AARP Public Policy Institute INSIGHT on the Issues Medicare Beneficiaries’ Out-of-Pocket Spending for Health Care Services According to the most recent data available, Medicare beneficiaries spent an average of $4,394 a year of their own money on health care services in 2005. Ten percent of beneficiaries—more than 4 million people—spent more than $8,000 a year. The oldest and poorest beneficiaries spent more than half their incomes on health care services. The Medicare program pays for certain About the Methods health care services for adults age 65 and older and eligible individuals with The MCBS is an annual panel survey disabilities. The program pays a portion of that asks more than 12,000 beneficiaries costs for the inpatient and outpatient about their health care use and spending, health care services beneficiaries receive. health status, and insurance, as well as socio-demographics, income, residence, While Medicare is a vital program that and other key items. It is representative helps older adults pay for needed health of the national population of Medicare care services, it typically requires beneficiaries, and includes people living significant cost sharing from in long-term care facilities for some or beneficiaries. To assess the out-of- all of the year. pocket (OOP) spending burden for We measure OOP health spending as all Medicare beneficiaries, researchers from personal expenditures for medical the University of Maryland School of services, Medicare premiums, and Pharmacy analyzed data on health premiums for supplemental insurance. spending from the most recent Medicare This includes spending for certain long- Current Beneficiary Survey (MCBS), the term care services as measured in the 2005 Cost and Use File. Unless MCBS. Long-term care spending otherwise noted, all data presented in includes room and board costs as well as this Insight on the Issues are based on spending for ancillary health care this analysis. An accompanying chart services for residents of nursing homes, pack can be accessed at as reported by facility representatives on www.aarp.org/research/medicare/outofpock behalf of survey participants. et/m8_oop.html. Medical spending is based on self- In 2005, beneficiaries paid a $912 reported data verified by invoices, deductible for each inpatient spell of receipts, explanation of benefits forms, illness.1 After 60 days in a hospital or and empty prescription containers, 20 days in a skilled nursing facility supplemented by Medicare claims data. (SNF), beneficiaries also paid daily co- Unless otherwise noted, our analyses pays, with benefits ending after 90 or exclude people enrolled in Medicare 100 days. Beneficiaries also paid an Advantage (MA) plans during any part annual deductible of $110 for outpatient of the year because spending may not be accurately attributed for these people. Medicare Beneficiaries’ Out-of-Pocket Spending for Health Care Services services, and paid 20 percent of all costs In 2005, Medicare’s Part D prescription after that. Furthermore, Medicare does drug coverage program was still a year not cover certain services such as away. About three-quarters of hearing aids, eyeglasses, dental care, and beneficiaries had at least some coverage most long-term care services. Also, as of for drugs,2 leaving approximately the time of this survey (2005), Medicare 11 million beneficiaries without did not offer coverage for most coverage. Beginning in June 2004, all prescription drugs. Therefore, beneficiaries had access to the Medicare beneficiary spending for drugs in this discount drug card program, which analysis reflects the higher costs many allowed beneficiaries to join programs beneficiaries faced before the that offered reduced rates on many introduction of Medicare’s Part D prescription drugs, and many prescription drug coverage in 2006. beneficiaries used such cards. The The research found that many Medicare Centers for Medicare & Medicaid beneficiaries faced high OOP spending Services estimates that some 6.5 million burdens, which varied based on a number beneficiaries had a discount drug card. of factors (table 1). Demographic Beneficiary spending on drugs in 2005, characteristics such as age, income, then, was certainly higher for many than gender, education, health status, and it has been since the introduction of health conditions were