Health care and prescription drug spending by seniors: spending for health care and for prescription drugs among seniors has increased over the 1980-97 period; 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

Monthly Labor Review, March, 2003 by Jessie X. Fan, Deanna L. Sharpe, Goog-Soog Hong

Out-of-pocket spending on prescription drugs increased 411 percent between 1970 and 1997, based on nominal aggregate figures from the Health Care Financing Administration. (1) 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. (3) 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. (5) 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 co-payments and as some insurance providers have cut-back or eliminated coverage for prescription drugs. (8)

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?

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-of-pocket 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. (9) 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. (10) 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. (11)

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. (13) 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. (14) They concluded that a higher share of total expenditures (13.6 percent) was devoted to out-of-pocket health expenditures for seniors with low incomes, compared with those having high incomes (7.7 percent).