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Tax incentives and the decision to purchase long-term care insurance

  • Courtemanche, Charles
  • He, Daifeng

This paper studies the impact of the tax incentive prescribed in the Health Insurance Portability and Accountability Act of 1996 (HIPAA) on individuals' long-term care insurance purchasing behavior. Using data from the Health and Retirement Study, we find that the tax incentive in HIPAA increased the take-up rate of private LTC insurance by 3.3 percentage points, or 25%, for those eligible. Despite this seemingly strong response, our results imply that even an above-the-line tax deduction would not increase the coverage rate of seniors beyond 13%, indicating that tax incentives alone are unlikely to expand the market substantially. We also present, to our knowledge, the first estimate of the price elasticity of demand for LTC insurance of around -Â 3.9, suggesting that demand is highly elastic at the current low ownership rate. Finally, we evaluate the net fiscal impact of the tax incentive and find that the tax deductibility of LTC insurance premiums leads to a net revenue loss for the government, as the reduced tax revenue from granting the tax incentive exceeds the savings in Medicaid's LTC expenditures.

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File URL: http://www.sciencedirect.com/science/article/B6V76-4SNNT45-1/2/1deba725b679a92362239bc9dc950c47
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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 93 (2009)
Issue (Month): 1-2 (February)
Pages: 296-310

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Handle: RePEc:eee:pubeco:v:93:y:2009:i:1-2:p:296-310
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. 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.
  2. Gruber, J. & Poterba, J., 1994. "Tax Incentives and the Decision to Purchase Health Insurance: Evidence from the Self-Employed," Working papers 94-10, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. 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.
  4. 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.
  5. 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.
  6. David M. Cutler, 2002. "Health Care and the Public Sector," NBER Working Papers 8802, National Bureau of Economic Research, Inc.
  7. Finkelstein, Amy, 2002. "The effect of tax subsidies to employer-provided supplementary health insurance: evidence from Canada," Journal of Public Economics, Elsevier, vol. 84(3), pages 305-339, 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.
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