Morningstar - Summer 2019 - 57

EXHIBIT 1

The definition of health expenditures used for the
analysis includes health insurance, medical
services, prescription drugs, and medical supplies.
To be included in the analysis, the household
had to have four quarters of available data (data
in the exhibit is annualized), it must be coded
as retired (either the individual respondent if single
or both the respondent and spouse if married),
and its total combined health expenditures over
the four periods cannot be negative. A total
of 1,927 households met these filters. Age is either
the age of the respondent or the average age
of the couple, if married.

Healthcare Spending During Retirement Panel A breaks down retirees by
how much they spend on healthcare. No matter the level of spending, healthcare
expenses represent a growing share of household expenditures as retirees
age. Panel B puts retirees in quintiles based on income and shows that spending
on healthcare was very consistent across the income groups.
Panel A Total Expenditures by Amount Spent
(Percentile Groups)

95th 95th 75th 75th Median
Median
th
th th
th
25 25 5 5
% of %
Total
Expenditures
of Total
Expenditures

Panel B Total Expenditures by Income
(Quintile Groups)

1
4

12
45

23
5

3

% of %
Total
Expenditures
of Total
Expenditures
50 50

50 50
40.2 40.2

40 40
40 40
30.1 30.1
Panel A demonstrates that healthcare expenses
30 30
30 30
represent a growing share of total house19.1 19.1
20.3 20.3
19.0 19.0
hold expenditures during retirement. The median
20 20
20 20
household (gray line) devotes 10% of total
13.4 13.4
10.5 10.5
expenditures to healthcare at age 65 versus 20%
12.3 12.3
5.9 5.9
10 10
10 10
by age 85. Households with the highest healthcare
11.5 11.5
0 0
0 0
th
spending, the 95 percentile (dark blue line),
60 60
70 70
80 80
85 85
60-6560-6566-7066-70
71-7571-75
76-8076-8081-8581-85
allocate approximately 20% of total expenditures
Household
Age Age
Age Group
Household
Age Group
to healthcare at age 65 versus 40% at age 85.
Source: Morningstar and Bureau of Labor Statistics.
Panel B shows that median spending on
healthcare was remarkably consistent across the
Real Real
Spending
LevelLevel
Spending
$25,000 $50,000
$50,000 $100,000
$100,000
Expenditure
Level:Level: $25,000
Expenditure
income quintile groups. (The first quintile
was $134 per month for a single (or joint)
significant, for most retirees the healthcare$1.10
costs
represents retirees who spend the least; the
$1.10
fifth quintile spends the most.)
household making $85,000 ($170,000) or less
are effectively bimodal, with many retirees
1.03 1.03
(yearly income as of 2016); the monthly
experiencing little or no cost and others facing
1.00 1.00
premium was $428.60 for a single (joint) household
There are two primary components of healthcare
significant expenditures.
making $160,000 ($320,000) or more.5 Part D
expenditures for retirees: health insurance
0.90
(prescription drug plan) premiums work in a similar
premiums and out-of-pocket healthcare
Healthcare expenditures not only increase
in 0.90
0.88 0.88
way: the more a household makes, the higher
expenditures. Health insurance premiums, which
retirement but are greater for retirees than for the
0.80 0.80
the premium.6
include Part B, Part C (Medicare Advantage),
working population. This difference is important
Part D (prescription drug plans), and supplemental
when attempting to model how spending
0.75 0.75
Out-of-pocket healthcare expenditures are
might change over time. In the Consumer Price
coverage (such as Medigap and retiree health
0.70 0.70
expenses other than insurance premiums,
Index for All Urban Consumers, or CPI-U, the
plans) account for roughly two thirds of total
0.60
weight of healthcare is approximately 8%,80.60
which
including things like medical supplies and nursing
healthcare expenses among retirees, according to
85 85 is significantly lower95than
100 100of total
65 stays. The costs 75
75
95its portion
of a nursing
home
both Fronstin and VanDerhei (2017) and Cubanski 65 home
Age Age
can be significant. According to Genworth's Cost
et al. (2014). This is important because these
expenditures for older Americans. Alternative
7
the
average
cost
of
an
expenses are generally known with more certainty
of
Care
Survey,
consumption
baskets,
such as the Consumer Price
Above
Threshold
Above
Threshold
Above
Threshold
Above
Threshold
annual
stay
in a semiprivate room at a nursing
62 years of age and
than are other out-of-pocket healthcare expenses.
Index
forBelow
Americans
Below
Threshold
Below
Threshold
Below
Threshold
Threshold
775Nondurable
a 3% Spending
older,
orDiﬀerence
CPI-E, better reflect
home
in 2017 was $85
Diﬀerence
Diﬀerence
Δ ,in
Diﬀerence
Δ inthe
Nondurable
Spending
Δ, with
in Nondurable
Spending
Δ inexpenditure
Nondurable
Spending
forecast five-year growth rate. It's important to0 0
distribution of older Americans and are
Medicare premiums are typically based on
0 0
income. In 2018, the Medicare Part B premium
likely a better proxy for how the base costs would
note that while nursing home costs can be

5
6
7
8

Medicare.gov
Ibid.
https://www.genworth.com/about-us/industry-expertise/cost-of-care.html
https://www.bls.gov/cpi/tables/relative-importance/2016.pdf

-5 -5
-8.4 -8.4

-5 -5
-7.4 -7.4

-10.1-10
-10.1-10

-10 -10

-15 -15
-18.6 -18.6
-20 -20
5 5
10 10 15 15 20 20
0 0
Threshold
(% of(%
Total
Spending)
Threshold
of Total
Spending)

-7.8 -7.8

-15.2-15.2
-15 -15

-20 -20
0global.morningstar.com/Morningstarmagazine
5 5
10 10 15 15 20 20
0
Threshold
(% of(%
Total
Spending)
Threshold
of Total
Spending)

57
http://www.Medicare.gov https://www.genworth.com/about-us/industry-expertise/cost-of-care.html https://www.bls.gov/cpi/tables/relative-importance/2016.pdf http://global.morningstar.com/Morningstarmagazine
Morningstar - Summer 2019

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