The research team first studied the topic of health in 2009 to determine if and how it might be included in our web-based financial planning architecture. Our belief then, as it is now, not having a Health module in the architecture would be a serious omission. Yet, nearly all retirement readiness tools focus solely on investments and lifestyle spending habits. In 2009, we published an initial health framework to supplement our financial models. Lately, we have dabbled with a closely related topic known as Subjective Well Being (SWB), subject matter discussed in another blog category. Much has changed to alter our original health framework, the Affordable Care Act (ACA) being one of the most significant items.
So what is it that we exactly do in a Health module consisting of more than 10,000 lines of C# code? Here is the simplest explanation possible in 50 words or less. From a health-oriented survey form, we take a client’s answers and determine a benchmark score. This score is used to project future health scores along with health care costs. Health insurance is then applied to offset health costs, but there is the added premium expense.
What are the types of Health insurance? At the highest level of abstraction, you have: Medicare & Supplements for those aged 65 & above; ACA has 4 major classes of Bronze, Silver, Gold, and Platinum. Within each, there are a myriad of specific choices depending on your locality.
You can self-insure. Insurance has what is known as loss-ratios, a value that suggests how much premium is returned to the policyholder in terms of benefits on average. Typically, this might be $80 / $100 (80%) for health insurance, so on average you lose with health insurance. In assessing the probability that your financial plan is a success, if you encounter an unfavorable tail risk, your plan that works for the average will fail in those cases.
You can run highly sophisticated readiness-to-retire Monte Carlo simulations models with glam outputs all day long at your favorite investment web-site, but a lack of consideration of health finances renders such exercises as academic.
Ironically, a poor health state may help one’s financial state if it suggests early mortality, usually not one’s goal. There is also the question of morbidity — living long, but not healthy requiring significant, expensive care.
Health is an extremely broad topic. We have confined our efforts to acquiring large health data sets and modeling with many of these factors and others. After all, those 10K lines of code must be doing something meaningful!