linked to OOP Part D, but lower than it was before spending burden. Most beneficiaries 2005, at least for those who used the (90 percent) had some sort of discount cards. Table 1 The Burden of Out-of-Pocket Spending Depends on Several Factors OOP Spending Total OOP OOP OOP as a Total OOP Total OOP Spending Spending Spending Percentage Spending Spending (90th on on of Income (Mean) (Median) Percentile) Services Premiums (range) Overall $4,394 $2,912 $8,264 $2,867 $1,527 28 - 37% Under 65 3,306 1,653 8,173 2,517 789 26 - 34 65–69 3,557 2,536 7,000 1,959 1,598 19 - 30 70–74 3,925 2,965 7,326 2,175 1,750 20 - 29 75–79 4,709 3,258 8,264 2,922 1,787 27 - 37 80–84 5,111 3,504 9,015 3,357 1,754 36 - 46 85+ 7,103 3,668 16,342 5,613 1,489 54 - 62 Men 4,105 2,713 7,702 2,580 1,525 23 - 35 Women 4,630 3,072 8,729 3,101 1,529 32 - 40 White 4,662 3,162 8,658 2,979 1,683 28 - 38 Black 3,299 1,753 6,874 2,518 780 30 - 37 Hispanic 3,664 1,609 6,707 2,668 996 29 - 37 Other 3,072 2,059 6,730 1,963 1,110 21 - 29 Up to 100% FPL 2,963 1,192 7,034 2,371 592 66 - 83 101–150% FPL 4,261 2,581 8,291 3,134 1,127 35 - 43 151–200% FPL 4,539 2,901 7,941 3,055 1,484 26 - 34 201–-300% FPL 4,784 3,340 8,513 2,949 1,835 18 - 28 Over 300% FPL 4,978 3,450 8,881 2,875 2,103 10 - 16 Source: University of Maryland analysis of MCBS 2005 Cost and Use File, fee-for-service beneficiaries only. 2 Medicare Beneficiaries’ Out-of-Pocket Spending for Health Care Services supplemental coverage to help defray a large portion of beneficiaries’ income. those added costs, but the remaining On average, OOP spending accounted for 10 percent had no supplemental coverage. between 28 and 37 percent of income.3 And having supplemental coverage did Median OOP spending as a percentage of not guarantee that beneficiaries would not income was only between 11 and face high OOP costs if they got sick. 16 percent, reflecting the fact that some beneficiaries faced very high OOP Overall, in 2005 beneficiaries in the fee- spending burdens, while most had lower for-service Medicare program spent an spending burdens. average of $4,394 OOP on health care services and premiums for supplemental Demographics: Where Does the health insurance (figure 1). About two- Burden of OOP Spending Fall? thirds of that ($2,867) went toward health care services, while one-third Beneficiaries spend significantly more ($1,527) went toward premiums. Many OOP for health care as they age. In beneficiaries had significantly lower 2005, beneficiaries age 85 or older spent OOP spending—one-quarter spent less about twice as much as beneficiaries than $1,500 per year on health care younger than age 69. Interestingly, services, and 10 percent spent less than beneficiaries under age 65 with $500. Unfortunately, a considerable disabilities had the lowest OOP number spent much more; more than spending, despite the fact that they are in 4 million beneficiaries, or 10 percent of the Medicare program because of serious the Medicare population, spent more health care needs and were significantly than $8,000 OOP on health care in 2005. less likely than other beneficiaries to have supplemental insurance in 2005. These spending totals often accounted for Figure 1 Average Total Out-of-Pocket Spending for Beneficiaries was $4,394 in 2005… $5,000 $4,394 $4,500 $4,000 $1,527 $3,500 $3,000 Out-of-pocket spending on premiums $2,500 Out-of-pocket spending on $2,000 health care services $1,500 $2,867 $1,000 $500 $0 Total out-of-pocket spending Source: University of Maryland analysis of Medicare Current Beneficiary Survey 2005 Cost and Use File. Note: Data reflect beneficiaries in the traditional Medicare program and spending prior to Medicare Part D implementation. 3 Medicare Beneficiaries’ Out-of-Pocket Spending for Health Care Services Women face higher OOP costs than men. excellent health. Women spent an average of $4,630 compared with $4,105 for men, despite the Although OOP spending rises with fact that women are more likely than men income, the burden of that spending is to have supplemental insurance greatest for the poorest beneficiaries. (93 percent of women have supplemental Individuals with income below the insurance, compared with 87 percent of federal poverty level (FPL) spent an men). The burden on women was even average of $2,963, or more than two greater when compared with income— thirds of