UMC Links

Seniors’ Premiums Exceed Costs of Prescription Drugs

July 10, 2003 — The addition of prescription drug benefits to seniors’ Medicare has become an important public health policy-and hotly debated-issue. Politicians have batted around different figures, but, according to University of Utah Associate Professor of Consumer Studies Jessie Fan, little research has existed on actual dollar amounts spent over time and how these expenses related to seniors’ health coverage.

“Extreme case figures make for good drama, but don’t make for good public policy,” says Fan, primary author of a new study on health care and prescription drug spending by seniors. “The research provides factual information on exactly how much those 65 and older have spent on health care in the past and what impact insurance has.”

Fan and two other researchers spent four years studying the total health care expenditures of 3,423 representative American households, age 65 and older, over a 17-year period, from 1980-1997. Out-of-pocket expenses were tracked, including the cost of health insurance premiums, visits to the doctor, medical equipment and prescription drugs.

“We were interested in what kinds of additional insurance were purchased because Medicare didn’t cover all medical expenses,” notes Fan, who specializes in consumer expenditures and financial management. “We looked at commercial insurance offered by private insurance companies; insurance offered by non-profit insurance companies; health maintenance organizations (HMOs); and commercial, government-regulated Medicare supplements, often referred to as ‘Medigap’ policies because they fill in the gaps of Medicare coverage.”

Study results, recently published in Monthly Labor Review, showed that from 1980 to 1997 seniors without supplemental health insurance had an average annual income of $19,050 and spent an average of $1,210 on out-of-pocket health care expenditures annually. Of that, $402 was spent on premiums and $282 was spent on prescription drugs. These seniors spent 8.6 percent of their total annual expenditures on health care. Seniors who purchased supplemental health insurance had an average annual income of $24,759 and spent $2,805 or 14.95 percent of their annual expenditures on health care. Of those out-of-pocket expenses, $1,550 was spent on premiums and $473 was spent on prescription drugs.

After adjusting for inflation over 17 years in medical-related commodities, out-of-pocket expenditures for seniors without additional insurance or with HMO plans only decreased-by $18 a year, with no increase in out-of-pocket expenditures for prescription drugs. Conversely, expenditures in both of these areas increased for seniors with supplemental insurance. For this group, health care expenses increased from $43 to $75 annually, with the cost of prescription drugs increasing from $8.59 to $11.93 per year.

“Out-of-pocket drug costs didn’t increase as much as the health insurance premiums, which continued to go up like crazy-and that was true for the general population as well as for seniors, 80 percent of whom buy supplemental insurance. So these people were paying more and more for additional insurance so as not to incur the high cost of care and prescription drugs,” Fan notes.

“We found HMOs to be very effective in lowering the cost of medical care to seniors in terms of out-of-pocket expenditures. If you have HMOs, you pay less total out-of-pocket, compared to having other types of insurance. Over the years there has been increase in the use of HMO and Medigap plans and a decrease in commercial insurance, so the market’s changing over time. We know that having a managed care approach (like an HMO) keeps health care costs down, but we didn’t address whether this method compromises services. Quality measurement can be very difficult with credence goods like medical care, for which the consumer cannot always assess the quality even after receiving the care,” she says.

Fan’s multivariate analysis looked at age, race, family type, geographical location and education level. Researchers found that older seniors and those with higher incomes spent more on out-of-pocket and prescription expenses. Minorities spent less on health care, with Hispanics spending the least amount, an average of $369 less annually on out-of-pocket health care expenses and $60 less annually on out-of-pocket prescription drugs than Caucasians. Cultural differences and care access issues are often cited for such ethnic differences. On average, single parent families spent about $1,100 less annually than married couples.

Co-authors of the research were Deanna L. Sharpe, associate professor of Family and Consumer Economics at the University of Missouri at Columbia, and Goog-Soog Hong, professor of Consumer Sciences and associate dean in the School of Graduate Studies at Utah State University.