46 Consumer Expenditure Survey Anthology, 2008

Out-of-Pocket Health 

Care Spending Patterns 

of Older Americans, 

as Measured by the 

Consumer Expenditure 

Survey

Meaghan Duetsch The United States has experienced many changes over the 

past two decades in the way 

health care is managed, such as the 

shift from primarily fee-for-service 

type health insurance coverage to 

coverage through health maintenance 

organizations (HMOs) and preferred 

provider organizations (PPOs). Health 

care expenditures, as a proportion of 

all expenditures, have increased over 

the last 20 years. This article examines the health care expenditures of 

older families in the age ranges just 

before and just after the Medicare 

eligibility age of 65 and analyzes how 

health care expenditures for these two 

groups have changed. The analysis 

includes an examination of health care 

expenditure changes over the past two 

decades between consumer units with 

reference person in the 55-64 year-old 

range, and so not eligible for Medicare, 

and consumer units with reference 

person in the 65-74 year-old range, 

whose reference person is eligible for 

Medicare. 

In the Consumer Expenditure Survey (CE), health care expenditures 

include health insurance, medical 

services, drugs, and medical supplies. 

Only out-of-pocket, non-reimbursed 

expenditures on these items are included; for example, the portion of 

a health insurance premium that the 

consumer unit pays, as opposed to the 

portion paid by an employer; any copayments paid by the consumer unit; 

and any insurance deductibles. Thus, 

the CE captures data on how much 

consumer units pay for their health care 

expenditures, not necessarily the total 

cost of the health care provided to that 

consumer unit. The CE also captures 

data on the health insurance status of 

the consumer unit—although this article 

does not include health insurance status 

of the consumer unit in its analysis—as 

well as the type of health insurance, 

such as PPO or HMO.

Data and methods

Data from the Consumer Expenditure 

Survey for 1985, 1995, and 2005, are 

used in this analysis. Note that while 

the age of the reference person classifies the consumer unit into an age 

group, other members of the consumer 

unit could be different ages. Therefore, 

someone in a consumer unit in the 55-

64 year-old age group other than the 

reference person could be eligible for 

Medicare. In the 65-74 year-old age 

group, the reference person is eligible 

for Medicare, because the reference 

person is at least 65 years old. 

Some key demographic characteristics associated with expenditures 

do not change, or vary only slightly, 

across this 20-year period. In the 55-64 

year-old group, the average number of 

persons1

 in the consumer unit is 2.4 in 

1985, 2.2 in 1995, and 2.1 in 2005. In 

the 65-74 year-old group, the average 

number of persons in the consumer 

unit is approximately 2 in all 3 years. 

Meaghan Duetsch is an economist with the 

Branch of Production and Control, Division of 

Consumer Expenditure Surveys, U.S. Bureau 

of Labor Statistics.
Consumer Expenditure Survey Anthology, 2008 47

Another similarity in all 3 years is 

the average number of earners in the 

consumer unit: For the 55-64 year-old 

group, the average number of earners 

in the consumer unit is about 1.4, while 

in the 65-74 year-old group it is slightly 

more than 0.5. 

Expenditures

Over the 20-year period, there was 

a greater percent increase in expenditures on health care than in total 

expenditures. As a share of average 

total annual expenditures, health care 

expenditures rose for both age groups 

over the two decades. Total average 

annual expenditures, in nominal terms, 

increased for both groups from 1985 

to 1995 to 2005. The nominal percent 

change in average annual expenditures 

was different from 1985 to 1995 for the 

two groups, with a 32-percent increase 

in expenditures for the 55-64 year-old 

group and a 41-percent increase in 

expenditures for the 65-74 year-old 

group. The nominal percent change 

in expenditures from 1995 to 2005 

was similar for both groups at about 52 

percent. In real terms, using constant 

dollars with 2005 as the base year, the 

percent change in average annual expenditures was also different between 

the two groups from 1985 to 1995 – a 

7-percent decrease for the 55-64 yearold group and 0.5-percent decrease for 

the 65-74 year-old group; it was similar 

from 1995 to 2005 with an increase 

of approximately 19 percent for both 

groups. (See table 1.) 

In the 55-64 year-old group, health 

care expenditures were 5.5 percent 

of total average annual expenditures 

in 1985. (See table 1 for values.) In 

1995, the proportion rose slightly to 

5.9 percent, but by 2005 the share allocated to health care had increased by 

another percentage point to 6.9 percent. 