their income, on health care women spent between 32 percent and 40 services. In contrast, individuals with percent of income, on average, for health income above 300 percent of the federal care, compared with an average between poverty level spent an average of $4,978 23 and 35 percent of income for men. OOP, or less than one-fifth of income. The difference was largely due to much Race and ethnicity also show different higher premium spending among high- patterns of OOP spending. Whites had income beneficiaries than among low- higher average OOP costs than other income beneficiaries. groups. This higher spending was due largely to higher premium spending Health Status: Showing the rather than higher spending on health Burden of Illness care services. Whites were more likely than other groups to have supplemental Beneficiaries’ need for health care has a insurance and to report being in Table 2 Out-of-Pocket Spending: The Sickest Pay the Most OOP Spending Total OOP OOP OOP as a Total OOP Total OOP Spending Spending Spending Percentage Spending Spending (90th on on of Income (Mean) (Median) Percentile) Services Premiums (range) Overall $4,394 $2,912 $8,264 $2,867 $1,527 28 - 37% Excellent/Very Good Health 3,697 2,849 6,938 1,859 1,838 19 - 27 Good Health 4,546 2,983 8,309 2,975 1,571 30 - 40 Fair Health 4,957 2,885 9,705 3,820 1,137 36 - 47 Poor Health 5,643 3,128 12,084 4,752 891 40 - 54 Alzheimer’s Disease 7,384 3,732 16,035 6,190 1,194 61 - 74 Cancer 6,781 4,126 11,437 5,058 1,722 44 - 65 Congestive Heart Failure 5,819 3,668 10,617 4,470 1,349 40 - 51 Coronary Artery Disease 5,385 3,471 9,136 3,645 1,740 30 - 41 No Supplemental Coverage 6,574 2,419 15,571 5,685 889 48 - 59 Any Supplemental Coverage 4,029 2,811 7,746 2,463 1,566 25 - 34 Type of Supplemental Coverage Medicaid 2,861 817 7,986 2,621 240 36 - 41 Medicare Advantage 3,630 2,168 6,346 2,304 1,326 22 - 31 Employer-related 4,222 2,894 7,535 2,409 1,812 17 - 26 Other Private (Medigap) 4,896 3,940 8,468 2,430 2,466 26 - 38 Other Public 3,307 2,774 5,918 1,953 1,354 28 - 37 Source: University of Maryland analysis of MCBS 2005 Cost and Use File, fee-for-service beneficiaries only. 4 Medicare Beneficiaries’ Out-of-Pocket Spending for Health Care Services Figure 2 But Poorer Beneficiaries Have Higher Out-of-Pocket Burdens Range of total out-of-pocket spending (services and premiums) as a % of income 66% to 83.2% 35% to 43.2% 26% to 34.3% 18% to 28.3% 10% to 16.1% Up to 100% 101 to 150% 151 to 200% 201 to 300% Over 300% FPL FPL FPL FPL FPL lower bound upper bound Source: University of Maryland analysis of Medicare Current Beneficiary Survey 2005 Cost and Use File. Note: Data reflects beneficiaries in the traditional Medicare program and spending prior to Medicare Part D implementation. direct impact on their OOP spending. Supplemental Insurance Helps Total OOP spending in 2005 rose as Because the Medicare program requires health status declined (table 2). significant cost sharing from beneficiaries, Beneficiaries in poor health were less most people have supplemental insurance likely to have supplemental insurance to help cover those costs. In 2005, nine out than those in excellent health (85 percent of ten beneficiaries had some sort of vs. 92 percent) despite having greater supplemental coverage, either through a need for services. former employer, through the Medicaid program, through the MA program, or by The burden of OOP spending was also purchasing a Medigap plan (figure 4). much higher for beneficiaries in poor Women were more likely than men to health than for those in excellent health. have supplemental insurance, and those in Beneficiaries in poor health spent an excellent or very good health were more average of 40 – 54 percent of their likely to have it than those in poor health. income on health care services, compared with less than 30 percent for those in It is not surprising that beneficiaries who excellent health. lacked supplemental insurance faced the highest OOP spending (figure 5).4 Some illnesses and health conditions led Beneficiaries without supplemental to much higher spending than others coverage spent an average of $6,574 OOP (figure 3). Average OOP spending for on health care, far more than the second people with Alzheimer’s disease was highest group, those with “Other Private” $7,384, and patients with cancer spent (usually Medigap) $6,781. For patients with Alzheimer’s, OOP spending accounted for 61 to 74 percent of income on average. 