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Research Questions

  1. How well do retirees and near-retirees understand what their likely out-of-pocket health care expenditures might be in retirement?
  2. How well do they understand how much these costs can vary from person to person and over time?

Abstract

Most retirees in the United States receive Medicare benefits, and most obtain supplemental insurance to help fill the coverage gaps that Medicare leaves, such as for prescription drug expenses. But even with both these types of coverage, they face out-of-pocket expenses for premiums, cost-sharing obligations, and items or services not covered by Medicare or supplemental plans. This study examined whether retirees and near-retirees understand what their likely out-of-pocket health care expenditures might be in retirement. Using the RAND American Life Panel, a representative Internet survey of about 4,000 U.S. households, researchers surveyed Americans age 40–80 on these issues. They found many retirees and near-retirees do not understand the magnitude and variability of their future out-of-pocket health care costs and may be unprepared to finance higher-than-typical expenditures. Women and younger respondents (age 40–60), in particular, were most likely to underestimate their future out-of-pocket health care expenses.

Key Findings

Many Americans do not understand the magnitude and variability of their future out-of-pocket health care costs and may be unprepared to finance them.

  • Most respondents' estimates of the magnitude of their likely out-of-pocket health care expenditures were lower than those given by experts, and respondents tended to be overly optimistic about how much Medicare will cover.
  • Women generally estimated lower average monthly costs than men, but women's estimated lifetime health care expenditures are actually higher than men's, due to their women's higher average life expectancy.
  • The estimates of future health care expenditures made by respondents age 40–60 were nearly identical to the estimates made by respondents age 60–80, but younger group's actual costs will be significantly higher by the time they retire, due to health care cost growth.
  • Respondents in all age groups underestimated the risk of variation in personal health expenditures that could come from their own health problems, unanticipated health care cost growth, and changes in Medicare.

Recommendations

  • Increase the transparency of insurance policies so that consumers can understand their risks and potential gaps in coverage. In addition to providing information on deductibles, co-pays, and annual and lifetime limits, insurers should provide information on the distribution of out-of-pocket costs under various policies.
  • Design policies that limit the out-of-pocket exposure retirees face.
  • Be cautious about health policy reforms that shift costs to retirees.
  • In addition to policy reforms, offer financial education on specific topics, especially the potential for future health care costs to vary, and to specific subgroups, including women and 40–60-year-olds (both groups tend to underestimate their future costs, and the younger group is still in their working years and in a good position to save for retirement).

This issue of Insight summarizes research conducted within the Financial Literacy Center.

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