Household out-of-pocket health care expenditure trends:
1980–95
Deanna L. Sharpe,1 Jessie X. Fan2 and Gong-Soog Hong3
1 University of Missouri, MO, USA
2 University of Utah, UT, USA
3 Utah State University, UT, USA
Abstract
This descriptive study examines household out-of-pocket
expenditure trends for health insurance, medical services,
prescription drugs and medical supplies using the 1980–95
Consumer Expenditure Surveys. Constant dollar out-ofpocket expenditures for health insurance have risen sharply
over time while constant dollar out-of-pocket expenditures
for medical services have declined, perhaps reflecting
health care market changes. Older consumers spent more
in constant dollars and had higher budget shares for all
aspects of health care than younger consumers. Although
Medicare and Medicaid provide access to basic health care,
results indicate that, for older consumers who are poor,
health care expenditures may still crowd out spending for
other necessities.
Keywords Health care, out-of-pocket expenditures.
Introduction
Health care has become increasingly expensive in
the United States. During the 1980s and 1990s, inflation-adjusted national health care expenditures grew
between 5% and 6% a year. By the end of the 1990s,
national health care expenditures exceeded 13% of U.S.
Gross Domestic Product. Health care costs are projected to increase at twice the rate of inflation over the
next several years.1 In response, private health insurance
companies have passed on cost increases to consumers
in the form of higher health insurance premiums,
reduced reimbursements and tighter coverage restrictions. Recently, the managed care approach to health
care delivery has gained popularity as a means of
Correspondence
D.L. Sharpe, University of Missouri-Columbia, 239 Stanley Hall, Columbia, MO 65211, USA. E-mail SharpeD@missouri.edu
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restraining costs through use of preventive care, prepayment of most medical services and restricting the use
of medical services.2–4
The elderly and the poor can obtain basic health care
through government funded Medicare and Medicaid
respectively.5,6 Tax and transfer payments essentially
redistribute a portion of the health care financial burden
from these groups to the general population. This redistribution implies that a social contract exists which says
that those least able to help themselves as a result of
advanced age, limited physical capacity or inadequate
economic resources should receive help to meet a basic
need. Escalating health care costs have begun to force
reconsideration of the form and extent of this social
contract, however. Provisions of the 1997 Balanced
Budget Act were clearly intended to slow growth in
public health care expenditures under Medicare and
Medicaid.
If accessible and affordable health care for a broad
segment of the U.S. population is a public policy goal,
assessing household out-of-pocket spending on health
care is important for national health policy planning.
This study uses 15 years of Consumer Expenditure
Survey data to chart trends in constant dollar outof-pocket dollar expenditures and household budget
shares for health insurance, medical services, prescription drugs and medical supplies, taking eligibility for
government health care programmes into consideration. Findings were used to draw policy implications
regarding the effect of health care market changes and
the allocation of the health care financial burden.
Related literature
The health economics literature suggests that the low
price that consumers pay out-of-pocket after the insurance company covers the larger share of the costs
induces a higher demand for health care.7 In support
of this idea, Rubin and Koelln8 found a significant and
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© 2001 Blackwell Science Ltd
D.L. Sharpe et al. • Out-of-pocket health care expenditure trends
positive association between having health insurance
coverage and the level of out-of-pocket health expenditures; also, the demand for health care increased as
financial resources increased. They presented their
results as evidence of moral hazard in health care
markets and adverse selection in health insurance
markets. Moral hazard refers to the increased demand
for health care that results from having health insurance
coverage. Adverse selection occurs when those most in
need of health care services are the ones who purchase
health insurance.7
Ace and Sabelhaus9 report that the average household spent 62% more on health care in 1997 than in
1987. In 1987, medical service expenditures took the
bulk of the health care dollar, whereas, in 1997, health
insurance was the largest component of a household’s
health care expenses. Similarly, Paulin and Weber3
found that average spending on health insurance premiums by families rose almost 70% between 1988 and
1993. The out-of-pocket share of health care expenditures for health insurance increased, while the share
spent on medical services declined by approximately
10%. Thus, households spent proportionately more on
health insurance premiums but less on actual medical
services.
