Worker Health Care Investment Can Save Expenses in Retirement

September 13, 2007 ( - A new working paper from the National Bureau of Economic Research (NBER) suggests an additional $1 of health expenditure during one's working life can translate into $2.50 of savings during retirement.

Using data from the Medical Expenditure Panel Survey (MEPS) and the Health and Retirement Study (HRS) the NBER found that employee turnovers lead to inefficiencies in health investment and particularly that the employment-based health insurance system in the U.S. might lead to an inefficient low level of individual health investment during individuals’ working ages. The model also suggests the level of employers’ contribution to workers’ health investment is higher in lower turnover industries.

When NBER extended the model and introduced a “retirement” period after the working career, it found a reversal of the ranking of the medical expenditures. Individuals who worked in lower turnover industries had higher medical expenditures when working, but lower medical expenditure when retired.

“This latter prediction suggests that employment-based health insurance system in the U.S. might lead to inefficient patterns of health expenditures during individuals’ lifecycle,” the paper said. NBER pointed out U.S. health expenditure accounted for about 17% of its gross domestic product (GDP) in 2005, while in the U.K. health expenditures accounted for about 8% of its GDP.

Additionally, the share of health expenditures by retirees in U.K. is much lower than that in the U.S.

The model found health care expenditure differences when working have consequences on health expenditures in retirement. Using the 2002 HRS data, NBER found the retirees’ medical expenditure is higher for workers whose industry of longest tenure prior to retirement had higher turnover rates.

Further, NBER said its model suggests that in the typical life of U.S. individuals, too much of their health expenditures are allocated toward their retirement ages. The research provides a link between the employment-based health insurance system in the U.S. and this observation, NBER said.

“[Our research} suggests that it is possible to reduce the total health care expenditures in the U.S. without hurting Americans’ health, if one could find a way to internalize the dynamic externalities intrinsic in health care investment,” NBER concluded.

The paper is here .