Are Health Care Costs a Burden for Older Americans?

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Abstract

Although Medicare covers nearly all Americans age 65 and older, premiums, cost shares, and holes in the benefit package raise concerns about seniors' ability to pay for their health care. This brief, based on newly released data, shows that Medicare Part D, introduced in 2006 to cover prescription drugs, helped reduce out-of-pocket costs. The majority of older adults devoted less than one-eighth of their incomes to health care in 2006. However, nearly half of low-income seniors spent more than 20 percent of their 2006 incomes on health care. Medical costs for seniors should figure into the health-reform debate.

Introduction

Affordable health care is a growing concern for many older Americans. Although Medicare covers nearly all adults age 65 and older, premiums, deductibles, copays, and holes in the benefit package leave many older Americans with substantial out-of-pocket expenses. Fidelity Investments (2009) estimates that a 65-year-old couple retiring in 2009 can expect to pay about $240,000 out of pocket for health care over the rest of their lives. With health care costs expected to grow further (Sisko et al. 2009), assessments of retirement income adequacy must account for these expenses.

This brief examines the distribution, composition, and financial burden of out-of-pocket health care spending for Americans age 65 and older in 2006 and shows how outcomes have changed since 2001 and 2005. Spending patterns differ in 2006 because Congress introduced Medicare Part D that year, adding drug coverage to the program. The lack of drug coverage was the most glaring hole in the Medicare program, with drug costs accounting for much of seniors' out-of-pocket spending (Crystal et al. 2000). About one-quarter of Medicare beneficiaries age 65 and older who were not in nursing homes lacked supplemental drug coverage in 2003 (Federal Interagency Forum on Aging-Related Statistics 2006). Adding pharmaceutical coverage to Medicare could significantly lower out-of-pocket health care spending, but the benefit's design might limit protections. The standard Part D plan temporarily suspends coverage when beneficiaries' annual spending exceeds a certain level, and does not resume coverage until their out-of-pocket drug costs become quite high.

The study's data come from the Medical Expenditure Panel Survey (MEPS), a nationally representative household survey sponsored by the Agency for Healthcare Research and Quality, that collects detailed information on health care expenditures. The sample is restricted to noninstitutionalized adults.

The results show that the majority of older Americans devoted less than one-eighth of their incomes to health care in 2006, with premiums consuming the largest share of their health care dollars. However, nearly half of low-income seniors (with incomes below twice the federal poverty level) spent more than $1 out of every $5 of their incomes on health care, even after the introduction of Medicare Part D. Policymakers considering reforming the retirement income system must keep in mind the difficulties that many low-income older adults face covering their medical expenses. Medical costs for seniors should also figure into the health-reform debate.

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