Do Health Problems Reduce Consumption at Older Ages?

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Abstract

High out-of-pocket health care costs may have serious repercussions for older people and their families. This paper examines the impact of health problems at older ages on out-of-pocket health care spending and other types of expenditures. The results show that medical conditions increase health spending, particularly for households ages 51 to 64, but do not generally reduce nonhealth spending. Health conditions do, however, reduce nonhealth spending for low-income households ages 51 to 64, suggesting that holes in the health safety net before the Medicare eligibility age force some low-income people to lower their living standards to cover medical expenses.

Introduction

The possibility of serious illness poses significant financial risks for older adults. Although virtually all Americans ages 65 and older are covered by Medicare, cost-sharing requirements and the exclusion of certain services often lead to large out-of-pocket medical expenses, especially for those who lack private supplemental insurance health benefits. Older adults under age 65, who are not eligible for Medicare unless they are disabled, may face more serious financial risks because there is no guarantee that they will have health insurance. In fact, 12 percent of Americans ages 55 to 64 were uninsured in 2004 (Johnson 2007).

High out-of-pocket health care costs may have important repercussions for older people and their families. If their incomes are not high enough to cover these expenses, older adults with health problems may have to deplete their savings, turn to family and friends for financial help, or forgo necessary care. Or they may be forced to reduce their consumption of other goods and services to pay their medical bills.

Relatively little is known about how health problems affect economic well-being. Widespread anecdotal evidence suggests that some older Americans are forced to choose between buying medications and paying for rent or groceries. There are no careful empirical studies, however, that measure the pervasiveness of the problem. Several studies have documented the relatively large share of income that certain subsets of the older population devote to health care (Crystal et al. 2000; Goldman and Zissimopoulos 2003; Maxwell, Moon, and Segal 2001), but we do not yet know how much these costs reduce living standards.

This study examines the impact of health problems at older ages on out-of-pocket health care spending and other types of expenditures. The effects might be minimal if older people are generally well-insured or have substantial financial resources. For example, wealthy older adults hit with high out-of-pocket health care costs could dip into their savings to cover medical bills without having to reduce their standard of living. Otherwise, the onset of serious health problems could force many people to divert large shares of their spending to health care and away from other goods and services. The analysis uses a unique data source that includes information on both consumption patterns and specific medical conditions, and estimates models of different types of household expenditures. We examine spending patterns separately for households that are ages 65 and older and those that are ages 51 to 64. The impact of health problems on spending patterns may be especially strong for those in the younger age group, most of whom do not yet qualify for Medicare, because some of them are uninsured or underinsured.

The results suggest that high out-of-pocket health care spending does not generally force older Americans to reduce their living standards. However, low-income adults in their fifties and early sixties appear to curtail their nonhealth spending in response to high health care expenses when they develop multiple medical conditions. These findings suggest that Medicare and Medicaid generally protect older adults from high out-of-pocket health care costs, but that important gaps in the health care safety net exist for older people who have not yet reached the Medicare eligibility age of 65.

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