The Economic Burden of Out-of-Pocket Medical Expenditures Before and After Implementation of the Medicare Prescription Drug Program



Older Americans, although covered by Medicare, bear a large economic burden of medical expenses in the form of premiums for Medicare and supplemental plans, as well as the cost of uncovered or under-covered medical services.  This study compares the patterns of this economic burden in 2010 with the baseline year of 2005.  The period covered was marked by economic shocks, health care technology innovations and major Medicare reforms, including implementation of the prescription drug (Part D) program and changes in premium rules.  Consequently, we present a description of the economic burden and do not attempt to make causal inferences.  The definition of expenditures is limited to three components of out-of-pocket (OOP) medical spending: premiums, prescription drugs costs, and health services.  While this definition is a limitation of the study, it also allows the researchers to focus on the costs most likely to be affected by improved access to prescription drugs and premium reforms.

This paper found that:

  • Overall, the economic burden (expressed as a percent of income spent on OOP expenditures and premiums) averaged 18.5 percent of 2010 income, with top decile spending at 32 percent or more of their income going to health care.
  • A typical beneficiary spent 1.4 percentage points less of their income in 2010 than in 2005. When this burden is decomposed, we observed that the share of income spent for prescription drugs declined by 1.3 percentage points.  This was the major component of the decline in this burden.  The burden of premiums increased over the period, offsetting some of the gains from declining expenses for prescription drugs.
  • These gains were mostly observed at the high end of the burden distribution, i.e., those who were spending more than 20 percent of their income on health care. This group had lower incomes, on average, and were much less likely to possess employer-sponsored supplemental (or self-purchased) coverage.
  • Dual eligibles experienced a lower economic burden in 2010, even though their incomes were also significantly lower compared to the rest of the Medicare beneficiaries. Compared to other Medicare beneficiaries, they experienced relatively larger reductions in economic burden between 2005 and 2010.

The policy implications of this paper are:

  • We observed some relief in the economic burden of prescription drug expenditures and overall health care, particularly for those who were most vulnerable to financial strains.
  • Our observations were consistent with the intended direction of policies implemented during the period. However, one can argue that the size of the gains was unremarkable  when compared to the scope of the Part D reform.
  • Medicaid continued to fulfill its role as a safety net for those who are most vulnerable to financial strains. The relatively higher rate of decline for duals or low-income beneficiaries suggests that key components of the reform (premium- and cost-sharing assistance) are reaching the intended targets.
  • Affordability of high-cost drugs for the management of chronic conditions continues to be a major national health policy challenge. Medicare policy changes are likely to continue affecting out-of-pocket cost exposure to medications, particularly with the introduction and expansion in use of very high-priced specialty medications.  Given the size and the unequal distribution of the economic burden of health care, we conclude that the economic burden needs to be a continuous concern when policy alternatives are discussed.