Why Doesn't the Market Fully Insure Long-Term Care?
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.
|Date of creation:||Mar 1993|
|Note:||PE HC AG|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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"Policy Options for Long-Term Care,"
NBER Chapters,in: Studies in the Economics of Aging, pages 395-442
National Bureau of Economic Research, Inc.
- David M. Cutler & Louise M. Sheiner, 1993. "Policy Options for Long-Term Care," NBER Working Papers 4302, National Bureau of Economic Research, Inc.
- 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.
- 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. Full references (including those not matched with items on IDEAS)
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