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Jessie X. Fan, Deanna L. Sharpe & Goog-Soog Hong, Health Care and Prescription Drug

Spending by Seniors, 126 Monthly Lab. Rev. 16 (2003).

ALWD 6th ed.

Jessie X. Fan, Deanna L. Sharpe & Goog-Soog Hong, Health Care and Prescription Drug

Spending by Seniors, 126 Monthly Lab. Rev. 16 (2003).

APA 6th ed.

Fan, J. X.; Sharpe, D. L.; Hong, G. (2003). Health care and prescription drug

spending by seniors. Monthly Labor Review, 126(3), 16-26.

Chicago 7th ed.

Jessie X. Fan; Deanna L. Sharpe; Goog-Soog Hong, "Health Care and Prescription Drug

Spending by Seniors," Monthly Labor Review 126, no. 3 (March 2003): 16-26

McGill Guide 9th ed.

Jessie X Fan, Deanna L Sharpe & Goog-Soog Hong, "Health Care and Prescription Drug

Spending by Seniors" (2003) 126:3 Monthly Lab Rev 16.

MLA 8th ed.

Fan, Jessie X., et al. "Health Care and Prescription Drug Spending by Seniors."

Monthly Labor Review, vol. 126, no. 3, March 2003, p. 16-26. HeinOnline.

OSCOLA 4th ed.

Jessie X Fan and Deanna L Sharpe and Goog-Soog Hong, 'Health Care and Prescription

Drug Spending by Seniors' (2003) 126 Monthly Lab Rev 16

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Health care and prescription

drug spending by seniors

Spending for health care and for prescription drugs among seniors

has increased over the 1980-97period; the seniors who had insurance

coverage in addition to Medicare, on average, spent more on health

care and prescription drugs than those who had Medicare coverage only

Jessie X. Fan,

Deanna L. Sharpe,

and

Goog-Soog Hong

Jessie X. Fan, Ph.D. Is

associate professor of

Family and

Consumer Studies at

the University of Utah,

E-Mail:

fan@fcs.utah.edu;

Deanna L. Sharpe,

Ph.D, Is associate

professor of Family and Consumer

Economics at the

University of MissouriColumbia. E-Malil:

SharpeD@mlssourl.edu.

Goog-Soog Hong, Ph.D. Is associate

dean In the School of

Graduate Studies

and Professor of

Consumer Sciences

at Utah State

University. E-Mail:

shong78@cc.usu.edu.

ut-of-pocket spending on prescription

drugs increased 411 percent between 1970

and 1997, based on nominal aggregate

figures from the Health Care Financing

Administration.' With the exception of health

insurance premium payments, prescription drug

expenses represent the single largest component

of out-of-pocket spending on health care (17

percent of the total health care dollar, on average).

Prescription drug expenses account for as much

as those spent on physician care, vision care

services, and medical supplies combined.2 Many

seniors, especially those with low income and

those with multiple health problems, often must

make a difficult choice between health care and

other consumption needs.' According to the

American Enterprise Institute, more than 10

percent of seniors spend up to $5,000 annually on

prescription drugs and nearly one-fourth of

Medicare beneficiaries are living on less than $600

per month.4

Although Medicare provides basic medical

coverage for virtually all of the Nation's seniors

who are aged 65 and older and for those under age

65 with certain severe disabilities, it does not

provide coverage for prescription drugs. Consequently, seniors often turn to other insurance

sources to defray costs of prescription drugs and

other medical expenses. About 1 in 10 seniors

have assets and income low enough to qualify for

Medicaid.' To cover expenses that Medicare does

not cover, nearly 3 in 4 seniors purchase

additional insurance through their former

employer or through private purchase. 6 Still,

about one-third of Medicare beneficiaries do not

have coverage for prescription drugs and, among

those who do, coverage is often inadequate

relative to expenses.7 Further, prescription drug

coverage is becoming increasingly expensive to

obtain, as both public and private insurers have

shifted costs to the ultimate consumer in the form

of higher premiums, deductibles, and copayments and as some insurance providers have

cut-back or eliminated coverage for prescription

drugs.'

Given the importance of prescription drugs to

the health care of seniors, the addition of

prescription drug benefits to Medicare has

become an important public health policy issue.

This article examines this issue in-depth by using

the Consumer Expenditure Surveys from 1980 to

1997 to answer the following research questions:

1. What is the trend in out-of-pocket

spending for health care in general and

for prescription drugs in particular for

the consumers aged 65 and older, both

in terms of real dollars and budget

shares?

2. What is the trend in purchasing health

insurance to supplement Medicare for

consumers aged 65 and older?

16 Monthly Labor Review March 2003
3. For individuals who are aged 65 and older, what is

the relationship between having health insurance

that supplements Medicare and out-of-pocket

spending on prescription drugs? Does this

relationship vary over time and by the type of health

insurance? What are the determinants of out-ofpocket spending on health care and prescription

drugs?

4. What is the relationship between having additional

insurance coverage and total out-of-pocket health

care expenditures, and does this relationship vary

over time and by the type of health insurance? What

are the other determinants of total out-of-pocket

health care expenditures?

The results of this study provide detailed information for

the current debate on prescription drug coverage for

Medicare recipients.

Relevant literature

The consensus of previous research on out-of-pocket

spending on health care in general and prescription drugs in

particular, is that seniors are heavy users of medical care.

