

(Percent)

Source: Congressional Budget Office based on data from the 

Centers for Medicare and Medicaid Services.

four years (through 2001), all three groups spent nearly 

twice as much on Medicare-covered services as beneficiaries in the reference group.

Those methods are highly stylized and conceptual illustrations. In practice, which groups to identify and which 

methods to use would depend on the actual intervention 

strategies that might be implemented. Moreover, the extent to which those targeted beneficiaries reduced their 

spending would ultimately rest on the ability to devise 

and implement effective intervention strategies, clinical 

or otherwise, to change beneficiaries’ use of medical services. 

The Concentration of Medicare

Expenditures

Medicare spending is highly concentrated, with a small 

number of beneficiaries accounting for a large proportion 

of the program’s annual expenditures. In 2001, the costliest 5 percent of beneficiaries enrolled in Medicare’s feefor-service (FFS) sector accounted for 43 percent of total 

spending, while the costliest 25 percent (defined as the 

high-cost group in this paper) accounted for fully 85 percent of spending (see Figure 1). In this context, spending 

includes expenditures paid for by all parties—including 

the Medicare program itself, beneficiaries, and thirdparty payers such as medigap insurers—for all services 

covered by the Medicare program.2

 (For a description 

and discussion of the Medicare data used in this analysis, 

see Box 1.) Real (inflation-adjusted) spending among the 

most expensive 5 percent of beneficiaries averaged about 

$63,000 per person in 2001, with the least expensive 

person in that group spending more than $35,400 (see 

Table 1). Among the most expensive 25 percent of beneficiaries, spending averaged about $24,800, with the least 

expensive beneficiary in that group spending over $6,200 

in 2001. By contrast, the least expensive 50 percent of 

Medicare beneficiaries accounted for only 4 percent of total spending, with costs in 2001 averaging about $550 

per person. 

The concentration of Medicare spending has lessened 

slightly since the early 1990s. From 1991 to 2001, there 

was a large increase in the level of Medicare spending, 

with total annual Medicare expenditures per FFS beneficiary growing by more than 40 percent in inflationadjusted terms, from $5,080 to $7,310.3

 However, the 

rate of increase in spending was larger among low-cost 

beneficiaries than among high-cost ones. On average, real 

per capita spending among the bottom 75 percent of 

beneficiaries grew at 6.8 percent per year over that 10-

year period, whereas spending among the top 25 percent 

Beneficiaries Expenditures

0

10

20

30

40

50

60

70

80

90

100

3.8

11.2

23.5

18.4

43.1

5

5

15

25

50

2. Spending by the Medicare program itself is more concentrated. 

For example, the most expensive 5 percent of Medicare FFS beneficiaries accounted for 48 percent of annual Medicare FFS spending in 2002, and the most expensive 25 percent accounted for 88 

percent. See Medicare Payment Advisory Commission, Report to 

the Congress: New Approaches in Medicare (June 2004), Figure 2-1.

3. The increase in national health expenditures during that period 

was even larger, with an average annual growth rate of inflationadjusted spending per person of over 5 percent between 1990 and 

2001. See www.cms.hhs.gov/statistics/nhe/historical/t1.asp. Part 

of the difference in the rates of spending growth is attributable to 

the fact that Medicare did not cover outpatient prescription 

drugs—a fast-growing component of national health expenditures—during that period. In addition, the Balanced Budget Act 

of 1997 reduced payments for various Medicare-covered services.
HIGH-COST MEDICARE BENEFICIARIES 3

of beneficiaries grew at 3.3 percent per year.4 As a result, 

the share of Medicare spending by the top one-quarter of 

beneficiaries decreased from 88.8 percent in 1991 to 85.0 

percent in 2001 (see Table 1).

Factors Affecting the Degree of Concentration 

A high degree of concentration of expenditures is not 

unique to the Medicare population. Health care expenditures in the general population show similar patterns.5 In 

fact, they are even more concentrated: in 1996, for example, the costliest 5 percent of the U.S. population accounted for 55 percent of total health care spending.

Box 1.

