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Persistence in Health Expenditures in the Short Run: Prevalence and Consequences

Monheit, Alan C. PhD

Original Articles

Background. Knowing whether persons in the top percentiles of the health expenditure distribution exhibit persistently high expenditure is fundamental to developing health plan payment policies, containing costs, and understanding the consequences of costly illnesses.

Objectives. To determine the extent of high expenditure persistence over a 2-year period. To identify the correlates and consequences of expenditure persistence.

Subjects. A national sample of the population from a longitudinal panel of the Medical Expenditure Panel Survey (MEPS).

Methods. Changes in a person’s position in the expenditure distribution were examined. χ2 tests were used to identify differences in characteristics between high and low spenders. Logistic regression was used to predict the likelihood of expenditure persistence. Changes in income, employment, out-of-pocket expenditure burden, and health insurance were compared for high and low spenders.

Results. Of the top 5% of spenders in 1996, 30% retain this position in 1997 and 45% are in the top decile of 1997 spenders. High expenditures begin to regress to the mean over the study period. Cancer, mental disorders, diabetes, and infectious diseases and being in the top decile of 1996 spenders increase the probability of expenditure persistence (P < 0.05 for all). This probability also has a strong random component. An increased proportion of persons in the top expenditure decile for both years had out-of-pocket health spending greater than 20% of income in 1997 (P < 0.10). Persons with persistently high expenditures were less likely than low spenders to lose employment-based coverage (5.4% vs. 8.8%, P < 0.05) but no changes in income or employment status were detected.

Conclusions. A sizable minority of persons exhibits persistently high expenditures, creating incentives for favorable risk selection. Few consequences of short-run expenditures persistence are observed.

Data on the population’s health expenditures reveal that a relatively small proportion of persons account for a substantial share of aggregate expenditures. For example, since 1970, the concentration of health expenditures among the US population has remained relatively stable: the top 1% of spenders account for 27 to 29% of total expenditures and the top 5% for over half. 1 While independent cross-sectional surveys reveal stability in the expenditure distribution, there has been considerable interest in the dynamics of high health expenditures, especially whether persons in the top percentiles persist from 1 year to the next or exhibit short-term experience with high expenditures. 2–8

Understanding the extent to which high and persistent health expenditures are systematically associated with an individual’s characteristics and prior position in the expenditure distribution, or are unrelated due to a substantial random component, is fundamental to several important health policy issues. These include the development of equitable and efficient health plan payments that mitigate the financial consequences of adverse risk selection into specific plans. Such risk-adjusted payments also weaken incentives for plans to compete on the basis of favorable risk selection rather than cost and quality. 5,8–11 Expenditure persistence is also a concern for policy initiatives to control health care spending through the use of medical savings accounts in conjunction with catastrophic health care coverage. Persons with persistently high expenditures may disproportionately draw on these accounts and lack sufficient balances to meet deductible provisions of catastrophic health plans. 5,7 Finally, the ability to predict expenditure persistence is important for cost containment efforts seeking to identify expensive cases for intensive medical and financial management. 2,6,12

There is also little information on whether persistently high health expenditures have implications for individual welfare, in terms of out-of-pocket expenditures, health insurance status, and economic status. Such information can help to inform health plan design regarding the appropriateness of cost-sharing provisions and the adequacy of catastrophic expenditure protection, and more generally, whether the social safety net can effectively mediate the economic consequences of high cost illnesses.

Previous studies have examined expenditure persistence using claims data for publicly-insured elderly persons 2–5 or for the privately insured nonelderly. 6–8 Such research has examined expenditure persistence for periods of a decade or more 4,5 or for just a few years. 2,3,6,7,12 This article adds to this research by considering expenditure persistence over a 2-year period, using data on total health expenditures incurred by a nationally representative sample of the civilian, noninstitutionalized US population. This study also examines whether high and persistent expenditures have short-run implications for individual health insurance and economic status.

From the School of Public Health, Division of Health Systems and Policy, University of Medicine and Dentistry of New Jersey, Piscataway, New Jersey.

This research was supported by the Agency for Healthcare Research and Quality (AHRQ).

The author is Professor, Health Systems and Policy Division, School of Public Health, University of Medicine and Dentistry of New Jersey. This research was conducted when the author was Director, Division of Social and Economic Research, Center for Cost and Financing Studies, Agency for Healthcare Research and Quality (AHRQ). The views expressed in this paper are those of the author, and no official endorsement by AHRQ or by the Department of Health and Human Services is intended or should be inferred.

Address correspondence and reprint requests to Alan C. Monheit, PhD, School of Public Health, Division of Health Systems and Policy, University of Medicine and Dentistry of New Jersey, 675 Hoes Lane, Piscataway, NJ 08854-5635. E-mail:

© 2003 Lippincott Williams & Wilkins, Inc.