They make up about 13 percent of the population, but they

account for more than 35 percent of all health care

expenditures, 34 percent of all prescriptions dispensed, and

42 percent of prescription drug expenditures.' Marilyn Doss

Ruffin found that the household budget share for medical

care and for housing was considerably greater for elderly

consumers, compared with medical care and housing for

consumers of all ages.'" Similarly, Rose M. Rubin and

Kenneth Koelln note that consumers aged 65 and older

devote a larger proportion of total health expenditures to

health insurance, prescription drugs, and medical supplies,

as compared with the proportion for consumers aged 64 and

younger."

Another study found that seniors aged 75 and older spend

more on all components of health care, compared with seniors

aged 65 to 74.12 Still another study, investigating differences

in consumer spending by working and nonworking elderly

households, concluded that, regardless of income level, the

nonworking elderly households spent more on health care

than working elderly households did. 3 Furthermore,

disaggregating categories of health spending by income level

and work status for 62 to 74 year olds, this study found

significant differences for overall health care expenditures

and for health insurance premiums. It also found significant

differences for prescription drug purchases among seniors

with incomes between $15,000 and $29,999. Rubin and Koelln

compared the health spending of high income seniors with

the low income elderly. 4 They concluded that a higher share

of total expenditures (13.6 percent) was devoted to out-ofpocket health expenditures for seniors with low incomes,

compared with those having high incomes (7.7 percent).

According to a study by Families USA, a nonprofit

advocate for consumer health care, the cost of the top 50

prescription drugs used by seniors increased at four times

the rate of inflation during 1998.1 When public and private

insurers shift the costs of health care goods and services to

the ultimate consumers, such cost increases for prescription

drugs can represent a major financial burden for seniors.

Burdens of health care spending

Every year, about 90 percent of Medicare beneficiaries get at

least one prescription filled. But, the financial burden

associated with prescription drug expenditures is not evenly

distributed among seniors. Financial resources, health

conditions, and access to health insurance that offers

prescription drug coverage vary. Seniors with higher than

average prescription drug costs are likely to be in relatively

poor health; have severe functional limitations; be aged 75 or

older or younger and disabled; and lack prescription drug

coverage, but have purchased supplemental insurance. 6

Seniors with modest incomes (135 percent to 200 percent of

the poverty threshold) have the highest average out-ofpocket drug expenses, whereas seniors who have incomes

less than 100 percent of poverty with no Medicaid benefits

spend the largest percent of their income on prescription

drugs. 7

Although a supplemental health insurance policy can help

defray out-of-pocket costs for prescription drugs, not all

seniors can afford this coverage. Further, among the

supplemental health policies, there is wide variation in

coverage, co-payments, deductibles, and stop-loss limits. A

few seniors are fortunate enough to obtain supplemental

health coverage that pays 100 percent of prescription drug

costs, but that scenario is rare." More than half of the seniors

who spent $500 or more annually on out-of-pocket expenses

for prescription drugs and more than 40 percent of seniors

spending $1,000 or more had some type of prescription drug

coverage. One-third of all Medicare beneficiaries have no

prescription drug coverage; in rural areas, nearly half of all

Medicare beneficiaries lack prescription drug benefits. 9 A

survey of Medicare beneficiaries was conducted by the

Health Care Financing Administration to investigate the

proportion of health care spending devoted to prescription

drugs across several States. The survey revealed wide

variation in the proportion of prescription drug spending

among Medicare beneficiaries living in different States-from

Monthly Labor Review March 2003 17
Health Care Spending by Seniors

a low of 12 percent in Missouri to a high of 67 percent in

Kentucky. 2 In addition, the survey found that almost onefourth of all Medicare beneficiaries have private sector

coverage through a former employer, but the number of firms

offering such coverage had fallen by 25 percent between

1994 and 1998, and may continue to fall, as firms seek ways to

rein in rising health-care costs.2'

In light of these facts, it is of interest to examine trends in

spending on health care and prescription drugs by seniors and

to explore the possible impact that having health insurance, other

than Medicare might have had on those trends.

Methods

Data andsample. Data for this study are from the Interview

portion of the 1980 to 1997 Consumer Expenditure (CE)

surveys.22 The Consumer Expenditure survey collects data

quarterly from approximately 5,000 consumer units in a

rotating panel design. A consumer unit is defined as all

members of a household related by blood, marriage, adoption

or other legal arrangements; or as someone living alone or

sharing quarters with others, but financially independent; or

as two or more persons who pool income and make joint

expenditures. The survey is designed to collect data regarding

both regular and relatively large household expenses.

Although the focus of the survey is on expenditures, limited

data on demographic, social, and economic characteristics of

members of the consumer unit are also obtained.

Unless a consumer unit decides not to continue with the

survey, it will remain in the sample for five consecutive quarters.

First quarter data are not included in the survey, but are used to

compare responses obtained in subsequent quarters. Each

quarter, 20 percent of the sample rotates out and a new 20 percent

sample is added.

For this study, a sample of 3,423 households was used,

with about 200 households for each year. The following five

sample selection criteria were used:

1. For each year from 1980 to 1997, consumer units

that contributed to four consecutive quarters of

information in a given year were selected

2. Complete income reporters were selected23

3. The reference person or spouse of the consumer

unit had to be age 65 or older at the time of the

interview in order to be included in the study

4. Consumer units with positive income and positive

total health care expenditures were included

5. Because estimates in expenditure studies are very

sensitive to outliers, consumer units with real value

of total health care expenditure greater than 3

standard deviations from the mean were excluded

from the study.