Methodology of This Analysis

The Congressional Budget Office’s (CBO’s) analysis 

of Medicare expenditures presented in this paper is 

based on longitudinal data of Medicare claims from 

1989 through 2001 for a 5 percent sample of Medicare beneficiaries enrolled in the fee-for-service sector of the Medicare program. The sample was derived from claims records maintained by the Centers 

for Medicare and Medicaid Services.

The data contain information on the enrollment and 

entitlement status of each beneficiary, his or her demographic characteristics, and monthly expenditures 

for all Medicare-covered services (short-term hospital, other hospital, skilled nursing facility, outpatient, 

physician, home health, hospice, and durable medical equipment). In this paper, total expenditures for 

Medicare-covered services include third-party payments and beneficiaries’ share of payments through 

deductibles and copayments, as well as the amounts 

paid by the Medicare program. CBO converted all 

expenditures into 2005 dollars using the GDP deflator. (Those constant-dollar expenditures can be interpreted as the opportunity cost of health care.) Although the data contain some diagnostic information reported in claims files (such as beneficiaries’ diagnosis-related group, or DRG), they generally lack detailed clinical information. Moreover, because outpatient prescription drugs were not covered 

by Medicare during the years of the sample, the database also does not include spending for prescription 

drugs.

To be included in a given year of data, a beneficiary 

had to have at least one month of enrollment in both 

Part A (Hospital Insurance) and Part B (Supplementary Medical Insurance) of the Medicare program. 

Beneficiaries enrolled in managed care were excluded 

from the analysis because their expenditure information was not available. The resulting sample contains 

approximately 1.6 million beneficiaries per year.

The number of admissions to hospitals and skilled 

nursing facilities was constructed from inpatient and 

skilled nursing claims. The number of visits to physicians’ offices and emergency departments was constructed from codes (according to the Healthcare 

Common Procedure Coding System, or HCPCS) reported in physicians’ claims.

Seven chronic conditions were considered in the 

analysis: asthma, chronic obstructive pulmonary disease, chronic renal failure, congestive heart failure, 

coronary artery disease, diabetes, and senility. A beneficiary was defined as having a chronic condition if 

he or she had the diagnosis reported in physicians’ 

claims data (as the primary or secondary diagnosis) 

for at least one month in a given year. Detailed diagnosis codes were grouped into general categories using the Clinical Classification Software developed by 

the Agency for Healthcare Research and Quality.

4. Those trends are consistent with the fact that medical spending 

for physician-provided care (used by both low-cost and high-cost 

Medicare beneficiaries) grew faster during that period than did 

spending for hospital-provided care (used largely by high-cost 

beneficiaries).

5. See Marc L. Berk and Alan C. Monheit, “The Concentration of 

Health Care Expenditures, Revisited,” Health Affairs, vol. 20, no. 

2 (March/April 2001), pp. 9-18.
4 HIGH-COST MEDICARE BENEFICIARIES

Table 1.

Expenditure Levels and Thresholds for Medicare Beneficiaries, by Spending 

Group, 2001 and 1991

Source: Congressional Budget Office based on data from the Centers for Medicare and Medicaid Services.

Notes: Spending is reported in 2005 dollars.

n.a. = not applicable.

That skewed distribution of medical spending is rooted 

in the fundamental reason that people value insurance. 

Events that people typically insure against, like flood or 

fire, involve a small probability of a very expensive outcome. Similarly, in health care, although individuals may 

know about their need for medical services to some degree, their exact amount of spending on medical care is 

variable and unpredictable. For instance, most people do 

not know whether they will have a heart attack, even if 

they are fully aware of their relative risk factors. Health 

insurance spreads the financial risks of adverse health outcomes across the insured population, so that the small 

fraction of people who incur very high expenses of severe 

illness are financially protected. Both the probability of 

adverse health outcomes and the expense of medical care 

to treat them affect the degree of concentration of spending. 