Out-of-pocket expenditure for in-patient hospital
care has declined steadily since the 1980s as a result
of the movement of employer-sponsored insurance,
Medicare, and Medicaid to managed care, and increasing numbers of treatments in ambulatory settings. These
changes resulted in fewer hospital admissions and
in-hospital days, which, in turn, slowed the increase in
out-of-pocket spending for hospital care. Out-of-pocket
expenses for physician services fell by 9.2% between
1980 and 1992 and have increased slowly since 1992 with
annual growth rates of less than 10%.10
Ace and Sabelhaus9 reported that average out-ofpocket expenses for prescription drugs have been fairly
stable although the aggregate outlays for prescription
drugs have increased since the mid-1990s. Baker and
Kramer11 explained that bulk rate, mail-order prescription drug services, generous insurance coverage and
inexpensive generic drugs might have contributed to
the stable growth (as opposed to significantly greater
growth) in out-of-pocket expenses for prescription
drugs.
© 2001 Blackwell Science Ltd
Method
Data
Data for this study are from the interview portion of
the 1980–95 Consumer Expenditure Surveys (CES).
The CES collects data quarterly from approximately
5000 consumer units (generally, household members
related by blood, marriage, adoption or other legal
arrangement) in a rotating panel design.12 Consumer
units typically contribute data for five consecutive quarters. Each quarter, 20% of the sample is replaced with
new participants. Although the survey focuses on both
regular and relatively large household expenditures,
limited demographic, social and economic data are also
obtained from consumer unit members.
Sample
For each year from 1980–1995, consumer units that contributed to four consecutive quarters of information in
a given year and that were complete income reporters
were selected. A few cases that had expenditure values
for medical services greater than two standard deviations from the mean were deemed outliers and were
excluded. The final sample in this study consisted of
14 513 consumer units (for all years combined).
Analysis
To make comparisons using constant dollars across
time, expenditure levels for each year were converted
to 1996 dollars using the Consumer Price Index (CPI).
Then, overall trends in out-of-pocket expenditures
for health insurance, medical services, prescription
drugs and medical supplies made between 1980 and
1995 were charted using the entire sample. This approach facilitates comparison of similarities and differences in expenditure trends among the four types of
health expenditures, but presumes that all consumers
within the sample face similar health care costs. Use of
Medicare or Medicaid, however, could reduce out-ofpocket costs for eligible households.
To account for Medicare eligibility, the sample was
subdivided into those under age 65 years (younger consumers) and those aged 65 years or older (older con-
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Out-of-pocket health care expenditure trends • D.L. Sharpe et al.
1200
Constant dollar (1996 $)
sumers). As Medicaid use was not reported in the early
years of the CES data used in this study, poverty status
was used to proxy access to Medicaid. Although the
specific requirements for receiving Medicaid have
varied over time, as a means-tested programme it is generally available to those with low income. In both age
groups, those who had expenditures at or below 125%
of the official poverty threshold were classified as poor
(designated as lower income in the figures); all others
were classified as non-poor (designated as higher
income in the figures). Data limitations in the CES led
to use of total expenditures to proxy income.13 The
choice of the 125% was based on recent criticism that
the official poverty threshold is too stringent and does
not adequately identify the poor.14
1000
Health insurance
800
Prescription drugs
Medical supplies
600
Medical services
400
200
0
80
82
84
86
88 90
Year
92
94
96
Figure 1 Out-of-pocket expenditures (in 1996 constant
dollars) on health care by expenditure categories: 1980–95.
Variables
Four types of health-related expenditures, as categorized in the CES data, were examined: health insurance,
medical services, prescription drugs and medical supplies. Health insurance included commercial health
insurance, Blue Cross or Blue Shield plans, health
maintenance plans, Medicare premiums, commercial
Medicare supplements, and other types of medical
insurance such as dental insurance. Medical services
included net outlay for services of physicians and other
medical professionals, lab and hospital services (other
than room), dental care, and eye exams, treatment or
surgery. Net outlays for medicines and prescription
drugs were combined. The net outlay for purchase
of eye glasses or contact lenses, medical or surgical
equipment (e.g. ice bags, heating pads, orthopaedic
appliances, etc.), supportive or convalescent medical
equipment (e.g. wheelchair, braces, etc.), or hearing aids
comprised out-of-pocket spending for medical supplies.
