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Seniors Spending Four Times More for Healthcare Than Others: New Report Says

Dec. 5, 2004 – People age 65 and older spent $11,089 for personal health care goods and services in 1999, while those under 65 spent only $2,793 per capita, according to a recently release report prepared by the Office of the Actuary of the Centers for Medicare & Medicaid Services (CMS). The cost per senior citizens was almost 400 percent greater than for those under 65. The average for all persons in the United States was $3,834 each.

People, 65 or over, made up 13 percent of the population in 1999, yet consumed 36 percent of the nation's spending for personal health care. This spending totaled $387 billion or $11,089 per person, quadruple the amount of per person spending, $2,793, for people under age 65.

The authors conclude, "Defined narrowly, aging will continue to play a relatively minor role in comparison to other factors that influence health care spending growth. The aging of the population, though, is likely to have significant implications on the financing of health care and a disproportionate impact on spending for certain services and payers."

Medicare financed 46 percent of the health care spending for seniors in 1999 while Medicaid financed more than 15 percent. The Medicare Modernization Act of 2003 will, accordingly, increase the percent paid by Medicare because of important new benefits such as the prescription drug benefit.

Working-age adults were 59 percent of the population and accounted for 51 percent of personal health care spending in 1999. This spending amounted to $547 billion or $3,352 per person. Private health insurance paid for 47 percent of that, while out-of-pocket payments and Medicaid, paid for approximately 18 and 15 percent, respectively. Working-age adults accounted for 61 percent of all prescription drug spending.

Children made up 29 percent of the population, but accounted for only 12 percent of spending on personal health care in 1999. This spending amounted to $131 billion or $1,646 per child. Children's health care is primarily financed through private health insurance and Medicaid; together, these sources paid for over two-thirds of health care for children. Hospital and physician services accounted for 70 percent of health spending for children in 1999.

Age Estimates in the National Health Accounts reports that, over the next several decades, the combination of higher relative health spending by seniors and their faster population growth will increase pressure on public funding over the next several decades.

The report finds that per capita spending for health care for working-age adults - people who are age 19 to 64, was $3,352, with private health insurance as the dominant payer. Children 18 or younger consumed the least amount of health care, $1,646 per person, with private health insurance and Medicaid as the major payers.

The authors use these age estimates to show the future effect of the changing age-mix of the population on health care spending. The simulation results show that, as a source of funding, nursing homes and Medicare are the most likely affected by projected demographic changes over the next 50 years.

The report also highlights some of the recent trends in health spending by age in three recent points in time: 1987, 1996, and 1999. The health care spending by age data can be found on the CMS web site at http://www.cms.hhs.gov/statistics/nhe/age.

The information appears in a Web Exclusive, published on-line by Health Care Financing Review, and may be found at http://cms.hhs.gov/review/default.asp under the title Age Estimates in the National Health Accounts. This is the first time since 1989 that health spending estimates by age have been published.

Statement from Medicare on the Report

"What this report shows is the importance of our efforts to bring down the high cost of health care for America's seniors," said CMS Administrator Mark B. McClellan, M.D., Ph.D. "Working with Congress we have a variety of initiatives in action to do just that, beginning now with lower prescription drug costs."

Nearly six million Medicare beneficiaries have signed up for Medicare-approved prescription drug discount cards. Independent studies have shown those cards are saving beneficiaries significant costs on prescription drugs, with low-income seniors saving up to 90 percent. Information on competitive prices, generic drugs and alternative drugs is helping bring down prices. Seniors will save even more beginning in 2006, when Medicare begins offering a comprehensive prescription drug benefit. Low-income beneficiaries will save up to $3,500 per year as part of the new benefit.

Beginning January 1, 2005, new preventive benefits in Medicare will help, considerably, to bring down costs and improve the health and quality of life of seniors by preventing complications and hospital readmissions, according to Medicare. As part of these new benefits, all new Medicare enrollees will receive a free Welcome to Medicare physical examination.

Medicaid is also making health care more affordable for low-income Americans. Today, some 56 million individuals are receiving services through either Medicaid or the State Children's Health Insurance Program (SCHIP). Under President George W. Bush, more than 4,250 state plan amendments, waivers and demonstrations have been approved, which has led to greater access and enhanced benefits to those who need it most. CMS estimates that approximately 2.6 million individuals will become eligible for Medicaid or SCHIP when these expansions are fully implemented, and approximately 7.5 million will have improved coverage.

CMS also is conducting demonstrations to cut costs and improve health through better coordination of care and disease management. Pay-for-performance demonstrations and other quality measures are also targeted at improving care and lowering costs.

More from the report

Age Estimates in the National Health Accounts (.pdf 99 KB)
Sean P. Keehan, Helen C. Lazenby, Mark A. Zezza, and Aaron C. Catlin

ELDERLY

In 1999, people age 65 or over made up only 13 percent of the population yet consumed 36 percent of spending for personal health care. This spending totaled $387 billion or $11,089 per person, quadruple the amount of per person spending ($2,793) for people under age 65. Medicare financed 46 percent of the health care spending for the aged in 1999 while Medicaid financed over 15 percent. During this period, Medicare primarily funded acute care services and Medicaid paid the largest portion of nursing home care.