To the extent that the probability and the nature of ill 

health vary across subgroups of the Medicare population, 

one would expect to see varying degrees of concentration 

in spending across those groups. A striking example is the 

very small group of beneficiaries with end-stage renal disease (ESRD), who have chronic kidney failure and require dialysis or kidney transplantation.6

 Most people 

with that condition have very high medical spending. As 

a result, that group has a much more even distribution of 

expenditures across its members than does the larger 

Medicare population. For example, the most expensive 5 

percent of ESRD patients accounted for only 17.4 percent of spending by all ESRD patients in 2001; in comparison, the most expensive 5 percent of all Medicare FFS 

beneficiaries accounted for 43 percent of spending by all 

Medicare beneficiaries (see Table 2). Similarly, beneficiaries with chronic medical conditions have high average 

annual medical spending, but it is also more evenly 

spread across that group than is spending for the overall 

Medicare population.7

Characteristics of High-Cost Medicare Beneficiaries 

Although high-cost beneficiaries tend to be older than 

low-cost ones, the two groups are not so distinct in terms 

of other demographic characteristics (see Table 3). At 

over 74 years, the average age of high-cost beneficiaries 

exceeded that of low-cost ones by more than three years 

Top 5 percent 43.1 63,030 35,420 45.8 46,530 25,470

6 percent to 10 percent 18.4 26,900 20,470 19.0 19,260 14,560

11 percent to 25 percent 23.5 11,430 6,210 24.0 8,140 4,240

26 percent to 50 percent 11.2 3,290 1,620 9.1 1,840 760

51 percent to 100 percent 3.8 550 0 2.2 220 0

Memorandum:

n.a. 7,310 n.a. n.a. 5,080 n.a.

(Dollars)

Threshold

for Group

(Dollars) (Dollars)

2001

Percentage

of Total

Spending

1991

Percentage

Average

in Group

(Dollars)

Medicare Expenditures 

per Beneficiary

of Total

Spending

Percentage of Beneficiaries

Spending Group

Spending Threshold

for Group

Average

Spending

in Group

6. People with ESRD, like people receiving Social Security benefits 

on the basis of a disability, are entitled to Medicare benefits 

regardless of age.

7. See Box 1 for the definition of chronic conditions used in this 

paper.
HIGH-COST MEDICARE BENEFICIARIES 5

Table 2.

Concentration of Expenditures Among Subgroups of Medicare Beneficiaries, by 

Spending Group, 2001

(Percent)

Source: Congressional Budget Office based on data from the Centers for Medicare and Medicaid Services.

Notes: Spending is reported in 2005 dollars.

ESRD = end-stage renal disease.

Elderly beneficiaries are defined as those 65 years of age or older. As an example of how to read the information in this table, the top 

5 percent of elderly Medicare beneficiaries accounted for 41.9 percent of all spending by elderly beneficiaries.

in 2001. Nearly 20 percent of high-cost beneficiaries were 

age 85 or older, compared with 10 percent of other beneficiaries, and about 14 percent died during the year. The 

gender and racial compositions of the two groups were 

very similar.

The prevalence of chronic conditions, which typically require ongoing care and treatment to maintain health and 

functional status and to slow the progression of the disease, was also strongly linked to high expenditures and 

the use of medical resources. More than 75 percent of 

high-cost beneficiaries were diagnosed with one or more 

of seven major chronic conditions in 2001. More than 40 

percent of high-cost beneficiaries had coronary artery disease, and about 30 percent had each of three other conditions—diabetes, congestive heart failure, and chronic obstructive pulmonary disease. All of those conditions were 

much less prevalent among low-cost beneficiaries.

In terms of the medical services they received, the highand low-cost groups were similar in that they both visited 

physicians regularly (see Table 4). The vast majority of 

Medicare beneficiaries in both groups saw a physician in 

2001; however, among high-cost beneficiaries who visited 

a physician, the average number of visits during the year 

was 11, compared with six visits among low-cost beneficiaries who visited a physician at least once. High-cost 

beneficiaries were also much more likely to have been admitted to a hospital or a skilled nursing facility than were 

members of the low-cost group and to have been treated 

in a hospital emergency room during the year.

