A Look At Catastrophic Medical Expenses And The Poor by S.E. Berki

Transcription

1 DataWatch A Look At Catastrophic Medical Expenses And The Poor by S.E. Berki Catastrophic illness, or, more precisely, financially catastrophic illness, affects a relatively small percentage of the population, yet it accounts for a substantial share of national health expenditures. The relative national magnitude of the problem depends entirely on how one defines a catastrophic level of expenditure, and who incurs the expense. Several coronary artery bypass procedures at $25,000 to $30,000 apiece may represent a catastrophic expenditure for a small, newly established health maintenance organization (HMO) even though it may not be financially catastrophic for the patients if their health benefits pay for them. On the other hand, even a relatively low-cost disease, involving no more than a $2,000 expenditure, may be financially disastrous for a lowincome family without health insurance. From society's perspective, a disease may have catastrophic financial implications if it results in high productivity losses, what economists call the indirect costs of illness, resulting from premature mortality and high morbidity in the workingage population. It is important, therefore, to distinguish between highcost and financially catastrophic illness and to specify both the bearer of cost for whom financial catastrophe is implied as well as the point at which expenditures become catastrophic. Current discussion of catastrophic health insurance focuses on expenditures by the family. An expenditure for medical care becomes financially catastrophic when it endangers the family's ability to maintain its customary standard of living. Based on the belief that the basic spending unit is the family and not the individual (since the welfare of each individual within the family is interdependent), expenditures per family rather than per capita are the appropriate units of analysis and of policy. Thus the threshold at which a level of expenditure becomes financially catastrophic should be defined relative to family income. 1 A hospital episode costing $5,000 is not financially catastrophic for any family whose health insurance (whether private, Medicare, or Medicaid) fully pays for it. It may not be catastrophic for a family even S.E. Berki is professor of health services management and policy at the University of Michigan School of Public Health. He is an economist who has resided at the University of Michigan for two decades.

2 DATAWATCH 139 without health insurance whose annual income is $100,000. Yet it represents financial disaster for a family without health insurance whose annual income is only $15,000. Our study used three thresholds and concentrated on that subset of families whose exceeded 5, 10, and 20 percent of their annual family income. The 5 percent level corresponds roughly to the 1986 income tax laws, which qualify exceeding 5 percent of adjusted gross income as tax-deductible. Since the recent congressional conference report that sets the deductibility threshold at 7.5 percent indicates no clear consensus on what constitutes a financially catastrophic level of expenditures and since previous analyses have employed other levels, we consider 10 and 20 percent of income as well. This report, therefore, examines the incidence of expenditures and some of the characteristics of families that incurred medical expenditures in 1977 that exceeded 5,10, or 20 percent of their family income. Data And Methods This report builds on Louis Rossiter and Gail Wilensky's groundbreaking study of the financial burden of medical care expenditures, and uses the same National Medical Care Expenditure Survey (NMCES) database. 2 In 1977, the National Center for Health Services Research and Health Care Technology Assessment interviewed a nationally representative sample of 14,615 families in depth about their health services utilization, expenditures, health status, and socioeconomic characteristics. Detailed descriptions of the sample, the procedures employed, and the calculation of the relative errors and of the national estimates are available elsewhere, as are more detailed reports on our findings. 3 Families With Financially Catastrophic Expenditures Nearly 16 million American families, about one of every five, had outof-pocket expenditures in 1977 that equaled or exceeded 5 percent of their income. Almost half of such families, 7.5 million, incurred out-ofpocket medical care expenditures that were 10 percent or more of their income. The most hard hit were those 3.3 million families, or 4.3 percent of all families, whose medical care expenditures equaled or exceeded 20 percent of their family income (Exhibit 1). The vast majority of families, 62.8 million or 80 percent, had out-ofpocket medical less than 5 percent of their income. These families accounted for 58 percent of all national health care expenditures, while the 19.9 percent of families whose health care expenditures were 5 percent or more of their income generated almost 42