The aged accounted for four-fifths of all spending for nursing home care and three-fifths of spending for home health care in 1999.

Average spending for health care generally escalates as people age and health deteriorates. As age advances, treating progressively more severe and complex medical conditions is reflected in the mix of services. The oldest old (age 85 or over) use more acute care services and require more, very expensive nursing home care than younger seniors. Also, the oldest old are more likely to be in their last year of life, which has been shown to correspond to high health care costs.

Payer Sources

In 1999, Medicare funded almost one-half of all spending for those age 65-74 and 75-84, and 36 percent of expenditures for the oldest old. This included 73 percent of hospital care spending, 65 percent of spending for physician and clinical services, and 40 percent of home health care spending for the elderly.

Medicare paid for only 6 percent of all elderly prescription drug spending in 1999, mostly accounted for by those in Medicare managed care plans.

Out-of-pocket payments represented 16 percent of all personal health care spending for persons age 65-84 in 1999, but accounted for 21 percent of spending for the oldest old. By comparison, the share paid out-of-pocket in 1987 was 22 percent for those age 65-84 and 29 percent for the oldest old. In 1999, prescription drug spending was the largest out-of-pocket expense for those age 65-74, accounting for 28 percent of their out-of-pocket payments; for those age 75-84 and for the oldest old, the largest out-of-pocket expense was nursing home care at 34 and 66 percent, respectively. Out-of-pocket spending on prescription drugs was higher for the average person age 75-84 ($395) than for both the 65-74 ($371) and the oldest age group ($265) in 1999.

Private health insurance and Medicaid each financed small shares (15 percent each, approximately) of overall health care expenditures of the aged. However, the share was much larger for certain services: almost one-third of prescription drug spending was funded by private health insurance while Medicaid funded 40 percent of spending for nursing home care in 1999.

Services

Hospital care and physician and clinical services accounted for 56 percent of seniors’ personal health care spending in 1999, with the spending shares for these acute care services declining as people advance in age. Age-related declines in the share of overall spending going for these services resulted from increasing spending on long-term care (LTC), rather than from lower levels of spending on acute care services. In 1999, per capita spending for hospital care was $5,791 for the oldest old, compared with $3,298 for those age 65- 74. By comparison, the oldest old spent, on average, $7,819 on nursing home care while those 65-74 spent only $611.

Spending for physician and clinical services averaged $2,263 per person for those age 75-84 in 1999, with the youngest and the oldest age groups averaging approximately 12 percent less.

For the oldest old, spending for physician services may have been limited because they were receiving alternative care in nursing homes. Also, if they were in their last year of life, they or their families may have chosen to forego some treatment measures in favor of hospice care (Levinsky et al., 2001).

The major payer for physician and clinical services was Medicare, followed by private health insurance. The private health insurance share was 25 percent for the youngest elderly age group, who are more likely to participate in the workforce and have employer-based private health insurance, compared with 14 percent for the two older age groups.

For each age group, the out-of-pocket share of spending for physician and clinical services dropped approximately 10 percentage points from 1987 to 1999 (eventually reaching 6 percent) while the private health insurance and Medicare shares rose.

In 1999, prescription drug spending accounted for 8 percent of all health care spending for the aged, but represented the largest single out-of-pocket expense for the 65-74 age group and second largest for the 75-84 age group. The elderly paid for 41 percent of prescription drug expenditures directly out-of-pocket while private health insurance financed 33 percent. By comparison, the 1987 out-of-pocket share was 64 percent, with more than one-half of this change in share shifted to private health insurance (smaller shares were picked up by Medicare and Medicaid). The oldest old relied more heavily on Medicaid than did younger elderly cohorts, reflecting declines in income as the population ages and the spending down of assets to qualify for Medicaid coverage (Johnson and Penner, 2004).

Advancing age increases the need for LTC, which contributed heavily to higher per capita spending for older Americans.10 In 1999, nursing home expenditures for the oldest old consumed 39 percent of their total personal health care expenditures, compared with 18 percent for the 75-84 age group. Trends in spending for home health care were comparable to those for nursing home care, with average spending increasing for each successive age group. The outof- pocket share of payments for home health care also increased with advancing age, reaching one-third of all spending for the oldest old. However, unlike nursing home care, Medicare funded the largest share of spending for home health care—40 percent in 1999.

FUTURE IMPACTS

Over the next several decades, the elderly share of the population is projected to move from 12.5 percent in 1999 to 21.3 percent in 2049.

One of the most valuable applications of age estimates is to be able to isolate the effect on health care spending growth from only the changing age-mix of the population. We can then simulate the impact of this factor in the future by holding constant other cost-increasing factors that drive growth in health care spending such as technological change, price inflation, and age-specific utilization rates, at 1999 levels.11 Another costincreasing factor is population growth; however, this factor is removed in the simulation because the results are reported on a per capita basis. This exercise does not create a complete health care projection, but instead provides insight into the role that the changing age-mix of the population may have on future health care spending.

