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

R. Anton Braun, Karen A. Kopecky, and Tatyana Koreshkova

Working Paper 2017-3
March 2017

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Half of U.S. 50-year-olds will experience a nursing home (NH) stay before they die, and a sizeable fraction will incur out-of-pocket expenses in excess of $200,000. Given the extent of NH risk, it is surprising that only about 10 percent of individuals over age 62 have private long-term care insurance (LTCI). This market also has a number of other puzzling features. Many applicants are denied coverage by insurers. Coverage of those who have insurance is incomplete. Insurance premia are high relative to an actuarily fair benchmark. Using a model that features agents with private information about their NH entry risk and an insurer who optimally chooses menus of LTCI contracts subject to participation and incentive compatibility constraints, this paper shows that these puzzles can be attributed to adverse selection, overhead costs on the insurer, and Medicaid. The model also accounts for the lack of correlation between NH entry and LTCI ownership. This final property is novel because our setup has only one dimension of private information.

JEL classification: E62, H31, H52, H55

Key words: long-term care insurance, Medicaid, adverse selection, insurance rejections

The authors thank Taylor Kelley for outstanding research assistance. They are grateful for comments received at the 2015 Workshop on the Macroeconomics of Population Aging, Notre Dame University, the Canon Institute for Global Studies 2015 End of Year Conference, the Keio-GRIPS Macroeconomics and Policy Workshop, the 2016 Workshop on Adverse Selection and Aging held at the Federal Reserve Bank of Atlanta, and the 2016 Society for Economic Dynamics meetings held in Toulouse, France. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to R. Anton Braun, Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-8708, r.anton.braun@gmail.com; Karen A. Kopecky, Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-8974, karen.kopecky@atl.frb.org; or Tatyana Koreshkova, Concordia University and CIREQ, Department of Economics, 1455 De Maisonneuve Blvd. W., Montreal, Quebec, Canada H3G 1M8, tatyana.koreshkova@concordia.ca.
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