The Persistence of Medicare

Expenditures 

If the goal of policymakers is to ultimately direct intervention strategies toward high-cost beneficiaries and 

change their use of Medicare services, it is important to 

consider patterns in Medicare spending over relatively 

long periods of time, not just over one year. Do individuals who make heavy demands on the Medicare program 

one year continue to do so in subsequent years? Or are 

17.4 41.9 34.2 43.1

11.2 18.4 16.9 18.4

24.1 23.9 26.9 23.5

26.6 11.7 15.7 11.2

20.8 4.1 6.3 3.8 ____ ____ ____ ____

Total 100.0 100.0 100.0 100.0

1 85 48 100

54,370 7,270 12,130 7,310

All Beneficiaries

per Beneficiary (Dollars)

Spending Group

ESRD

Beneficiaries

Subgroups as a Percentage of

All Beneficiaries

Average Spending 

Elderly

Beneficiaries

26 percent to 50 percent 

51 percent to 100 percent

Memorandum:

Beneficiaries with

Chronic Conditions

Percentage of Beneficiaries

Top 5 percent

 6 percent to 10 percent

11 percent to 25 percent
6 HIGH-COST MEDICARE BENEFICIARIES

Table 3.

Characteristics of Medicare Beneficiaries in High- and Low-Cost Spending 

Groups, 2001

(Percent)

Source: Congressional Budget Office based on data from the Centers for Medicare and Medicaid Services.

Note: Beneficiaries under age 65 include those who are entitled to Medicare benefits on the basis of a disability or end-stage renal disease.

the high-cost beneficiaries changing each year? If there is 

high turnover among high-cost beneficiaries, intervention 

strategies designed to change their use of Medicare services could be difficult to implement successfully because 

the time available to affect their spending may be limited. 

Expenditure Patterns Over Time 

The transition of Medicare beneficiaries between highand low-cost status in two successive years is illustrated in 

Table 5. For Medicare beneficiaries who were high cost in 

1997, nearly half (44 percent) were also in the high-cost 

category the next year, compared with one in six (17 percent) of low-cost beneficiaries. If the transition between 

cost categories was purely random, 25 percent of the survivors in each group would have been expected to be high 

cost in the second year. 

A look at the longer expenditure history of high-cost beneficiaries in 1997 provides additional insight into the persistence of their high-cost status (see Figure 2). As discussed above (and indicated by the darkest bars in 

Figure 2), 44 percent of high-cost beneficiaries in 1997 

had large Medicare spending again in 1998. That fraction 

dropped off in subsequent years, nearly reaching 25 percent four years later, in 2001. A similar spending pattern 

preceded high-cost beneficiaries’ 1997 experience: nearly 

half of those who would be high cost in 1997 were high 

cost in 1996, and about one-quarter were high cost four 

years prior to 1997.

That pattern of spending makes intuitive sense. Although 

the presence of serious chronic illness is common among 

high spenders, many types of adverse health shocks that 

result in very high spending (such as a heart attack and 

the subsequent bypass operation) are episodic and largely 

random. It is less likely that a person would have a series 

Average age (Years) 74.4 71.1

Under age 65 13 15

Age 85 and over 19 10

Female 57 57

Black 10 9

Mortality 14 2

Asthma 8 4

Chronic obstructive pulmonary disease 29 10

Chronic renal failure 9 1

Congestive heart failure 30 5

Coronary artery disease 42 15

Diabetes 30 16

Senility 14 4

78 38

48 12

Demographic Characteristics

Presence of Chronic Conditions

Beneficiaries with

(Bottom 75 Percent)

Low Cost 

One or More Chronic Conditions

Beneficiaries with

More than One Chronic Condition

High Cost

(Top 25 Percent)
HIGH-COST MEDICARE BENEFICIARIES 7

Table 4.

Use of Medicare Services by High- and Low-Cost Spending Groups, 2001

Source: Congressional Budget Office based on data from the Centers for Medicare and Medicaid Services.

Note: As an example of how to read the information in this table, among the 74.8 percent of high-cost beneficiaries who had a short-term 

hospital admission, the mean number of admissions was 1.7.

of acute health shocks several years in a row than have an 

episode or two in a given year and then recover. Therefore, high expenditures in one year are likely to decrease 

over time as expenditures regress to the mean in subsequent years. 

An examination of the spending patterns of Medicare 

beneficiaries reveals a second pattern: the quantitative importance of the subsequent death of high-cost beneficiaries. About 14 percent of beneficiaries with high Medicare expenses in a given year die during that year (see 

Figure 2). Within four years, that fraction accumulates to 

40 percent. 