Findings
Overall trends
Lines for the four types of health expenditures for
all consumers (Fig. 1) indicate that, before the late
1980s, out-of-pocket expenditures for medical services
were above out-of-pocket expenditures for health insurance. After that time, out-of-pocket expenditures for
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health insurance exceed out-of-pocket expenditures for
medical services. The two lines no longer track together
but diverge, with out-of-pocket expenditures for health
insurance continuing to rise and out-of-pocket expenditures for medical services declining. These findings are
consistent with previous research3,7 and probably reflect
both the prepayment of medical services and restricted
access to medical services under managed care.
Increases in prescription drug costs have received
blame for rising health care costs.15 Fig. 1 suggests,
however, that constant dollar out-of-pocket prescription drug expenditures have remained relatively constant over time. Taken together, these facts suggest that
some of the higher cost may be indirectly borne by the
consumer in the form of higher health insurance premiums. Alternatively, employees may have received
reimbursement for prescription drug costs from their
employer’s medical savings account. Or, the relatively
low spending by some consumers may offset the high
level of spending on prescription drugs by other
consumers.
Not surprising, constant dollar out-of-pocket expenditures for medical supplies were relatively low and flat
across all years of this study. Many commonly used
medical supplies are relatively inexpensive; few consumers would purchase more costly medical supplies.
Thus, average spending for medical supplies across a
broad spectrum of consumers would remain low.
International Journal of Consumer Studies, 25, 2, June 2001, pp114–122
© 2001 Blackwell Science Ltd
D.L. Sharpe et al. • Out-of-pocket health care expenditure trends
2000
Trends in budget share of total out-of-pocket
expenditure on health care
Trends by expenditure type
Health insurance expenditure
As seen in Fig. 3, heath insurance expenditures trend
upwards rather sharply for all consumers except the
young poor. While the latter group also experienced
increasing expenditure levels, the change over time was
not quite as dramatic as it was for other groups. In this
respect, the group-specific expenditure trends mirror
the expenditure trends seen in the overall analysis.
Costs are not borne equally by all consumers, however.
Over the 15-year period, those aged 65 years and older
spent more than those under age 65 years, despite their
Medicare eligibility. Within each age group, the expenditure level of the poor is below that of the non-poor,
< 65 higher income
1000
< 65 lower income
500
Total health care budget share (%)
18
≥ 65 higher income
16
≥ 65 lower income
82
84
86
88 90
Year
92
94
96
Figure 3 Out-of-pocket expenditures (in 1996 constant
dollars) on health insurance by age and income groups:
1980–95.
14
≥ 65 higher income
12
10
≥ 65 lower income
8
< 65 higher income
6
< 65 lower income
4
2
0
80
20
≥ 65 lower income
1500
0
80
Health insurance budget share (%)
Older consumers devoted a larger share of their budget
to all health care expenditures than younger consumers
did, a share that generally increased over time (Fig. 2).
Older consumers with lower incomes spent a larger proportion of their budget on health care than those with
higher incomes. Among younger consumers, those with
higher incomes devoted a larger budget share to health
care, perhaps reflecting both an increased ability to pay
and a willingness to make human capital investments
in health.
Health insurance (1996 $)
≥ 65 higher income
82
84
86
88 90
Year
92
94
96
Figure 4 Budget share of health insurance by age and
income groups: 1980–95.
14
< 65 higher income
12
10
< 65 lower income
8
suggesting that, among the poor, either Medicaid is
an effective substitute for own purchase of health insurance or a substantial number opt to be under- or
uninsured.
