Impact of Adverse Health Shocks on Financial Well-Being in Late Life

Financial Well-Being in Late Life: The Impact of Adverse Health Shocks and Spousal Deaths James Poterba & Steven Venti RRC Symposium, Washington August 3 2017 1

Growing Research Interest in Late-Life Medical Expenses Central driver of precautionary saving in lifecycle models Potentially important explanation of how some individuals reach late life with very little wealth Key to assessing social safety net 2

New Evidence on Wealth Cost of Late-Life Health Shocks Focus on longitudinal data for HRS sample over age 65 Self-reported data on health status, health conditions, and care episodes Detailed data on net worth and its components Measure wealth change in two year intervals including health shock 3

Strengths and Weaknesses of Wealth Cost Measure Strengths: Captures full cost of a health episode, not just medical bills Net of public and private insurance Weaknesses: May confound non-health spending with health outlays: Wt+1 = (1+r)Wt + Yt - Mt - Ct Measurement error in wealth May miss end-of-life expenses 4

Age-Specific Probability of First Stroke for Men 5

Age-Specific Probability of First Stroke for Women 6

Age-Specific Probability of First Arthritis Diagnosis for Women 7

Age-Specific Probability of First Arthritis Diagnosis for Men Arthritis 0.040 0.035 0.030 0.025 probability 0.020 0.015 0.010 0.005 0.000 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 age 8

Lifetime Probability of Diagnosis for Condition-Free 65 Year Old Condition Stroke Heart Attack Cancer Lung Disease Arthritis Diabetes Hypertension Psychiatric Problems Women 0.24 0.14 0.22 0.18 0.55 0.22 0.45 0.24 Men 0.21 0.19 0.30 0.18 0.46 0.24 0.39 0.15 9

Percent of 65+ HRS Sample with New Health Condition in Two-Year Period Condition All Single Women Married Women (incl. Spouse) 4.5% 1.7 6.9 3.7 18.2 5.7 17.8 3.5 Stroke Heart Attack Cancer Lung Disease Arthritis Diabetes Hypertension Psychiatric Problems 3.8% 2.8 4.9 3.0 14.7 4.3 13.8 3.3 3.3% 2.8 2.7 2.4 13.2 2.7 11.6 3.3 10

Percent of 65+ HRS Sample with New Health Condition in Two Year Period Condition All Single Women Married Women (incl. Spouse) 50.8 7.8 9.5 Hospitalization Nursing Home Stay Death of Spouse 43.1 8.9 3.6 35.6 11.6 0 11

Estimate of Wealth Cost of New Diagnosis or Health Event Condition Stroke Heart Attack Cancer Lung Disease Arthritis Diabetes Hypertension Psychiatric Problems Hospitalization Nursing Home Stay Death of Spouse All -$25,393 -6,262 8,808 -29,076 -11,242 4,248 10,349 -13,180 -7,597 -14,999 -31,317 12

Wealth Cost of Stroke Diagnosis by Gender and Marital Status Condition All All -$25,393 Single Women -19,854 Single Men -44,219 Married Women -17,040 Married Men -33,679 13

Insurance and the Wealth Cost of Health Shocks Limited Evidence that Supplemental Health Insurance Coverage Reduces Wealth Cost (three diagnoses: Cancer, Diabetes, and Psychiatric Disorders) Long Term Care Insurance (LTC) is Associated with Lower Wealth Drop 14

Lifetime Expected Cost of Stroke (Starting at Age 65) ?????? 100 Expected Cost = ?=65 (1+?)? 65 pa = probability of new stroke diagnosis at age a sa = survival probability from 65 to a da = wealth cost of stroke diagnosis r = discount rate (2.5 percent real) 15

Lifetime Expected Cost of Stroke by Gender and Marital Status Condition All Single Women $3,621 Single Men 7,611 Married Women 5,741 Married Men 8,414 16

Lifetime Expected Cost of Various Health Conditions and Episodes Condition Lung Disease Hospital Stay Nursing Home Stay $8,918 Loss of Spouse Single Women Single Men $1,163 $15,653 $0 6,799 14,090 5,476 0 Married Women Married Men 8,867 9,304 41,422 11,787 24,446 33,771 6,553 7,701 17

Conclusions Expected wealth cost of health conditions ranges from $30K (Singles) to $65-90K (Marrieds) Between 6 and 12% of household net worth Compares well with previous estimates Open question: how does level of net worth interact with wealth cost 18