UCLA School of Law

A mounting body of health care research reports that American retirees are likely to face large and increasing expenditures for out-of-pocket health care costs and that they often struggle to finance these expenditures.  It is, however, unclear whether the general population understands what their likely out-of-pocket health care expenditures might be in retirement.  It is even less clear whether the population appreciates how much these costs can vary from person to person and over time.  It is critically important to know whether Americans understand these costs and to what degree misunderstanding might hamper their financial planning  for retirement, especially in light of recent discussion of Medicare reform that could affect these costs.

This article explores this previously unexamined question of how much Americans expect to pay for their out-of-pocket health care spending in etirement.  To answer this question,we surveyed 2000 near retirees and retirees to gauge their expectations with regard to their own likely expenditures.  We then compared their responses to experts’ estimates. Our findings suggest that, surprisingly, many respondents have a reasonable sense of the magnitude of likely out-of-pocket expenditures, at least for the median, or typical, retiree.  However, we also found people struggle to understand potential variability in expenditures that might cause them to spend more than the typical retiree.  In particular, they underestimate how much personal health experience can affect individual spending.These results suggest that misperception of typical spending may not be a primary factor in retirees’ inability to finance out-of-pocket health care costs, but that misperception of the risk of spending above the median is likely an important factor.  We discuss educational,regulatory, and health policy implications of our findings.