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Economic Brief

May 2017, EB17-05

Medical Spending in Old Age
By John Bailey Jones and Jessie Romero

Older Americans’ health care spending is relevant to many policy questions.
Recent research shows that spending varies considerably with income, as do
funding sources for that spending. Overall, the government pays more for
lower-income individuals than higher-income individuals, but Medicaid is not
just a program for the young and the poor. It provides substantial benefits to
older adults with higher incomes as well.
Health care spending in the United States is an
issue of considerable interest to both policymakers and the public. The spending of people over
age 65 is of special concern given their growing
share of the population and the portion of their
health expenses paid for by the government. In
2010, average medical expenditures of people
over 65 were more than 2.6 times the national
average. They accounted for one-third of total
medical spending but only 13 percent of the
population. The government paid for about 67
percent of older adults’ health care. As their share
of the population continues to grow, the fiscal
impact is almost certain to increase.1
As policymakers consider reforms to programs
such as Medicare and Medicaid, and to the
health care system more broadly, it will be important to understand the medical expense risk
that these programs are intended to offset, the
extent to which the programs offset the risk, the
amount of expenditures associated with these
programs, and the value that older adults attach
to these expenditures. In recent research, one of
the authors of this brief (Jones) has documented
key facts about medical spending after age 65 in
an effort to answer these questions.

EB17-05 - Federal Reserve Bank of Richmond

The Distribution of Spending
In a 2016 article with Mariacristina De Nardi of
the Chicago Fed and Eric French and Jeremy
McCauley of University College London, Jones
analyzed data from the Medicare Current Beneficiary Survey (MCBS) for the years 1996 through
2010.2 Jones and his coauthors examined the
distribution of medical expenses among older
individuals, considering both total spending and
spending disaggregated by type of treatment
and by payer. They found that total spending
is highly concentrated; individuals in the top 5
percent of the expenditure distribution spent an
average of nearly $98,000 per year, compared
with the overall average of about $14,000, and
constituted nearly 35 percent of all medical
spending. Those in the top 5 percent of the
expenditure distribution also spent significantly
more out of pocket: almost $27,000 apiece versus
the overall average of $2,740. They accounted for
49 percent of all out-of-pocket spending.
Medical spending varied considerably with income. Annually, individuals with lower incomes
consumed more medical resources than those
with higher incomes; total annual spending for
older adults in the bottom income quintile aver-

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aged $17,410, while it averaged $12,430 for older
adults in the top income quintile.3

the costs associated with prescription drugs (with
an additional premium). Medicare Advantage plans
pay for close to 100 percent of the cost of hospital
stays, doctor visits, and prescription drugs. De
Nardi, French, Jones, and McCauley found that
Medicare and Medicare Advantage together paid
for 54.7 percent of older adults’ health care during
the period they studied.

Over a lifetime, at least some of this annual spending
difference is likely to be offset by the longer lifespans, on average, of higher-income individuals.
Year-to-year, much of the difference is explained by
the fact that lower-income individuals consumed
more nursing home care than those with higher
incomes. (Because those with lower incomes tend
to be sicker, they are more likely to enter a nursing
home at the beginning of a sample period. People
with high incomes are in fact slightly more likely to
enter nursing homes overall, but they enter them
later in life.4) Excluding nursing homes, the difference
in average expenditures between the bottom and
top income quintiles was only about $1,100. (See
Figure 1.)

Some individuals also have private insurance plans,
such as Medigap or employer-sponsored retiree
benefits, that can help cover expenses not paid for
by Medicare. Private insurance covered 12.5 percent
of older adults’ health care expenses. But neither
Medicare nor most private plans cover long-term
nursing home care, the median cost of which exceeds $80,000 per year.5 Researchers have estimated
that U.S. adults face a 30 percent probability of
spending at least 100 days in a nursing home; the
average length of such stays is more than three
years, at a cumulative out-of-pocket cost of more
than $200,000.6 Many of these expenses are
covered by Medicaid, which pays nearly all of the
cost of nursing home care for low-income older
adults and assists higher-income individuals who
have exhausted their savings. According to the
Kaiser Family Foundation, Medicaid assists 64
percent of nursing home residents, making it an
important public insurance program for older

