The concentration of most U.S. health care spending in a small proportion of individuals is well documented. The notion that high health care spending only affects a small portion of people in a given year is particularly relevant to the ongoing policy debate about how to make health insurance affordable for all, while accommodating people with complex health care needs and accompanying higher costs. The distribution of health care spending is directly related to the solvency of insurance markets in which adverse selection may occur, and whether models like high-risk pools and reinsurance can be effective stabilization tools.
To better understand the patterns of spending for higher-risk enrollees, the Health Care Cost Institute studied the distribution of health care spending among commercially insured individuals and how their spending changed over time. Specifically, we analyzed the annual health care spending of more than 9 million individuals under the age of 65 in each pair of years from 2008 to 2015. Because people may change insurers over time, within each pair of years we limited our sample to people with continuous enrollment and prescription drug coverage for the full 2 years. We found that top spenders (the top 5%) account for a growing share of health care spending, and there is consistent and substantial turnover among these top spenders.
Taken together, we interpret these findings as evidence that as costs continue to rise, health insurance will play an increasingly important role in easing the financial burden of increased health care spending. For this reason, less comprehensive plans may be risky, even for consumers with low health care spending in previous years. These findings provide a timely reminder of the inherent uncertainty in health care spending in light of proposals to create significant changes in individual and group insurance markets, such as altering consumer protections created by the Affordable Care Act.
Within a Given Year, Small Proportion of Population Accounts for Majority of Health Care Spending
In 2015, the top 5% of spenders accounted for 53% of health care spending. By comparison, the bottom 50% of spenders accounted for just 4% of health care spending, and almost 13% of our sample had no spending at all. This concentration of health care spending is consistent with findings from numerous studies. The median member of the top 5% accounted for $39,409 in total spending in 2015 (payer spending plus out-of-pocket spending), with a median out-of-pocket burden of $3,850.
The concentration of health care spending among top spenders has also increased over time. The share of total spending by the top 5% steadily grew over our study period, rising from 48% in 2009 to 53% in 2015. The increased concentration is a result of faster spending growth by top spenders. Per capita spending by the top 5% of spenders grew at an average of 5% per year from 2009 to 2015, compared to an average of 3% per year for all spenders.
The implication is that both health care spending and the growth in health care spending are concentrated in a relatively small minority of individuals. These findings, consistent with existing literature, support the notion that a better understanding of health care spending and utilization of the top 5% of spenders is an important starting point to manage outcomes for this population — and that successes in that effort have the potential to meaningfully impact total spending.
Large Degree of Turnover from Year to Year among Top Spenders
Simply put, three out of five top spenders in any given year were not top spenders in the prior year. In 2015, only 39% of the top 5% of spenders were in the top 5% of spenders in 2014. Moreover, this trend was consistent in each year from 2009 to 2015. These new top spenders came from all portions of the spending distribution. For example, in each year studied, almost 15% of top spenders were in the bottom 50% of spenders or had no spending in the previous year.
People who are new to the top 5% of spenders endure dramatic changes in their health care spending within a short period of time. The median newly top spender saw their total health care spending rise almost 800% from $4,528 in 2014 to $35,523 in 2015. While insurance plans insulated them from most of this spending increase, median out-of-pocket spending for this group also rose nearly 400% from $1,048 in 2014 to $4,067. These year-to-year changes in out-of-pocket spending are particularly jarring considering the Federal Reserve Board’s 2016 Survey of Household Economics and Decision, which reported that 44% of respondents could not afford a $400 emergency expense.
Turnover of Top Spenders Demonstrates Role of Health Insurance in Smoothing Financial Risk
In any given year, high health care spending affects only a small portion of the population. However, it would be an oversimplification to conclude that healthy consumers should view robust health insurance coverage as necessary only for the already sick. The consistent and substantial turnover in the top 5% of spenders provides evidence that high health care spending annually affects new people. For newly top spenders, health insurance plays a role in blunting exposure to total spending increase. Even though newly top spenders had substantial increases in their out-of-pocket spending, health insurance covered over 90% of the increase in spending.