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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.

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Bibliographic Info

Paper provided by Center for Retirement Research in its series Working Papers, Center for Retirement Research at Boston College with number wp2010-1.

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Length: 45 pages
Date of creation: Feb 2010
Date of revision: Feb 2010
Handle: RePEc:crr:crrwps:wp2010-1

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  1. Courtney Monk & Alicia H. Munnell, 2009. "The Implications of Declining Retiree Health Insurance," Working Papers, Center for Retirement Research at Boston College, Center for Retirement Research wp2009-15, Center for Retirement Research, revised Aug 2009.
  2. Gaobo Pang, Mark J. Warshawsk, . "Optimizing the Equity-Bond-Annuity Portfolio in Retirement: The Impact of Uncertain Health Expenses," Research Reports, Watson Wyatt Worldwide 4, Watson Wyatt Worldwide.
  3. Peter Zweifel & Stefan Felder & Markus Meiers, 1999. "Ageing of population and health care expenditure: a red herring?," Health Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 8(6), pages 485-496.
  4. Mariacristina De Nardi & Eric French & John Bailey Jones, 2006. "Differential Mortality, Uncertain Medical Expenses, and the Saving of Elderly Singles," 2006 Meeting Papers, Society for Economic Dynamics 46, Society for Economic Dynamics.
  5. Michael D. Hurd & Susann Rohwedder, 2009. "The Level and Risk of Out-of-Pocket Health Care Spending," Working Papers, University of Michigan, Michigan Retirement Research Center wp218, University of Michigan, Michigan Retirement Research Center.
  6. Pierre-Carl Michaud & Dana Goldman & Darius Lakdawalla & Yuhui Zheng & Adam Gailey, 2009. "Understanding the Economic Consequences of Shifting Trends in Population Health," NBER Working Papers 15231, National Bureau of Economic Research, Inc.
  7. David M. Cutler & Adriana Lleras-Muney & Tom Vogl, 2008. "Socioeconomic Status and Health: Dimensions and Mechanisms," NBER Working Papers 14333, National Bureau of Economic Research, Inc.
  8. Alicia H. Munnell & Mauricio Soto & Anthony Webb & Francesca Golub-Sass & Dan Muldoon, 2008. "Health Care Costs Drive Up the National Retirement Risk Index," Issues in Brief, Center for Retirement Research ib2008-8-3, Center for Retirement Research, revised Mar 2008.
  9. Seshamani, Meena & Gray, Alastair M., 2004. "A longitudinal study of the effects of age and time to death on hospital costs," Journal of Health Economics, Elsevier, Elsevier, vol. 23(2), pages 217-235, March.
  10. Cassio M. Turra & Olivia S. Mitchell, 2004. "The Impact of Health Status and Out-of-Pocket Medical Expenditures on Annuity Valuation," Working Papers, University of Michigan, Michigan Retirement Research Center wp086, University of Michigan, Michigan Retirement Research Center.
  11. Eric French & John Bailey Jones, 2004. "On the distribution and dynamics of health care costs," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 19(6), pages 705-721.
  12. David M. Cutler & Adriana Lleras-Muney, 2006. "Education and Health: Evaluating Theories and Evidence," NBER Working Papers 12352, National Bureau of Economic Research, Inc.
  13. Baoping Shang & Dana Goldman, 2008. "Does age or life expectancy better predict health care expenditures?," Health Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 17(4), pages 487-501.
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Cited by:
  1. Samuel Marshall & Kathleen McGarry & Jonathan S. Skinner, 2011. "The Risk of Out-of-Pocket Health Care Expenditure at the End of Life," NBER Chapters, National Bureau of Economic Research, Inc, in: Explorations in the Economics of Aging, pages 101-128 National Bureau of Economic Research, Inc.
  2. Samuel Marshall & Kathleen M. McGarry & Jonathan S. Skinner, 2010. "The Risk of Out-of-Pocket Health Care Expenditure at End of Life," NBER Working Papers 16170, National Bureau of Economic Research, Inc.
  3. Werding, Martin & McLennan, Stuart, 2011. "International portability of health-cost coverage : concepts and experience," Social Protection Discussion Papers 63929, The World Bank.

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