Sudipto Banerjee is a Global Retirement Strategist at T. Rowe Price.
Health care costs are among the most significant financial uncertainties facing older Americans. Even with near-universal Medicare coverage from age 65 onward, retirees remain exposed to meaningful out-of-pocket (OOP) expenses and the possibility of very high long-term care (LTC) costs. Understanding how these expenses are distributed, and when they arise, is essential for both household planning and retirement policy.
In a recent paper for the Pension Research Council, I examine how health care expenses vary across different types of Medicare coverage, how common medical conditions affect spending, and how costs spike at the end of life for people who do not qualify for Medicaid. The findings highlight both an encouraging reality and a sobering one: for most retirees, health care expenses are manageable—but for a small group, costs can be catastrophic.
How Costly Is Ongoing Care?
Insurance premiums, not OOP expenses, are the largest component of annual health care expenses for most Medicare beneficiaries. Overall, premiums for Medicare Part B, prescription drug plan coverage (Part D), Medicare Advantage, and Medigap form a relatively stable baseline expense, totaling between 73% and 81% of annual health care spending. Median expenses for traditional Medicare with Part D and Medicare Advantage with Part D are similar, $4,300 and $4,400, respectively.
Total spending rises to $6,400 when Medigap is added to traditional Medicare as supplemental coverage. In exchange, Medigap reduces exposure to extremely high OOP expenses, effectively shifting spending from uncertain OOP risk to more predictable premiums. Yet regardless of coverage type, risk remains concentrated: 5% of Medicare beneficiaries spend more than $10,000 annually.
How Medical Conditions Affect Out-Of-Pocket Expenses
Arthritis (69%) and high blood pressure (63%) are by far the most common medical conditions among older Americans. More severe conditions such as stroke and cancer are reported less frequently (8% and 21%, respectively).
Nearly all major conditions significantly increase OOP spending. Heart conditions are associated with the largest impact, raising annual OOP expenses by about 55% on average. Psychiatric problems (including dementia and related conditions) and lung diseases are associated with 44% and 43% increases, respectively.
Importantly, many individuals suffer from multiple conditions simultaneously. The interaction of comorbidities can meaningfully amplify financial risk. While a single diagnosis may increase annual expenses, overlapping conditions can compound both medical complexity and spending exposure.
Long-Term Care and Spending Risk at the End of Life
The sharpest spending increases occur near the end of life, and the risk rises significantly with age. Among individuals who passed away between ages 65 and 69, 5% spent more than $34,200 in the last year of life. For those who died between ages 80 and 89 and those who died after age 90, the corresponding figures, respectively, rise to $87,100 and $159,500.
Long-term care is the key contributor to this spike. Medicare provides only limited coverage for stays at skilled nursing facilities and generally does not cover custodial LTC. Yet these services can be extremely costly. The national median cost of a full-year semi-private nursing home room in 2026 exceeded $118,000, according to SeniorLiving.org.
LTC entry rates rise sharply with age. Just over half of individuals who died after age 80 had entered a nursing home or LTC facility near the end of life, with that share climbing to 67% among those who lived to age 90 or beyond. Moreover, 8.7% reported stays lasting two years or longer, which can represent significant financial risk.
Although median nursing home OOP spending in the final year of life is zero, reflecting the fact that many never enter facilities or are covered for short stays, the right tail is substantial. Among those who died after age 90, 5% spent more than $116,000 in their final year. For this small but vulnerable group, LTC expenses represent a severe financial shock. This concentration of risk underscores why many households self-insure against LTC costs by maintaining precautionary savings.
Implications for Retirement Security
Two lessons follow from this analysis. First, planning separately for health care premiums and OOP expenses can improve financial management. Premiums are relatively predictable and can be funded through steady income sources such as Social Security, pensions, or systematic withdrawals. A separate liquid reserve can help manage uncertain OOP costs.
Second, LTC remains the most consequential uninsured risk. According to LIMRA, only 3% to 4% of Americans age 50 or older carry long-term care insurance (LTCI). With Medicaid functioning primarily as a means-tested safety net, many households are not financially prepared for LTC risk. As a result, policy interventions to reform the LTCI marketplace are highly needed.
Sudipto Banerjee is a Global Retirement Strategist at T. Rowe Price.
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