6
4
2
80
82
84
86
88 90
Year
92
94
96
Figure 2 Budget share of total out-of-pocket expenditures
on health care by age and income groups: 1980–95.
© 2001 Blackwell Science Ltd
Health insurance budget share
As a share of the household budget, out-of-pocket
spending on health insurance is clearly a greater burden
for those aged 65 years and older than for those who
are younger (see Fig. 4). Indeed, for older individuals,
health insurance expenditures have required an increas-
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Out-of-pocket health care expenditure trends • D.L. Sharpe et al.
Medical services expenditure
The level of expenditure on medical services for the
groups shown in Fig. 5 repeats the slight downward
trend depicted in the overall analysis (Fig. 1). It is not
entirely clear what contributed to the volatility in
spending among the non-poor aged 65 years and older.
Introduction of the Consolidated Omnibus Reconciliation Act of 198516 may have encouraged some retiring
employees to purchase continued group health coverage from their former employer, allowing them to use
health care as needed rather than forgoing or postponing medical services. Market adjustment to the new
legislation may have contributed to the subsequent up
and down swings before a decided downward trend
prevailed. Expenditure levels were clearly lower for
the poor in both age groups, perhaps reflecting either
substantial subsidization of the cost of medical services
by Medicaid or limited utilization of medical services
by the poor.
2000
Medical services (1996 $)
≥ 65 higher income
≥ 65 lower income
1500
< 65 higher income
1000
< 65 lower income
500
0
80
82
84
86
88 90
Year
92
94
96
Figure 5 Out-of-pocket expenditures (in 1996 constant
dollars) on medical services by age and income groups:
1980–95.
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6
Medical services budget share (%)
ingly large proportion of the household budget over
time. This proportion was greater and the upward trend
in the budget share was steeper for the poor in the older
group. In contrast, the budget share levels for both the
non-poor and poor among the young show only a slight
increase over time.
≥ 65 higher income
5
≥ 65 lower income
4
< 65 higher income
3
< 65 lower income
2
1
0
80
82
84
86
88 90
Year
92
94
96
Figure 6 Budget share of medical services by age and
income groups: 1980–95.
Medical services budget share
All four groups devoted an increasingly smaller share
of their budget to medical services over time (see Fig. 6).
Within each age group, though, the share of the budget
allocated to medical services was lower for the poor
than for the non-poor. At least until the early 1990s, the
budget shares for medical services for older consumers
were greater than that of younger consumers. After
1992, the continuing decline in the medical services
budget share for older poor consumers crossed the
line for the younger non-poor consumers, a line that
declined only slightly over the time period studied.
Prescription drug expenditure
While the analysis of trends in health care spending for
all consumers indicated that prescription drug expenditure had remained relatively flat over time, the disaggregated trends clearly indicate that older consumers
spent considerably more than younger consumers on
prescription drugs (see Fig. 7). Indeed, expenditures by
poor and non-poor older consumers move decidedly
upwards, while those of poor and non-poor younger
consumers appear to remain relatively constant over
time. This difference may reflect the fact that older individuals typically have a greater need for prescription
drugs owing to declining health. Prescription drugs may
be used to prevent or postpone more costly medical
procedures.17 Younger individuals may have greater
access to prescription drug benefits through their
International Journal of Consumer Studies, 25, 2, June 2001, pp114–122
© 2001 Blackwell Science Ltd
D.L. Sharpe et al. • Out-of-pocket health care expenditure trends
700
160
Prescription drugs (1996 $)
600
500
≥ 65 lower income
400
< 65 higher income
< 65 lower income
300
200
100
0
80
Medical supplies (1996 $)
≥ 65 higher income
140
≥ 65 higher income
120
≥ 65 lower income
100
< 65 higher income
80
< 65 lower income
60
40
20
82
84
86
88 90
Year
92
94
0
80
96
82
84
86
88 90
Year
92
94
96
Figure 7 Out-of-pocket expenditures (in 1996 constant
dollars) on prescription drugs by age and income groups:
1980–95.
