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Old, Frail, and Uninsured: Accounting for Puzzles in the U.S. Long-Term Care Insurance Market

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Abstract

Half of U.S. 50-year-olds will experience a nursing home stay before they die, and one in ten will incur out-of-pocket long-term care expenses in excess of $200,000. Surprisingly, only about 10% of individuals over age 62 have private long-term care insurance (LTCI). This paper proposes a quantitative equilibrium optimal contracting model of the LTCI market that features screening along the extensive margin. Frail and/or poor risk groups are ordered a single contract of no insurance that we refer to as a rejection. According to our model, rejections are the main reason that LTCI take-up rates are low. Both supply-side frictions due to private information and administrative costs and demand-side frictions due to Medicaid play important and distinct roles in generating rejections and the pattern of low take-up rates in the data.

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  • Braun, R. Anton & Kopecky, Karen A. & Koreshkova, Tatyana, 2017. "Old, Frail, and Uninsured: Accounting for Puzzles in the U.S. Long-Term Care Insurance Market," FRB Atlanta Working Paper 2017-3, Federal Reserve Bank of Atlanta, revised 01 Aug 2018.
    • Handle: RePEc:fip:fedawp:2017-03
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    File URL: https://www.frbatlanta.org/-/media/documents/research/publications/wp/2017/03c-old-frail-and-uninsured-accounting-for-puzzles-in-the-us-long-term-care-insurance-market-2018-09-10.pdf
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    References listed on IDEAS

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    1. repec:aea:aecrev:v:108:y:2018:i:9:p:2513-50 is not listed on IDEAS
    2. Pierre‐André Chiappori & Bruno Jullien & Bernard Salanié & François Salanié, 2006. "Asymmetric information in insurance: general testable implications," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 783-798, December.
    3. Lee M. Lockwood, 2018. "Incidental Bequests and the Choice to Self-Insure Late-Life Risks," American Economic Review, American Economic Association, vol. 108(9), pages 2513-2550, September.
    4. Matthew Shapiro & Joseph Briggs & Chris Tonetti & Andrew Caplin & John Ameriks, 2016. "Late-in-Life Risks and the Under-Insurance Puzzle," 2016 Meeting Papers 241, Society for Economic Dynamics.
    5. Benjamin Lester & Ali Shourideh & Venky Venkateswaran & Ariel Zetlin-Jones, 2019. "Screening and Adverse Selection in Frictional Markets," Journal of Political Economy, University of Chicago Press, vol. 127(1), pages 338-377.
    6. Karen A. Kopecky & Tatyana Koreshkova, 2014. "The Impact of Medical and Nursing Home Expenses on Savings," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(3), pages 29-72, July.
    7. repec:oup:restud:v:85:y:2018:i:2:p:766-809. is not listed on IDEAS
    8. R. Anton Braun & Karen A. Kopecky & Tatyana Koreshkova, 2017. "Old, Sick, Alone, and Poor: A Welfare Analysis of Old-Age Social Insurance Programmes," Review of Economic Studies, Oxford University Press, vol. 84(2), pages 580-612.
    9. repec:rje:randje:v:37:y:2006:i:4:p:783-798 is not listed on IDEAS
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    Cited by:

    1. Amengual, D.; Bueren, J.; Crego, J.A.;, 2017. "Endogenous Health Groups and Heterogeneous Dynamics of the Elderly," Health, Econometrics and Data Group (HEDG) Working Papers 17/18, HEDG, c/o Department of Economics, University of York.
    2. Radim Bohácek & Jesús Bueren & Laura Crespo & Pedro Mira & Josep Pijoan-Mas, 2018. "Inequality in Life Expectancies across Europe," Working Papers wp2018_1810, CEMFI.

    More about this item

    Keywords

    long-term care insurance; Medicaid; adverse selection; insurance rejections;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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