5 Medicare Beneficiaries’ Out-of-Pocket Spending for Health Care Services Figure 3 Average Total Out-of-Pocket Spending Varies by Chronic Condition Total out-of-pocket spending (services and premiums) Overall Average $4,394 Rheumatoid Arthritis $4,151 Emphysema $4,528 Hypertension $4,593 Diabetes $4,803 Osteoporosis $4,962 Stroke $5,189 Congestive Heart Failure $5,819 Depression $6,304 Cancer $6,781 Alzheimers $7,384 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 Figure 4 Most People Had Supplemental Coverage in 2005 6% 10% 20% 31% 15% 39% None Medicaid Medicare Advantage Em ployer Related Other Private (Medigap) Other Public Source: University of Maryland analysis of Medicare Current Beneficiary Survey 2005 Cost and Use File. Note: Data reflects beneficiaries in the traditional Medicare program and spending prior to Medicare Part D implementation. 6 Medicare Beneficiaries’ Out-of-Pocket Spending for Health Care Services Figure 5 Total Out-of-Pocket Spending was Significantly Lower for Those with Supplemental Insurance Compared to Those Without $6,574 $7,000 $4,986 $6,000 $889 $4,105 $4,238 $5,000 $3,400 $2,890 $4,000 $2,507 $1,612 $1,812 $3,000 $5,685 $224 $1,394 $2,000 $2,493 $2,666 $2,426 $2,480 $1,000 $2,006 $0 None Any Medicaid Employer Other Private Other Public (Medigap) Out-of-pocket spending on services Out-of-pocket spending on premiums Source: University of Maryland analysis of Medicare Current Beneficiary Survey 2005 Cost and Use File. Note: Data reflects beneficiaries in the traditional Medicare program and spending prior to Medicare Part D implementation. coverage. Ten percent of those without page 1, these costs include room and supplemental coverage spent more than board as well as health care services. $15,000 on care. Those without supplemental insurance spent more than Where Does the Money Go? twice as much OOP on direct health care services as any other group. Where does the money Medicare beneficiaries spend on health care go? Interestingly, the second highest average The largest categories of OOP spending OOP spending amount for services was in 2005 were for long-term care facility for low-income dual-eligible costs, prescription drugs (both of which beneficiaries covered by Medicaid. were noncovered services in 2005), and Dual-eligibles spent more than one-third medical providers. Together, these three of their income on health care, on categories accounted for almost three- average. While their spending on quarters of beneficiary spending. Note premiums was very low, their spending that these figures include only spending on services was higher than that of other on health care services. As noted earlier, groups, mainly because, even with beneficiaries spent about one-third of Medicaid coverage, dual-eligibles faced their health care dollars on premiums. higher long-term care facility costs. Medicaid-covered nursing facility However, overall spending numbers residents are required to surrender mask how much the patients who used virtually all their income toward the cost individual services spent for care. of services, retaining only a small Almost all beneficiaries saw a clinician “personal needs allowance,” generally in at least once in 2005, and two-thirds the range of $30 to $50 per month. received treatment in a hospital Moreover, as explained in the box on outpatient department. Only about 7 Medicare Beneficiaries’ Out-of-Pocket Spending for Health Care Services 20 percent were admitted to a hospital, services, OOP spending was highest for and far fewer used home health, skilled LTC facility services. Users of such nursing care, or hospice (table 3). facilities paid an average of $13,195 OOP for room and board and health Among services not covered by care-related services during 2005. It is Medicare, almost nine in ten likely that some portion of these beneficiaries used prescription drugs residents began their nursing facility stay (most prescription drugs were not paying completely OOP before covered by Medicare in 2005). About eventually qualifying for Medicaid. 