In general, impending mortality greatly increases the 

probability of an individual’s incurring high costs regardless of his or her prior spending. Studies show that about 

one-quarter of total Medicare payments are for the typically expensive and intensive treatment received in a patient’s last year of life, which often postpones death for 

only a short time.8

 Indeed, the high mortality rate among 

high-cost beneficiaries reported in Figure 2 confirms that 

a sizable fraction of spending by high-cost beneficiaries is 

for people near death. But not all deaths result in high 

spending, nor do all high-cost beneficiaries die soon 

thereafter.9 Different trajectories of functional decline at 

the end of life imply different spending patterns prior to 

death. Whereas people dying from organ failure experience gradually diminishing functional status with periodic exacerbations of their illness, thus incurring very 

high spending before death, other people who die suddenly often incur little health care spending in their last 

year of life.10

Although patients who die incur no further medical costs, 

they also offer little potential for cost savings if they had 

been targeted for an intervention strategy. Taking subsequent mortality into account, however, strengthens the 

empirical correlation of high spending over time. For 

high-cost beneficiaries in 1997 who did not die over the 

next four years, nearly one-half—instead of one-quarter—were high cost at the end of 2001. In Figure 2, the 

numbers of living high-cost and low-cost beneficiaries 

were roughly equal in each year from 1998 through 

2001. Had there been no persistence in high medical expenses, only one-quarter of those beneficiaries would 

have been expected to be high cost during those years.

Percentage with 

Type of Service Service Type

Short-Term Hospital Admission 74.8 1.7 2.4 1.0

Other Hospital Admission 12.1 1.4 0.3 1.1

Skilled Nursing Facility Admission 16.5 1.4 0.1 1.1

Emergency Department Visit 62.6 2.2 14.0 1.4

Physician's Office Visit 86.0 11.3 73.6 6.0

High Cost (Top 25 Percent) Low Cost (Bottom 75 Percent)

Average Use

 Conditional 

 Service Type on Service

Average Use

 Conditional 

on Service

Percentage with

8. See Christopher Hogan and others, “Medicare Beneficiaries’ Costs 

of Care in the Last Year of Life,” Health Affairs, vol. 20, no. 4 

(July/August 2001), pp. 188-195; and James D. Lubitz and Gerald F. Riley, “Trends in Medicare Payments in the Last Year of 

Life,” New England Journal of Medicine, vol. 328, no. 15 (April 

15, 1993), pp. 1092-1096.

9. Moreover, because a patient’s time of death is unpredictable 

(except perhaps in cases such as advanced cancer), it is only in 

hindsight that researchers can estimate which costs were associated 

with care at the end of the patient’s life and which costs were associated with attempts to save the patient’s life.

10. See June R. Lunney, Joanne Lynn, and Christopher Hogan, “Profiles of Older Medicare Decedents,” Journal of the American Geriatrics Society, vol. 50, no. 6 (June 2002), pp. 1108-1112; and June 

R. Lunney and others, “Patterns of Functional Decline at the End 

of Life,” Journal of the American Medical Association, vol. 289, no. 

18 (May 14, 2003), pp. 2387-2392.
8 HIGH-COST MEDICARE BENEFICIARIES

Table 5.

Transition of Medicare Beneficiaries 

Between High- and Low-Cost Spending 

Groups, 1997 to 1998

(Percent)

Source: Congressional Budget Office based on data from the 

Centers for Medicare and Medicaid Services.

Note: The low-cost (or not high-cost) spending group in 1998 also 

includes beneficiaries who died or became disenrolled 

between 1997 and 1998.

The Concentration of Spending 

Over a Five-Year Period

Given the presence of high end-of-life expenditures and 

the regression to the mean following a high-cost year, one 

might expect Medicare expenditures over a longer period 

to be less concentrated than annual expenditures tend to 

be. For the entire 1997 cohort of Medicare beneficiaries, 

that is indeed the case (see Figure 3).11 Compared with 

the distribution of annual expenditures reported in 

Figure 1, that cohort’s five-year inflation-adjusted cumulative expenditures are somewhat less concentrated: the 

top 5 percent of beneficiaries, when ranked by five-year 

cumulative spending, accounted for 27 percent of total 

five-year Medicare spending from 1997 to 2001, compared with 43 percent for annual spending. Furthermore, 

the top 25 percent of beneficiaries accounted for 68 percent of total five-year spending, compared with 85 percent for annual spending. 