3 140 HEALTH AFFAIRS Winter 1986 Exhibit 1 Total Health Services And Mean Out-Of-Pocket Expenditures, 1977 Out-of-pocket expenditures as percent of income 5% or more 10% or more 20% or more Number (and percent) of families 15,600,648(19.0%) 7,514,111(9.6) 3,369,482 (4.3) 78,360,064(100.0) Mean Total expen diture ($ in expenditure ($) billions) $1, $ , , Percent of total expenditure percent of all such expenditures. Families with expenditures amounting to 10 percent or more of their income (9.6 percent of all families) generated a little more than a quarter of all health expenditures. In other words, one in ten families accounted for one of every four dollars spent for health care. Out-of-pocket expenditures for medical care as a proportion of income varied greatly by income level. As stated above, 9.6 percent of families at all income levels spent 10 percent or more of their income on health care. Fewer than one in 100 (0.9 percent) families with an income of at least $20,000, but almost one of six (17.9 percent) with less than $12,000 income, incurred expenditures amounting to 10 percent or more of their family income (Exhibit 2). Even at the substantially lower financial burden of expenditures at 5 or more percent of income, these disproportionalities remain. Thus while only about five of each 100 families with an income of $20,000 or more spent 5 percent or more of it for medical care, nearly one of every three (31.7 percent) families with an income of less than $12,000 incurred medical amounting to 5 percent or more of their income. Since family income is not adjusted for family size, it is instructive to Exhibit 2 Percent Of Families At Various Income Levels Spending More Than 5,10, And 20 Percent Of Their Income On Out-Of-Pocket Expenses, 1977 Income level and poverty status Less than $12,000 $12,000-19,999 $20,000 or more Percent of all families % or more on % or more on Above poverty level Poverty level and below % or more on

4 DATAWATCH 141 consider expenditures as a percent of income by poverty level. Reported incomes are adjusted for family size in accordance with U.S. Bureau of Census procedures. In 1977 the mean poverty threshold for a family of four was $6,157. The relationship of burdensome medical care expenditures to income is clearly shown by the fact that while only 6 percent of families above the poverty level spent 10 percent or more of their income on health care (excluding health insurance premiums), almost a third of all families living at or below the poverty level spent that much (Exhibit 2). At the most financially burdensome level (where 20 percent or more of income is spent on medical care), the proportion of families at or below the poverty level is more than ten times the proportion of families above the poverty level. It is notable that while a tenth of all families spent 10 percent or more of their income on medical care, among the poor almost a third did so. Yet at this level of medical, the mean expenditure in families at or below the poverty level ($828) was less than half of the mean expenditures by families above the poverty level ($1,834), as shown in Exhibit 3. This relationship is quite consistent at each of the three expenditure levels and shows that for the roughly 12 million families living at or below the poverty level in 1977, expenditures of between $800 and $1,100 were sufficient to claim between 10 and 20 percent of their incomes. Thus it appears that it is not the absolute magnitude of their expenditures but rather their low incomes that result in catastrophic medical by a third or more of all families living in poverty. This is reinforced by the finding that almost half (47.5 percent) of all families that spent 10 percent or more of their income on medical care were at or below the poverty level. 4 Exhibit 3 Mean Annual Out-Of-Pocket Medical Care Expenditures, % or more on 10% or more on 20% or more on Poverty status Above poverty level $ $ 1, $1, $2, Poverty level and below , , , , Of all families that spent 10 percent or more of their income on medical care, more than half (53.4 percent) spent less than $1,000, and 80 percent spent less than $2,000 in 1977 (Exhibit 4). These proportions are quite similar for families with medical expenditures that claimed a fifth or more of their incomes. Only 1 percent of all families had medical expenditures of $3,000 or more, and less than 10 percent of families

