Out‐of‐Pocket Health Expenditures: A Suggested Role for Social Security

• DOI: http://doi.org/10.1111/j.1540-6296.2012.01215.x
• Author: Itzhak Zilcha,Nancy Schneier
• Date: 01 September 2012
• Published date: 01 September 2012

Risk Management and Insurance Review

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Risk Management and Insurance Review, 2012, Vol.15, No. 2, 153-164

DOI: 10.1111/j.1540-6296.2012.01215.x

OUT-OF-POCKET HEALTH EXPENDITURES:ASUGGESTED

ROLE FOR SOCIAL SECURITY

Itzhak Zilcha

Nancy Schneier

ABSTRACT

We present economic data to demonstrate that the (random) out-of-pocket

health-related expenses of seniors who face medical problems are significant

and increasing over time. This remains the case even when we take into account

the availability of supplemental health insurance. We propose to apply a mod-

est part of Social Security benefits, without increasing the total expenses of this

system, to provide mandatory supplemental health insurance for all recipients.

Using a theoretical framework we demonstrate that introducing such additional

role for Social Security makes individuals (ex ante) better off and hence results

in a Pareto dominating new regime for Social Security.

INTRODUCTION

The adequacy of health insurance coverage for senior citizens in the United States varies.

Supplemental health insurance is typically needed for protection against expenses that

Medicare does not cover. This cost sharing is also increasing because of cuts in types

of services and treatments covered by Medicare and by Medicare Advantage managed

care plans. Toreduce some of the burden of health care cost sharing, the recently enacted

changes in the Patient Protection and Affordable Care Act of 2010 include expanding the

Medicare prescription drug plan to cover previous gaps in coverage. Under the current

uncertain political circumstances, one solution may be to alter the Social Security distri-

bution of benefits among eligible recipients. Proposals include making Social Security

cuts to the wealthy while increasing Social Security payments to the poor. Currently,

the distribution of Social Security benefits takes into account the level and length of

the contributions made by each individual over his or her lifetime. Because the Social

Security program is a compulsory annuity plan aimed to increase ex ante well-being of

individuals, it does not take into account the “true” state of nature (in terms of current

well-being when old) of recipients; that is, the financial burden that each person en-

counters, for example due to illness, is not incorporated fully at the benefits level, when

taking health status and out-of-pocket (OOP) health expenditures into account.

Itzhak Zilcha works at the College of Management Academic Studies, Israel; e-mail:

izil@post.tau.ac.il; phone: 972-3963-5749; fax: 972-3963-5823. Nancy Schneier works for a large

law firm in New York City. We are very thankful to our referees for the invaluable suggestions

we received during the refereeing process and which have improved our article tremendously.

This article was subject to double-blind peer review.

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