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Why Doesn't the Market Fully Insure Long-Term Care?

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  • David M. Cutler

Abstract

This paper examines the failure of the private market to fully insure long-term care. I argue that the failure is a result of large intertemporal variability in the cost of long-term care. Unlike variability in cross section use, variability in the cost of care affects everyone in a pool and therefore cannot be diversified within a cohort. Further, since costs are serially correlated, the cost risk cannot be diversified across cohorts. Estimates suggest that the standard deviation of cost uncertainty is on the order of 4 to 14 percent for an average long-term care policy. In response to this cost risk, most long-term care policies do not insure real benefits. Policies generally pay a fixed nominal amount for care, which is updated using predetermined nominal rules. Many policies also have lifetime maximum payments and other restrictions on aggregate risk bearing by the insurer. The lack of complete long-term care insurance may be one explanation for the low rate of purchase of long-term care policies.

Suggested Citation

  • David M. Cutler, 1993. "Why Doesn't the Market Fully Insure Long-Term Care?," NBER Working Papers 4301, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4301
    Note: PE HC AG
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    References listed on IDEAS

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    1. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    2. Benjamin M. Friedman & Mark Warshawsky, 1985. "Annuity Prices and Saving Behavior in the United States," NBER Working Papers 1683, National Bureau of Economic Research, Inc.
    3. 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.
    4. Andrew Dick & Alan M. Garber & Thomas MaCurdy, 1992. "Forecasting Nursing Home Utilization of Elderly Americans," NBER Working Papers 4107, National Bureau of Economic Research, Inc.
    5. David M. Cutler & Louise Sheiner, 1994. "Policy Options for Long-Term Care," NBER Chapters,in: Studies in the Economics of Aging, pages 395-442 National Bureau of Economic Research, Inc.
    6. Alan M. Garber & Thomas E. MaCurdy, 1991. "Nursing Home Discharges and Exhaustion of Medicare Benefits," NBER Working Papers 3639, National Bureau of Economic Research, Inc.
    7. Benjamin M. Friedman & Mark Warshawsky, 1988. "Annuity Prices and Saving Behavior in the United States," NBER Chapters,in: Pensions in the U.S. Economy, pages 53-84 National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Pierre Pestieau & Grégory Ponthière, 2010. "Long term care insurance puzzle," Working Papers halshs-00564862, HAL.
    2. Grégory Ponthière, 2011. "Long-Term Care, Altruism and Socialization," Working Papers halshs-00622385, HAL.
    3. David M. Cutler & Louise Sheiner, 1994. "Policy Options for Long-Term Care," NBER Chapters,in: Studies in the Economics of Aging, pages 395-442 National Bureau of Economic Research, Inc.
    4. Pierre Pestieau & Gregory Ponthiere, 2012. "The Public Economics of Increasing Longevity," Hacienda Pública Española, IEF, vol. 200(1), pages 41-74, March.
    5. Bradley Herring & Mark Pauly, 2003. "Incentive-Compatible Guaranteed Renewable Health Insurance," NBER Working Papers 9888, National Bureau of Economic Research, Inc.
    6. Pierre Pestieau & Grégory Ponthière, 2012. "The public economics of increasing longevity," Working Papers halshs-00676492, HAL.
    7. 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.
    8. Iwamoto, Yasushi & Kohara, Miki & Saito, Makoto, 2010. "On the consumption insurance effects of long-term care insurance in Japan: Evidence from micro-level household data," Journal of the Japanese and International Economies, Elsevier, vol. 24(1), pages 99-115, March.
    9. Walter M. Cadette, 2000. "Financing Long-Term Care: Options for Policy," Macroeconomics 0004030, EconWPA.
    10. Helmuth Cremer & Pierre Pestieau, 2009. "Securing Long-term Care in the EU: Some Key Issues," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 7(4), pages 8-11, 01.
    11. R. Brau & M. Lippi Bruni & AM. Pinna, 2004. "Public vs private demand for covering long term care expenditures," Working Paper CRENoS 200408, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    12. Yasushi Iwamoto & Miki Kohara & Makoto Saito, 2006. "On the Consumption Insurance Effects of Long-term Care Insurance In Japan: Evidence from Micro Household Data," CIRJE F-Series CIRJE-F-443, CIRJE, Faculty of Economics, University of Tokyo.
    13. Franck Bien & Arnold Chassagnon & Manuel Plisson, 2012. "Est-il rationnel de ne pas s'assurer contre la dépendance ?," PSE - Labex "OSE-Ouvrir la Science Economique" halshs-00754579, HAL.
    14. Rinaldo Brau & Matteo Lippi Bruni & Anna Maria Pinna, 2010. "Public versus private demand for covering long-term care expenditures," Applied Economics, Taylor & Francis Journals, vol. 42(28), pages 3651-3668.
    15. Igal Hendel & Alessandro Lizzeri, 2003. "The Role of Commitment in Dynamic Contracts: Evidence from Life Insurance," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 299-328.
    16. repec:dau:papers:123456789/5055 is not listed on IDEAS
    17. 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).
    18. Franck Bien & Arnold Chassagnon & Manuel Plisson, 2011. "Est-il rationnel de ne pas s'assurer contre la dépendance ?," Revue française d'économie, Presses de Sciences-Po, vol. 0(4), pages 161-199.
    19. Pascale Genier, 1996. "La gestion du risque dépendance : le rôle de la famille, de l'État et du secteur privé," Économie et Statistique, Programme National Persée, vol. 291(1), pages 103-117.
    20. Maximilien Nayaradou & Sébastien Nouet & Manuel Plisson, 2016. "Les mécanismes économiques et financiers associés à la couverture dépendance : une analyse exploratoire sur données bancaires," Revue d'économie financière, Association d'économie financière, vol. 0(2), pages 273-326.
    21. Fels, Markus, 2016. "When the affordable has no value, and the valuable is unaffordable: The U.S. market for long-term care insurance and the role of Medicaid," Working Paper Series in Economics 84, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering.
    22. David Cutler, 1994. "Market Failure in Small Group Health Insurance," NBER Working Papers 4879, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets

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