Measurements and Analytical Methods. The main variables of interest were annual total out-of-pocket health care

expenditures, health insurance coverage to supplement

Medicare, and annual total out-of-pocket prescription drug

expenditures. To answer the first research question, the

average annual out-of-pocket health care expenditures (in

1997 dollars) and prescription drug expenditures (in 1997

dollars) were plotted. In addition, the budget shares24 of

both total health care and prescription drug expenditures for

each year were plotted. To address the second research

question, a set of logistic regressions was estimated. The

dependent variable for the first logistic regression was

whether the seniors had any insurance coverage other than

Medicare. The dependent variables for the next four logistic

regressions were whether seniors had a particular type of

insurance plan to supplement Medicare, such as: a

commercial health insurance, a Blue Cross / Blue Shield health

insurance plan, a health maintenance organization (HMO)

plan, or a commercial Medicare supplement. To answer the

third research question, OLS regression analyses were run

using out-of-pocket prescription drug expenditures as the

dependent variable. Two models were estimated with dollar

expenditures for prescription drugs (1997 constant dollar)

and budget shares of prescription drug expenditures as

dependent variables. The year and the incidence of insurance

coverage were included as independent variables, along with

other control variables. To gain insights into the fourth

research question, which queries the relationship between

insurance coverage and overall health care expenditures, two

additional models were estimated with total out-of-pocket

health care expenditures and budget shares of total out-ofpocket health care expenditures as dependent variables.

The control variables used in this study include annual

after-tax income in 1997 constant dollars; age of the reference

person; race or ethnicity (non-Hispanic White as the reference group, non-Hispanic Black, Hispanics, and other

races); education (less than high school, high school as the

reference group, and college or more); employment status

(retired as the reference group, and still working); family size;

family type (husband-wife family as the reference group,

single male head, single female head, and other families);

Medicaid eligibility; housing tenure (renter as the reference

group, owner with mortgage, owner without mortgage); and

region25 (urban Northeast, urban Midwest, urban South as

the reference group, urban West, and rural).

Results

Trend of out-of-pocket spending. The average total out-ofpocket health care expenditures (in 1997 constant dollars)

generally increased over time for senior households, reaching

the highest point in 1989, and then slightly decreasing for a

18 Monthly Labor Review March 2003
few years and increasing again in 1997. (See chart 1.) The

budget share of health care also increased over the same time

period, but at a lower rate. (See chart 2.) In 1980, the seniors'

average total household health care expenditures was $1,434,

compared with $2,590 in 1997-an 8 1-percent increase in real

dollar amount, and a 35-percent increase in budget share.

The real expenditure on prescription drugs also increased

over time-$249 in 1980 and $492 in 1997. This was a 169-

percent increase in real dollar amount and a 34-percent

increase in budget share.

Additional insurance coverage. Table 1 shows descriptive

statistics of seniors with supplemental health insurance

coverage to Medicare. They are compared with seniors

having no additional insurance coverage. The descriptive

statistics show that, on average, the seniors without

additional health insurance coverage were more likely to be

Black non-Hispanic or Hispanic, not-working, single, having

less than a high school education, and eligible for Medicaid.

They also had lower incomes. The average annual total

expenditure on health care was much lower for the group

without additional insurance ($1,210), compared with the

group having additional insurance ($2,805). Both out-ofpocket expenditures on health insurance and on prescription

drugs were higher for the group with additional insurance.

The same pattern is true for budget share measures.

Table 2 presents the logistic regression results on

supplemental insurance coverage. The dependent variable

for the first regression was whether a senior household

carried any health insurance to supplement Medicare. The

results show that over the years, the probability of purchasing additional insurance had not changed, when other

factors were controlled. However, when different types of

insurance were analyzed, a clear trend emerged. Over the

years, senior consumers were more likely to purchase HMO

plans and commercial Medicare supplements, and less likely

to purchase other commercial health insurance or Blue Cross/

Blue Shield coverage.

Total after-tax income was positively related to the

likelihood of purchasing additional insurance, other things

being equal. Further investigation shows that higher income

was positively related to the probability of being covered by

a commercial Medicare supplement, but not related to being

covered by the other three types of insurance (HMOs, Blue

Cross/Blue Shield, and other commercial insurance). The older

the reference person, the more likely his or her household

Out-of-pocket expenditures on total health care and on prescription drugs in 1997 dollars,

1980-97

1997 dollars

13,000

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

2,500

2,000

1,500

1,000

500

0

Monthly Labor Review March 2003 19

1997 dollars

3,000

2,500

2,000

1,500

1,000

500 Prescription drug expenditures

I I I I II II

[OJn li[l!
Health Care Spending by Seniors

purchased some additional insurance coverage. In particular,

age was positively associated with the probability of purchasing Blue Cross/Blue Shield and commercial Medicare

supplement plans. It was, however, negatively related with

the probability of purchasing other types of commercial

health insurance, when other factors were held the same.

Ethnicity made a difference in senior consumers'

probability of purchasing additional insurance, indicated by

non-Hispanic Blacks and Hispanics being less likely to

purchase additional insurance coverage. Compared with nonHispanic White seniors, non-Hispanic Black seniors were

less likely to purchase all types of insurance coverage plans

with the exception of HMO plans, other things being equal.

Hispanic seniors were less likely to purchase either other

types of commercial health insurance plans or Blue Cross/

Blue Shield plans. Although there was no statistically

significant difference between seniors of other races and nonHispanic White seniors in terms of having any additional

insurance coverage, seniors of other races were more likely

to have HMO plans, and less likely to have Blue Cross/Blue

Shield plans.

Bucet shar

in percent

16

14

12

Holding other things equal, seniors with less than a high

school education were less likely to have health insurance

coverage other than Medicare. In particular, they were less

likely to have HMO plans and commercial Medicare

supplement plans. There was no statistically significant

difference between seniors with a high school education and

those with a college or post-college education in their

purchasing pattern for health insurance. If the reference

person was still working at the time of the interview, then his

or her household was more likely to have insurance coverage

other than Medicare.

