Health insurance literacy of older adults.

We developed an instrument to measure dimensions of health insurance literacy reflecting familiarity with health insurance terminology and proficiency with the Medicare program. The instrument's items were based on a conceptual framework integrating the financial and health insurance literacy fields and were fielded in a national survey of older adults. We found that overall levels of health insurance literacy were low to moderate. The oldest adults, those with lower education and income, and those with poorer health had lower levels of health insurance literacy. The items demonstrated good psychometric properties and construct validity. They are a promising way to measure selected aspects of health insurance literacy.

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Some financial service professionals have argued that individuals must have not only basic reading and math literacy to navigate in today's world but also basic money-management skills or some level of financial literacy (Anthes 2004). Financial literacy reflects one's understanding of financial concepts and is important in promoting informed financial decision making and asset management (Fox, Bartholomae, and Lee 2005). Financial literacy has been described as the "ability to read, analyze, manage, and communicate about the personal financial conditions that affect material well-being. It includes the ability to discern financial choices, discuss money and financial issues without (or despite) discomfort, plan for the future, and respond competently to life events that affect every day financial decision, including events in the general economy" (Anthes 2004, 49). Financial illiteracy is quite common, particularly among selected subgroups, including less-educated people, women, and minorities (Lusardi 2008). This study examined one aspect of financial literacy, namely health insurance and the factors that influence it.

Comprehensive financial planning addresses preparation for retirement, including appropriate planning for access to health care services in later years. Medicare is the U.S. federal government-sponsored health care coverage program for people 65 years of age or older and for those under 65 with certain disabilities or end-stage renal disease. It covers the costs of inpatient hospitalizations and helps pay for the costs of physician and outpatient care. In 2006, a prescription drug benefit was added to the program.

Over 95% of Americans aged 65 or older are covered by the Medicare program. Medicare does not cover all health care services; one study estimated that it covers on average about one-half of all needed health care services, including long-term care (Liu et al. 2000). Beneficiaries select the type of supplemental coverage they receive, through either managed care-style plans or a more traditional fee-for-service program (with or without individually purchased or employer-sponsored supplemental coverage).

About one-third of Americans purchased Medicare supplemental insurance from the private sector, another one-third obtained it from their employer, and another nearly 10% have both private supplemental coverage and employer-sponsored coverage. Nearly 15% of low-income Medicare beneficiaries also have Medicaid coverage, a joint federal-state program, and about 10% of consumers have no Medicare supplemental coverage (Khandker and McCormack 1999). People must be familiar with the terminology used in the health insurance market, understand the trade-offs of the different options (Center for Medicare Education 2000), and be aware of their rights as consumers (Baker et al. 1997; Scala 2002). Using the Medicare program might be even more challenging than other health insurance programs, given that many Medicare beneficiaries fall into the subgroups with limited financial literacy skills.

The issues consumers face when making decisions related to health insurance are similar the to issues they face when making other kinds of financial decisions. In recent years, both the financial services and health insurance marketplaces have become increasingly complex and specialized, requiring consumers to have higher levels of sophistication or involvement, unless they choose to outsource the decision-making responsibility. Longer life expectancy, uncertainty about the viability of social security, increasing service competition, and expanding technologies, including the Internet, have resulted in more choices and an elevated level of complexity of the decision-making processes (Braunstein and Welch 2002) and greater likelihood of information overload.