Back to Retirement Planning and Financial SecurityFrom Planning for the Future
p. 19-28, published 2002
As the AARP asserts, health insurance is now key to a financially sound retirement. Without it, many are at risk of financial ruin in the event of illness or injury. At the same time, health care now focuses more acutely on lifestyle choices and the management of medical interventions by the individual. Prescription drugs now play a prominent role in the treatment of chronic diseases, enabling many older citizens to live independently longer and function at higher levels. Access to prescription drugs, which Medicare does not cover outside of institutional settings, now permits many to enjoy a healthier, more productive old age. As a consequence, prescription drug coverage for the elderly has risen in prominence on the public agenda. Without supplemental health coverage, older citizens are likely to face high out-of-pocket health expenses and, in many cases, a poorer health status. According to the Commonwealth Fund, out-of-pocket medical expenses increased nearly 50 percent between 1999 and 2001. The Harvard Consumer Bankruptcy Project recently reported that nearly half of rising bankruptcies among the elderly were attributed to medical expenses. Thus, the presence of health care coverage indicates the financial as well as the health status of older citizens.
How current and coming elders pay or plan to pay for health care indicates their financial and health status.
Current and Anticipated Sources of Health Care in Retirement, KY, 2000
Three quarters of our sample say they now rely or plan to rely on Medicare as their major source of health care coverage in retirement, suggesting potentially high levels of vulnerability in the health and financial status of older Kentuckians.
More than a third of our sample reports that Medicaid is or will be a major source of health care in retirement, suggesting one of two things, the expectation of poverty or possibly a misunderstanding about the distinction between Medicaid and Medicare.
A significant portion of our sample reports they have or will have a supplement to Medicare. About 47 percent reported that a supplemental policy would be a major source of health care while 43 percent reported that they would look to employer-provided insurance as a major source of health care coverage.
Today, even employer-provided health care benefits are at risk, as the rising cost of health care cuts more deeply into the bottom line for firms. In response, many are raising costs to retirees or opting not to continue coverage.
Although a majority of our sample listed Medicare as a major source of health care in retirement, our findings reflect the very different experiences and expectations of current versus coming retirees. Compared with current retirees, a smaller proportion of coming retirees expect Medicare to be their most important source of health care in retirement. Coming retirees anticipate a heavier reliance on employer coverage, which, given trends, will likely mean shouldering more of the cost burden for health care coverage on their own.
In part, the differing perceptions of these generations reflect the waning confidence of many Americans in the ability of government to provide for their basic health care needs through the Medicare system. Moreover, shifting corporate priorities and a flagging stock market have effectively nullified the careful retirement plans of many Baby Boomers. In some cases, firms have simply reneged on promised health care benefits, as early retirements and longer lives have contributed to mounting health care costs. If this trend continues, the burden on Medicare could become even larger than anticipated and thus more unmanageable.
The health care expectations of coming retirees differ from the experiences of current retirees.
Most Important Source of Health Care in Retirement
While a majority of retirees and almost half of Kentucky’s workers indicate that Medicare is or will be their most important source of health care in retirement, these data reflect the differences in experiences and perceptions among Baby Boomers and current retirees.
A smaller percentage of those who are not retired expect Medicare to be the most important source of health care, and a somewhat larger percentage anticipate that employer-provided benefits will be most important.
Approximately 39 percent of single men indicated that Medicare is or will be their most important source of health care in retirement, compared to approximately half of married men and women and single women.
As our population ages, both the need for and the cost of long-term care will almost certainly rise. Though medical advances, healthier lifestyles, and higher incomes may increase the capabilities of older citizens and alleviate public burdens somewhat, their sheer numbers combined with increased longevity will inevitably boost demand for long-term care and public costs. Already, much of the cost of nursing home care is borne by government, largely through the partially state-financed Medicaid program.
For those who can afford it, long-term care insurance is considered by many to be an important component of financial preparedness. While widely held long-term care insurance would help lower public costs, consumer advocates consistently caution about the advisability of these policies for those at the lower and upper ends of the income ladder and about the provisions of such policies. By mid-2000, according to the National Conference of State Legislatures (NCSL), 23 states, including Kentucky, provided tax credits or deductions to encourage consumers to buy long-term care insurance.
