Why all the Fuss about Prescription Drug Coverage? Out-of-Pocket Health Care Expenditures Edward C. Norton University of North Carolina at Chapel Hill

Acknowledgments Hua Wang Hua Wang National Center for Health Statistics National Center for Health Statistics Sally C. Stearns Sally C. Stearns UNC at Chapel Hill UNC at Chapel Hill Funding from National Institute on Aging Funding from National Institute on Aging R01-AG16600 R01-AG16600

Health Care Expenditures Long literature in health economics Long literature in health economics Predict health expenditures Predict health expenditures At individual and national level At individual and national level Focus is on total or public expenditures Focus is on total or public expenditures Concern is with public finance and resources Concern is with public finance and resources

Out-of-Pocket Expenditures Little research on OOP expenditures Little research on OOP expenditures No one keeps track, hard to calculate No one keeps track, hard to calculate Important Important For elderly Americans, OOP risk is high For elderly Americans, OOP risk is high Distributional consequences of public insurance Distributional consequences of public insurance Affects economic behavior Affects economic behavior

Two Striking Graphs First shows out-of-pocket health care expenditures by age First shows out-of-pocket health care expenditures by age Second shows out-of-pocket health care expenditures as a fraction of income by age Second shows out-of-pocket health care expenditures as a fraction of income by age

Figure 1

Mean OOP expenditures rise with age Mean OOP expenditures rise with age $85 per month at age 66 $85 per month at age 66 $485 per month at age 95 $485 per month at age 95 Division between LTC and non-LTC Division between LTC and non-LTC All increase is due to LTC All increase is due to LTC Young and old elderly face different risk Young and old elderly face different risk Different magnitude Different magnitude Different composition Different composition

Figure 2

What fraction spend at least half income on health care? What fraction spend at least half income on health care? >10% at age 81 >10% at age 81 >25% at age 90 >25% at age 90

Who and What? Who faces the highest OOP expenditure risk? Who faces the highest OOP expenditure risk? What are the implications? What are the implications?

Outline of Talk Medicare and Medicaid Medicare and Medicaid Data Data Regression Results Regression Results Implications Implications Distributional Distributional Behavioral Behavioral

Non-LTC Insurance Inpatient, physician, pharmaceuticals Inpatient, physician, pharmaceuticals Medicare is fairly comprehensive Medicare is fairly comprehensive Many have Medigap policies Many have Medigap policies Medicaid for poorest 15% Medicaid for poorest 15% Private for about 67% Private for about 67%

Who Pays non-LTC? Predictors Predictors Health shocks, health status Health shocks, health status Insurance (e.g., Medicaid pays for much of pharmaceuticals) Insurance (e.g., Medicaid pays for much of pharmaceuticals) Some access issues (e.g., urban/rural) Some access issues (e.g., urban/rural) Hypotheses Hypotheses Low R-squared Low R-squared Demographics should not predict well Demographics should not predict well

LTC Insurance Nursing homes (long-term and skilled) Nursing homes (long-term and skilled) Medicare provides minimal insurance Medicare provides minimal insurance Medicaid is safety net Medicaid is safety net Deductible = wealth - $2000 Deductible = wealth - $2000 Co-payment = income - $30 Co-payment = income - $30 Little private insurance Little private insurance

Who Pays LTC? Predictors Predictors Health shocks, health status, disabilities Health shocks, health status, disabilities Substitutes: spouse, child Substitutes: spouse, child Ethnicity Ethnicity Hypotheses Hypotheses High R-squared High R-squared Demographics should predict well Demographics should predict well

Methods Predict Pr($OOP/month > Threshold) Predict Pr($OOP/month > Threshold) Non-LTC $100, $500 Non-LTC $100, $500 LTC $100, $1000 LTC $100, $1000 Control for age, sex, race and ethnicity, education, income, rural, marital status, year, census region Control for age, sex, race and ethnicity, education, income, rural, marital status, year, census region

Other Methods Threshold gets at most relevant variation Threshold gets at most relevant variation Two-part models: no action in first part for non- LTC, no action in second part for LTC Two-part models: no action in first part for non- LTC, no action in second part for LTC Looked at components of non-LTC (inpatient, physician, pharmaceuticals) Looked at components of non-LTC (inpatient, physician, pharmaceuticals) Looked at OOP/income Looked at OOP/income

Data Medicare Current Beneficiary Survey Medicare Current Beneficiary Survey Focus on aged 65 and older Focus on aged 65 and older ~10,000 people per year ~10,000 people per year Advantages Advantages Linked to Medicare claims Linked to Medicare claims Detailed diaries for all other expenditures Detailed diaries for all other expenditures

Data Data on 24,636 unique people and 709,413 person months Data on 24,636 unique people and 709,413 person months OOP expenditures per month OOP expenditures per month Overall mean is $151 (highly skewed) Overall mean is $151 (highly skewed) Mean of $70 for LTC Mean of $70 for LTC Mean of $28 for pharmaceuticals Mean of $28 for pharmaceuticals Average age is 75 Average age is 75 40% men, 89% white, 37% widowed 40% men, 89% white, 37% widowed 13% Medicaid eligible 13% Medicaid eligible

