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Supply or Demand: Why is the Market for Long-Term Care Insurance So Small?

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  • Jeffrey R. Brown
  • Amy Finkelstein

Abstract

Long-term care represents one of the largest uninsured financial risks facing the elderly in the United States. Whether the small size of this market is driven primarily by supply side market imperfections or by limitations to demand, however, is unresolved, largely due to the paucity of data about the structure of the private market. We provide what is to our knowledge the first empirical evidence on the pricing and benefit structure of long-term care insurance policies. We estimate that the typical policy purchased by a 65-year old has an average pricing load of about 18 percent and has a very limited benefit structure, covering only one-third of the expected present discounted value of long-term care expenditures. These findings are consistent with the presence of supply side market imperfections. However, we also find enormous gender differences in pricing -- typical loads are 44 cents on the dollar for men but better than actuarially fair for women -- that do not translate into differences in coverage. And, although purchased policies provide limited benefits, we demonstrate that more comprehensive policies are widely-available at similar loads, but are rarely purchased. These findings suggest that while supply-side market imperfections exist, they are not the primary cause of the small size of the private long-term care insurance market.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10782.

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Date of creation: Sep 2004
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Handle: RePEc:nbr:nberwo:10782

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  1. Joseph P. Newhouse, 2004. "Pricing the Priceless: A Health Care Conundrum," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640589.
  2. Thomas Philipson & Darius Lakdawalla, 1998. "The Rise in Old Age Longevity and the Market for Long-Term Care," University of Chicago - George G. Stigler Center for Study of Economy and State 146, Chicago - Center for Study of Economy and State.
  3. Andrew Dick & Alan M. Garber & Thomas E. MaCurdy, 1994. "Forecasting Nursing Home Utilization of Elderly Americans," NBER Chapters, in: Studies in the Economics of Aging, pages 365-394 National Bureau of Economic Research, Inc.
  4. Sloan, Frank A & Norton, Edward C, 1997. "Adverse Selection, Bequests, Crowding Out, and Private Demand for Insurance: Evidence from the Long-Term Care Insurance Market," Journal of Risk and Uncertainty, Springer, vol. 15(3), pages 201-19, December.
  5. Amy Finkelstein & Kathleen McGarry & Amir Sufi, 2005. "Dynamic Inefficiencies in Insurance Markets: Evidence from Long-Term Care Insurance," American Economic Review, American Economic Association, vol. 95(2), pages 224-228, May.
  6. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  8. Norton, Edward C., 2000. "Long-term care," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 17, pages 955-994 Elsevier.
  9. Amy Finkelstein & James Poterba, 2002. "Selection Effects in the United Kingdom Individual Annuities Market," Economic Journal, Royal Economic Society, vol. 112(476), pages 28-50, January.
  10. Darius Lakdawalla & Dana Goldman & Jay Bhattacharya, 2001. "Are the Young Becoming More Disabled?," NBER Working Papers 8247, National Bureau of Economic Research, Inc.
  11. Amy Finkelstein & Kathleen McGarry, 2003. "Private Information and its Effect on Market Equilibrium: New Evidence from Long-Term Care Insurance," NBER Working Papers 9957, National Bureau of Economic Research, Inc.
  12. Jeffrey R. Brown & Olivia S. Mitchell & James M. Poterba, 2000. "Mortality Risk, Inflation Risk, and Annuity Products," NBER Working Papers 7812, National Bureau of Economic Research, Inc.
  13. Pauly, Mark V, 1990. "The Rational Nonpurchase of Long-term-Care Insurance," Journal of Political Economy, University of Chicago Press, vol. 98(1), pages 153-68, February.
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Cited by:
  1. Joan Costa-Fonta & Montserrat Font-Vilalta, . "The limits on the Design of Long-Term Care Insurance Schemes in Spain stas," Studies on the Spanish Economy 201, FEDEA.
  2. Hanming Fang & Michael P. Keane & Dan Silverman, 2006. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," NBER Working Papers 12289, National Bureau of Economic Research, Inc.
  3. Jeffrey R. Brown & Amy Finkelstein, 2008. "The Interaction of Public and Private Insurance: Medicaid and the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 98(3), pages 1083-1102, June.
  4. Brown, Jeffrey R. & Finkelstein, Amy, 2007. "Why is the market for long-term care insurance so small?," Journal of Public Economics, Elsevier, vol. 91(10), pages 1967-1991, November.
  5. Amy Finkelstein & Kathleen McGarry, 2006. "Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 96(4), pages 938-958, September.
  6. Jeffrey R. Brown & Norma B. Coe & Amy Finkelstein, 2006. "Medicaid Crowd-Out of Private Long-Term Care Insurance Demand: Evidence from the Health and Retirement Survey," NBER Working Papers 12536, National Bureau of Economic Research, Inc.
  7. Amy Finkelstein & Kathleen McGarry & Amir Sufi, 2005. "Dynamic Inefficiencies in Insurance Markets: Evidence from long-term care insurance," NBER Working Papers 11039, National Bureau of Economic Research, Inc.
  8. Grégory Ponthière, 2011. "Long-Term Care, Altruism and Socialization," PSE Working Papers halshs-00622385, HAL.
  9. Rinaldo Brau & Matteo Lippi Bruni, 2008. "Eliciting the demand for long-term care coverage: a discrete choice modelling analysis," Health Economics, John Wiley & Sons, Ltd., vol. 17(3), pages 411-433.
  10. Amy Finkelstein & James Poterba, 2006. "Testing for Adverse Selection with "Unused Observables"," NBER Working Papers 12112, National Bureau of Economic Research, Inc.
  11. Dardanoni, V & Li Donni, P, 2008. "Testing For Asymmetric Information In Insurance Markets With Unobservable Types," Health, Econometrics and Data Group (HEDG) Working Papers 08/26, HEDG, c/o Department of Economics, University of York.
  12. Grabowski, David C. & Gruber, Jonathan, 2007. "Moral hazard in nursing home use," Journal of Health Economics, Elsevier, vol. 26(3), pages 560-577, May.

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