Compared with married-couple households, households

headed by single males were less likely to purchase additional

insurance coverage. They were less likely to purchase a

commercial Medicare supplement and other types of

commercial health insurance. Both households headed by

single females and nontraditional families were more likely to

purchase Blue Cross/Blue Shield plans, compared with

married senior households. Family size was related positively

with the probability of purchasing HMO plans, other things

being equal.

Budget shares for out-of-pocket total health care and for prescdiption drug expenditures,

1980-97

,e Budget share

in percent

16

a] haft car e~endtres14

12

10

8

6

4

scription drug expencitures

*...- . . ... " ." ..... "'" 2

0 1 1 I I I I I I I I I I I I I 1 0

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

20 Monthly Labor Review March 2003

To
0 0- Descriptive statistics of the senior sample, by insurance status, 1980-97

Do not have other Insurance Have other Insurance

Item

Mean Standard deviation Mean Standard deviation

Total health care expenditure, 1997 dollars ............. 1,210.21 1,213.76 2,804.89 1,858.52

Total health insurance expenditure, 1997 dollars ... 401.80 258.54 1,550.01 1,067.00

Prescription drugs expenditure,1997 dollars .......... 281.80 499.63 472.65 623.93

Total health care budget share, in percent ............. 8.58 7.24 14.95 9.13

Health care insurance budget share, in percent ..... 3.49 2.79 8.63 5.94

Prescription drugs budget share, in percent .......... 1.93 3.48 2.62 3.59

Total expenditure, 1997 dollars ............................... 16,236.89 12,237.09 22,023.41 14,896.22

Total income, 1997 dollars ....................................... 19,050.29 18,334.80 24,759.07 20,954.54

Age ........................................................................... 74.07 6.68 74.16 6.61

W hite ......................................................................... 74 .44 .90 .30

Black ......................................................................... 17 .38 .05 .23

H ispanic .................................................................... 06 .24 .02 .15

O therrace ................................................................. 03 .16 .02 .16

Less than high school .............................................. 55 .50 .42 .49

High school graduate ................................................ 37 .48 .45 .50

College or m ore ......................................................... 08 .27 .13 .34

Still working ............................................................... 18 .38 .22 .42

Not working ............................................................... 82 .38 .78 .42

Fam ily size ............................................................... 1.72 1.09 1.86 1.00

Husband-wife family .................................................. 39 .49 .52 .50

Single male head ...................................................... 15 .36 .08 .27

Single female head ................................................... 35 .48 .30 .46

Non-fam ily ................................................................. 11 .31 .11 .31

Not eligible for Medicaid ........................................... 68 .47 .84 .37

Eligible for M edicaid .................................................. 32 .47 .16 .37

Renter ....................................................................... 31 .46 .18 .39

Homeowner with mortgage ........................................ 14 .34 .16 .37

Homeowner without mortgage ................................... 53 .50 .65 .48

Urban South .............................................................. 28 .45 .26 .44

Urban Northeast ........................................................ 22 .42 .21 .41

Urban M idwest ........................................................... 22 .41 .23 .42

Urban W est ............................................................... 19 .39 .19 .39

R ural .......................................................................... 11 .3 1 .13 .34

NOTE: Percentages may not sum to 100 percent due to rounding.

Seniors who were eligible for Medicaid were less likely to

have any Blue Cross/Blue Shield insurance coverage,

compared with those who were not eligible for Medicaid.

Homeowners also were more likely to have commercial

Medicare supplements and other types of commercial health

insurance plans than renters, ceteris paribus.

Analysis of regional differences reveal that, senior

households in the urban Northwest were more likely than

senior households in the urban South to have Blue Cross/

Blue Shield plans, but less likely to have commercial Medicare

supplements or other commercial health insurance. Senior

households in the urban West were less likely to have health

insurance coverage to supplement Medicare, when compared

with seniors living in the urban South. However, seniors living

in the urban West were more likely to have HMOs, and less

likely to have commercial health insurance or Blue Cross/

Blue Shield plans. Senior households living in rural areas

were no different from those living in the urban South.

Insurance coverage and prescription drug expenditures. For

seniors without any additional insurance coverage other than

Medicare, neither the real dollar expenditures on, nor budget

shares for out-of-pocket prescription drugs increased in a

statistically significant manner from 1980 to 1997. (See table

3.) The prescription drug expenditures increased at different

paces for seniors with different types of health insurance

plans. Seniors with commercial Medicare supplement

insurance plans had the largest average increase per year on

average, both in terms of dollar amount and in terms of budget

share. The regression results show that, holding other things

equal, seniors with commercial Medicare supplement

insurance plans had about a $12-per year increase in 1997

constant dollars, compared with a $9-per year increase for

those with Blue Cross/Blue Shield coverage and other types

Monthly Labor Review March 2003 21
Health Care Spending by Seniors

o Logistic regression results on insurance coverage for seniors, 1980-97

All insurance Commercial Insurance Blue Cross/Blue Shield

item

Coefficient Chi-squared Coefficient Chi-squared Coefficient Chi-squared

Intercept ........................................ -7.75 11.63... 5.32 4.51 -8.30 12.64 - Year ................................................ 00 0.01 -. 01 2.66' -. 06 43.25 ... Log (real income) ........................... 18 5.23 - .12 1.99 .07 .78

Log (age) ....................................... 1.57 10.39 ... -1.75 10.58 "*' 1.66 11.17...

Black ............................................. -1.09 64.46 ...- .56 9.78 .. . .83 22.23"*

Hispanic ....................................... -. 91 19.27 .. -. 44 2.67' -. 90 9.40 ... Otherrace ..................................... -. 20 0.60"* -. 11 .16 -. 76 4.53-.