How Do Older Adults Pay for Health Care?
Virtually all people older than 65 in the United
States are eligible for Medicare, which includes both
original Medicare, where Medicare pays providers
directly, and Medicare Advantage, where Medicare
contracts with private insurance companies to
provide coverage. The plans have different coverage
rates: original Medicare pays for the great majority
of the cost of short-term hospital stays, 80 percent
of the cost of doctor visits, and, since 2006, most of
1: Medical
by Incomeby
1: Medical


Average Annual Expenditures

Average Annual Expenditures excluding Nursing Homes











Average Survey
Source: Medicare Current Beneficiary
/ De Nardi, French, Jones,Average
and McCauley
(2016) excluding Nursing Homes

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adults. Jones and his coauthors found that
Medicaid covered 9.4 percent of total health care
spending. Including both Medicare and Medicaid,
the government spent close to $14,000 per year on
older adults in the bottom income quin-tile and
slightly more than $6,540 on those in the top
quintile. (See Figure 2.) Much of the difference is
explained by the large portion of Medicaid spending that goes to nursing homes.
Many researchers have shown that higher-income
people spend more out of pocket across all types
of medical care than those with lower incomes. But
if private insurance premiums are excluded, annual
out-of-pocket spending is roughly equal across the
income distribution, according to Jones and his
Who Gets Medicaid?
In another 2016 article, De Nardi, French, and Jones
studied Medicaid spending in more detail, using
data from the MCBS from 1996 through 2010 and the
1994–2010 waves of the Assets and Health Dynamics

of the Oldest Old (AHEAD), a survey conducted by
the University of Michigan.7 The authors compared
Medicaid recipiency rates and Medicaid spending
by permanent income quintile for single retirees, a
group that is particularly easy to analyze.8
As stated above, Medicaid assists both low-income
individuals and higher-income individuals who have
exhausted their savings. Individuals in the first
group, who qualify for Medicaid even if their medical expenses are small, are known as the “categorically needy.” Individuals in the second group, who
qualify only after their expenses exceed their financial resources, are known as the “medically needy.”
Not surprisingly, 70 percent of retirees in the bottom quintile — the categorically needy — received
Medicaid benefits, compared with just 5 percent of
those in the top quintile. However, higher-income
individuals received significantly higher average
Medicaid benefits: $23,790 per year for older adults
in the top income quintile versus $12,990 per year
for those in the bottom quintile. (See Figure 3.) Because richer people qualify for Medicaid only after

Figure 2: Payer Type by Income Quintile
Figure 2: Payer Type by Income Quintile




Other Government

Private Insurance












Source: Medicare
Current Beneficiary Survey
/ De Nardi, French,
Jones, and McCauley
Note: Out-of-pocket spending does not include insurance premia. Data do not include uncollected liabilities,
which are less than 2 percent of total expenditures for all income quintiles.

Private Insurance

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the value of nonmedical consumption for individuals
in the bottom permanent income quintile, while the
opposite was true for those in the top quintile. The
value of both types of consumption, however, was
much higher for the rich than for the poor. The present discounted value of nonmedical consumption
was $59,200 for the bottom quintile and $234,900 for
the top quintile. The value of medical consumption
was $108,300 for the bottom quintile and $229,700
for the top quintile.

they exhaust their savings, richer Medicaid recipients
are more likely to face catastrophic medical expenses.
For lower-income retirees, Medicaid recipiency was
fairly stable over retirement. But recipiency rates
rose rapidly with age for those in higher quintiles.
For example, in the oldest survey cohort the authors
studied, the share of people in the top two quintiles receiving Medicaid was 4 percent at age 89; it
increased to 20 percent by age 96. As this illustrates,
even older adults with relatively substantial resources can face medical shocks large enough to drain
their assets and qualify them for Medicaid.

Overall, richer retirees in the model paid more in
Medicaid taxes than they expected to receive in
Medicaid benefits, while poorer individuals paid
much less. Those in the top quintile paid $4.59 in
taxes for every $1 in expected benefits, while those
in the bottom quintile paid just 20 cents per dollar
of expected benefit.

In line with these findings, higher-income individuals
also faced a greater risk of increasing out-of-pocket
spending (including insurance premia). Out-of-pocket
spending rose substantially with age, especially for
those in the top quintile; lower-income people, who
were categorically protected by Medicaid, spent less
out of pocket.

