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How Much Is Enough? The Distribution of Lifetime Health Care Costs

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  • Anthony Webb
  • Natalia Zhivan

Abstract

Estimates of the expected present value of lifetime out-of-pocket medical costs from age 65 onward are of limited value to households managing wealth decumulation in retirement. Their risk characteristics may differ from the average. They will also care about the whole probability distribution of health cost outcomes, and will want to update that probability distribution during the course of retirement. Using Health and Retirement Study data, we simulate health, mortality, and health cost histories of retired households. We show that the life expectancy and average health costs of our simulated households closely match published life tables and the findings of previous research. Using our simulated data, assuming a 3-percent real interest rate and including Medicare and private insurance premiums, we estimate that a typical household age 65 has a 5-percent risk of the present value of its lifetime health care costs exceeding $311,000, or $570,000 including the cost of long-term care. We find that relatively little resolution of uncertainty occurs with age, even for those who remain free of chronic disease.

Suggested Citation

  • Anthony Webb & Natalia Zhivan, 2010. "How Much Is Enough? The Distribution of Lifetime Health Care Costs," Working Papers, Center for Retirement Research at Boston College wp2010-1, Center for Retirement Research, revised Feb 2010.
    • Handle: RePEc:crr:crrwps:wp2010-1
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    References listed on IDEAS

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    Cited by:

    1. Poterba, James M. & Venti, Steven F. & Wise, David A., 2017. "The asset cost of poor health," The Journal of the Economics of Ageing, Elsevier, vol. 9(C), pages 172-184.
    2. Werding, Martin & McLennan, Stuart, 2011. "International portability of health-cost coverage : concepts and experience," Social Protection Discussion Papers and Notes 63929, The World Bank.
    3. John Bailey Jones & Aaron Steelman, 2019. "Lifetime Medical Spending of Retirees," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, issue May.
    4. Patrick Richard & Regine Walker & Pierre Alexandre, 2018. "The burden of out of pocket costs and medical debt faced by households with chronic health conditions in the United States," PLOS ONE, Public Library of Science, vol. 13(6), pages 1-13, June.
    5. M. Martin Boyer & Franca Glenzer, 2021. "Pensions, annuities, and long-term care insurance: on the impact of risk screening," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 46(2), pages 133-174, September.
    6. Samuel Marshall & Kathleen McGarry & Jonathan S. Skinner, 2011. "The Risk of Out-of-Pocket Health Care Expenditure at the End of Life," NBER Chapters, in: Explorations in the Economics of Aging, pages 101-128, National Bureau of Economic Research, Inc.
    7. Unruh Mark A. & Stevenson David G. & Frank Richard G. & Cohen Marc A. & Grabowski David C., 2016. "Demand-Side Factors Associated with the Purchase of Long-Term Care Insurance," Forum for Health Economics & Policy, De Gruyter, vol. 19(1), pages 23-43, June.
    8. Karolos Arapakis & Eric French & John Bailey Jones & Jeremy McCauley, 2021. "On the Distribution and Dynamics of Medical Expenditure Among the Elderly," Working Papers wp436, University of Michigan, Michigan Retirement Research Center.

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