There is still a great deal of concentration of expenditures 

over five years, however, in part because a significant 

group of Medicare beneficiaries incurs high spending 

over an extended period. For beneficiaries whose cumulative 1997-2001 spending put them in the top 25 percent 

of all beneficiaries for that 60-month period, Figure 4 

displays the distribution of the number of months in 

which they were in the top 25 percent of beneficiaries in 

terms of spending in that month. The median number of 

months is 22. In other words, about half of cumulatively 

high-cost beneficiaries had high monthly costs during 22 

months or more of the 60-month period. That result 

could indicate that there may be time and opportunity to 

intervene to affect the use of Medicare services for a significant number of high-cost beneficiaries because they 

remain persistently high cost over an extended period.

Prospectively Identifying Future 

High-Cost Beneficiaries

Whether a strategy of focusing on high-cost beneficiaries 

could lead to significant reductions in overall Medicare 

spending would depend on two factors: the ability to 

identify individuals who will have high costs in the future, and the ability to mitigate those high costs. The existence of Medicare beneficiaries whose high spending 

persists over an extended period presents potential opportunities for intervention strategies. However, prospectively identifying such individuals could be difficult.

A basic problem is that although researchers can identify 

characteristics or conditions that are prevalent among 

high-cost beneficiaries, many low-cost beneficiaries may 

also share the same characteristics. For instance, a number 

of chronic conditions were found to be highly prevalent 

among high-cost beneficiaries, and considerably less prevalent among low-cost beneficiaries. However, because the 

number of low-cost beneficiaries in this illustration is 

three times as large as the number of high-cost beneficiaries, the numbers of high-cost and low-cost beneficiaries 

with those conditions are much more similar (see 

Table 6). So while diabetes is nearly twice as prevalent 

among high-cost beneficiaries as it is among low-cost 

ones, the actual number of low-cost beneficiaries with diabetes greatly exceeds the number of high-cost beneficiaries with that condition. Therefore, any intervention 

strategy that focuses simply on beneficiaries with diabetes 

will include a large number of people who will not incur 

significant medical expenditures (at least soon thereafter). 

Even the most successful strategies for identifying highcost individuals will probably include some who will not 

turn out to be expensive.

11. That cohort is defined as beneficiaries who enrolled in the Medicare program as of January 1997 and who either remained 

enrolled for five years (until December 2001) or died. Beneficiaries who subsequently enrolled in a Medicare managed care plan 

were excluded. There were about 1.4 million beneficiaries in 

CBO’s random sample of that cohort.

Cost Status in 1997 High Cost Low Cost

High Cost 44 56

Low Cost 17 83

Cost Status in 1998
HIGH-COST MEDICARE BENEFICIARIES 9

Figure 2.

Expenditure History of Medicare Beneficiaries Who Constituted the 

Top 25 Percent in 1997

(Percentage of beneficiaries)

Source: Congressional Budget Office based on data from the Centers for Medicare and Medicaid Services.

Illustrative Strategies for Identifying 

High-Cost Beneficiaries 

This section briefly considers three simple strategies for 

prospectively identifying high-cost beneficiaries on the 

basis of the characteristics of those beneficiaries discussed 

above. The first strategy is to select beneficiaries who were 

high cost in the previous year. The spending history 

shown in Figure 2 demonstrates that expenditures in the 

previous year are correlated with expenditures in the following year. The second strategy is to select beneficiaries 

who were hospitalized in the previous year based on the 

correlation between hospital admission and continued 

high spending. Both the first and second strategies would 

delay providing interventions until the disease had progressed and some substantial costs had already been incurred. The third strategy is to select beneficiaries who 

were diagnosed with two or more of seven chronic conditions: asthma, chronic obstructive pulmonary disease, 

chronic renal failure, congestive heart failure, coronary 

artery disease, diabetes, and senility. The resulting samples from the three strategies were compared with a sample of randomly selected Medicare beneficiaries. (The selection criteria for all of those strategies also required that 

the beneficiaries still be alive in January 1998.)12

How the strategies fared is displayed in Table 7 on page 

12. The share of the Medicare population included in 

each of the three selected groups ranged from 17 percent 

to 22 percent. To make the subsequent shares of spending 

by the groups more comparable, CBO adjusted the size 

of each group (by random assignment) to match the size 

of the smallest original group, or 17 percent of the overall 

Medicare FFS population. The group with a hospital admission had the largest average spending in 1997 (at 

