Why all the Fuss Why all the Fuss about Prescription about Prescription

Drug Coverage?Drug Coverage?Out-of-Pocket Out-of-Pocket Health Care Health Care ExpendituresExpenditures

Edward C. Norton Edward C. Norton

University of North Carolina University of North Carolina at Chapel Hill at Chapel Hill

AcknowledgmentsAcknowledgments

Hua WangHua Wang National Center for Health StatisticsNational Center for Health Statistics

Sally C. StearnsSally C. Stearns UNC at Chapel HillUNC at Chapel Hill

Funding from National Institute on Funding from National Institute on AgingAging R01-AG16600R01-AG16600

Health Care Health Care ExpendituresExpenditures

Long literature in health economicsLong literature in health economics Predict health expendituresPredict health expenditures At individual and national levelAt individual and national level Focus is on total or public expendituresFocus is on total or public expenditures Concern is with public finance and Concern is with public finance and

resourcesresources

Out-of-Pocket Out-of-Pocket ExpendituresExpenditures

Little research on OOP expendituresLittle research on OOP expenditures No one keeps track, hard to No one keeps track, hard to

calculatecalculate ImportantImportant

For elderly Americans, OOP risk is highFor elderly Americans, OOP risk is high Distributional consequences of public Distributional consequences of public

insuranceinsurance Affects economic behaviorAffects economic behavior

Two Striking GraphsTwo Striking Graphs

First shows out-of-pocket health care First shows out-of-pocket health care expenditures by ageexpenditures by age

Second shows out-of-pocket health Second shows out-of-pocket health care expenditures as a fraction of care expenditures as a fraction of income by ageincome by age

Figure 1Figure 1

Figure 1Figure 1

Mean OOP expenditures rise with ageMean 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-LTCDivision between LTC and non-LTC All increase is due to LTCAll increase is due to LTC

Young and old elderly face different Young and old elderly face different riskrisk Different magnitudeDifferent magnitude Different compositionDifferent composition

Figure 2Figure 2

Figure 2Figure 2

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

Who and What?Who and What?

Who faces the highest OOP Who faces the highest OOP expenditure risk?expenditure risk?

What are the implications?What are the implications?

Outline of TalkOutline of Talk

Medicare and MedicaidMedicare and Medicaid DataData Regression ResultsRegression Results ImplicationsImplications

DistributionalDistributional BehavioralBehavioral

Non-LTC InsuranceNon-LTC Insurance

Inpatient, physician, Inpatient, physician, pharmaceuticalspharmaceuticals

Medicare is fairly comprehensiveMedicare is fairly comprehensive Many have Medigap policiesMany have Medigap policies

Medicaid for poorest 15%Medicaid for poorest 15% Private for about 67%Private for about 67%

Who Pays non-LTC?Who Pays non-LTC?

PredictorsPredictors Health shocks, health statusHealth shocks, health status Insurance (e.g., Medicaid pays for much Insurance (e.g., Medicaid pays for much

of pharmaceuticals)of pharmaceuticals) Some access issues (e.g., urban/rural)Some access issues (e.g., urban/rural)

HypothesesHypotheses Low Low RR-squared-squared Demographics should not predict wellDemographics should not predict well

LTC InsuranceLTC Insurance

Nursing homes (long-term and skilled)Nursing homes (long-term and skilled)

Medicare provides minimal insuranceMedicare provides minimal insurance Medicaid is safety netMedicaid is safety net

Deductible = wealth - $2000Deductible = wealth - $2000 Co-payment = income - $30Co-payment = income - $30 Little private insuranceLittle private insurance

Who Pays LTC?Who Pays LTC?

PredictorsPredictors Health shocks, health status, disabilitiesHealth shocks, health status, disabilities Substitutes: spouse, childSubstitutes: spouse, child EthnicityEthnicity

HypothesesHypotheses High High RR-squared-squared Demographics should predict wellDemographics should predict well

MethodsMethods

Predict Pr($OOP/month > Predict Pr($OOP/month > Threshold)Threshold) Non-LTC $100, $500Non-LTC $100, $500 LTC $100, $1000LTC $100, $1000

Control for age, sex, race and Control for age, sex, race and ethnicity, education, income, rural, ethnicity, education, income, rural, marital status, year, census regionmarital status, year, census region

Other MethodsOther Methods

Threshold gets at most relevant variationThreshold gets at most relevant variation Two-part models: no action in first part Two-part models: no action in first part

for non-LTC, no action in second part for for non-LTC, no action in second part for LTCLTC

Looked at components of non-LTC Looked at components of non-LTC (inpatient, physician, pharmaceuticals)(inpatient, physician, pharmaceuticals)

Looked at OOP/incomeLooked at OOP/income

DataData

Medicare Current Beneficiary SurveyMedicare Current Beneficiary Survey 1992-19981992-1998 Focus on aged 65 and olderFocus on aged 65 and older ~10,000 people per year~10,000 people per year

AdvantagesAdvantages Linked to Medicare claimsLinked to Medicare claims Detailed diaries for all other Detailed diaries for all other

expendituresexpenditures

DataData

Data on 24,636 unique people and Data on 24,636 unique people and 709,413 person months709,413 person months

OOP expenditures per monthOOP expenditures per month Overall mean is $151 (highly skewed)Overall mean is $151 (highly skewed) Mean of $70 for LTCMean of $70 for LTC Mean of $28 for pharmaceuticalsMean of $28 for pharmaceuticals

Average age is 75Average age is 75 40% men, 89% white, 37% widowed40% men, 89% white, 37% widowed 13% Medicaid eligible13% Medicaid eligible