Less than high school .................. -. 20 5.03* -. 04 .20 -. 13 1.95

College and above ......................... 13 0.92 .06 .17 -. 04 .07 Still work ......................................... 18 2.92' .09 .75 .13 1.58

Fam ily size ..................................... 06 1.26 .02 .21 .06 .95 Male single head ........................... -. 62 17.29".. -. 36 4.19. -.21 1.56

Female single head ....................... -. 01 0.01 -. 19 2.14 .24 3.73' Nonfamily ...................................... -. 01 0.01 .02 .02 .34 6.64...

Medicare eligible .......................... -. 39 9.09"'. -. 11 .57 -24 3.07'

Owner with mortgage ..................... 43 9.84... .27 3.09 * .17 1.40

Owner without mortgage ................ 44 20.54.-* .27 5.37-* .00 .00

Northeast ...................................... -. 12 1.04' -.41 10.66 "' .68 37.80 "* Midwest ......................................... -. 02 0.02 -. 10 .72 -. 10 .86 W est .............................................. -. 21 3.08 -. 32 5.96- -. 62 20.86 "* Rural ............................................... 19 2.04 .21 2.36 -. 18 1.65

Max-rescaled R-squared ................ 13 ... .05 ... .10 ...

Health Maintenance Commercial Medicare

Organization supplement

Item

Coefficient Chi-squared Coefficient Chi-squared

Intercept ........................................ -3.41 0.67 -7.04 8.61

Year ................................................. 07 24.89 "' .03 14.48 "' Log (real income) .......................... .22 2.54 .15 3.44-"

Log (age) ....................................... -. 64 .51 .95 3.47**

Black ............................................. -. 09 .10 -. 69 15.02 ... Hispanic ........................................ -. 10 .07 -. 29 1.30

Other race ...................................... 62 4.36" -. 16 .38

Less than high school .................. -. 34 4.37" -. 15 2.79'

College and above ........................ -. 09 .21 .19 2.31

Still work ......................................... 11 .43 .00 .00

Family size ..................................... 24 12.75 "'. .02 .14

Male single head ........................... -. 03 .01 -. 38 4.86"..

Female single head ....................... .14 .44 -. 7 .29

Nonfam ily ....................................... 26 1.53 .04 .08

Medicare eligible ........................... -. 24 .80 -. 18 1.50

Owner with mortgage ..................... -. 05 .04 .50 10.92-

Owner without mortgage ............... -. 13 .49 .48 17.04..*

Northeast ...................................... -. 07 .08 -. 85 42.68 "' M idwest .......................................... 20 .94 -. 11 .95

W est ............................................... 97 24.81 -. 03 .06

Rural ............................................... 14 .31 .20 2.53

Max-rescaled R-squared ............... .11 ... .09

Significant at the 90-percent level. "' Significant at the 99-percent level.

Significant at the 95-percent level.

of commercial health insurance plans. The trend is similar for

budget share of out-of-pocket prescription drug expenditure.

Seniors with commercial Medicare supplement plans lead the

way with a 0.05-percent per year increase in budget share,

followed by those with either other types of commercial health

insurance or Blue Cross/Blue Shield coverage with a 0.03-

percent increase, other things being equal. Interestingly, there

was no statistically significant difference in both prescription

drug expenditures and budget shares between senior

households without health insurance other than Medicare,

and those with HMO coverage, other things equal. This result

implies that for seniors with HMO plans, neither the real

22 Monthly Labor Review March 2003
expenditure on, nor the budget share for prescription drugs

increased in a statistically significant manner from 1980 to

1997.

Total after-tax income was found to be negatively

associated with the budget share of out-of-pocket expenditures on prescription drugs, while the association

between real dollar amount and income was not statistically

significant. Age was positively associated with both the

dollar amount on, and budget share for out-of-pocket

prescription drug expenditures. Both non-Hispanic Black

seniors and Hispanic seniors were found to spend less on

prescription drugs, compared with non-Hispanic White

seniors, other things being equal. Seniors with less than a

high school education spent more on prescription drugs in

terms of budget share, compared with seniors with a high

school education. Those with a college or post college

education spent the least on prescription drugs in terms of

budget share. Seniors who were still working at the time of

the interview had lower budget shares for prescription drugs,

compared with those who were not working.

Family type was associated with expenditures on out-ofpocket prescription drugs. Married-couple households spent

more on prescription drugs, both in terms of dollar amount

and budget share, compared with all other types of

families. Seniors who were homeowners with a mortgage

allocated less money to prescription drugs, compared with

renters, probably because of their high budget share for

housing. Compared with seniors living in the urban South,

seniors living in the urban Northeast and in the urban

West spent less money on prescription drugs, both in

dollar amount and in budget share forms.

Insurance coverage and total health care expenditure.

