Health care costs are a major financial concern for elderly households. Understanding the risk of health care costs at older ages is also important for the design of public and private insurance programs, such as employer-provided pensions and retiree health insurance as well as Social Security, Medicare, and Medicaid.
Past studies of the health care costs incurred by older households have often focused on out-of-pocket medical spending, finding these expenditures to be substantial and highly skewed. Yet such estimates may miss other important dimensions of the cost of poor health. Poor health may result in reduced earnings near the end of an individual's work life, or it may trigger expenses associated with home renovation, relocation, or the hiring of various service providers. Moreover, the financial consequences of poor health may grow over time, as poor health tends to be an ongoing condition.
In The Asset Cost of Poor Health, (NBER Working Paper 16389), researchers James Poterba, Steven Venti, and David Wise attempt to infer the "full cost" of poor health by estimating the cumulative effect on assets of all the adverse consequences of poor health over a long period of time. Data from the Health and Retirement Study (HRS) for the period 1992-2008 are used in the analysis.
The authors compare the evolution of assets over time for older individuals who in 1992 (when they are ages 51 to 61) have similar assets but different levels of "latent health." Latent health is an index that incorporates answers to numerous health questions, such as whether the individual has difficulty working for pay, has difficulty climbing stairs or performing other activities of daily living, or has experienced heart problems or other specific health conditions. This measure is strongly related to the subsequent onset of future health problems and to mortality, suggesting that it is a good summary measure of health status.
The results indicate that the asset cost of poor health may be quite large, substantially greater than most estimates of out-of-pocket medical spending. For example, within each asset quintile, the healthiest individuals (those in the top tercile, or third, of the health distribution) accumulate at least 50 percent more assets by 2008 than do the least healthy (those in the bottom tercile of health). The dollar differences in wealth accumulation are substantial - for those near the median of the wealth distribution in 1992, the difference in asset accumulation over the 1992-2008 period between the healthiest and least healthy groups is over $135,000. For the top asset quintile, the difference is over $470,000.
As the authors point out, poor health can reduce asset accumulation in many ways. It may lead to greater health-related expenditures, to lower earnings, and to lower Social Security benefits and other retirement annuity income as a result of lower earnings and earlier claiming of benefits. The authors find that between 20 and 40 percent of the asset cost of poor health can be attributed to lower earnings and lower annuity income.
In future work, the authors hope to explore some of the other reasons poor health reduces asset accumulation among older households. For example, people in poor health may do less new saving or may receive lower rates of return on their investments as a result of having less time to manage their portfolio or reduced cognitive ability.
The authors gratefully acknowledge funding from the National Insitute on Aging (grant #P01-AG005842) and the U.S. Social Security Administration through grants to the NBER as part of the SSA Retirement Research Consortium (grants #10-P-98363-1-05 and #10-M-98363-1-01).