In contrast, the larger increase in share 

allocation for those 65-74 years old 

occurred from 1985 to 1995. In 1985, 

the share allocated to health care was 

9.2 percent, and by 1995 that share had 

increased to 10.4 percent. From 1995 

to 2005, the share increased to 10.8 

percent of total annual expenditures. 

When comparing the two age groups, 

the share of expenditures allocated to 

health care by the 65-74 year-old group 

is slightly more than 1.5 times the share 

allocated by the 55-64 year-old group 

in all 3 years. 

The rate of increase in health care 

expenditures differed between the two 

groups. The 55-64 year-old group 

showed a different rate of increase 

from 1985 to 1995 than from 1995 

to 2005. Expenditures on health care 

by the 55-64 year-old group rose 41 

percent, in nominal terms, from $1,355 

in 1985 to $1,911 in 1995; they rose 

another 78 percent to $3,410 in 2005. 

In real terms, expenditures on health 

care by the 55-64 year-old group declined by 27 percent from 1985 to 1995 

and rose by 22 percent from 1995 to 

2005. In contrast, the rate of increase 

in health care expenditures, in nominal 

terms, by the 65-74 year-old group was 

the same from 1985 to 1995 and from 

1995 to 2005. For this group, health 

care expenditures rose 59 percent, 

from $1,649 in 1985 to $2,618 in 1995, 

followed by a 60-percent increase to 

$4,176 in 2005. In real terms, health 

care expenditures by the 65-74 yearold group declined by 18 percent from 

1985 to 1995 and rose by 9 percent 

from 1995 to 2005. 

The Consumer Price Index2

 (CPIU) for medical care shows that the 

price of medical care rose from 1985 

to 2005. The CPI for medical care 

rose 94 percent from 1985 to 1995, 

and then rose 47 percent from 1995 to 

2005. The medical care price index 

rose faster than the All Items price 

index measured by the CPI. There was 

a 42-percent increase in the All Items 

CPI-U from 1985 to 1995, and another 

28 percent increase to 2005. 

There is a distinction between the 

level of out-of-pocket expenditures, 

as measured by the CE, and the rate of 

price inflation as measured by the CPI 

for medical care. The CE measures a 

consumer unit’s expenditures, (price 

times quantity) while the CPI measures 

quality-adjusted (where possible) price 

change for a fixed quantity of goods 

and services. Therefore, the CE expenditure value alone cannot be used 

to determine whether price or quantity 

consumed, or both, are rising or falling. Thus, it is useful to examine the 

CPI to determine whether prices for a 

particular good or service were rising 

or falling over the period examined. 

Health insurance. Expenditures on 

health insurance by the 55-64 year-old 

group, in constant dollars, with 2005 

as the base year, increased in all three 

periods, rising from $1,284 in 1985 to 

$1,314 in 1995, and to $1,585 in 2005. 

Among the 65-74 year-old group, 

health insurance expenditures also rose 

in real terms in all three periods, from 

$1,917 in 1985 to $2,239 in 1995, and 

to $2,352 in 2005. Medicare payments 

are a component of the health insurance 

category, along with the more traditional types of insurance. Expenditures 

on Medicare payments by both age 

groups rose in both nominal and real 

terms over the three periods. 

While the 65-74 year-old group 

spent more of their health care dollar 

on health insurance than did the 55-

64 year-old group in all 3 years, both 

groups showed the largest increase in 

the shares allocated to health insurance 

from 1985 to 1995, as compared to 

1995 to 2005. In 1985, the 55-64 yearold group allocated about 33 percent of 

their health care spending to health insurance; by 1995, that share increased 

to 47 percent. (See table 1 for dollar 

amounts.) In 2005, the share allocated 

to health insurance was relatively unchanged from 1995 at 46 percent of all 

health care spending. The older group, 

those 65-74 years old, spent 41 percent 

in 1985, compared to 58 percent in 

1995 and 56 percent in 2005.

Charts 1 and 2 show the four 

components of health care and the 

allocation of health care expenditures 

among those components in 1985, 

1995, and 2005. Chart 1 shows these 

data for the 55-64 year-old group; 

chart 2 shows these data for the 65-74 

year-old group.