5 142 HEALTH AFFAIRS Winter 1986 Exhibit 4 Percent Distribution Oí All Families With Various Out-Of-Pocket Expenditures, 1977 Total annual expenditure Less than $100 $100-$499 $ $1,000-$1,999 $2,000-$2,999 $3,000-$3,999 $4,000 or more 31.4% % or more on 3.1% % or more on 3.4% % or more on 2.8% whose expenditures amounted to 10 percent or more of their incomes spent that much (Exhibit 4). As Exhibit 5 shows, inpatient care claimed one-third to half of all outof-pocket for families spending between 5 and 20 percent of Exhibit 5 Mean Annual Out-Of-Pocket Expenditures And Their Percent Distribution, By Type Of Expenditure, 1977 Type of service 5% or more on 10% or more on 20% or more on All services $ % $1, % $1, % $1, % Inpatient hospital % % % % Inpatient physician % % % % Other inpatient % % % % Ambulatory physician % % % % Other ambulatory % % % % Dental % % % % Eyeglasses % % % % Prescribed medicines % % % % Medical equipment % % % %

6 DATAWATCH 143 their incomes on medical care. For example, families that spent 10 or more percent of their incomes on medical care spent an average $619, or 45.6 percent, of that for inpatient care, including hospital charges, inpatient physician services, and other inpatient services. But this was 6.5 times the amount spent out of pocket for all such services by all families ($94.60). And whereas all families paid only 8.7 percent of hospital charges and 22 percent of inpatient physician charges out of pocket, families with 10 percent or more of their incomes going for medical care paid almost 20 percent of hospital charges and 40 percent of inpatient physician charges out of pocket (Exhibit 6). Families with expenditures amounting to 20 percent or more of their incomes paid 25 percent and 45 percent respectively. Families with 10 percent or more of their incomes spent on medical care also spent more than twice as much ($306) for ambulatory medical care as did all families ($134) (Exhibit 5), representing 55 percent of total ambulatory physician charges as opposed to only 42 percent for all families (Exhibit 6). Exhibit 6 Percent Of Total Health Service Expenses Paid Out-Of-Pocket, 1977 Type of service 30.7% % or more on 37.6% % or more on 38.3% % or more on 41.2% All services Inpatient hospital Inpatient physician Other inpatient Ambulatory physician Other ambulatory Dental Eyeglasses Prescribed medicines Medical equipment Reasons For Catastrophic Expenditures Low incomes and poor health insurance coverage, not exorbitant outof-pocket medical, account for catastrophic medical expenditures in four of five families who spent 10 percent or more of their income on medical care in Of the 7.5 million families who spent one-tenth or more of their income on medical care, six million spent less than $2,000. But for 2.3 million of them, that expenditure claimed one fifth or more of their total family income. At this inarguably financially catastrophic level where 20 percent or more of income in a given year

7 144 HEALTH AFFAIRS Winter 1986 goes directly for medical care, 70 percent of families, or 2.3 million in 1977, still spent less than $2,000 out of pocket. At the other end of the spectrum, where high dollar amounts, not relatively low income, seem to be the main reason for incurring catastrophic direct medical, medical expenditures of $4,000 or more in 1977 were made by 370,000 families. This is only 5 percent of all families who spent one-tenth or more of their income on medical care. For 315,000 of these families, the $4,000 spent on medical care amounted to one-fifth or more of total annual family income. When poverty level rather than income is considered in relation to medical care spending, the findings are even starker. Two-thirds of all families that spent 20 percent or more of their income on medical care, and one-half of those that spent 10 percent or more in 1977, were below the poverty level. Although the incidence of catastrophic medical is relatively small in the population as a whole, it is quite large among the poor. As pointed out earlier, less than 10 percent of all families spent 10 percent or more of their income on medical care but almost a third of all families at or below the poverty level did so. These estimates are conservative; because they are limited to one year, they disregard the recurrence of catastrophic expenditures over time. Depending on how catastrophic expenditure is defined, anywhere from 12 to 25 percent of families incurring such in any one year are likely to have them again the next year. 5 And all of these estimates exclude long-term residents of nursing homes who must liquidate their assets to pay for such care and thus consistently spend more than 100 percent of their income on medical care. These data clearly support the need to reexamine our current system of health insurance. With increases since 1977 of medical care prices, deductibles, copayments, and coinsurance outstripping increases in family incomes, and with an increased number of families at or below the poverty level, the picture in 1987 can only be darker than it was in The definition of what constitutes a financially catastrophic level of health care expenditures for a family is not obvious. The fact that 80 percent of families who spent 10 percent or more of their income on medical care in 1977 spent less than $2,000, however, indicates that the design of catastrophic health insurance must consider the financial consequences of even relatively small medical care for families with low incomes and poor basic health care coverage. It may not be too much to say that families with average incomes, adjusted for their age, the number of wage earners, and race, should not be expected to spend in any one year more than 10 percent of it for medical care. It is certainly less debatable that no one already at or below the poverty level should be further impoverished by medical expenditures.

