Out-of-Pocket Health Spending and Retirement

Most American adults look forward to the age of 65 for one reason:  they become Medicare eligible and they believe that will solve their health spending problems.  As a study from Boston College indicates, that is not really the case.   (Study)   Fee-for-service Medicare has a substantial Part B premium that must be paid.  Part B also has coinsurance and Part A has copayments.  Part D, which is selected by most beneficiaries, also embodies premiums and cost-sharing in most of the plans.  Medicare Advantage plans may reduce some of the cost-sharing, but may also carry premiums beyond the Part B ones which always must be paid.  This all adds up, particularly for seniors who have many medical needs.  The authors used survey data from 2002 to 2014 to examine how much of post-retirement income went to health care out-of-pocket spending.  On average in 2014, annual out-of-pocket spending per beneficiary was $4,274; of which $2,965 went toward premiums.  There is a wide range, with the typical skew toward the upper end–a few beneficiaries account for a lot of the out-of-pocket spending.  For people with higher out-of-pocket spending, the proportion spent on premiums declines and the proportion on service cost-sharing rises.

The average retiree spent about 34% of Social Security benefits on these out-of-pocket health costs and 18% of total income.  About one-fifth of beneficiaries spent 50% or more of their Social Security benefits on health care.  The pressure on income availability for other purposes is obvious.  The general trend through the period is a decline in the portion of post-retirement income devoted to out-of-pocket health expenses, this was caused by the enactment of Part D and the closing of the drug benefit “donut hole”.   People who are on Medicaid as well as Medicare spend the lowest percent of their income on health care.  Interestingly, people on fee-for-service Medicare with no supplemental insurance of any type have the second lowest percent of income spent on health care, likely because these people are relatively healthy and don’t feel a need for supplemental insurance.  Women spend more of their income than do men, but this is due to lower-income, not higher health spending.  There is little change by age, although obviously older people are spending somewhat more out-of-pocket than younger seniors.  There is some modest effect of health status as well.  Those with more income spend a lower proportion of it on out-of-pocket costs.  In addition to Medicare program premiums and cost-sharing, retirees may bear expenses from non-covered services, like dental and vision.  Health spending inflation has been relatively muted in recent years, but is likely to accelerate in the future.  All these factors suggest that for seniors, health spending is likely to be an ongoing source of anxiety, notwithstanding enrollment in Medicare.