The health status and utilization patterns of the elderly: implications for setting Medicare payments to HMOs

In this paper we have examined various aspects of the patterns of medical care use and costs of the elderly Medicare population. First, to summarize the major points, we found the following: 1. Although per capita costs increase with age among the elderly, the distribution of costs among individuals does not vary much across different age groups. Small changes in the shape of the cost distribution were observed, including a small decrease with age in the coefficient of variation of Medicare costs, and a spreading out or diffusion of the degree concentration of acute hospital utilization over single- and multiyear time frames. 2. Costs associated with mortality account for a large proportion of Medicare reimbursements; the 20 percent of elderly who are in their last 4 years of life account for over half of all Medicare expenditures over that period. The cost levels and the time span over which costs are high prior to death appears to vary systematically with the cause of death and with age. 3. The elderly population is quite similar to the younger population in that there is a subpopulation of individuals who are found to be frequent users of acute hospital care over an extended period of time. Among the elderly, we estimate that 85 percent are only routine users of the hospital, requiring one hospitalization every 8 years. The remaining 15 percent are frequent hospital users who often live on for many years. A key requirement of a Medicare payment system will be to identify these high-cost users and establish a fair payment for them. 4. Acute hospital use associated with certain marker conditions--heart attacks, strokes, and cancer, among others, is found to be associated with future high Medicare reimbursements, and the high costs persist over an extended period of time. Moreover, it may be possible to use these hospitalizations as morbidity indicators that are not sensitive to the discretionary behavior of physicians and can thus be used to detect differences in the expected costs of different groups of individuals. 5. There is a significant relationship between Medicare reimbursements and the extent of functional impairments. Disability level is an independent predictor of higher costs, even after controlling for prior utilization. In practice, the acute care utilization observed among severely impaired individuals participating in long-term care demonstrations is substantially higher than what is predicted from unidimensional measures of disability.