The magnitude of the share increase 

for health insurance was about the same 

1 This analysis does not adjust for changes 

in consumer unit size over time. 2 All urban consumers, U.S. all-city average; 

http://www.bls.gov/cpi/home.htm 
48 Consumer Expenditure Survey Anthology, 2008

Table 1. Selected average annual expenditures and characteristics of consumer units, by selected age of reference person, 

Consumer Expenditure Survey, selected years, nominal dollars

1985 1995 2005 1985 1995 2005

Number of CUs (in thousands)......................................... 13,056 12,624 18,104 11,302 11,933 11,505

Income before taxes......................................................... $27,055 $38,326 $64,156 $18,191 $25,553 $45,202 

Average age of reference person..................................... 59.5 59.4 59.3 69.3 69.3 69.1

Average number of persons in CU ................................... 2.4 2.2 2.1 2.0 1.9 1.9

Average number of earners.............................................. 1.4 1.4 1.3 .6 .6 .7

All item CPI, all urban consumers (1982-84=100)............ 107.6 152.4 195.3 107.6 152.4 195.3

Medical care CPI, all urban consumers 

 (1982-84=100) ............................................................... 113.5 220.5 323.2 113.5 220.5 323.2

Prescription drugs CPI, all urban 

 consumers (1982-84=100) ............................................. 120.1 235 349 120.1 235 349

 

Average annual expenditures........................................... $24,765.52 $32,626.42 $49,592.08 $17,937.87 $25,277.23 $38,573.50

 Percent change in nominal terms................................... 31.74 52.00 40.92 52.60

 Expenditures in real dollars (2005 as base year) 1 ....... $44,950.80 $41,810.63 $49,592.08 $32,558.23 $32,392.67 $38,573.50

 Percent change in real terms.......................................... -6.99 18.61 -.51 19.08

 

 Health care ............................................................... $1,355.27 $1,911.27 $3,410.39 $1,648.78 $2,618.00 $4,175.77

 Percent change in nominal terms............................... 41.03 78.44 58.78 59.50

 Expenditures in real dollars (2005 as base year) 2 ... $3,859.24 $2,801.46 $3,410.39 $4,695.03 $3,837.36 $4,175.77

 Percent change in real terms...................................... -27.41 21.74 -18.27 8.82

 Share of average annual expenditures .................... 5.47 5.86 6.88 9.19 10.36 10.83

 Percent reporting5 ................................................... 83.09 84.31 84.00 95.42 97.47 94.56

 

 Health insurance....................................................... $451.02 $896.76 $1,584.75 $673.36 $1,527.32 $2,352.13

 Expenditures in real dollars (2005 as

 base year) 2 ........................................................ $1,284.31 $1,314.43 $1,584.75 $1,917.44 $2,238.68 $2,352.13

 Percent reporting.................................................... 56.77 61.34 65.03 89.70 95.56 88.71

 

 Medicare payments .............................................. $26.49 $87.84 $184.22 $208.93 $687.69 $1,085.71

 Expenditures in real dollars2 ............................ $75.43 $128.75 $184.22 $594.94 $1,007.99 $1,085.71

 Percent reporting................................................ 13.08 14.08 17.30 81.84 90.95 80.78

 

 Medical services....................................................... $627.59 $587.22 $979.06 $576.26 $473.29 $733.39

 Expenditures in real dollars2 ................................. $1,787.11 $860.72 $979.06 $1,640.94 $693.73 $733.39

 Percent reporting.................................................... 56.72 50.26 49.03 59.90 49.13 37.08

 

 Drugs........................................................................ $221.04 $343.83 $712.73 $308.79 $535.65 $956.26

 Expenditures in real dollars3 ................................. $642.32 $510.62 $712.73 $897.32 $795.50 $956.26

 Prescription drugs................................................. $168.39 $247.22 $560.73 $241.92 $428.07 $812.34

 Expenditures in real dollars3 ............................ $489.33 $367.15 $560.73 $703.00 $635.73 $812.34

 Percent reporting................................................ 50.81 51.66 52.74 62.83 60.81 62.11

 

 Medical supplies....................................................... 4 $83.47 $133.86 4 $81.74 $133.98

 Expenditures in real dollars2 ................................ $122.35 $133.86 $119.81 $133.98

 Percent reporting.................................................... 10.43 9.31 11.84 8.75

 

Share of health care:

Health insurance .......................................................... 33.28 46.92 46.47 40.84 58.34 56.33

