How Much Do Retirees Spend on Uncertain Health Costs?

One source of financial risk that older Americans face is high health care expenses. Although the largest share of these expenses is due to predictable insurance premiums,retirees can pay sizable additional out-of-pocket costs as well. Medicare and Medicaid help reduce this risk, but Medicare does not cover every expense and Medicaid covers only households with very low income and assets. Thus, better understanding the extent of this coverage and the remaining burden on individuals is an important issue for retirees and policymakers alike. This brief is based on a recent paper that addresses the following question: How much do retirees pay in lifetime out-of-pocket health costs, excluding premiums and including long-term care? The analysis proceeds in two steps. It first calculates the distribution and evolution of total non-premium health care spending over the lifecycle of retired households. It then determines the amount covered by public and private insurers and subtracts this portion from the total to obtain out-of-pocket spending. By focusing on lifetime totals, this brief captures not only the risk of high expenses in a single year, but also the risk of moderate but persistent expenses that add up to a high cost burden over time. The discussion proceeds as follows. The first section provides a brief background on health care spending and insurance programs. The second section describes the data and methodology. The third section presents the results: total spending on health services, the portion covered by insurance, and what retirees pay out-of-pocket. The final section concludes that lifetime health care spending by retirees above and beyond predictable premiums is high and uncertain. However, Medicare, Medicaid, and other insurers cover a large portion of these expenditures. As a result, 65-year-old households pay, on average, $67,260 in out-of-pocket costs over their remaining lifetime, which is about one-fifth of total non-premium costs. Households at the 90th percentile of the health spending distribution pay twice this amount out-of-pocket, though it represents a similar share of the total.