The High Costs of Bad Health.
Much of the focus at the intersection of personal finance and health tends to narrow in on external market related topics such as health insurance prices, costs for in-home care, why these prices continue to rise, and ways to reduce them.
These are all practical areas for consideration, but they miss a more fundamental perspective to consider. It so happens that there is a compelling economic case that calls for us to focus on prioritizing good health as a way of maximizing out financial success.
This article will present that case by examining the lifetime costs of poor health, and how these costs can stand in the way of your ability to build wealth.
Contents
The Lifetime Costs of Bad Health
The title for this article was spun off from the title of a research paper by the National Bureau of Economic Research (NBER) entitled The Lifetime Costs of Bad Health.
I’ll use this research paper as the primary basis for this article. That said, let’s hop into a brief review of the study
Study Structure
The process for estimation in the study relied on 3 primary data sources. These are summarized below:
- Panel Study of Income Dynamics – Conducted by the University of Michigan, the PSID is the longest running longitudinal study of households in the world. This study includes a sample size of 18,000 individuals across 5,000 households.
- Health and Retirement Study – Also conducted by the University of Michigan, this longitudinal study surveys a sample of 20,000 U.S. citizens.
- Medical Expenditure Survey – Large-scale surveys of families and individuals, their medical providers, and employers. The most complete source of data on the cost and use of health care and health insurance coverage.
Study Sample
The study selected a sample of male household heads who’s education level fell between high school graduation and an Associates degree. All figures in the study are quoted in 2013 dollars.
There were a total of 2,038 individuals in the final analysis after removing individuals who had missing data.
Key Findings
- Those who are considered healthy earn an average of 37% more than those who self reported as unhealthy.
- Monetary costs of bad health includes direct (out of-pocket medical spending) and indirect (loss in labor earnings) costs. But indirect costs account for a larger share.
- The median wealth of the healthy at age 65 is 65% larger than that of the unhealthy.
- The longer people have been unhealthy (healthy), the less likely they are to become healthy (unhealthy).
- Health types account for more than 70% of the time spent being unhealthy.
- Among the long-term unhealthy, a larger fraction is less patient and has a lower propensity to save.
The High Costs of Bad Health
Without delay, we will start things off by getting on the same page about the true costs of poor health. The NBER study sought out to discover the lifetime costs of being unhealthy. In summary, what they discovered was that there are substantial financial consequences for bad health.
More specifically, they found that lifetime costs beginning in adulthood amount to roughly $1,500 per year because of bad health. They also found that people in poor health lived an average of six years fewer, thus resulting in a 10% annual loss in the ability to consume relative to those who are healthy.
Annual Monetary Costs
We must first ensure we have the full picture to really be able to gauge the magnitude of what we are seeing. As such, it would be folly to see $1,500 per year and scoff at how low it seems.
For starters, that $1,500 is reported in 2013 dollars. Adjusting for inflation results in an amount of $2,415 in today’s dollars.
That $2,415 is substantial. Here are the annual salaries that produce a bi-weekly paycheck of $2,415 for a few key cities.
- $87,000/yr in New York City
- $85,000/yr in San Francisco
- $84,000/yr in Washington, DC
- $77,000/yr in Miami
- $76,000/yr in Dallas
Source: Smartasset Paycheck Calculator
Costs on Consumption
We can apply this same lens to lifestyle by examining the costs of poor health on consumption. Consumption is simply the measure of one’s ability to use products, services, and resources. Things such as eating out, buying clothes, using gasoline, and paying for entertainment would all fall under this category.
The study found that the shorter lifespans of unhealthy people resulted in a lifetime consumption loss of 10% per year.
The actual dollar amount of this consumption loss is $1,933 in 2013 dollars which amounts to $3,113 in today’s dollars. This is even more than the bi-weekly paycheck amounts for the salaries listed above.
Total Lifetime Costs
Combining the out of pocket costs and the losses to consumption figures places the total costs of bad health at $5,528 annually. Extending this over a thirty year period and land at a total figure of $165,840.
This is no small figure when we take into account the fact that the average retirement account balance is only $86,869.
Hidden Costs of Bad Health
All in all, the figures presented thus far highlight the very real and substantial costs to poor health. But there is still a lot more to add to the equation. As often the case with money, there is a hidden side to the cost equation of bad health.
In brief, we must consider the opportunity costs of bad health. Or to put it differently, we must not only consider the money spent on bad health. We must also consider the costs of the opportunities lost due to poor health.
Let’s illustrate with an example using the numbers from the NBER study.
Opportunity Costs of Bad Health
For starters, opportunity cost is an economic measure representing the benefit or value of an opportunity or course of action that is given up.
A simple example would be to consider a decision to have pizza or burgers for dinner. If you choose a burger, your opportunity cost is the pizza which was given up.
Let’s assume that a person of any income level is in bad health and spends $2,415 annually which represents the out of pocket costs from the NBER study expressed in today’s dollars. These monies are spent on poor health and cannot be spent elsewhere.
Now let us flip the scenario to a healthy person and assume they get to keep the full $2,415 to use however they’d like. A very productive use of these funds could be the funding of an investment account earning the S&P historical average of 10% per year.
Assuming this person does no other investing and funds the account for 30 years – we would expect the balance to grow to roughly $436,978 at retirement.
That said, we must take one more step and measure the gap between the costs of bad health ($2415 * 30yrs) and the lost opportunity of investing ($436,978) to get the full picture. Measuring the full swing between the two and we land at a figure of $509,428.
Bad Health Is Expensive
I concede that there may be small holes in my analysis or that my lens is too narrow. Still, it would be difficult to frame any sort of credible argument that opposes the core message here – which is that bad health is costly.
Being in poor health means that a person is more likely to have higher medical costs and more likely to miss time from work. We don’t even need the conclusions from a detailed economic study for us to see how these things would be true.
I’ve had my share of health related issues over the years and can affirm the costliness of managing these issues. Multiple knee procedures have cost thousands in out of pocket expenses and ongoing physical therapy still amounts to over a thousand dollars per year.
These are worthwhile expenses because they have helped me have a higher quality of life – but they do result in financial opportunity costs such as those presented above.
Health is Wealth
My goal has been to shed light on the intersection between your health and your wealth. Hopefully you can now see that there is a very real connection here. And that this serves as a call for greater emphasis on good health as a part of a solid financial plan.
If you are in good health, then keep up the great work. Strive to maintain this for the long run and don’t settle on letting nature take it’s course.
If you aren’t in great health – it’s time for change.