$24,900), followed by the high-cost group (at $23,000) 

and the group with multiple chronic conditions (at 

$16,900). The reference group had $6,200 in average 

spending. The previously hospitalized group also had the 

1993 1994 1995 1996 1997 1998 1999 2000 2001

0

10

20

30

40

50

60

70

80

90

100

Bottom 75 Percent

Top 25 Percent 

Deceased as of January 1

Not Enrolled in the Fee-for-Service Sector

1997 Group in Preceding Years Base Year 1997 Group in Subsequent Years

12. The selection criteria further required that beneficiaries be 

enrolled in Medicare’s fee-for-service sector from 1997 to 2001, 

enabling analysts to track their spending over the entire five-year 

period.
10 HIGH-COST MEDICARE BENEFICIARIES

Figure 3.

Concentration of Total Cumulative

Medicare Expenditures Among

Beneficiaries, 1997 to 2001

(Percent)

Source: Congressional Budget Office based on data from the 

Centers for Medicare and Medicaid Services.

largest decline in spending from 1997 (the year of the 

hospitalization) to 1998, with its share of total Medicare 

spending falling by over 20 percentage points, or by more 

than one-third. In contrast, the share of spending by beneficiaries with chronic conditions, as with those in the 

reference group, barely fell at all.

In terms of subsequent spending, beneficiaries in each of 

the three selection groups used more than $46,000 in 

Medicare-covered services over the next four years, compared with $27,000 for beneficiaries in the reference 

group. The previously high-cost group accounted for 29 

percent of total Medicare spending over those four years, 

compared with 28 percent for beneficiaries with a prior 

hospitalization and 28 percent for those diagnosed with 

multiple chronic conditions. Those levels of aggregate 

spending occurred despite the fact that nearly half of the 

members in each group died before the end of the fouryear period.

Approaches to Managing Care for High-Cost

Beneficiaries 

The three selection strategies considered above are highly 

stylized and conceptual illustrations, and they do not address the challenges of designing and implementing 

workable programs to reduce costs. However, they 

broadly reflect some of the approaches currently being 

developed and tested by various organizations. For example, the selection strategy focusing on people diagnosed 

with chronic conditions is similar to the approach taken 

by some private disease management programs. 

Over the past decade, many private health plans and organizations have begun to offer disease management as a 

model of care for chronically ill patients, in an attempt 

both to improve the quality of care that enrollees receive 

and to slow the growth of their health care costs. Disease 

management programs vary widely in the specific techniques and tools they use, but they share some common 

components that are designed to address several perceived 

shortcomings of current medical practice. One component is to educate patients about their disease and how 

they can better manage it. The goal is to encourage patients to use medication properly, to understand and 

monitor their symptoms more effectively, and possibly to 

change their behavior. A second component is to actively 

monitor patients’ clinical symptoms and treatment plans, 

following evidence-based guidelines. A third component 

is to coordinate care among providers, including physicians, hospitals, laboratories, and pharmacies. A disease 

management program can provide feedback and support 

to physicians about patients’ status between office visits as 

well as up-to-date information on best practices as they 

apply to the specific patient. Although disease management is a term sometimes used as a catchall that addresses 

any and all limitations of fee-for-service care, it does not 

encompass general care coordination or general preventive services, such as flu shots.13

Various demonstration projects and initiatives by the 

Centers for Medicare and Medicaid Services also focus on 

strategies to improve care for beneficiaries who account 

for large amounts of Medicare spending. For example, 

the Chronic Care Improvement Program was created by 

the Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 to improve clinical care for 

Beneficiaries Expenditures

0

10

20

30

40

50

60

70

80

90

100

10.4

21.5

26.4

14.4

27.3

5

5

15

25

50

13. See Congressional Budget Office, An Analysis of the Literature on 

Disease Management Programs (October 2004).
HIGH-COST MEDICARE BENEFICIARIES 11

Figure 4.