For seniors without additional health insurance coverage,

the inflation-adjusted total dollar amount spent on health

care decreased from 1980 to 1997, by about $19 per year,

whereas the total budget share for health care also

decreased by about 0.10 percent per year since 1980. (See

table 4.) However, for seniors with health insurance

coverage other than Medicare, both the dollar amount

and the budget share for health care increased over the

years, with those having a commercial Medicare

supplement leading the way at about a $75 ($93.05 -

$18.50) increase per year, followed by those with Blue

Cross/Blue Shield and other types of commercial

insurance at about a $68 increase per year. The increase in

Monthly Labor Review March 2003 23

Regression results on out-of-pocket prescription drugs expenditures among seniors, 1980-97

Dollar amount (1997 dollars) Budget share (in percent)

Item

Coefficient t-value Coefficient t-value

Intercept ..................................................... -878.24 -1.53 -7.10 -2.06"

Year ............................................................ 2.36 1.01 .01 .82

Having commercial insurance year ...... 8.86 4.01 .03 2.61

Having Blue Cross/Blue Shield year ...... 8.59 3.93"' .03 2.19

Having HMO * year ..................................... 11 .03 -. 02 -. 86

Having Medicare supplement * year ........ 11.93 5.91 "' .05 4.15

Log (real income) ....................................... -18.43 -. 93 -. 59 -4.91

Log (age) .................................................... 380.51 3.10 ** 3.73 5.05

Black .......................................................... -60.15 -1.64 * -. 44 -1.99 "

Hispanic ..................................................... -185.80 -3.29 . -1.16 -3 .41

Other race .................................................. -82.96 -1.27 -. 61 -1.54

Less than high school ............................... 24.53 1.10 .53 3.99

College and above ..................................... -41.25 -1.25 -. 59 -2.97

Still work ..................................................... -34.89 -1.35 -.32 -2.06"

Family size ................................................. -6.22 -. 46 -. 10 -1.23

Male single head ........................................ -307.37 -7.80 . -1.34 -5.64

Female single head .................................... -245.90 -8.03 -. 58 -3.17"'

Nonfamily ................................................... -116.43 -3.48 . -. 24 -1.18

Medicare eligible ........................................ -107.20 -3.20 -. 80 -3.95

Owner with mortgage ................................. -67.55 -1.91 ' -. 40 -1.87'

Owner without mortgage ............................ -35.47 -1.39 -. 11 -. 74

Northeast ................................................... -161.27 -5.58 "' -1.15 -6.59 "

Midwest ...................................................... -33.12 -1.19 -.22 -1.33

West ........................................................... -105.40 -3.41 "* -. 73 -3.94'

Rural ........................................................... -12.19 -. 36 .05 .23

Adjusted R-squared ...................................... .08 ... .08

Significant at the 90-percent level. "' Significant at the 99-percent level.

Significant at the 95-percent level.
Health Care Spending by Seniors

total expenditures on health care was the smallest for seniors

with HMO coverage, at about $43 per year. Budget share

followed a similar pattern, with seniors who had Blue Cross/

Blue Shield or commercial Medicare supplement coverage

leading the way at 0.29 percent or 0.28 percent increase per

year, followed by seniors with other types of commercial

insurance at 0.25 percent per year, and those with HMO

coverage at 0.11 percent per year.

For seniors, the higher the household after-tax income, the

higher the total health care expenditure, holding insurance

coverage and other household characteristics constant.

However, total after-tax income had a negative relationship with

the budget share for health care expenditure when other things

were controlled. Age was positively correlated with a senior

household's total out-of-pocket health care expenditure. NonHispanic Black and Hispanic seniors were found to spend less

on health care, both in dollar amount and in budget share terms,

compared with non-Hispanic White seniors. Seniors of other

races were found to spend less on total health care expenditures,

but not in terms of budget share. The results also show that total

health expenditures were more of a burden to seniors with lower

levels of education, but less of a burden to seniors with college

or more education, compared with seniors who had a high school

education.

Family size generally had a negative relationship with the

budget share for health care, other things being equal.

Compared with all other types of households, married-couple

households spent more money on health care and allocated a

higher budget share for such care, holding other things equal.

Total out-of-pocket health care costs were less of a burden to

seniors who were eligible for Medicaid, compared with those

who were not; homeowners with a mortgage, compared with

renters; and seniors who lived in the urban Northeast and

urban West, compared with those living in the urban South.

However, homeowners without a mortgage allocated a larger

share of their total expenditure to health care than renters,

other things being equal.

Discussion

As the baby-boom generation ages, health care costs become

an important area of concern. Typically, seniors spend more

on health care than do younger members of the population,

as they tend to have more health problems with greater

severity. Medicare, which covers virtually all seniors aged

65 and older, was designed to help seniors avoid catastrophic

costs associated with hospital stays and use of medical

services. The original designers of the plan, however, did not

24 Monthly Labor Review March 2003

Regression results on out-of-pocket total health care expenditures among seniors, 1980-97

Dollar amount (1997 dollars) Budget share (in percent)

Item

Coefficient t-value Coefficient t-value

Intercept ................................................ -8831.94 -5.78"*' -62.82 -7.88"**

Year ....................................................... -18.50 -2.98"' -. 10 -2.95"'*

Having commercial insurance* year... 87.70 14.91* .35 11.55"*

Having Blue Cross/Blue Shield * year. 85.83 14.78"- .39 12.80"'

Having HMO * year ............................... 61.28 7.30"' .21 4.73***

Having Medicare supplement' year.. 93.05 17.33- .38 13.41 ** ,

Log (real income) .................................. 151.75 2.88"' -2.25 -8.19"'

Log (age) ............................................... 2276.43 6.97"- 22.88 13.43"'*

Black ..................................................... -368.63 -3.77"' -2.19 -4.29 **

Hispanic ................................................ -565.70 -3.76"' -2.87 -3.66"' •

Otherrace ............................................. -385.67 -2.21" -1.07 -1.18

Less than high school .......................... -160.36 -2.71 "' 1.17 3.80"'

College and above ................................ 48.13 .55 -2.32 -5.0*"'

Still work ................................................ 67.83 .99 -. 53 -1.49

Family size ............................................ 10.95 .30 -. 50 -2.62"'

Male single head ................................... -1100.75 -10.50"' -3.77 -6.90"'

Female single head ............................... -1106.90 -13.58' " -2.15 -5.04"'*

Non-family ............................................. -726.74 -8.17 -2.22 -4.79"*

Medicare eligible ................................... -15.58 -. 17 -1.43 -3.08 * * 

Owner with mortgage ............................ 25.00 .27 -. 86 -1.76'

Owner without mortgage ....................... 76.91 1.13 1.04 2.94'*

Northeast .............................................. -246.35 -3.20 -2.16 -5.39'

Midwest ................................................. -53.64 -. 72 -. 09 -0.22

West ...................................................... -31.38 -. 38 -1.06 -2.48"

Rural ...................................................... -124.69 -1.40 .26 .57

Adjusted R-Squared ............................... 32 ... .24

Significant at the 90-percent level. ** Significant at the 99-percent level.

