The Risk of High Out-of-Pocket Health Spending among Older Americans

Traditional Medicare imposes significant cost-sharing on beneficiaries. Most but not all beneficiaries obtain supplemental insurance through Medigap, Medicare Advantage, Medicaid, or employer-sponsored retiree coverage, which may vary in how well they protect against the risk of high spending. This paper uses data from the Health and Retirement Study for the years 2002 through 2016 to document how supplemental coverage for Medicare beneficiaries 65 and older has changed over time, and to estimate the distribution of out-of-pocket spending for enrollees with different coverage types. I find that the shares of beneficiaries with employer-sponsored supplemental coverage or Medigap declined between 2002 and 2016, whereas the shares with Medicare Advantage or no supplemental coverage for doctor and hospital bills have increased. The majority of those with no supplemental coverage for doctor and hospital bills have Medicare Part D, which covers prescription drug expenses. I find that all supplemental coverage types are associated with lower observed dispersion in out-of-pocket medical care spending, measuring dispersion as the ratio of the 90th to the 50th percentile or the standard deviation. All supplemental insurance types are associated with a lower probability that out-of-pocket medical care spending exceeds 10% of household income, while all but Medicaid are associated with a significantly higher probability that total out-of-pocket health spending (that is, medical care plus health insurance premiums) exceeds this threshold. Thus, all supplemental insurance forms effectively function as insurance, translating uncertain medical costs into more predictable — although still potentially burdensome — premiums.