James Poterba & Steven Venti RRC Symposium, Washington August 3 2017 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

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

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

Strengths and Weaknesses of Wealth Cost Measure 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

Age-Specific Probability of First Stroke for Men

Age-Specific Probability of First Stroke for Women

Age-Specific Probability of First Arthritis Diagnosis for Women

Age-Specific Probability of First Arthritis Diagnosis for Men

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

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

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

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

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

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

Lifetime Expected Cost of Stroke (Starting at Age 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)

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

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

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”