40 percent saw a dentist, and one-quarter used vision or hearing services. OOP spending on prescription drugs Six percent spent at least part of 2005 in averaged $825, with 10 percent of a long-term care (LTC) facility. beneficiaries spending more than $1,900. Dental services were also expensive, with Among Medicare-covered services, OOP average OOP costs of $581 and the top spending for SNF services was the 10 percent spending more than $1,300. highest spending category, at $1,141. While Medicare covers up to 100 days in As expected, beneficiaries who do not a SNF, only the first 20 days are covered have supplemental insurance faced the in full. In 2005, beneficiaries incurred a greatest OOP spending burden. They daily co-payment of $114 for days 21 to spent more than three times more for 100 in a SNF. Average OOP spending for hospital care and almost twice as much patients who spent time in a hospital was for outpatient care as those with some $654, and 10 percent of patients spent form of supplemental coverage. Among more than $900 for such care. Average those with supplemental coverage, OOP spending for clinician services was individuals with Medicare Advantage $606, and 10 percent of patients spent spent considerably less on outpatient and more than $1,100 on these services. clinician services, but spent significantly more than any other group for SNF care. Spending for non-Medicare covered services was also high. Among users of Table 3 Beneficiary Out-of-Pocket Spending on Health Care Services5 Mean OOP Median OOP 90th Percentile Users of Spending by Spending by OOP Spending Service Service (%) Users Users by Users Medicare Covered Services Hospital Inpatient 20.8 $654 $0 $912 Hospital Outpatient 69.9 284 3 373 Medical Providers 94.6 606 141 1,183 Home Health 8.1 236 0 0 Skilled Nursing Facility 4.6 1,141 0 4,104 Hospice 1.9 0 0 0 Non-Medicare Covered Services Prescription Drugs 88.4 $825 $484 $1,963 Dental 40.3 581 189 1,367 Vision and Hearing 27.7 315 108 500 LTC Facility6 5.7 13,195 7,599 36,754 Source: University of Maryland analysis of MCBS 2005 Cost and Use File, fee-for-service beneficiaries only. 8 Medicare Beneficiaries’ Out-of-Pocket Spending for Health Care Services Prescription Drug Spending: from an average of $1,177 without Demonstrating the Need for Part D Part D to an average of $492 with Part D. The median estimated change in Despite the fact that many beneficiaries drug spending as a result of Part D was did not have access to drug coverage $208. Part of the drop in OOP spending through Medicare, almost nine in ten for prescription drugs would be offset by beneficiaries used prescription increased spending for Part D premiums. medications during the year. Spending on prescription drugs accounted for For many who lacked drug coverage in 26 percent of OOP spending in 2005. 2005, OOP spending would fall However, at the individual level, substantially after the start of Part D. prescription drug spending accounted for About two-thirds of beneficiaries, almost half of the average beneficiary’s however, had at least some coverage for OOP spending. drugs in 2005.8 These beneficiaries would experience a less dramatic change On average, beneficiaries spent $870 in OOP drug spending in 2006. OOP for prescription drugs. Median drug spending was $428, reflecting the Conclusions fact that some beneficiaries had very high drug spending. Not surprisingly, OOP health care spending presents a those in poor health spent the most significant financial burden for many ($983), while those in the best health Medicare beneficiaries. While most have spent the least ($585). Beneficiaries supplemental coverage, a large enrolled in MA had the lowest OOP proportion of many beneficiaries’ spending for drugs ($317), while those income still goes toward health care. The with Medigap coverage had the highest poor, and those in poor health, face the OOP spending ($1,007), reflecting highest burden, even with programs like typical benefit designs of these products. Medicaid, which is intended to help these populations. While good information is not yet available on how OOP spending on Another important finding is that a large prescription drugs changed after the part of the OOP spending burden comes introduction of Part D, we do know from services that Medicare does not something about enrollment patterns cover. The Part D benefit should help during the first year of the program. reduce prescription drug spending. About 64 percent of those who lacked Nevertheless, Medicare