Figure 9 Out-of-pocket expenditures (in 1996 constant
dollars) on medical supplies by age and income groups:
1980–95.
employer-sponsored group health plan. In contrast,
Medicare does not cover prescription drug costs; thus,
those over age 65 years must either pay the costs outof-pocket or purchase a Medicare supplement that
covers prescription drugs.
65 years and older, however, the budget share for prescription drugs trended decidedly upwards, with the
lines for the poor typically slightly higher than the nonpoor among this group.These findings suggest that older
consumers bear a relatively greater burden in paying for
prescription drugs than younger consumers, a burden
that is heavier for the poor among older consumers.
Prescription drug budget share
Figure 8 indicates that the budget share allocated to
prescription drugs among those under age 65 years
remained relatively flat and at about the same level over
time for both the poor and the non-poor. For those aged
Prescription drugs budget share (%)
4
≥ 65 higher income
≥ 65 lower income
3
< 65 higher income
2
< 65 lower income
1
0
80
Medical supply expenditure
Trends in medical supply expenditure for the disaggregated groups (see Fig. 9) are clearly more volatile than
the overall trend analysis revealed. The non-poor spent
more than the poor. Within each income group, older
consumers generally paid more out-of-pocket than
younger consumers.
82
84
86
88 90
Year
92
94
96
Figure 8 Budget share of prescription drugs by age and
income groups: 1980–95.
© 2001 Blackwell Science Ltd
Medical supply budget share
The budget share for medical supplies reflects the same
volatility seen in the trend lines for expenditures (see
Fig. 10). Still, it is clear that out-of-pocket expenditures
for medical services represent a larger share of the
budget for those age 65 years and older than for
younger individuals, probably reflecting a greater need
for medical supplies among older consumers.
Policy implications
Policy implications related to the health care expendi-
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Out-of-pocket health care expenditure trends • D.L. Sharpe et al.
Medical supplies budget share (%)
1
≥ 65 higher income
0.8
≥ 65 lower income
0.6
< 65 higher income
0.4
< 65 lower income
0.2
0
80
82
84
86
88 90
Year
92
94
96
Figure 10 Budget share of medical supplies by age and
income groups: 1980–95.
ture trends examined in this study centre on two issues:
(1) the possible effect of recent health care market
changes on consumer behaviour and the quality of
health care received; and (2) the allocation of the health
care financial burden between public and private payers
in the health care market.
Impact of health care market changes
As previously discussed, the steep rise in health insurance expenditure for all except the poor among the
younger consumers may reflect the shift towards prepayment of medical services under managed care plans.
The rise in health insurance spending may also reflect
the trend toward requiring the ultimate consumer to
share a larger proportion of the total cost. If such cost
sharing reduces the moral hazard, both consumers and
health care markets can benefit. Out-of-pocket costs
will more accurately reflect the true cost of health care,
thus encouraging consumers to make wise choices.
Consequently, the health care market may become
more competitive.
On the other hand, should the increase continue,
consumers will either cut back on other areas of their
budget to afford health insurance or, ultimately, they
will not be able to afford the higher premium and will
either be underinsured or become uninsured. The latter
situation can have large social costs. If treatment for
health conditions is not sought until a crisis occurs
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(e.g. emergency room visits), the care is costly, making
payment collection difficult. The cost of uncollected
payments will probably shift to those who purchase
health insurance or who make various other types of
payments for health care use.
If the reduction in out-of-pocket costs in medical services noted in this study is the result of increasing efficiency in ways that did not compromise patient care,
both the consumer and the health care industry benefit.
However, the decline in medical services expenditure
may also reflect managed care practices of reducing
in-hospital days or limiting physician visits or access to
specialists. Recent passage of a California law allowing
patients to sue health maintenance organizations
(HMOs) for punitive damages suggests disagreement
exists regarding care quality in managed care settings.18
At present, few states have similar laws permitting
HMOs to be sued for malpractice. Pressure to pass
such legislation may arise, however, if consumers
believe that cost reductions compromise health care
quality for themselves or for family members.
