Academic journal article The Journal of Consumer Affairs

Health Shocks, Out-of-Pocket Medical Expenses and Consumer Debt among Middle-Aged and Older Americans

Academic journal article The Journal of Consumer Affairs

Health Shocks, Out-of-Pocket Medical Expenses and Consumer Debt among Middle-Aged and Older Americans

Article excerpt

We examine two important issues related to health and financial burden in middle-aged and older Americans: (1) whether or not new health events affect a consumer's unsecured debt, and (2)to what extent the associated out-of-pocket medical expenses (OOP) contribute to unsecured debt. We use six biennial waves (1998, 2000, 2002, 2004, 2006 and 2008) from the Health and Retirement Study (HRS). We estimated fixed effects models and conducted mediation analyses. We find that new health events affect the accumulation of unsecured debt. Our estimates suggest that new health events increase unsecured debt by 6.3% ($230) to 9.3 % ($339); approximately 20% of the increase in unsecured consumer debt comes from OOP when experiencing new health events. New severe health events increase debt for the 50-64 age group, but do not increase it for the 65+ group.


In recent years, middle-aged and older Americans have experienced increased levels of consumer debt. The proportion of debt to assets has increased from 4.2% in 2001 to 6.5% in 2007 among Americans aged 65 to 74. In particular, unsecured debt (e.g., credit card) holdings and debt balances are sizable. Credit card balances in this age group increased by 25% between 2004 and 2007 (Bucks et al. 2009). The recent economic downturn exacerbated the credit card debt situation. According to the Financial Crisis Surveys (from November 2008 to April 2010), credit card debt conditional on carrying debt from one month to the next increased by 24.7% or $1,000 (Hurd and Rohwedder 2010). Indebted amounts of credit cards equaled $8,333 for non-medical expenses and $12,515 for medical expenses, respectively, for those aged 50-64 (Zeldin and Rukavina 2007).

Medical expenses from health problems have been threatening the solvency of middle-class older Americans (Himmelstein et al. 2005, 2009; Linfield 2009). The number of bankruptcy filers aged 55 or older among all fliers doubled from 11.7% in 2001 to 22.3% in 2007 when the US economy was booming (Pottow 2010). Older Americans spend on average 19% of their income on out-of-pocket medical expenses (OOP), increasing to 35% for low-income groups (Crystal et al. 2000). Unlike young adults, if older adults accumulate debt, it is more difficult to repay the debt because they typically have a fixed income, limited employment opportunities, and fewer remaining working years. The consequences of accumulated debt can devastate individual well-being and increase society's fiscal burden through an increased need for Supplemental Security Income and Medicaid.

This article examines the impact of health shocks (new health events or new chronic health conditions) on consumer debt through OOP for middle-aged and older Americans. In particular, we ask two specific questions: Do new health events increase consumer debt for this age group? If so, to what extent do the associated OOP contribute to consumer debt? Answering these questions will have implications for the health and financial security of older Americans.


Theoretical Channels

The life-cycle hypothesis (LCH) of consumption and savings can provide the theoretical channel through which health problems affect consumer debt (Modigliani and Brumberg 1954). Individuals prefer to smooth their consumption in their lifetime regardless of their income fluctuations. Thus they tend to allocate their resources to consumption evenly over their life cycle. Based on this consumption pattern, the LCH model predicts that people save in their life stages where income is greater than the resources needed to meet current consumption, and people borrow when income is insufficient and does not enable one to satisfy their current consumption requirements. Thus, through borrowing or saving, transferring resources across periods allows people to increase marginal utility of consumption without increasing lifetime resources.

This basic model of the LCH, however, does not explicitly consider shocks related to consumption, and thus savings or debt. …

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