Significant at the 95-percent level.

Ie 4-
foresee the impact that an aging population, increased

longevity, and rising health care costs would have on the

ability of Medicare to pay claims. The lack of prescription

drug coverage as well as other coverage gaps has encouraged many seniors to purchase additional health

insurance to supplement their Medicare coverage.

Points for debate. The dramatic rise in prescription drug costs

in recent years has sparked a debate. Some argue that seniors

would be better off if prescription drugs were covered under

Medicare.26 Others cite the size of Medicare's current financial

liabilities and contend that such a plan would wastefully

duplicate coverage that nearly 3 in 4 seniors already have

through Medicaid and private insurance. This group of debaters

prefers to allow seniors to choose their health coverage in the

market and giving them tax-advantaged ways of saving to cover

their own health expenses such as using a Roth IRA as a medical

savings account.2 7 Still others would target the pharmaceutical

companies themselves, requiring price controls or shorter

periods of patent protection. 28

There are problems with each solution offered. Covering

prescription drugs under Medicare will certainly increase the

financial demands placed on the Nation's largest public

insurance program. Meeting these financial demands could

mean a reallocation of public dollars to the program at the

expense of meeting other needs. However, to leave it to the

seniors to cover their own health expenses requires the

means to do so be available, both in terms of market choices

and seniors' own financial resources. Currently, many

insurers are cutting back on coverage and passing additional

costs on to the ultimate health consumer, reducing market

choices. Seniors with relatively high income and asset

holdings may be able to finance their health care needs

through the purchase of insurance or out-of-pocket

payments. Seniors with low income and few assets can draw

on Medicaid. Seniors who have low to moderate income and

asset holdings, however, may not be able to finance health

care or prescription drug costs. While the idea of using a

Roth IRA to help cover health costs has appeal, the law

governing Roth IRAs would have to be changed. Currently,

only earned income can be deposited into an Roth IRA and

only 18 percent of those aged 65 and older have earned

income from employment. Further, unless deposits are held

for 5 years, they cannot earn interest tax-free. This rule would

discourage the type of deposits and withdrawals needed to

pay for health care goods and services." Placing price

controls on, or reducing patent protection for prescription

drugs could discourage investment in research and

development of new drugs. And, although the cost of

prescription drugs is high, to the extent such drugs help

seniors to avoid or minimize hospital stays, they might lead

to a cost savings overall.

Outcomes and indications. Results of this study indicate

that, in both real dollar amounts and budget shares, the outof-pocket costs that seniors pay for health care in general

and prescription drugs in particular have increased, except

for seniors with either no additional health insurance other

than Medicare or seniors with HMO insurance in addition to

Medicare. Other than those with HMOs, the seniors who had

insurance coverage in addition to Medicare, on average,

spent more on health care and prescription drugs than those

who had Medicare coverage only. This fact suggests

possible adverse selection, with those who perceive a need

for additional coverage purchasing and utilizing the

provisions of such coverage.

The increasing use of HMO plans and commercial Medicare

supplements and the decreasing use of other commercial

health insurance or Blue Cross/Blue Shield might be due to a

changing health care market during the years examined in

this study. Rising health care costs in the 1980s encouraged

growth of HMO plans. These plans incorporated the cost of

care in the premium dollar paid, emphasized preventative care,

and restricted access to more expensive specialists. Typically,

out-of-pocket costs consisted of the premium payment and

nominal co-pay for each physician visit. Other commercial

health insurance and Blue Cross/Blue Shield policies in

contrast, required the consumer to pay for health care out-ofpocket first and then would reimburse dollars spent

according to a benefit schedule. Thus, the HMO plans could

not only limit out-of-pocket costs per physician visit, but

also could make such costs more predictable, which is

important to seniors living on a relatively fixed income.

Overall, our results indicate that using a managed care

approach to meet the prescription drug needs of seniors can

help keep costs down. However, whether such an approach

is the most cost-effective and whether it is capable of

maximizing social welfare is open to debate.

Limitations. The CE survey provides data on household

level out-of-pocket spending on health care over a broad

span of time. In this respect, it is a good data set to use to

examine trends in health care spending. However, the CE

survey gives no insight into the health condition of survey

respondents. Because health condition is certainly an

important factor in health care spending, this limitation can

reduce the explanatory power of the multivariate models in

this study. Also, the CE survey gives no information on the

specific provisions of health insurance policies held by a

consumer unit. And, expenditure information is collected at

the household level instead of the individual level. Whereas

other sources of data, such as the Medical Expenditure Panel

Survey (MEPS), 3 ° report greater detail about respondents'

health conditions and specific health insurance coverage,

the data are available for only limited points in time.

