ageing and out-of-pocket medical expenses

Although residents of the US lack universal health care, those 65 years of age and older do have access to a near-universal scheme for the elderly, known as “Medicare”. But Medicare covers only a fraction of  the cost of medical care for the elderly. A new study estimates that a typical married couple that reaches old age in good health should still plan on spending an enormous amount out-of-pocket for medical and dental bills, including supplemental insurance premiums, co-payments, home health care and nursing home care.

[US] households are at significant risk of incurring health care costs that are more than twice the average. A typical couple age 65 can expect to incur health care costs of $260,000 in present-value terms over their lifetimes, including the cost of long-term care and Medicare, Medigap, and retiree health insurance premiums, assuming their financial resources permit. But this couple faces a 5-percent chance it will spend more than $570,000. At age 65, remaining life expectancy for men and women born in 1944 is 17 and 21 years, respectively. By age 85, it has more than halved, to six and seven years, respectively. But health care risk decreases much less than proportionately, and a typical couple age 85 still faces a 5 percent chance that the present value of its remaining lifetime health care costs will exceed $477,000. ….

Our calculations assume that expenditures are not constrained by available resources. In many instances, the household’s financial resources will not permit expenditure at the average cost level, much less anything greater. In that case, the household will have to either forego needed health care or rely on Medicaid [means-tested health care for the poor]. The risk is not of destitution, but of health care costs impoverishing a couple or a surviving spouse, or of the household not having the retirement it planned for.

Anthony Webb and Natalia Zhivan, “How Much is Enough? The Distribution of Lifetime health Care Costs”, Center for Retirement Research at Boston College, CRR Working Paper 2010-1 (February 2010).

The authors assume a 3-percent real interest rate and a 4.2% a year growth in inflation-adjusted expenditure per capita on health care (equal to the average for 1960-2007). Long-term nursing care is not covered by Medicare, so all of it is paid out-of-pocket. Disregarding the expense of long-term care, the typical lifetime medical costs that a healthy couple faces at age 65 are still $197,000, and there is a 5 percent chance that these costs will exceed $311,000.

It is tragic that in the United States – one of the wealthiest countries on the planet – it is possible for sickness and ill health to drive the elderly into poverty.

Hat tip to Catherine Rampell at Economix.

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