In our last post, we examined a report by the Federal Reserve Bank of Richmond on end-of-life medical expenses, an often-misunderstood aspect of financial planning. 

We first took a look at the effect of spending on households with members in this stage of life and we now turn our analysis to chronic disease in America’s older citizens and its implications for end-of-life spending. 

The Fed documents in its study that a tenth of all medical spending occurs in the last 12 months of life, as does a full quarter of all medical spending, facts that have driven the supposition that too much money is spent on those near to death rather than those who could be saved.

For that to be true requires the assumptions that we can predict who will, in fact, die in any given 12 months, now that end-of-life care doesn’t improve quality of life nor textends lifespan.

Regarding the first claim, the Fed points out – in what should be obvious – that most of those who die are sick and sick people use more health care than healthy people who die suddenly. The report refers to a 2008 study showing less than five percent of Medicare beneficiaries who died that year had a predicted mortality risk above 50 percent. 

The second point is addressed through evidence that palliative care can extend life for those with terminal or advanced illnesses as long or longer than those receiving conventional medical treatment alone. 

As to the second claim, the Fed is less clear:.For instance, those with private insurance tend to be healthier and live longer, but healthy people tend to have better employment histories – with insurance – and the likelihood of purchasing private insurance.  

To gauge the extent heightened longevity correlates with an increase in medical spending, we must acknowledge older people generally have worse health and thus higher medical expenses. The graph below shows annual medical spending rises between ages 65 and 100 from less than $10,000 to almost $50,000.

However, health at any age has been improving and Americans appear to spend more of their lives with chronic conditions and less with disability, a probable result of more developed medical technology.  

Those factors working in concert make it hard to accurately ascertain the trajectory of medical spending.

A theory known as the “red herring” hypothesis posits that time to death, rather than absolute agedetermines medical spending. If the relationship between time to death and medical spending is stable, increased longevity should have only modest effects on aggregate expenditures. In fact, if people live longer but face the same medical expense flows before and during their terminal illnesses, increased longevity should lead per capita medical spending to fall, as a greater fraction of the population will be in good health. 

The Fed points to evidence that time to death is a stronger predictor of health care costs than age but there is also a possibility people require more expensive care at older ages, regardless of how near to death they may be.

In conclusion, the Fed report admits that while there is need for more study of chronic disease and aging to medical costs, ample evidence exists to call into question the notion that spending at this final stage of life is unnecessarily costly and wasteful.