How Do Retirees Cope with Uninsured Medical and Long-Term Care Costs?

• In Event: Health Care Spending and Costs

Abstract

Retirees face the risk of a large healthcare spending shock involving either medical or long-term care (LTC) spending either because their health insurance involves significant cost sharing or because they lack insurance entirely. We study the consequences of large out-of-pocket (OOP) medical and LTC shocks on the Medicare-eligible population. First, results from a new survey dealing with healthcare shocks in retirement are presented, demonstrating what individuals believe their fallback options are after a healthcare shock. We then turn to the Health and Retirement Study to estimate how households actually fare following a large healthcare expenditure, examining the years 2002-2016. Since households bearing large OOP costs are different from households spared these shocks, we compare households that experience a shock in a given year to those that will experience the same shock four years in the future. The identifying assumption is that the exact timing of the shock is random, even if the type of households that experience such shocks is not. The approach yields a difference-in-differences estimate of the causal effects of such shocks. We find that LTC shocks lead to a drawdown of home equity; a reduction in bequest expectations; a loss of supplemental health insurance; and, above all, increased reliance on Medicaid. In contrast, large medical shocks are borne by individuals without severely impacting their retirement trajectories; their adjustments seem limited to reductions in expected bequests. Overall, results point to medical cost shocks being relatively well-insured while individuals are still exposed to meaningful LTC cost risk.

Authors

• Anqi Angie Chen, Boston College - Center for Retirement Research

• Alicia Munnell, Boston College

• Gal Wettstein, Center for Retirement Research at Boston College