Trends in Out-of-Pocket Healthcare Costs Among Older Community-Dwelling Medicare Beneficiaries

October 15, 2008
Gerald F. Riley, MSPH

Volume 14, Issue 10

Out-of-pocket healthcare costs rose significantly between 2000 and 2004; these data provide a baseline for evaluating Medicare reform proposals that affect beneficiary spending.


: To describe trends in out-of-pocket healthcare costs, including insurance premiums, for older Medicare beneficiaries living in the community.

Study Design

: Medicare Current Beneficiary Survey data were analyzed for community-dwelling beneficiaries 65 years or older between 1992 and 2004.


: The primary focus of the analysis was out-of-pocket healthcare costs and out-of-pocket costs as a percentage of income. Descriptive statistics are presented for 1992, 1996, 2000, and 2004.


: Inflation-adjusted median out-of-pocket costs were stable between 1992 and 2000 and then rose by 21.7% between 2000 and 2004. Median costs as a percentage of income declined between 1992 and 1996 but increased from 12.6% in 2000 to 15.5% in 2004. Between 1992 and 2004, out-of-pocket costs increased fastest at the upper percentiles of the distribution. High out-of-pocket costs tended to persist from year to year, exacerbating the financial burden for some beneficiaries.


: Following a period of declining burden between 1992 and 1996, out-of-pocket healthcare costs rose significantly between 2000 and 2004, increasing the financial burden for many older Medicare beneficiaries. These data provide a baseline for evaluating Medicare reform proposals that affect beneficiary spending.

(Am J Manag Care. 2008;14(10):692-696)

Following a period of relative stability between 1992 and 2000, the median out-of-pocket healthcare costs grew by 21.7% between 2000 and 2004 after adjustment for inflation.

  • The relative burden of out-of-pocket costs, measured as a percentage of income, declined between 1992 and 1996 and then rose between 2000 and 2004.
  • High costs tended to persist over multiple years, significantly exacerbating the long-term financial effect of chronic illness on many beneficiaries.

Medicare costs have risen rapidly in recent years and are projected to do so for the foreseeable future.1 Cost increases potentially create a burden for beneficiaries, who must pay for a portion of their care through Part B premiums, deductibles, and coinsurance payments. Increases in the costs of noncovered services also have a significant effect. The introduction of the Medicare Part D prescription drug benefit in 2006 was expected to ease the financial burden on beneficiaries, but the effect seems to be modest.2

Given recent and projected increases in healthcare costs, it is useful to examine the current level of financial burden on Medicare beneficiaries, the distribution of that burden, and trends over time. Previous research has shown that out-of-pocket spending as a share of income has increased in recent years.3 Out-of-pocket costs tend to be highly skewed and are higher for beneficiaries in poor health and for those who have an individually purchased private insurance supplement (Medigap) or no supplement.4-6 Beneficiaries with higher incomes tend to spend more on healthcare, but such costs represent a substantially greater burden for low-income beneficiaries.4,7-9

This article describes trends in out-of-pocket costs among older community-dwelling beneficiaries between 1992 and 2004 using data from the Medicare Current Beneficiary Survey (MCBS). All out-of-pocket healthcare costs are examined (vs just those associated with Medicarecovered services) to obtain a complete picture of the financial burden of healthcare on beneficiaries. The following questions are addressed: (1) How much have out-of-pocket costs increased absolutely and relative to income? (2) Has the distribution of out-of-pocket costs changed over time? (3) How do costs vary by beneficiary characteristics such as income and health status? (4) To what extent do high out-of-pocket costs persist from year to year?

DATA SOURCEThe MCBS is a longitudinal multipurpose survey of a nationally representative sample of the Medicare population.10 It has been conducted by the Centers for Medicare & Medicaid Services (formerly the Health Care Financing Administration) continuously since 1991. The survey uses a rotating panel design, with each panel consisting of about 4000 respondents who participate in 12 interviews that produce data for 3 complete calendar years. Medicare administrative records are routinely linked to survey data.

Respondents are asked about their use of healthcare services, including Medicare-covered and non–Medicare-covered services. Costs and sources of payment are determined for each service received by the respondent. Survey-reported services are matched to Medicare claims records to improve the accuracy of utilization and cost data.11 Information on health and functional status, specific medical conditions, supplemental health insurance, and demographics is also collected.

The MCBS collects information about income of the respondent and spouse (if married). Respondents are asked to provide total income only, with prompts to include several specific types of income in the total. In cases of missing data, hot-deck procedures are used to generate responses. The MCBS income data are subject to underreporting and misreporting,12 with systematic underreporting primarily occurring among higher-income beneficiaries (D Waldo, MA, unpublished data, 2005). Despite the limitations of income as captured in the MCBS, the consistency of the data collection procedures over time should yield a reasonably accurate picture of trends. Because income is not collected separately for respondents and their spouses, reported income was divided by 2 for married respondents in the analyses reported herein.


Table 1

The median out-of-pocket costs (after adjustment for inflation) rose from $2107 in 1992 to $2581 in 2004, an increase of 22.5% (). The increase was not uniform; the median out-of-pocket costs decreased by 6.5% between 1992 and 1996, followed by increases of 7.6% between 1996 and 2000 and 21.7% between 2000 and 2004. Out-of-pocket costs were higher for older beneficiaries. The median out-of-pocket costs were lowest for low-income beneficiaries, for whom costs did not increase during 12 years of the study after adjustment for inflation.