Distribution of High-Cost Months Over the 1997-2001 Period

(Percentage of beneficiaries in the top 25 percent)

Source: Congressional Budget Office based on data from the Centers for Medicare and Medicaid Services.

beneficiaries with advanced congestive heart failure and/

or diabetes with significant comorbidities.14 The more 

recent Care Management for High-Cost Beneficiaries 

Demonstration is designed to develop and test strategies 

to improve the coordination of Medicare services for 

high-cost FFS beneficiaries.

Identifying individuals likely to be responsible for a large 

share of Medicare spending merely points out the possibility of focusing on high-cost beneficiaries as a way to reduce the program’s costs. Realizing those reductions in 

spending would ultimately rest on the ability to devise 

and implement effective intervention strategies, clinical 

or otherwise, to change beneficiaries’ use of medical services. 

Initial results from disease management programs and 

other efforts indicate the difficulty of reducing the use of 

care. In certain cases, the health conditions underlying 

high spending may not be amenable to effective interventions. Moreover, although interventions may improve 

health outcomes for high-cost beneficiaries, they may 

lead to increases in the use of medical care. It is important 

to note that improving the care received by high-cost 

beneficiaries in itself may be a worthwhile objective, even 

if it fails to reduce costs.

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Number of High-Cost Months Incurred by Cumulatively High-Cost Beneficiaries

Median

14. Nine sites have been selected for the pilot phase of the program.
12 HIGH-COST MEDICARE BENEFICIARIES

Table 6.

Percentage and Number of Medicare Beneficiaries in High- and

Low-Cost Spending Groups with Selected Chronic Conditions, 2001

Source: Congressional Budget Office based on data from the Centers for Medicare and Medicaid Services.

Table 7.

Illustrative Criteria for Targeting Future Medicare Beneficiaries in High-Cost 

Spending Groups

Source: Congressional Budget Office based on data from the Centers for Medicare and Medicaid Services.

Notes: A chronic condition is a diagnosis of asthma, chronic obstructive pulmonary disease, chronic renal failure, congestive heart failure, 

coronary artery disease, diabetes, or senility in at least one month. Multiple chronic conditions comprise two or more of those seven 

conditions. Spending is reported in 2005 dollars.

n.a.=not applicable.

Chronic Condition

Chronic Obstructive Pulmonary Disease 29 2.3 10 2.4

Chronic Renal Failure 9 0.7 1 0.2

Congestive Heart Failure 30 2.4 5 1.2

Coronary Artery Disease 42 3.4 15 3.6

Diabetes 30 2.4 16 3.9

 High Cost (Top 25 Percent) Low Cost (Bottom 75 Percent)

Percentage

Number

(Millions) Percentage

Number

(Millions)

25 20 19 n.a.

22 17 17 n.a.

17 17 17 17

22,990 24,890 16,940 6,180

54.1 58.6 39.9 16.7

38.1 36.9 36.1 15.9

29.6 28.3 29.6 14.9

25.1 24.0 25.3 13.9

21.7 20.8 21.9 12.9

1998 to 2001 (Dollars) 48,150 46,180 47,420 27,480

1998 to 2001 28.6 27.5 28.2 14.4

46 46 49 23

Percentage of Beneficiaries

Deceased as of December 2001

Share of total 2000 spending

Share of total 2001 spending

Average four-year cumulative spending,

Average share of total Medicare spending,

Average spending in 1997 (Dollars)

Share of total 1997 spending

Share of total 1998 spending

Share of total 1999 spending

Original Percentage of 1997 Cohort

Percentage Alive in January 1998

Adjusted Sample Size (Percent) 

Spending

Selection Criteria Based on the 1997 Cohort Random Sample

of Medicare

Beneficiaries

High Cost

in 1997

 Hospital Admission

in 1997

Multiple Chronic 

Conditions in 1997