Allocation of health care financial burden
Study results indicate that older consumers spend more
on health insurance and devote a larger share of their
budget to health insurance than younger consumers do,
regardless of income level. Among those aged 65 years
and older, those who can pay (i.e. the non-poor) apparently do pay, as their out-of-pocket costs for all types of
health care expenditure were relatively higher than that
of other groups. Examination of budget share trends,
however, suggests that the rising health-related expenditures of older consumers, especially those who are
poor, may ‘crowd out’ other budget items. For those who
have relatively low or fixed incomes, serious problems
can arise if purchase of other necessities must be
forgone to afford health care.
Medicare provides basic health insurance to virtually
all those aged 65 years and over at no or low cost. The
upward trend in health insurance expenditures among
those aged 65 years and older strongly suggests that
older consumers do not consider Medicare alone to be
sufficient for their health insurance needs, thus they purchase relatively costly supplemental insurance. Public
spending cutbacks may have little practical impact on
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D.L. Sharpe et al. • Out-of-pocket health care expenditure trends
those able to afford alternative coverage in the private
sector. For those who cannot afford such coverage,
however, the ability to obtain adequate health care may
be compromised.
Medicare does not fund long-term care nor does it
cover prescription drugs. Medicaid, however, covers
both items to a limited extent for those who meet
stringent requirements for low income and resources.
Indeed, many seniors strategically spend down their
assets to qualify for Medicaid so that they can afford
long-term care. Currently, over 40% of Medicaid costs
cover nursing home and intermediate care. Although
the aged, disabled and blind comprise only one-fourth
of Medicaid recipients, their care accounts for twothirds of programme costs.19 If Medicaid cost reduction
restricts such payments, the health care financial burden
of seniors needing nursing home and related care will
substantially increase. In some cases, the burden may be
borne by family members or other payers. In other
cases, poor quality or inadequate care may be obtained
owing to financial constraints.
Trends in both the level of expenditure on and budget
share for prescription drugs are markedly higher for
older consumers than for younger consumers, owing in
part to more extensive use of prescription drugs among
older consumers. On average, older individuals take
over 10 different prescription drugs every day.17 Addition of prescription drug benefits to Medicare is
currently being debated.20,21 Given the high cost of prescription drugs coupled with an ageing population, it is
clear that any effort to fund prescription drug purchase
under Medicare must be carefully structured to avoid
obligating government to pay a bill that spirals ever
higher. At the same time, to the extent that public policy
and managed care directives shift prescription drug and
other health care costs back to the household, those
with relatively low levels of post-retirement income
may have to forego needed medications.
The young poor had both the lowest level of spending on and budget share for all four health-related
expenditures in this study. Use of Medicaid may have
contributed to that situation. Evidence exists, however,
that Medicaid reaches only about half of the poor,
owing to complex eligibility requirements and state
variations in programme funding and implementation.19
Obviously, programme cutbacks will have little direct
© 2001 Blackwell Science Ltd
effect on those who are eligible but not currently
using the programme. To the extent that programme
cutbacks reduce health care access for the poor,
however, other social costs can rise. Human capital is
diminished. Costs of providing care to those who cannot
pay will certainly be passed on to those who can pay in
the form of higher prices.
Conclusion
Designing policy that makes health care accessible and
affordable for a broad spectrum of the population is
challenging. Declining health typically forces older consumers to pay more than younger consumers for all
components of health care.Thus, the cost reductions and
subsidies provided by Medicare and Medicaid can be
important to those aged 65 years and older. Population
ageing and increased longevity may shift more public
dollars to those over age 65 years than to those of a
younger age. Given limited government resources, escalating health care costs could displace other forms of
social investment such as education that tend to benefit
the younger generation. Legislated spending restrictions on Medicare and Medicaid may shift at least a
portion of the burden of health care financing to those
consumers least able to absorb the additional costs
owing to low or fixed income levels. In light of these
factors, difficult decisions must be made in the public
policy arena regarding who will receive health care
financing, how much will be received and for how long.
These decisions will affect the quality of care received
and the distribution of the health care financing burden
for both current and future generations.
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