HealthView Insights Brief

EBRI Data Looks at a Narrow Slice of Retirement Health Care Expenses
Retirees Must Plan for Costs Including Premiums

The Employee Benefit Research Institute (EBRI) recently released an issue brief, Cumulative Out-of-Pocket Health Care Expenses After the Age of 70, which summarizes self-reported survey data from the “Asset and Health Dynamics Among the Oldest Old” cohort of EBRI’s Health and Retirement Study.

The EBRI data shows cumulative out-of-pocket health care costs for non-premium expenses related to hospital or nursing home stays, outpatient surgery, doctor visits, prescription drugs, dental services, home health care, hospice care, and other health care and related services.  For respondents aged 70 to 95, these amounted to a modest $27,000 (or about $1,000 annually).  It is important to note that EBRI’s data does not include the following:

  • Medicare Part B premiums
  • Medicare Part D premiums
  • Medigap (Supplemental Insurance) premiums
  • Dental premiums

Given that this represents a slice of health care costs in retirement, these numbers are significantly below the lifetime retirement health care costs estimated by HealthView and others, which include Medicare and other health premiums.

In this HealthView Insights Brief, we clarify the potential confusion around these numbers.

The Difference between Retirement Health Care Costs and “Out-of-Pocket” Costs

Many retirees pay for Medicare Part B and D premiums, a Medigap (or supplemental insurance) plan, and dental premiums to minimize their out-of-pocket expenses in retirement.  Costs are either paid directly out of a retiree’s Social Security check or out-of-pocket.  These premiums will be the most significant source of health care expenses in retirement.  Please see Figure I later in this paper for a detailed breakdown of these premium costs.

Medigap (Supplemental Insurance) Variance and Importance of Health

Out-of-pocket costs vary based on an individual’s health status and chosen supplemental plan.  While HealthView’s
projections include Plan F, the most comprehensive and popular supplemental plan available, less expensive options will provide lower levels of coverage and potentially result in greater annual out-of-pocket costs.  Additionally, health status is a major factor when projecting spending outside of premiums.  The $27,000 figure applies only to those who were age 70 in 1993, but eventually achieved age 95 or better (living beyond the anticipated life expectancy for an average 70-year-old at that time).  Therefore, many of the participants were likely healthier than average, and probably would have spent less on out-of-pocket expenses because they required fewer health-related services extending beyond their premium coverage.

Health Care Inflation Is Driving Costs Higher 

EBRI’s brief used 2015 dollar-values to illustrate how much health care will cost for older Americans.  Retirement health care costs have risen at approximately 5.5% annually since then.  The outlays for a 70-year-old in 2018 will be higher due to three extra years of health care cost inflation.

HealthView’s Projection Utilizing EBRI’s Numbers

HealthView has carefully reviewed and compared EBRI’s findings to its actuarial data and generated the following calculations:

Figure I: Health Care Costs for Healthy 70-year-old Male Living to 95 (In Today’s Dollars)  
Part B Premiums Part D Premiums Supplemental(Plan F) Premiums Dental Premiums Total Premiums Out-of-Pocket Costs Total Cost
2018 Lifetime Average 2018 Lifetime Average 2018 Lifetime Average 2018 Lifetime Average 2018 Lifetime Average 2018 Lifetime Average 2018 Lifetime Average
$1,608 $2,044 $946 $1,822 $2,093 $3,343 $367 $472 $5,014 $7,680 $1,397 $1,924 $6,411 $9,604

A healthy 70-year-old man, who has paid premiums and had purchased supplemental insurance, will spend almost $1,400 in out-of-pocket medical expenses in 2018 and an average of $1,924 per year throughout retirement (in today’s dollars).  The key takeaway is that in order to keep out-of-pocket expenses to these amounts, this individual would have to pay over $5,000 in premiums in 2018, and an average of nearly $7,700 each year during his retirement.

Please note that these projections do not include costs associated with long-term care, including skilled nursing facilities.  A 70-year-old male requiring one year of nursing home care at the age of 95 (in the year 2043), will spend an average of $75,405 in today’s dollars.

Conclusion

At first glance, the EBRI survey may lead some to mistakenly conclude that retirees will require roughly $1,000 per year throughout retirement to cover all out-of-pocket medical expenditures.  This set of data does not tell the entire story.  As HealthView’s actuarial data indicates, there is little disparity between our out-of-pocket cost data that uses EBRI’s assumptions.  Retirees will need to spend a significant amount of money on Part B and D premiums, as well as a supplemental plan and dental premiums, to limit out-of-pocket costs to the outlay reported in the EBRI study.  Additionally, the report utilizes 2015 dollar-values and does not account for added costs associated with health care inflation for the past three years.

Ultimately, when premiums are included, most aging Americans will pay much more than $1,000 per year to cover their total medical expenses, and with high health care inflation, affording quality health care in retirement will continue to be a concern for the foreseeable future.

For questions or comments, please contact Michael Daley at mdaley@hvsfinancial.com.

2018-04-23T18:11:16+00:00