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Medical Spending in Old Age and Retirement

Last update on: Feb 07 2020

This is a policy/academic paper by economists at the Federal Reserve Bank of Richmond. Yet, it’s interesting reading. It points out that medical spending varies by income level, with lower income people on average spending more on medical care. But most of that spending is due to nursing home costs. The paper also looks at how people pay for the medical spending and how much the government pays. It’s not a how-to guide, but I found it useful. The data is more detailed and accurate than what you’ll read in a lot of sales material and political essays.

Virtually all people older than 65 in the United States are eligible for Medicare, which includes both original Medicare, where Medicare pays providers directly, and Medicare Advantage, where Medicare contracts with private insurance companies to provide coverage. The plans have different coverage rates: original Medicare pays for the great majority of the cost of short-term hospital stays, 80 percent of the cost of doctor visits, and, since 2006, most of the costs associated with prescription drugs (with an additional premium). Medicare Advantage plans pay for close to 100 percent of the cost of hospital stays, doctor visits, and prescription drugs. De Nardi, French, Jones, and McCauley found that Medicare and Medicare Advantage together paid for 54.7 percent of older adults’ health care during the period they studied.

Some individuals also have private insurance plans, such as Medigap or employer-sponsored retiree benefits, that can help cover expenses not paid for by Medicare. Private insurance covered 12.5 percent of older adults’ health care expenses. But neither Medicare nor most private plans cover long-term nursing home care, the median cost of which exceeds $80,000 per year.5 Researchers have estimated that U.S. adults face a 30 percent probability of spending at least 100 days in a nursing home; the average length of such stays is more than three years, at a cumulative out-of-pocket cost of more than $200,000.6

 

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