In 1992, half of the beneficiaries reported spending 14.8% or more of their income on healthcare costs; 10% reported spending 42.4% or more (Table 2). Between 1996 and 2004, the burden at the upper percentiles of the distribution increased at a faster rate than the burden at the lower percentiles. By 2004, half of the beneficiaries reported spending 15.5% or more of income on healthcare costs, which was not significantly different from 1992. However, 10% reported spending 48.5% or more of income, which was significantly higher than in 1992.

For beneficiaries with chronic conditions, high out-ofpocket costs may persist over multiple years, exacerbating the total financial burden of illness. For example, combining data from 2003 and 2004 for respondents who were in the survey both years, the 90th percentile of out-of-pocket costs as a percentage of income was 43.8%, indicating a high 2-year burden. Among respondents who had high out-of-pocket costs as a percentage of income in 2003 (defined as those at the 90th percentile or above), 33.8% also had high out-ofpocket costs in 2004 (data not shown).

DISCUSSIONSome recent trends in out-of-pocket healthcare costs for older Medicare beneficiaries may be of concern to policy makers. Following a period of relative stability between 1992 and 2000, the median costs grew by 21.7% between 2000 and 2004 after adjustment for inflation. Although the relative burden of out-of-pocket costs, measured as a percentage of income, declined significantly between 1992 and 1996, it rose by almost 3 percentage points between 2000 and 2004. Increases in financial burden tended to be greatest at the upper end of the distribution. High costs also tended to persist over multiple years, significantly exacerbating the long-term financial effect of chronic illness on many beneficiaries. A key question for policy makers is whether the increase in burden of out-of-pocket costs since 2000 will continue, especially for the segment of the beneficiary population with the highest out-of-pocket costs.

A more favorable trend was that the median out-of-pocket costs did not change between 1992 and 2004 for low-income beneficiaries. This finding is attributable to increases in Medicaid coverage during the study period. Among respondents in the lowest-income quartiles, Medicaid coverage increased from 28% in 1992 to 39% in 2004. Out-of-pocket costs were much lower for Medicaid recipients than for low-income respondents without Medicaid (data not shown). On the other hand, the largest increase in financial burden over 12 years of the study occurred among beneficiaries in the second lowest–income quartile, for whom Medicaid coverage was much less common.

Medicare’s long-term financial health continues to be of great concern.1 Policy makers have considered several proposals aimed at containing costs such as raising the age of eligibility, increasing taxes, restructuring Medicare benefits, implementing a defined contribution or premium support model, and encouraging private savings.15-18 Underlying any proposals for program reform are the fundamental questions of how much additional cost burden should be borne by beneficiaries and how such burdens should be distributed. Some proposals call for increased beneficiary contributions in the form of increased premiums or greater cost sharing.15 Future increases in beneficiary financial burden could also be tied to wealth or income,15,19 and means testing of the Part B premium and Part D benefits has already been introduced through the Medicare Modernization Act of 2003. The findings reported herein provide baseline information for evaluating the beneficiary effect of reform proposals, especially among vulnerable subgroups of beneficiaries.

Although the Part D prescription drug benefit is expected to significantly reduce beneficiary out-of-pocket costs, it may be of limited help for beneficiaries with the highest out-ofpocket costs. Among such beneficiaries in 2004, prescription drugs accounted for only 15% of their out-of-pocket costs. It should be noted that the full effect of Part D will not be limited to direct out-of-pocket costs for prescription drugs; many beneficiaries may also experience lower health insurance premiums under Part D because these premiums should cover fewer prescription drug benefits.

This study was limited to the community-dwelling population. Institutionalization is often associated with high out-of-pocket costs, sometimes resulting in spend-down to eligibility for Medicaid coverage. The rate of nursing home use has declined substantially among older persons in recent years.9 This decline has reduced the beneficiary financial burden associated with institutionalization.

The Medicare program will continue to attract proposals for reform. The amount that beneficiaries contribute to the costs of their healthcare and the way that burden is distributed will be central to the debate. Current trends in the level and distribution of out-of-pocket costs will be important factors in planning for the future of Medicare.

Acknowledgments: I thank James Lubitz, MPH, and Brigid Goody, ScD, for their valuable comments on early drafts of the manuscript.

Author Affiliation: Office of Research, Development, and Information, Centers for Medicare & Medicaid Services, Baltimore, MD.

Funding Source: None reported.

Author Disclosure: The author reports no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article. The statements contained in this article are those of the author and do not necessarily reflect the views or policies of the Centers for Medicare & Medicaid Services.

Authorship Information: Concept and design (GFR); acquisition of data (GFR); analysis and interpretation of data (GFR); drafting of the manuscript (GFR); critical revision of the manuscript for important intellectual content (GFR); statistical analysis (GFR); and provision of study materials or patients (GFR).

Address correspondence to: Gerald F. Riley, MSPH, Office of Research, Development, and Information, Centers for Medicare & Medicaid Services, 7500 Security Blvd, Rm C3-21-27, Baltimore, MD 21244. E-mail: gerald.

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