American Journal of Law & Medicine

Retiree Out-of-Pocket Healthcare Spending: A Study of Consumer Expectations and Policy Implications


    A. Background on Out-of-Pocket Expenditures
    B. Measuring Out-of-Pocket Expenditures
       1. Two Methods of Estimating Out-of-Pocket Expenditures
       2. A Note on Demographics and Spending Variation
    C. Uncertainty in Healthcare Costs
       1. Individual Health Experience
       2. Healthcare Cost Growth
       3. Policy Instability
    A. Survey Sample and Treatments
    B. Estimating Out-of-Pocket Retiree Expenditures
       1. Estimates of Components of Cost (Insurance Coverage
          and Premiums)
       2. Estimates of Total Out-of-Pocket Expenditures
       3. Estimates and Demographic Spending Variation
    C. Estimating Uncertainty: Health, Medical Inflation,
       Policy Change
       1. Group One: Assessments of Concern and Severity
       2. Group Two: Willingness to Pay
    A. Discussion of Findings and Further Research
       1. Point One: Quality of Overall Estimates and
          Demographic Variation
       2. Point Two: Uncertainty and Risk
    B. Policy Recommendations
       1. Improving Financial Planning: Opportunities
          and Challenges
       2. Improving Risk Protection: Implications for Insurance
          Design and Policy Reforms

Even though most American retirees benefit from Medicare coverage, a mounting body of research predicts that many will face large and increasing out-of-pocket expenditures for healthcare costs in retirement and that many already struggle to finance these costs. It is unclear, however, whether the general population understands the likely magnitude of these out-of-pocket expenditures well enough to plan for them effectively. This study is the first comprehensive examination of Americans' expectations regarding their out-of-pocket spending on healthcare in retirement. We surveyed over 1700 near retirees and retirees to assess their expectations regarding their own spending and then compared their responses to experts' estimates. Our main findings are twofold First, overall expectations of out-of-pocket spending are mixed. While a significant proportion of respondents estimated out-of-pocket costs in retirement at or above expert estimates of what the typical retiree will spend, a disproportionate number estimated their future spending substantially below what experts view as likely. Estimates by members of some demographic subgroups, including women and younger respondents, deviated relatively further from the experts' estimates. Second, respondents consistently misjudged spending uncertainty. In particular, respondents significantly underestimated how much individual health experience and changes in government policy can affect individual out-of-pocket spending. We discuss possible policy responses, including efforts to improve financial planning and ways to reduce unanticipated financial risk through reform of health insurance regulation.


Our current system for retiree healthcare relies on seniors to finance a significant portion of their own healthcare expenditures in retirement. Even though most will benefit from Medicare coverage, Medicare pays for only about 60% of retiree healthcare costs (1) and, on its own, has no limit on "out-of-pocket" spending (premiums and direct payments for cost sharing and uninsured care). (2) Supplemental insurance is available to cover what Medicare does not, but it can be expensive and still leave some coverage gaps. (3) Recent studies estimate that the median Medicare beneficiary spends about 16% of his or her income on out-of-pocket healthcare spending, (4) and some spend as much as one-third of their annual income on such costs. (5)

Retirees' role in managing healthcare expenditures will only grow as the cost of medical care increases, employer-sponsored retiree healthcare disappears, and insurance shifts in form from defined benefit to defined contribution. Experts project healthcare spending will consume a larger share of retirees' disposable income, as much as 50% of post-tax income for some retirees by 2030, (7) even without major changes to Medicare or Medicaid in response to federal budget constraints. (8)

Even under current conditions, prior studies, based on various measures of financial distress, show that retirees are already struggling in the face of large, uncertain, and increasing out-of-pocket costs, (9) but it is unclear why. One reason individuals might be unprepared for retiree healthcare spending could be a failure to understand the magnitude of future healthcare costs, (10) Awareness of costs is a necessary (albeit insufficient) condition of planning for future spending. We know Americans care deeply about accessing healthcare when they need it, and studies show that anticipated healthcare expenditures motivate savings by the elderly, even more than the bequest motive does. (11)

It is unclear, however, how much people know about their likely expenditures and to what degree ignorance might impede successful retirement planning for some individuals. Compared to deciphering credit card terms or mortgage options, estimating individual retiree healthcare costs is much more complex, as anyone who has tried to puzzle through the options for supplemental coverage knows well. The few studies that examine perceptions of some of the components that affect spending, such as potential future insurance coverage, suggest confusion exists. For example, one study found more workers expect to receive retiree health benefits through a current employer than is likely. (12) Prior studies suggest that individuals have only low to moderate levels of understanding about Medicare, the foundation of most Americans' retiree healthcare. (13) Another study reported workers' projections of their total needs for retirement seem not to take healthcare costs into account and, despite such an omission, nearly half say they are confident that they will have enough money to pay for medical expenses in retirement. (14)

Financial literacy research has shown that one driver of inadequate overall retirement savings is a knowledge gap (15) and that people with more complete information (16) and adequate financial literacy to interpret that information (17) plan better for retirement. This research has motivated legal reforms to require better financial education or disclosure, (18) as well as support for regulatory approaches that use default rules or incentives to induce people to save more, despite imperfect knowledge and financial literacy shortcomings. (19)

This study is the first to examine what people understand about their likely future healthcare spending, and, impliedly, to what degree ignorance might impede retirement planning. We asked over 1700 individuals in the Rand American Life Panel, who are approaching or already in retirement, to estimate out-of-pocket healthcare expenditures they are likely to face in retirement and compared their estimates to experts' estimates, which we used as benchmarks. We sought to identify both whether respondents' estimates deviated from the experts' benchmarks and, if so, what aspects of respondents' estimates deviated more or less from these benchmarks. Our starting hypothesis was that individual estimates of retiree healthcare out-of-pocket costs would, in general, fall well beneath expert estimates. We were wrong, at least in some regards.

Our main findings, reported in Part III, are twofold. First, with respect to estimating total out-of-pocket expenditures, we saw a bimodal distribution of responses. On one hand, some answers approximated expert benchmarks. Almost 40% of respondents' estimates of monthly out-of-pocket expenditures were at or above the median expert benchmark for annual out-of-pocket spending. (20) Furthermore, respondents estimated certain components that affect costs, including likely future insurance coverage, premiums, and life expectancy at levels surprisingly close to what experts predict. These results suggest that a significant portion of respondents understand approximate future resources needed to sustain typical healthcare expenses and that lack of understanding, alone, does not explain financial planning challenges. (21) On the other hand, a significant portion of responses deviated from the expert benchmarks. More than 50% of respondents' estimates of monthly out-of-pocket expenditures fell below experts' projections for the twenty-fifth percentile of retiree out-of-pocket spending. Our median response was over a quarter below the expert median benchmark. Some subgroups' estimates deviated relatively further from benchmarks. (22) For example, younger cohorts tended to offer estimates similar to those of older cohorts, raising potential concerns that younger respondents may not be anticipating the increases in healthcare expenditures that experts predict for the coming decades. (23) Women respondents projected 50% lower lifetime expenditures ($30,000 median estimate) than their male counterparts ($60,000 median estimates), despite experts' estimates that the typical woman will spend 50% more over her retirement on healthcare costs than the typical man. …

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