still does not coverage for drugs in 2005 enrolled in a cover dental, vision, hearing, and LTC Part D plan during 2006.7 The higher a facility costs. beneficiary’s OOP spending on drugs in While it may not be feasible to extend 2005, the more likely the beneficiary Medicare coverage to include these was to enroll in a prescription drug plan services, policymakers should take these during 2006. costs into account when calculating any As part of their analysis, researchers at potential program changes, including a the University of Maryland School of cap on OOP spending. Pharmacy estimated how OOP spending It is also notable that specific illnesses for prescription drugs was likely to can lead to very high spending. change after the start of Part D. They Beneficiaries who suffer from mental estimated that for beneficiaries with no illnesses, Alzheimer’s disease, cancer, or drug coverage in 2005, spending for various forms of heart disease face prescription drug coverage would fall 9 Medicare Beneficiaries’ Out-of-Pocket Spending for Health Care Services unusually high spending. Changes in benefit design should take these findings 1 into consideration and help to alleviate A spell of illness begins the day a beneficiary goes to a hospital or skilled nursing facility. The spending burdens associated with the spell ends when the beneficiary has not received most expensive chronic illnesses. any inpatient hospital or skilled nursing facility care for 60 days in a row. If the beneficiary goes Finally, this analysis demonstrates that into a hospital or a skilled nursing facility after low-income beneficiaries, including one spell of illness period ends, a new one begins those who are dually eligible for and the beneficiary must pay the deductible Medicare and Medicaid, still have a very again. 2 high OOP spending burden. D.G. Safran et al. “Prescription Drug Coverage and Seniors: Findings from a 2003 National One option for limiting such high levels Survey.” Health Affairs 24 (2005): W152– of cost exposure is a cap on OOP W166; J. Rodgers and J. Stell, “The Medicare Prescription Drug Benefit: Potential impact on spending in the Medicare program. The beneficiaries.” Washington, DC: AARP Public Congressional Budget Office and the Policy Institute, 2004. Medicare Payment Advisory 3 Calculating the share of income devoted to Commission have both explored the health care spending is open to interpretation. budget impact and other issues Twenty-eight percent of income represents a associated with an OOP cap of $5,250. lower bound, and measures the proportion of household income going toward healthcare. The A cap on OOP spending is important, upper bound – 37 percent – takes only the but setting it at $5,250 would help fewer individual beneficiary’s income into account. than 10 percent of beneficiaries, and 4 The analyses discussed in this section include would still expose many beneficiaries to beneficiaries enrolled in Medicare Advantage. a large spending burden relative to their 5 The figures shown in this table and discussed in typically modest incomes. Further, a cap this section include beneficiaries enrolled in would not impact the large share of OOP Medicare Advantage. spending on services that Medicare does 6 LTC facility spending includes basic room and not cover. board costs as well as ancillary health spending in nursing homes. Room and board are A better option for limiting costs would considered medical expenses when they are a be to combine a cap on beneficiary part of the basic charge for nursing homes and spending with an expansion of programs similar long-term care institutions, and are intended to help low-income counted as such in National Health Expenditures Accounts. beneficiaries. Raising income limits and 7 eliminating asset tests for participation University of Maryland School of Pharmacy in low-income programs such as the analysis of MCBS 2006 Access to Care file. 8 Medicare Savings Program, which helps Safran, op. cit. low-income beneficiaries pay premiums and cost sharing, would reduce the Insight on the Issues I30, June, 2009 burden that these costs impose. Written by Lynn Nonnemaker and Shelly Ann Sinclair AARP Public Policy Institute, 601 E Street, NW, Washington, DC 20049 www.aarp.org/ppi 202-434-3489, ppi@aarp.org © 2009, AARP. Reprinting with permission only. 10