Retirement, healthcare and the ever-growing longevity curve
by Sudipto BanerjeeExcerpts from the new study by the Employee Benefit Research Institute (EBRI). Reprinted with permission. Read the entire repot here.
One of the biggest risks American retirees face is the cost of their health care. Health care expenses generally increase with age, but how much any individual will spend on health care during his or her retirement years depends on a number of uncertain factors, such as life span, health status, and medical inflation.
Understandably, a question that has everyone worried, from an individual retiree to financial firms engaged in retirement planning to policy makers, is how large are health care expenses likely to be in retirement? There are a number of studies and estimates currently available. For example, according to Fidelity’s Retiree Health Care Cost Estimate , a 65-year-old couple retiring in 2016 will need an estimated $260,000 to cover health care costs in retirement. This does not include the costs of covering long-term care, which Fidelity estimates will require an additional $130,000 for the same 65-year-old couple.
A similar projection done by the Employee Benefit Research Institute (EBRI) (Fronstin and VanDerhei, 2017) predicts that a 65-year-old man and woman would need $127,000 and $143,000, respectively, if they want to have a 90 percent chance of covering all their health care costs (excluding longterm care costs) in retirement. These projections are based on assumptions about types of Medicare coverage people will have during retirement and, to a large extent, reflect the premiums for such coverage.
How much will people need?
For example, the EBRI projections include premiums for Medigap Plan F, which provides the most extensive coverage among all Medigap plans. In 2016, the average annual premium for Medigap Plan F was $1,846 2 . In fact, however, many people might choose not to get Medigap coverage or choose different levels of Medigap coverage. Also, Medicare Part B premiums, which averaged $134 per month in 2018 3 , are deducted from Social Security checks, not from personal savings of retirees.
So, if these premiums are included when calculating how much savings people will need for retirement health care costs, ideally such savings estimates should include the present value of Social Security benefits as well. This study estimates the out-of-pocket (OOP) expenses people incur for using different types of health care services after the age of 70. However, there are two crucial differences between this study and the other studies mentioned above. First, this study reflects only the cost of medical care received, i.e., different types of Medicare and retiree insurance premiums are not included in this study. Second, the numbers reported in this study are not projected health care expenses for any hypothetical individual; rather these are actual OOP health care expenses reported by individuals in a household survey.
So, this study does not make any assumptions regarding the types of health insurance coverage people will choose in retirement, but rather it is based on the reported OOP expenses that people actually incur, based in part on the types of insurance these people have actually chosen. The study uses panel data from 1993 through 2014 for the Assets and Health Dynamics Among the Oldest Old (AHEAD) birth cohort from the Health and Retirement Study (HRS). The results show that while OOP health care expenses can be extremely high for some, such expenses are moderate for most retirees. This means that the distribution of cumulative OOP health care expenses in retirement is skewed toward those with the highest levels of OOP health care expenses. Nursing home expenses are one of the biggest factors responsible for the right skewness of the distribution. While the majority of people do not incur any OOP nursing home expenses, for some older people these expenses can be very high. Finally, the results show that women are more likely than men to enter a nursing home and spend more than men on nursing home care.
Components of Out-of-Pocket Health Care Expenses
The study only includes OOP expenses incurred for health care services used. So, any kind of health insurance premium is not included. Also, the study does not include expenses for over-the-counter medicine. The health care services for which expenses are included are:
- Hospital Stays
- Nursing Home Stays (including non-medical expenses paid to the nursing home)
- Outpatient Surgery
- Doctor Visits
- Prescription Drugs
- Dental Services
- Home Health Care
- Hospice Care
- Other Health Care and Related Services (e.g., special facility or services such as an adult care center, a social worker, an outpatient rehabilitation program, physical therapy, or transportation for the elderly or disabled)
Chances of Entering a Nursing Home are Significantly Higher for Women
The chance of entering a nursing home differs between men and women. As expected, women have significantly higher chances of entering a nursing home after age 70 than men, 51 percent for women compared to 38 percent for men. Typically, women live longer than men and that might explain the difference. But it is also important to note that because women live longer than men, they are also more likely to be single in their final years.
This means that while they are more likely to act as a caregiver for their spouse or partner, their chances of receiving similar care from their spouse or partner is lower. This might also lead to higher incidence of nursing home entry and consequently higher nursing home expenses. Banerjee (2016) shows that non-recurring OOP health care expenses, which include services like hospital care, nursing home care, home health care etc. are significantly higher for singles than for couples and the difference increases with age.
Chances of Paying for Out-of-Pocket Nursing Home Expenses after Age 70
A nursing home entry doesn’t necessarily mean a large OOP expense. There are several factors that determine the OOP expenses for nursing home visits including whether the visit qualifies for coverage under Medicare, whether the person meets the Medicaid eligibility criteria, or if he or she has long-term care insurance to cover such visits.
So, the next step in finding out the extent of the risk of nursing home expenses is to figure out what percentage of nursing home entrants incur OOP expenses for the visits. Figure 7 shows that only 23.1 percent of the sample reported an OOP nursing home expense after the age of 70. So, nearly half (as nearly 46 percent reported overnight nursing home stays after the age of 70 in figure 3) of those who entered a nursing home incurred an OOP expense for the same. This study does not look into the coverage details for the nursing home entrants who do not incur OOP expenses. But as discussed above, the coverage is attributed to Medicare, Medicaid and private long-term care insurance.
Average Annual Out-of-Pocket Medical Expenses
The aim of the study is to capture all the OOP medical expenses survey participants incur after the age of 70. But because of the nature of the underlying survey, this cannot be done for some respondents. When individuals were first interviewed in 1993, some of them were already more than 70 years old. This means that, for some of these individuals, OOP medical expenses for the years between 70 and when they were first included in the sample are missing and, thus, the cumulative expenses are likely to be underreported.
For example, if someone was first interviewed when she was 75 years old and died at the age of 79 then the survey captures her OOP medical expenses for five years. But if these expenses are interpreted as the sum of her OOP medical expenses for the 10 years (70 to 79), then this individual’s reported expenses are likely to be less than her actual expenses. As a result, the cumulative OOP medical expenses reported in this study should be interpreted as the lower bound of such expenses, rather than the true estimates of the means or medians. This is most likely not an issue for nursing home expenses, because most nursing home expenses are likely to occur toward the end of life, at which point all the respondents were already part of the survey.
To show the significance of this issue, the following figures report average annual OOP medical expenses. The annual averages are calculated over the years for which the respondents were part of the survey. To take the examples discussed above, for the person present in the survey from age 75 to 79, the average is calculated as the total OOP medical expenses incurred over the five years and divided by five. For the person present in the survey from ages 70 to 79, the total OOP medical expenses are divided by 10. Figure 15 shows the distribution of average annual OOP medical expenses by age of death and for the entire sample as well. Note that these expenses include nursing home expenses. A number of observations that can be made from figure 15 are still in line with the observations made earlier from the cumulative OOP expense figures.
Read the entire report here.