Study: Health Care Costs Overstated

Published April 1, 2001

Elderly Americans spend about 12 percent of their income on out-of-pocket health expenses on average, and the poor elderly spend about 20 percent, according to a study by Santa Monica, California-based RAND.

Previous estimates—such as those calculated by researchers at the American Association of Retired Persons (AARP) and other institutions—placed the average burden for all the elderly at about 19 percent, and for the poor elderly at about 35 percent.

The report, “Methodological Biases in Estimating the Burden of Out-of-Pocket Expenses,” appears in the February 2001 issue of Health Services Research, the journal of the Association for Health Services Research. The report was written by Dana P. Goldman, a senior economist, and James P. Smith, senior fellow in Labor Markets and Demographic Studies, at RAND.

Goldman and Smith confirm that the health cost data set reported by the Medicare Current Beneficiary Survey (MCBS) and used by AARP and other researchers is sound. “But the validity of estimates of the burden that health costs impose on the elderly depends on the quality of the income data as well as of medical expenditures,” Goldman explains. “Unfortunately, the MCBS understates family income by about 20 percent and household income by 41 percent. As a result, the cost share estimates are much too high.”

The finding could play an important role in the current debate over Medicare reform in general and enactment of a prescription drug benefit in particular, the analysts say. “If the elderly are spending a large proportion of their income for health care, it’s easier to make the case for a broad-based subsidy. If the burden is significantly lower, it strengthens the case for a subsidy that is targeted on the smaller number of people, especially the poor, who really need it. After all, a 20 percent cost share is not a trivial number,” Smith observes.

RAND is a nonprofit institution that helps improve policy and decision making through research and analysis.

For more information . . .

about the Goldman/Smith report, contact Jess Cook in RAND’s public affairs office at [email protected].