Regression Results Hypotheses confirmed Hypotheses confirmed Low R-squared for non-LTC (<.03) Low R-squared for non-LTC (<.03) High R-squared for LTC (>.26) High R-squared for LTC (>.26) Age, sex, race, marital status all predict LTC extremely well, as expected Age, sex, race, marital status all predict LTC extremely well, as expected

Implications: Distributional Focus on the implications, not regressions Focus on the implications, not regressions Distributional Distributional Not much for non-LTC Not much for non-LTC Public LTC insurance incomplete, suboptimal Public LTC insurance incomplete, suboptimal Spousal impoverishment Spousal impoverishment

Implications: Behavioral Behavioral Behavioral Savings over life cycle Savings over life cycle Red herring, end-of-life expenditures Red herring, end-of-life expenditures Changing longevity and savings Changing longevity and savings Flat-of-the curve medicine Flat-of-the curve medicine Alternative motivation for exchange Alternative motivation for exchange Political economy Political economy

Distributional (1) Not much consequence for non-LTC insurance Not much consequence for non-LTC insurance No one group seems greatly affected by OOP expenditures No one group seems greatly affected by OOP expenditures

Distributional (2) Medicaid incomplete LTC insurance Medicaid incomplete LTC insurance Brown and Finkelstein (NBER 2004) Brown and Finkelstein (NBER 2004) Medicaid structured in a way that discourages private insurance Medicaid structured in a way that discourages private insurance Implicit tax Implicit tax Elderly buy less LTC insurance than they want Elderly buy less LTC insurance than they want Elderly have less consumption smoothing Elderly have less consumption smoothing This affects certain groups more: oldest-old, women, widows, whites, unmarried This affects certain groups more: oldest-old, women, widows, whites, unmarried

Distributional (3) Married persons pay less LTC Married persons pay less LTC Perhaps spouse and child are substitutes Perhaps spouse and child are substitutes Or Medicare Catastrophic Coverage Act of 1988 works Or Medicare Catastrophic Coverage Act of 1988 works Spousal impoverishment not repealed Spousal impoverishment not repealed More wealth and income protected if spouse More wealth and income protected if spouse Lowers cost of nursing home care Lowers cost of nursing home care As predicted, in MCBS, married persons have lower OOP payments conditional on NH entry As predicted, in MCBS, married persons have lower OOP payments conditional on NH entry

Behavioral (1) Savings over life cycle Savings over life cycle Hubbard, Skinner, Zeldes (1995) Hubbard, Skinner, Zeldes (1995) Means-tested public insurance affects savings Means-tested public insurance affects savings Some will save less than otherwise Some will save less than otherwise The longer you live, the higher the risk The longer you live, the higher the risk Hard to balance precautionary savings, optimal consumption Hard to balance precautionary savings, optimal consumption

Behavioral (2) “Red Herring” literature “Red Herring” literature Importance of age in predicting end-of-life expenditures Importance of age in predicting end-of-life expenditures There are two stories here, not one There are two stories here, not one Story for LTC expenditures is different Story for LTC expenditures is different Age effect huge even after controlling for time until death (although endogenous) Age effect huge even after controlling for time until death (although endogenous) Delicate relationship between disability, longevity, end-of-life, substitutes to NH Delicate relationship between disability, longevity, end-of-life, substitutes to NH

Behavioral (3) Recent gains in longevity, especially for men Recent gains in longevity, especially for men If unanticipated, then savings too low If unanticipated, then savings too low Greater longevity means higher eventual OOP expenditures for many than anticipated Greater longevity means higher eventual OOP expenditures for many than anticipated

Behavioral (4) Flat-of-the-curve medicine Flat-of-the-curve medicine Marginal benefits low, below average cost Marginal benefits low, below average cost This is more likely a problem for highly insured services, not LTC This is more likely a problem for highly insured services, not LTC

Behavioral (5) Literature on intergenerational transfers Literature on intergenerational transfers If informal care is substitute (Van Houtven and Norton 2004) If informal care is substitute (Van Houtven and Norton 2004) If elderly parent has much wealth If elderly parent has much wealth May be reason to provide informal care, even if no exchange, only bequest, to preserve wealth May be reason to provide informal care, even if no exchange, only bequest, to preserve wealth

Behavioral (6) Political science Political science Why did Congress pass the Medicare Modernization Act? Why did Congress pass the Medicare Modernization Act? Focus on prescription drugs Focus on prescription drugs Relatively little OOP on drugs Relatively little OOP on drugs For young elderly bigger issue, they VOTE For young elderly bigger issue, they VOTE

Future Research Other countries Other countries Less economic research on long-term care in non-US countries than in US Less economic research on long-term care in non-US countries than in US Issues no less important Issues no less important Hope that this conference, iHEA, better data sets, will lead to more research Hope that this conference, iHEA, better data sets, will lead to more research

Out-of-Pocket Expenditures People respond to what hits their wallet People respond to what hits their wallet Expenditure risk high for LTC Expenditure risk high for LTC Expenditure risk generally low for other Expenditure risk generally low for other Many behavioral implications Many behavioral implications