This analysis shows that the effects of the changing age-mix of the population on personal health care spending growth would average just under 0.5 percent annually (27 percent cumulatively) from 1999 to 2049, double the average annual growth rate due to aging from 1987 to 1999. The growth rate over the 50-year simulation period is also above the 0.3 percent growth rate during the 1965-1999 period, which has also been documented in other studies. Even though the changing age-mix of the population is expected to play a larger role in the future, it is still rather limited when compared with the 10.6 percent average annual growth of personal health care spending from 1965 to 1999.

These small age-mix effects on the annual growth of overall health spending mask more significant effects on certain services and payers. The nursing home sector is most affected by this demographic change, which would increase nursing home spending by 1.3 percent annually (89 percent cumulatively) from 1999 to 2049. Growth is projected to peak between 2029 and 2039 when the baby boom generation reaches and surpasses age 85, and is expected to have a considerable impact on Medicaid and out-of-pocket spending that pays for the vast majority of this care. In contrast, spending on hospital care, prescription drugs, and physician and clinical services is projected to experience smaller age-mix impacts over the five-decade period.

The program responsible for financing the largest portion of health care spending by the elderly—Medicare— will experience the most significant age-mix effect of any payer, increasing just over 1 percent annually (67 percent cumulatively) from 1999 to 2049. In contrast, both Medicaid and out-ofpocket spending can be expected to increase by 0.5 percent annually due to age-mix effects—only slightly faster than the effect on overall spending. The impact of aging on private health insurance is greatest between 1999 and 2009, as the baby boomers enter the more expensive working-age cohorts and just before they become eligible for Medicare. However, the age-mix effect on private health insurance growth is limited over the 50-year simulation period, averaging just 0.2 percent per year.

As discussed in the 2004 Medicare Trustees Report, the projected distribution of the population in the future is likely to create challenges in financing elderly health care spending. The relatively slower population growth in younger age groups that provide tax income to support pay-as-you- go programs, such as Medicare, will place increasing pressure on health care financing for an aging population—even more so when the prescription drug benefit begins in 2006. Slower population growth in the working-age cohorts will mean that the number of workers supporting each beneficiary of agerelated programs such as Medicare and Social Security will fall. For Medicare, 2.2 workers will likely support each beneficiary in 2049, down from 4.0 in 1999 (Board of Trustees, 2004).

The simulation provided here shows a static aging effect because only the distribution of the population is allowed to change. This is a narrow definition of the effect of population aging used by several researchers (Strunk and Ginsburg, 2002, Reinhardt, 2003). This type of exercise assumes that relative spending in each age group remains constant over the next several decades. From 1965 to 1987, growth in per capita personal health care spending for the elderly outpaced that for the non-elderly (Lubitz et al., 2001). However, from 1987 to 1999, growth was similar for both groups, causing the ratio of per capita personal health care spending of the elderly to the non-elderly to remain stable.12 Our estimates show that elderly spending grew slightly faster than nonelderly spending between 1987 and 1996, while the opposite was true between 1996 and 1999 (Table 5). This turnaround was driven by a sharp downturn in home health care growth and a strong deceleration in hospital spending growth mainly caused by efforts to control fraud and abuse in Medicare and by provisions of the BBA that curbed Medicare payments to home health agencies and skilled nursing facilities. Additional slower growth in Medicare inpatient hospital spending came from the nationwide trend of lower inpatient hospital utilization. Another reason for the turnaround is higher relative spending by the baby boom generation as it moved into older age groups during this period.13 Looking at aging effects more broadly, it is possible that future elderly health care spending could resume growing at a faster rate than that of the non-elderly.

Should we return to the experience of the 1965-1987 period, this broader view would show much larger impacts of aging than the static effects described in the simulation. An example of why spending could return to this historical trend is the diffusion of cost-increasing medical technologies focused toward the aged, especially with the movement of the baby boom generation into aged cohorts. On the other hand, lower elderly disability trends coupled with earlier treatment of chronic conditions by the non-elderly could continue the 1996-1999 trend of relatively stronger non-elderly growth in the future. Either way, the simulation presented here likely minimizes the total effect that the aging of the population will have on health spending over the next several decades.

CONCLUSION

This report has broken down the Nation’s health care spending by children, working-age adults, and the elderly. Children spend the least on health care with private health insurance and more recently, Medicaid, picking up the bulk of the bill.

Adults from age 19 to 64 make up over half of the population and spend the most aggregate dollars on health care with private health insurance as the most common payer. The elderly have the highest per capita expenditure on health care, almost four times the under 65 population, with Medicare paying for about half of their health care costs.

Higher relative health spending levels by the aged and faster elderly population growth combine to generate much discussion and confusion about the impact that aging will have on future health care expenditures. Defined narrowly, aging will continue to play a relatively minor role in comparison to other factors that influence health care spending growth. The aging of the population, though, is likely to have significant implications on the financing of health care and a disproportionate impact on spending for certain services and payers.

Internet address: http://www.cms.hhs.gov/statistics/nhe/age.

Population Projections, by Distribution and Average Annual Growth Rates: 1987-2049

Distribution - Percent

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