My theme for the year seems to be: “Getting the facts right matters.” But a corollary to this is: “Interpreting analysis correctly is important, too.”
A case in point is the coverage of the Employee Benefit Research Institute’s (EBRI) Issue Brief, “Cumulative Out-of-Pocket Health Care Expenses After the Age of 70,” published on April 3, 2018. Based on data from the Health and Retirement Study, we reported that while for some retirees, costs such as out-of-pocket nursing home expenses can be substantial, the majority of older people pay modest out-of-pocket health care expenses in retirement.
Some in the press and within the industry interpreted this to mean that previous studies projecting the amount of savings required for couples to cover their health care expenses, including premiums, in retirement, have been overstated. For example, some note that health care cost projection studies have found that an average couple retiring today at age 65 needs between $280,000 and $370,000 to cover health care expenses in retirement. These numbers, it is concluded, are not the modest out-of-pocket health care expenses calculated in EBRI’s April research.
This conclusion simply doesn’t hold up: The two analyses have materially different intent, scope, data, and assumptions.
The intent of the studies that project health care costs in retirement is to help workers understand how much they may need to save for a financially secure retirement that includes adequate health care coverage. These studies use assumptions about types of Medicare coverage people will have during retirement, and to a large extent, reflect the premiums for such coverage.
In contrast, the out-of-pocket health care costs study EBRI issued in April was intended to provide a good understanding of the risks of out-of-pocket health care expenses faced by retirees—beyond health care premiums. That study used self-reported out-of-pocket costs including hospital stays, nursing home stays, outpatient surgery, doctor’s visits, prescription drugs, dental services, home health care, and hospice care after age 70 from a household survey in order to show the magnitude of such costs during retirement.
Other key differences between the April 2018 report and the two other reports are that the April 2018 study:
• Examines individuals, not couples
• Takes into account expenses for people after the age of 70 (not including those ages 65-69).
We also noted in the April report that, because of data limitations, reported cumulative out-of-pocket medical expenses should be interpreted as the lower bound of such expenses, rather than the true estimates of the means or medians. Further, we noted that health care expenses could be catastrophic for some individuals, and ranged from just under $172,000 to just over $269,000 for a single person at the extreme end of the distribution. We also noted that it is not easy to predict in advance who will actually have high medical expenses, and that as a result, the risk of high medical expenses remains a significant one.
It is critically important that workers preparing for retirement understand the amount they will likely need to save in order to have adequate health care coverage in retirement. But workers and retirees also should understand the magnitude of the out-of-pocket costs that they may experience beyond medical premiums due to catastrophic health care needs such as long-term care in retirement.
Both are valuable insights—but conflating the two can be misleading for both workers and policymakers. This is a good lesson about interpreting research in general.