How to Reform US Long-Term Care

Long-term care is costly. About 45 percent of 65-year-old Americans will require formal long-term care assistance during their lifetime and one in twelve will incur out-of-pocket expenses of $200,000 or more. Surprisingly, only 10 percent of retirees have private long-term care insurance. We use a quantitative structural model to show that an obstacle to increasing coverage is disagreement across the income distribution: scaling back public long-term care insurance expands the private market and benefits the affluent but imposes large welfare losses on the poor, while universal public insurance does the opposite. We then show that making the main public insurer, Medicaid, the primary rather than the secondary payer of long-term care costs, while retaining its means tests, raises welfare for nearly all Americans. Private insurers respond by offering smaller, more profitable policies, and total coverage against long-term care risk rises with only a modest increase in public expenditures.