Monthly Labor Review March 2003 25
Health Care Spending by Seniors

FUTURE RESEARCH CAN EXPLORE the possibility of combining

the CE with other data sets to get more information. For

example, the National Health Interview Survey (NHIS) or

the MEPS can be used to estimate health conditions and

then the estimated health status can be entered into the

CE analysis. In addition, when more recent CE data become

available, this study should be expanded in order to

provide more up to date information. 0

Notes

INational Health Expenditure Projections 1998-2008 (Health

Care Financing Administration (HCFA). January 2000) on the Internet

at: www.hcfa.gov/stats/NHE/-Proj/.

2 M. J. Gibson, N. Brangan, D. Gross, and C. Caplan, How much are

Medicare beneficiaries paying out-of-pocket for prescription drugs?

(Washington, oc, AARP Public Policy Institute, September 1999) on the

Internet at: http://research.aarp.org/health 9914_howmuchl.html.

I B. Jackson, " Paying for prescription drugs worries Medicare

recipients," Mar. 16, 1999, on the Internet at: www.enn.com/

ALLPOLITicsstories/1999/03/16/jackson.prescriptions/; Gibson and

others, How much are Medicare beneficiaries paying? 1999.

' "Should Medicare's basic benefits include prescription drugs?"

(American Enterprise Institute, Jan. 4, 1999), on the Internet at:

www.aei.org/ra/rahelms.htm.

J. Rogowski, L. A. Lillard, and R. Kington, "The financial burden

of prescription drug use among elderly person," The Gerontologist,

1978, vol. 37 no. 4, pp. 475-82.

6 J. C. Goodman and M. Matthews, Jr., "Simple solutions for elderly

prescription drugs," Brief Analysis no. 300 (Dallas, TX, National

Center for Policy Analysis, July 2, 1999).

7 Gibson and others, How much are Medicare beneficiaries paying?

1999.

6 National Health Expenditure Projections 1998-2008, January

2000.

1 Cost overdoses: Growth in drug spending for the elderly, 1992-

2010 (Families USA, Washington, DC, July 2000); and R. M. Rubin, K.

Koelln, and R. K. Speas, Jr., "Out-of-pocket health expenditures by

elderly households: Change over the 1980s," Journal of Gerontology:

Social Sciences, vol. 50B, no. 5, 1995, pp. S291-S300.

" R. M. Rubin and K. Koelln, "Out-of-Pocket health expenditure

differentials between elderly & nonelderly households," The Gerontologist,

1993, vol. 333 no. 5, pp. 595-602.

12 M. Abdel-Ghany, and D. L. Sharpe, "Consumption patterns of

the young-old and the old-old," Journal of Consumer Affairs, 1997,

vol, 31, pp. 90-112; Beth Harrison, "Spending patterns of older

persons revealed in expenditures survey," Monthly Labor Review,

October 1986, pp. 15-18; and F. N. Schwenk, "A comparison of

households headed by persons 55 to 65 years of age: Retired and

employed," Family Economics Review, 1990, vol. 3, pp. 19-25.

'1 Thomas Moehrle, "Expenditure patterns of the elderly: workers

and nonworkers," Monthly Labor Review, May 1990, pp. 34-41.

'4 Rubin and Koelln, "Out-of-Pocket health expenditure," The

Gerontologist, 1993.

" D. J. Hall, "Drug prices put squeeze on the elderly," Wisconsin

State Journal, November 1999, vol. 4, pp. Al, A3.

16 Gibson and others, "How much are Medicare beneficiaries paying

out-of-pocket?" 1999.

11 Gibson and others, "How much are Medicare beneficiaries paying

out-of-pocket?" 1999.

18 Jackson, "Paying for prescription drugs worries," 1999.

19 National Health Expenditure Projections, HCEA, January 2000.

20 Cost overdoses, Families USA, 2000.

23 Testimony of Michael Hash, Deputy Administrator, Health Care

Financing Administration on prescription drug coverage for Medicare

beneficiaries before the House Commerce Committee, Subcommittee

on Health and Environment (Sept. 28, 1999). On the Internet at:

http://cms.hhs.gov/media/press/testimony.asp?Counter=546.

22 Data for the Consumer Expenditure survey are collected by the

Bureau of the Census for the Bureau of Labor Statistics. For more

information about the Consumer Expenditure survey. See BLS

Handbook of Methods, Bulletin 2490 (Bureau of Labor Statistics,

April 1997) or on the Internet at: http://www.bls.gov/opub/hom/

homch 16_ite.htm.

23 The distinction between complete and incomplete income

reporters in the Consumer Expenditure Survey is based in general on

whether the respondent provides values for major sources of income,

such as wages and salaries, self-employment income, and social security

income. Even complete income reporters may not provide a full

accounting of all income from all sources. In the current CE surveys,

consumer units that report across-the-board zero income are

categorized as incomplete reporters.

24 Budget share for prescription drugs was defined as total

expenditure for prescription drugs divided by total household

expenditure. Budget share for total health care expenditure was defined

as total health care expenditure divided by total household expenditure. We also tried defining budget shares as a percentage of after-tax

income. However, extreme cases with low reported after-tax income and

high health care expenditure skewed all mean budget share estimates

substantially upward.

23 The reason the variable "region" is included is to control for

possible regional price differences of medical care.

26 American Enterprise Institute, "Should Medicare's basic benefits

include prescription drugs," 1999.

27 Goodman and Matthews, "Simple solutions for elderly prescription drugs," 1999.

2s Samuelson, R. J., "Beware of a regulatory overdose," The

Washington Post,Sept. 5, 2000.

29 Goodman and Matthews, "Simple solutions for elderly prescription drugs," 1999.

30 The Medical Expenditure Panel Survey is conducted by the National

Opinion Research Center for the Agency for Healthcare Research and

Quality Center and the National Center for Health Statistics.

26 Monthly Labor Review March 2003