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The design of long term care insurance contracts

Author

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  • Helmuth CREMER
  • Jean-Marie LOZACHMEUR
  • Pierre PESTIEAU

Abstract

This paper studies the design of long term care (LTC) insurance contracts in the presence of ex post moral hazard. While this problem bears some similarity with the study of health insurance (Blomqvist, 1997) the significance of informal LTC affects the problem in several crucial ways. It introduces the potential crowding out of informal care by market care financed through insurance coverage. Furthermore, the information structure becomes more intricate. Informal care is not publicly observable and, unlike the insurer, caregivers know the true needs of their relatives. We determine the optimal second-best contract and show that the optimal reimbursement rate can be written as an A-B-C expression à la Diamond (1998). These terms respectively reflect the efficiency loss as measured by the inverse of the demand elasticity, the distribution of needs and the preferences for risk sharing. Interestingly, informal care directly affects only the first term. More precisely the first term decreases with the presence and significance of informal care. Roughly speaking this means that an efficient LTC insurance contract should offer lower (marginal) reimbursement rates than its counterpart in a health insurance context.
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Suggested Citation

  • Helmuth CREMER & Jean-Marie LOZACHMEUR & Pierre PESTIEAU, 2016. "The design of long term care insurance contracts," CORE Discussion Papers RP 2864, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvrp:2864
    Note: In : Journal of Health Economics, 50, 330-339, 2016
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    References listed on IDEAS

    as
    1. Cremer, Helmuth & Roeder, Kerstin, 2013. "Long-term care and lazy rotten kids," TSE Working Papers 13-424, Toulouse School of Economics (TSE).
    2. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, May.
    3. Helmuth Cremer & Pierre Pestieau, 2006. "Intergenerational Transfer of Human Capital and Optimal Education Policy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(4), pages 529-545, October.
    4. Melanie Arntz & Stephan L. Thomsen, 2011. "Crowding Out Informal Care? Evidence from a Field Experiment in Germany," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73(3), pages 398-427, June.
    5. Blomqvist, Ake, 1997. "Optimal non-linear health insurance," Journal of Health Economics, Elsevier, vol. 16(3), pages 303-321, June.
    6. CREMER, Helmuth & PESTIEAU, Pierre & PONTHIERE, Grégory, 2012. "The economics of long-term care: a survey," CORE Discussion Papers 2012030, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    7. Richard G. Frank, 2012. "Long-term Care Financing in the United States: Sources and Institutions," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 34(2), pages 333-345.
    8. Richard G. Frank, 2012. "Long-term Care Financing in the United States: Sources and Institutions," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 34(2), pages 333-345.
    9. Besley, Timothy J., 1988. "Optimal reimbursement health insurance and the theory of Ramsey taxation," Journal of Health Economics, Elsevier, vol. 7(4), pages 321-336, December.
    10. Diamond, Peter A, 1998. "Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates," American Economic Review, American Economic Association, vol. 88(1), pages 83-95, March.
    11. Zeckhauser, Richard, 1970. "Medical insurance: A case study of the tradeoff between risk spreading and appropriate incentives," Journal of Economic Theory, Elsevier, vol. 2(1), pages 10-26, March.
    12. Pauly, Mark V, 1990. "The Rational Nonpurchase of Long-term-Care Insurance," Journal of Political Economy, University of Chicago Press, vol. 98(1), pages 153-168, February.
    13. Mark V. Pauly, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, Oxford University Press, vol. 88(1), pages 44-62.
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    1. repec:kap:itaxpf:v:25:y:2018:i:1:d:10.1007_s10797-017-9445-4 is not listed on IDEAS

    More about this item

    JEL classification:

    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health

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