Regression ResultsRegression Results

Hypotheses confirmedHypotheses confirmed Low Low RR-squared for non-LTC (<.03)-squared for non-LTC (<.03) High High RR-squared for LTC (>.26)-squared for LTC (>.26)

Age, sex, race, marital status all predict Age, sex, race, marital status all predict LTC extremely well, as expectedLTC extremely well, as expected

Implications: Implications: DistributionalDistributional

Focus on the implications, not Focus on the implications, not regressionsregressions

DistributionalDistributional Not much for non-LTCNot much for non-LTC Public LTC insurance incomplete, Public LTC insurance incomplete,

suboptimalsuboptimal Spousal impoverishmentSpousal impoverishment

Implications: BehavioralImplications: Behavioral

BehavioralBehavioral Savings over life cycleSavings over life cycle Red herring, end-of-life expendituresRed herring, end-of-life expenditures Changing longevity and savingsChanging longevity and savings Flat-of-the curve medicineFlat-of-the curve medicine Alternative motivation for exchangeAlternative motivation for exchange Political economyPolitical economy

Distributional (1)Distributional (1)

Not much consequence for non-LTC Not much consequence for non-LTC insuranceinsurance

No one group seems greatly affected No one group seems greatly affected by OOP expendituresby OOP expenditures

Distributional (2)Distributional (2)

Medicaid incomplete LTC insuranceMedicaid incomplete LTC insurance Brown and Finkelstein (NBER 2004)Brown and Finkelstein (NBER 2004)

Medicaid structured in a way that Medicaid structured in a way that discourages private insurance discourages private insurance

Implicit taxImplicit tax Elderly buy less LTC insurance than they Elderly buy less LTC insurance than they

wantwant Elderly have less consumption smoothingElderly have less consumption smoothing This affects certain groups more: oldest-This affects certain groups more: oldest-

old, women, widows, whites, unmarriedold, women, widows, whites, unmarried

Distributional (3)Distributional (3) Married persons pay less LTCMarried persons pay less LTC Perhaps spouse and child are substitutesPerhaps spouse and child are substitutes Or Medicare Catastrophic Coverage Act Or Medicare Catastrophic Coverage Act

of 1988 worksof 1988 works Spousal impoverishment not repealedSpousal impoverishment not repealed More wealth and income protected if spouseMore wealth and income protected if spouse Lowers cost of nursing home careLowers cost of nursing home care As predicted, in MCBS, married persons As predicted, in MCBS, married persons

have lower OOP payments conditional on NH have lower OOP payments conditional on NH entryentry

Behavioral (1)Behavioral (1)

Savings over life cycleSavings over life cycle Hubbard, Skinner, Zeldes (1995)Hubbard, Skinner, Zeldes (1995)

Means-tested public insurance affects Means-tested public insurance affects savingssavings

Some will save less than otherwiseSome will save less than otherwise

The longer you live, the higher the riskThe longer you live, the higher the risk Hard to balance precautionary savings, Hard to balance precautionary savings,

optimal consumptionoptimal consumption

Behavioral (2)Behavioral (2)

““Red Herring” literatureRed Herring” literature Importance of age in predicting end-of-Importance of age in predicting end-of-

life expenditureslife expenditures There are two stories here, not oneThere are two stories here, not one Story for LTC expenditures is differentStory for LTC expenditures is different

Age effect huge even after controlling for Age effect huge even after controlling for time until death (although endogenous)time until death (although endogenous)

Delicate relationship between disability, Delicate relationship between disability, longevity, end-of-life, substitutes to NHlongevity, end-of-life, substitutes to NH

Behavioral (3)Behavioral (3)

Recent gains in longevity, especially Recent gains in longevity, especially for menfor men

If unanticipated, then savings too If unanticipated, then savings too lowlow

Greater longevity means higher Greater longevity means higher eventual OOP expenditures for many eventual OOP expenditures for many than anticipatedthan anticipated

Behavioral (4)Behavioral (4)

Flat-of-the-curve medicineFlat-of-the-curve medicine Marginal benefits low, below Marginal benefits low, below

average costaverage cost This is more likely a problem for This is more likely a problem for

highly insured services, not LTChighly insured services, not LTC

Behavioral (5)Behavioral (5)

Literature on intergenerational Literature on intergenerational transferstransfers

If informal care is substitute (Van If informal care is substitute (Van Houtven and Norton 2004)Houtven and Norton 2004)

If elderly parent has much wealthIf elderly parent has much wealth May be reason to provide informal May be reason to provide informal

care, even if no exchange, only care, even if no exchange, only bequest, to preserve wealthbequest, to preserve wealth

Behavioral (6)Behavioral (6)

Political sciencePolitical science Why did Congress pass the Medicare Why did Congress pass the Medicare

Modernization Act?Modernization Act? Focus on prescription drugsFocus on prescription drugs Relatively little OOP on drugsRelatively little OOP on drugs For young elderly bigger issue, they For young elderly bigger issue, they

VOTEVOTE

Future ResearchFuture Research

Other countriesOther countries Less economic research on long-Less economic research on long-

term care in non-US countries than term care in non-US countries than in USin US

Issues no less importantIssues no less important Hope that this conference, iHEA, Hope that this conference, iHEA,

better data sets, will lead to more better data sets, will lead to more researchresearch

Out-of-Pocket Out-of-Pocket ExpendituresExpenditures

People respond to what hits their People respond to what hits their walletwallet

Expenditure risk high for LTCExpenditure risk high for LTC Expenditure risk generally low for Expenditure risk generally low for

otherother Many behavioral implicationsMany behavioral implications