Medicare payments ................................................... 1.95 4.60 5.40 12.67 26.27 26.00

Medical services ......................................................... 46.31 30.72 28.71 34.95 18.08 17.56

Drugs ........................................................................... 16.31 17.99 20.90 18.73 20.46 22.90

 Prescription drugs .................................................... 12.42 12.93 16.44 14.67 16.35 19.45

Medical supplies .......................................................... 4.10 4.37 3.93 5.48 3.12 3.21

 

55 - 64 years 65 - 74 years Item

1

 Average annual expenditure values are deflated by the All 

item CPI. 2

 Health care, health insurance, Medicare payments, medical 

services, and medical supplies expenditure values are deflated by 

the medical care CPI. 3

 Drugs and prescription drugs expenditure values are deflated 

by the prescription drugs CPI. 4

 Medical supplies in 1985 were not strictly comparable to 1995 

and 2005 due to collection differences. 5

 Percent reporting information is from Interview survey data, 

whereas integrated data are used in the rest of the table.
Consumer Expenditure Survey Anthology, 2008 49

Chart 2. Shares of health care, 65-74 year olds, 1985, 1995, 2005

1985

1995

2005

Chart 1. Shares of health care, 55-64 year olds, 1985, 1995, 2005

1985

1995

2005

Health insurance Medical services Drugs Medical supplies

Health insurance Medical services Drugs Medical supplies

Health care components

Health care components

Percent Percent
50 Consumer Expenditure Survey Anthology, 2008

for both groups from 1985 to 1995, just 

over 40 percent. This suggests that the 

increase in health insurance spending 

accounted for a greater portion of the 

total cost of health care. Similarly, both 

age groups showed a slight decrease in 

the share of expenditures allocated to 

health insurance from 1995 to 2005, 

also suggesting stability in that trend 

and nothing explicitly related to age 

group. Medicare premium payments 

by both groups, as a share of health 

care expenditures, also jumped quite a 

bit from 1985 to 1995, and then showed 

only a slight increase from 1995 to 

2005, mirroring the share allocations 

for health insurance overall. 

Medical care services. The share of 

health care expenditures allocated to 

medical services declined from 1985 to 

2005 for both age groups. The largest 

decline for both age groups occurred 

from 1985 to 1995 and was followed 

by a further slight decline from 1995 

to 2005. In fact, actual expenditures 

showed a drop for both groups between 

1985 and 1995. In the 55-64 year-old 

group, the share allocated to medical 

services declined from 46 percent in 

1985 to 31 percent in 1995. By 2005, 

the share had declined further to 29 

percent of health care expenditures. 

Among the 65-74 year-old group, the 

share of health care expenditures allocated to medical services followed 

a similar pattern, though the share 

allocated to medical services by this 

group was smaller than the share allocated by the younger group in all 3 

years. For the 65-74 year-old group, 

the share declined from 35 percent of 

health care expenditures allocated to 

medical services in 1985, to 18 percent 

in 1995. The share allocated to this 

category declined slightly from 1995 

to 2005 to 17.6 percent. Note that the 

decline in shares of health care expenditures allocated to medical services 

mirrors the increase in the share of 

health care expenditures allocated to 

health insurance. This perhaps suggests 

that since 1985 a larger portion of those 

expenditures previously spent directly 

on medical services were shifted to 

expenditures on health insurance. 

Perhaps medical services are now being covered through health insurance, 

rather than paid for directly by the 

consumer unit. 

Drugs. Expenditures on drugs in the 

CE include both prescription drugs and 

non-prescription drugs. The share of 

health care expenditures allocated to 

drug expenditures increased for both 

groups over the two decades, although 

the 55-64 year-old group experienced 

somewhat larger percentage increases 

in share allocation than did the older 

group. The share of health care expenditures allocated to drug expenditures 

by the 55-64 year-old group rose 10 

percent from 1985, when 16 percent of 

health care expenditures were allocated 

to drugs, to 1995, when 18 percent of 

health care expenditures were allocated 

to drugs. A larger share increase occurred from 1995 to 2005, when it rose 

16 percent with the result that 21 percent of health care expenditures were 

allocated to drugs. The 65-74 yearold group had a smaller magnitude 

of percentage share increases. From 

1985 to 1995, the share allocated to 

drug expenditures grew by 9 percent, 

to 20.5 percent in 1995 from just under 

19 percent in 1985; the share increased 

by another 12 percent from 1995 to 

2005, when 23 percent of health care 

expenditures were allocated to drugs. 