Still, richer individuals seem to value Medicaid quite
highly. The authors simulated various reforms to
Medicaid and calculated the payment an older adult
would need to receive (known as the compensating
variation) in order to be as well off after the reform
as before it. When Jones and his coauthors made the
program less generous, they found that the compensating variation for people in the bottom three
income quintiles was between $1,000 and $1,800
greater than the reduction in the present discounted

The Value of Medicaid
De Nardi, French, and Jones developed a model to
calculate how older adults value medical versus nonmedical consumption, and thus how they value Medicaid benefits. They found that the present discounted
value of medical consumption (that is, the current
value of expected future spending) was higher than

Recipiency Rate

Figure 3: Medicaid Recipiency Rate and Average Benefit per Recipient

Average Benefit/Recipient


Recipiency Rate (left axis)

Average Benefit per Recipient (right axis)

















Source: De Nardi, French, and Jones (2016)

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value of Medicaid payments. But for people in the
top quintile, the compensating variation was $3,000
more than the reduction in payments. Similarly,
when the authors made Medicaid more generous,
older adults in the bottom two quintiles valued the
increase in benefits at less than its cost, while those
in the top quintile valued the increase at twice
its cost.
There are two primary reasons why richer individuals
might place a higher insurance value on Medicaid.
First, they have a higher level of consumption to begin with, and thus have more consumption to insure
in the years before they enter a nursing home. Second, they face a greater risk than poorer individuals
of living longer than their life expectancy and thus
incurring very high medical costs late in their lives.
The picture changed somewhat when taxes were
taken into consideration. Even though older adults
with higher incomes valued each dollar of increased
benefits at twice the cost, this value was still less
than the additional taxes they would have to pay
to fund the extra benefits. Older adults with lower
incomes, who placed less value on increased benefits, still favored more generous benefits since
their tax burden would increase by far less than the
value. Overall, the authors concluded that the current Medicaid system appears to be about the right
size for single retirees, meaning that the value older
adults place on the benefits is about the same as
the benefits themselves.
Several key facts emerge from Jones’ and his coauthors’ studies of older adults’ medical spending.
Spending is highly concentrated at the top of the
spending distribution. Lower-income people spend
more annually and have more of their spending covered by the government than higher-income people.
Much of the difference is the result of higher nursing

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home expenditures, which are largely covered by
Medicaid. However, older adults with relatively high
incomes also can become eligible for Medicaid after
they exhaust their savings. As a result, high-income
people tend to value Medicaid at more than its actuarial cost because it allows them to consume more in
their golden years without worrying about potential
nursing home expenses down the road. Even so, the
value that high-income single retirees would place
on increased Medicaid benefits would be less than
any associated increase in their taxes.
In short, medical spending constitutes a significant
financial risk for older Americans, and Medicaid,
generally thought of as a program for the young and
the poor, provides significant benefits to older adults
with high incomes as well.
John Bailey Jones is a senior economist and research
advisor and Jessie Romero is an economics writer
in the Research Department at the Federal Reserve
Bank of Richmond.

T he Census Bureau estimates that the share of the population
older than 65 will increase to 23.6 percent by 2060.


 ariacristina De Nardi, Eric French, John Bailey Jones, and
Jeremy McCauley, “Medical Spending of the U.S. Elderly,”
Fiscal Studies, September-December 2016, vol. 37, no. 3–4,
pp. 717–747.


I ndividuals in the bottom quintile had an average annual
income of $8,000. Those in the top quintile had an average
annual income of $68,930. The MCBS measures total household income during the past twelve months, including transfer and asset income.


S ee Table 3 in Mariacristina De Nardi, Eric French, and John
Bailey Jones, “Medicaid Insurance in Old Age,” American Economic Review, November 2016, vol. 106, no. 11, pp. 3480–3520.
A working paper version is available online.


 edicare will help pay for up to 100 days in a skilled nursing
facility under certain conditions.


 . Anton Braun, Karen A. Kopecky, and Tatyana Koreshkova,
“Old, Frail, and Uninsured: Accounting for Puzzles in the U.S.
Long-Term Care Insurance Market,” Federal Reserve Bank of
Atlanta Working Paper No. 2017–3, March 2017.


 e Nardi, French, and Jones (2016)


 ore precisely, the authors study postretirement permanent
income, excluding asset income, which they find is a reasonable proxy for lifetime permanent income. Average annual
income is about $5,000 in the bottom quintile and $23,000
in the top quintile.

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entirety. Please credit the authors, source, and the
Federal Reserve Bank of Richmond and include the
italicized statement below.
Views expressed in this article are those of the authors
and not necessarily those of the Federal Reserve Bank
of Richmond or the Federal Reserve System.

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