Research paper elaborating on the gap in efficiency related to rising cost of pharmaceuticals for the aging population.
Since outpatient prescription drug use is not covered by Medicare, it is a major source of out-of-pocket expenditures for the elderly. By one estimate, severely disabled elderly persons spend more than half their out-of-pocket health expenditures on outpatient prescription drugs. What makes this financial burden all the more daunting is that half the elderly population has no insurance coverage for prescription drugs.
Given this burden, it is not surprising that policymakers have considered expanding Medicare benefits to cover prescription drug costs a number of times. For example, the Medicare Catastrophic Act of 1988, which contained a prescription drug benefit, was passed into law but repealed before it became effective, and during the health debate in 1993, administration proposals would have added the benefit to Part B of Medicare. New proposals are circulating again.
Still, despite the potentially catastrophic nature of prescription drug expenses and the desire to address the problem through policy, surprisingly little is known about how much the financial burden is, how much coverage might increase demand for prescription drugs, and how much such coverage might cost.
Researchers Jeannette Rogowski, Lee Lillard, and Raynard Kington addressed these issues using data from the 1990 Elderly Health Supplement to the Panel Study of Income Dynamics (PSID). Begun in 1968, the PSID is a nationally representative longitudinal survey of 7,000 elderly households and 21,000 individuals; the supplement collects detailed information on health status, insurance, and health care costs.
Among the elderly who used prescription drugs in 1990, a large fraction of drug cost (67 percent) was paid for out of pocket. As a result, the elderly spent an average of 3.1 percent of their household income on prescription drugs. Some elderly households, however, have much higher levels of expenditures and financial burden than others. For instance, 3.4 percent of elderly persons had total annual expenditures that exceeded $2,000, and 1 percent spent in excess of $2,000.
The resulting distribution of financial burden is highly skewed. Although 55 percent of elderly persons who used prescription drugs spent 1 percent or less of their household income on them, the “tail” of the distribution is long: 7 percent spent at least 10 percent, and 1 percent spent over one quarter of their household income. For those in the tail, such expenditures are potentially catastrophic.
While such numbers tell us much about the aggregate level of the burden, they tell us little about which groups bear most of the burden. The figure provides some answers to this question for the PSID group surveyed.
Those without private insurance bear nearly three times the burden of those with it. Similarly, elderly persons in poor, near-poor, and low-income households have much higher levels of burden than those in middle- and higher-income households. On average, lower-income individuals have burden levels more than three times as high as middle-income elderly people and almost 10 times as high as the high-income elderly. This is related not only to income but also to the presence of private health insurance, since the likelihood of having private insurance that covers drugs rises as income rises.
Finally, drug expenditures and burdens vary by whether the elderly have a chronic medical condition, such as diabetes. Those having one or more such conditions bear 2.5 times the burden as those who have no chronic medical conditions. The presence of a second common chronic condition, while raising total expenditures, has little additional effect on out-of-pocket expenses or burden levels.
Using multivariate analyses, the researchers showed that insurance coverage, income, and health status primarily determine the financial burden. Insurance coverage decreases the fraction of household income spent out of pocket by 50 percent once these other factors are controlled for.