The CE and CPI drug categories 

are not completely comparable due to 

some definitional differences—the CPI 

includes some medical supplies in its 

non-prescription drug category that 

the CE does not. However, they can 

be compared at the subset level of prescription drugs. The share of health care 

expenditures allocated to prescription 

drugs by the 55-64 year-old group increased by 4 percent from 1985 to 1995, 

and then increased by 27 percent from 

1995 to 2005. In the 65-74 year-old 

group, the share allocated to prescription drugs increased by 11 percent from 

1985 to 1995, and then increased by 19 

percent from 1995 to 2005. 

Drug expenditures by the 55-64 

year-old group rose, in nominal terms, 

from $221 in 1985 to $344 in 1995, an 

increase of 56 percent. From 1995 to 

2005, they increased by 107 percent, 

to $713. In contrast, the percentage increases among the older group showed 

more similarity over the two periods: 

73 percent from 1985 to 1995 ($309 

to $536), and 79 percent from 1995 

to 2005 ($536 to $956). In constant 

dollars, with 2005 as the base year, expenditures on drugs by both groups declined from 1985 to 1995 and then rose 

from 1995 to 2005. For the younger 

group, they declined from $642 in 1985 

to $511 in 1995, a decrease of 21 percent, but then rose to $713 in 2005, an 

increase of 40 percent. Expenditures 

on prescription drugs by this group, 

in constant dollars, followed a similar 

trend: they declined from $489 in 1985 

to $367 in 1995, and then rose to $561 

in 2005. Expenditures on drugs by the 

65-74 year-old group, in constant dollars, declined from 1985 to 1995 ($897 

to $796), a decrease of 11 percent, and 

then rose to $956 in 2005, an increase 

of 20 percent. Expenditures on prescription drugs, in constant dollars, by 

this group, followed a similar pattern. 

Examining these same years for 

the CPI for prescription drugs, prices 

almost doubled from 1985 to 1995, 

rising 96 percent. In 2005, prescription drug prices had increased another 

49 percent over 1995. Again, as with 

health care expenditures, it is impossible to determine from CE data how 

much of the nominal expenditure 

increase resulted from the increase in 

prices and how much was caused by 

an increase in quantity of prescription 

drugs consumed. In fact, the quantity 

consumed could have decreased, with 

prices rising enough to more than 

offset the consumption decrease and, 

thus, show an increase in expenditure 

for that item. 

Expenditures on medical supplies 

by the 55-64 year-old group rose, in 

nominal dollars, over the two decades 

as it did for the 65-74 year-old group. 

However, as a share of health care, 

spending on medical supplies by both 

groups declined over the two decades. 

The share allocated to medical supplies 

by the 55-64 year-old group showed 

a slight decline, from 4.1 percent in 

1985 to 3.9 percent in 2005, while the 
Consumer Expenditure Survey Anthology, 2008 51

share allocated by the 65-74 year-old 

group showed a more marked decline 

in spending allocated to medical supplies—from 5.5 percent in 1985 to 3.2 

percent in 2005.

Conclusion

Examining shares of expenditures allows an analysis of how consumer units 

are allocating their various types of 

expenditures. For both age groups, the 

share of average annual expenditures 

allocated to health care expenditures 

rose over both decades. The increase 

in the share of health care expenditures 

allocated to health insurance from 1985 

to 2005 mirrors a decrease in health 

care expenditures allocated to medical services over the period for both 

groups. Consumption of health care increases with age. The 65-74 year-olds 

spent more overall on total health care 

in both decades. They also spent more 

on health insurance and drugs than did 

the 55-64 year-old group in each of the 

survey years, while spending less overall on medical services and about the 

same on medical supplies. Thus, the 

shares of the components of health care 

are different between the two groups. 

However, the percentage changes 

from 1985 to 1995 and from 1995 to 

2005 in the shares allocated among the 

components of health care trended in 

the same direction for both age groups, 

although the magnitudes of the percent 

changes were different. Examining CE 

data, Medicare eligibility at the age of 

65 has little effect on the allocation 

of health care expenditures, since the 

share allocations among the health care 

components moved in similar directions for the two age groups over the 

3 years examined. The new Medicare 

prescription drug benefit will impact 

the drug expenditure data after 2005, 

and that change will warrant further 

analysis.