Nationally, awareness of the cost of and coverage by long-term care insurance is believed to be low.
Importance of Long-Term Care Insurance as a Source of Health Care, by Retirement Status
On the surface, the 20 percent of current and coming retirees who indicate that long-term care insurance is or will be a major component of their health care coverage appears encouraging. But in late 2001 AARP found that about 31 percent of survey respondents aged 45 and older believed they had long-term care insurance.
AARP researchers found that these same survey respondents knew little about the cost of long-term care and did not know about coverage. They concluded that many confuse long-term care insurance with other types of coverage and believe they have coverage when they do not.
Only about 6 percent of Americans, according to the Health Insurance Association of America, purchased long-term care insurance in 2001.
According to national data, annual medical costs are again rising at a double-digit pace. For older citizens on fixed incomes, health care expenditures that are unmet by Medicare and supplemental insurance policies can become a substantial drain. AARP’s Public Policy Institute projected 1999 out-of-pocket spending on health care for 65 and older Medicare beneficiaries at an annual average of $2,430 or 19 percent of total income. That same year, 42 percent of Medicare beneficiaries spent $1,000 or more for prescription drugs alone, a cost that has risen sharply since then. As previously noted, a 2002 Consumer Bankruptcy Project study at Harvard found that nearly half of rising bankruptcies among older Americans are attributed to the inability to pay medical expenses.
Here, we asked Kentucky retirees about how much they spend monthly for out-of-pocket medical expenses such as health insurance premiums, prescriptions, medical tests, and doctor visits.
Nearly half of older Kentuckians report spending more than $3,000 a year on health care expenses.
Median monthly out-of-pocket spending by Kentucky retirees for health care was $250; their median annual income was between $20,000 and $25,000. Thus, on a monthly basis, older Kentuckians spend about 13 percent of their income on health care.
Almost half (47 percent) of respondents reported spending more than $3,000 a year on health care services and premiums while 15 percent reported spending at least $6,000.
Proportionately more men (18 percent) spend more than $500 per month on medical expenses than women (10 percent).
As numerous studies have shown, the poorer the individual the heavier the burden of out-of-pocket health care expenses and the less likely that the individual will receive needed care, regardless of age. But the problem is more pronounced for those elders who are not quite poor enough to qualify for Medicaid, the senior equivalent of the health care limbo in which the working poor find themselves. Medical expenses not covered by Medicare cut more deeply into lower incomes and circumscribe health care choices. Anecdotal evidence suggests that many low-income older citizens often face a choice between health care and necessities. When funds are short, health care needs often go unmet.
We analyzed data from our survey to determine how differently medical expenses affect retirees by income group and found a predictable disparity in the impact of health care costs on low-income Kentucky seniors.
Medical expenses are eroding the incomes of Kentucky’s poorest seniors.
Estimated Medical Expenses for Kentucky Retirees, by Income, 2000
Kentucky’s low-income seniors report the highest median out-of-pocket health care expenses, a likely reflection of their poorer health status relative to higher income seniors and the proven disadvantage that those who lack health insurance to supplement Medicare experience.
Those retirees in the second quartile shown here ($15,000-$29,999) shoulder medical costs that are, on average, 33 percent higher than those of seniors in the two highest income quartiles. Like working poor Kentuckians, these older Kentuckians likely cannot afford supplemental coverage and, for the most part, are ineligible for Medicaid.
The poorest of Kentucky’s elders see their already limited incomes severely eroded by health care expenses. For some, medical expenses are consuming almost 40 percent of their income.
Older Kentuckians in the highest income quartiles also have medical expenses that are not insignificant, but low-income elders devote anywhere from 2 to 15 times as much of their income to medical expenses.
Men, with the noted exception of those with incomes between $15,000 and $29,999, reported higher median monthly medical expenses than women.