8 DATAWATCH 145 The author gratefully acknowledges support for the research on which this article is based by the National Center for Health Services Research and Health Care Technology Assessment (NCHSR/ HCTA), and the support and encouragement of Herbert Traxler and Ira Raskin of the center. However, the opinions here expressed do not necessarily reflect the views and policies of NCHSR/HCTA. NOTES 1. Although both government and academic studies have defined financially catastrophic illness in various ways, it is generally agreed that measures based on expenditures relative to family income are the most appropriate. See M.S. Feldstein, "A New Approach To National Health Insurance," The Public Interest 23 (1971):93; J. Feder, J. Hadley, and H. Holahan, Insuring the Nation's Health (Washington, D.C.: The Urban Institute, 1981); J.A. Kasper, R.O. Anderson, and C. Brown, The Financial Impact of Catastrophic Illness As Measured In The CHAS-NORC National Survey (Chicago: University of Chicago, 1975); Congressional Budget Office, Catastrophic Health Insurance (Washington, D.C.: CBO, 1982). Most state catastrophic health insurance programs take the same approach. See T Van Ellet, State Comprehensive and Catastrophic Health Insurance Programs: An Overview (Washington, D.C.: Intergovernmental Health Policy Project, Georgetown University, 1981); J. Needleman, M. Anderson, and R. Jaffe, State Options for Addressing Catastrophic Health Expense (Washington, D.C.: Lewin and Associates, Inc., 1983). There is no agreement, however, on the threshold the percentage of income spent for medical care beyond which such expenditures become financially catastrophic. 2. L.F. Rossiter and G.R. Wilensky, Out-of-Pocket Expenditure for Personal Health Services, Data Preview 13, DHHS Pub. no. (PHS) , (Washington, D.C.: National Center for Health Services Research, 1982). 3. For a detailed report of findings on which this paper is based, see S.E. Berki and L. Wyszewianski, Families with High Out-of-Pocket Expenditures, Final Report on Phase II of Contract No , Pub. no. (NTIS) PB /AS (Washington, D.C.: National Technical Information Service, 1986); and L. Wyszewianski, "Families with Catastrophic Health Care Expenditures," Health Services Research, forthcoming. Detailed descriptions of NMCES procedures are found in G.S. Bonham and L.S. Corder, National Health Care Expenditures Study, Instruments and Procedures 1: NMCES Household Interview Instruments, DHHS Pub. no. (PHS) (Washington, D.C.: 1981); and S.B. Cohen and WD. Kalsbeek, National Health Care Expenditures Study, Instruments and Procedures 2: NMCES Estimation and Sampling Variances in the Household Survey, DHHS Pub. no. (PHS) (Washington, D.C.: National Center for Health Services Research, 1981). 4. Berki and Wyszewianski, Families with High Out-of-Pocket Expenditures. 5. CBO, Catastrophic Health Insurance.