The Rising Burden of Health Spending on Seniors
Thursday, February 01, 2007
by Liqun Liu, Andrew J. Rettenmaier and Zijun Wang
Table of Contents
Health Spending by the Elderly
The baby boomers are healthier and will live longer lives than previous generations. Longer life expectancies lead to 1) longer retirements, 2) a larger retired population and, inevitably, 3) higher medical expenses for the retired population. Consequently, health care spending on the over-65 population will rise at a brisk pace:
- The percentage of the U.S. economy spent on health care for the elderly - about 5.3 percent today - will more than double by 2030, and will nearly triple by midcentury. 3 [See Figure I.]
- Further, the share of total national health expenditures dedicated to the over-65 population will rise from 32 percent today to 44 percent by 2080.
Health Care Spending as a Percent of Total Consumption. If the predictions hold, total health care spending on the elderly - including both out-of-pocket spending by seniors and third-party expenditures - will constitute a growing portion of seniors' total potential consumption. "Total potential consumption" includes everything seniors can consume: All their personal income plus all health care expenditures by third parties on their behalf net of their own premium payments. 4
“The share of the economy spent on elder health care will more than double by 2030.”
- Economist Victor Fuchs estimated that in 1997 health care represented 35 percent of the "full income" of Americans age 65 and older. 5
- Today, we estimate that more than two of every five dollars of consumption by the elderly (43 percent) is health care. [See Table I.]
- By 2024, health care will equal 50 percent of seniors' total consumption
- For the 75-plus population, it is already more than half.
In these estimates, long-term care is categorized as health care and thus the projections may overstate total health care given that much of the long-term care costs are associated with housing and food. Further, these projections do not account for any changes in the health care market that may alter the relative price consumers pay for health care. Changing incentives will affect consumers' willingness to allocate their budget toward health care and thus would change the associated shares of consumption.
Health Spending versus Other Goods and Services. Health care's prominent role in the spending patterns of older Americans can be further illustrated by comparing its share of total potential consumption to spending on other goods and services. For all individuals age 65 and older, health care's percentage of total potential consumption (43 percent) dominates all the other categories, and is larger than housing, food, and savings and taxes combined. 6 As Figure II shows: 7
- For individuals ages 65 to 74, health care represents 30.6 percent of potential spending (Medicare and individually purchased medigap premiums and out-of-pocket spending are estimated to account for 8.7 percent, while third-party payments account for 21.9 percent).
- Among retirees age 75 and older, heath care already constitutes 52.5 percent of total potential consumption (Medicare and individually purchased medigap premiums and out-of-pocket spending account for 14.0 percent, while third-party payments make up 38.5 percent).
“Health care spending amounts to almost one-third of younger seniors' total consumption.”
“Health care spending amounts to more than one-half of older seniors' total consumption, on the average.”