Our findings in Kentucky were prefigured at the national level by the AARP Public Policy Institute’s 1999 projections for out-of-pocket health care spending. They illustrate the broad outline of circumstances that have subsequently worsened as the cost of health care coverage and goods and services, particularly prescription drugs which are critical to the treatment of chronic illnesses that often afflict older citizens, have sharply risen. AARP projected that, on average, medical expenses would consume 19 percent of the incomes of Medicare beneficiaries aged 65 and older. Those with incomes below 100 percent of the federal poverty level were expected to spend, on average, a third of their incomes on health care, findings that are comparable to ours.
Our follow-up to the question about how much current retirees spend out of pocket for health care simply asked retired Kentuckians if they could afford their medical needs.
Disproportionately poor, more than half of Kentucky’s current retirees report that they cannot afford their medical needs.
Can Current Retirees Afford Medical Needs?
As illustrated, we found that a majority (52 percent) of Kentucky’s current retirees report that they cannot afford their medical expenses. The high rates of poverty among Kentucky elders combined with mounting health care costs suggest that these circumstances are unlikely to improve and may worsen as medical costs rise.
Approximately 48 percent of women said they could not afford their monthly medical expenses compared to 56 percent of all men. Thus, while men spend proportionately more of their income on their medical expenses they also are more likely to say they cannot afford them.
Proportionately more married men, however, said they could not afford their medical needs than single men and women and married women.
The uncertain future of Social Security and Medicare are by now widely known. As the largest generation in history approaches retirement, the long-range viability of the principal programs on which older Americans depend is of growing concern. The Social Security and Medicare Boards of Trustees reported in 2001 that costs for Medicare will begin to exceed the income that supports it just after 2015 and continue to rise steadily. By 2075, when today’s toddlers are old, the Medicare cost rate will be three times its income rate.
About three quarters of our sample of Kentuckians aged 45 and older say that Medicare is or will be a major source of health care in retirement. Only 16 percent of our respondents say it is or will be only a minor source of health care. Since most Kentuckians plan to rely on Medicare in retirement, their confidence in the long-range fiscal health of Medicare is key to the perception and the reality of financial and health security.
The perceptions of current versus coming retirees about the future viability of Medicare differ markedly.
The Medicare system will continue to provide benefits of at least equal value to the benefits received by retirees today.
We found much higher levels of confidence about the future capacity of the Medicare system among current retirees. Still, more than a third of current retirees lack confidence. Boomers, on the other hand, are split evenly.
The national retirement confidence survey shows that the confidence of U.S. workers in the Medicare system has grown throughout the 1990s; however, only 35 percent of workers nationally believe that Medicare will continue to provide equal benefits to future retirees, compared to 50 percent of Kentucky’s Baby Boomer-age workers.
About 17 percent of retirees and 9 percent of current workers say they are very confident that the current level of Medicare benefits will be sustained.
Thus, Kentucky’s current and coming retirees lack confidence in the very program on which about half rely or expect to rely as their most important source of health care in retirement.
Irrespective of retirement status, single men and women are more likely to express confidence; married women are least likely to be confident.
Since many aging Kentuckians anticipate relying on Medicare but at the same time lack confidence in the program’s capacity to provide for future health care needs, we asked Kentuckians to assess how confident they are about meeting their medical expenses in retirement. Their responses help us gauge how well workers are planning for this part of their retirement and how confident current retirees are in meeting these needs throughout retirement.
Current and coming Kentucky retirees express essentially the same low levels of confidence about their abilities to meet medical expenses in retirement.
You (and your spouse or partner) have or will have enough money to take care of your medical expenses in retirement.
When asked about their confidence in meeting their medical expenses in retirement, we found similarly low levels of confidence among both current and coming retirees.
A majority of both indicate that they are either not too or not at all confident in their ability to meet the cost of their health care needs in retirement.
Nationally, 69 percent of workers feel very or somewhat confident in their ability to meet their health care needs in retirement compared to 44 percent in Kentucky, a likely reflection of the lower wage scales and higher poverty rates found here.
So, while Kentucky workers are relatively more confident in the Medicare system than their national counterparts, workers at the national level are more confident in their ability to meet their medical expenses in retirement.
Only 32 percent of retired single women are confident they can meet medical expenses compared to 50 percent of married women, 48 percent of single men, and 46 percent of married men.
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