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 2017-3a
March 2017 (Revised June 2017)

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Half of U.S. 50-year-olds will experience a nursing home (NH) stay before they die, and a sizable fraction will incur out-of-pocket expenses in excess of $200,000. Surprisingly, only about 10 percent of individuals over age 62 have private long-term care insurance (LTCI), and many applicants are denied coverage by insurers because they are frail. This paper proposes an equilibrium optimal contracting framework that features demand-side frictions due to Medicaid and supply-side frictions due to adverse selection, market power, and administrative costs of paying claims. We find that low LTCI take-up rates and rejections among poor individuals are due to Medicaid. Supply-side frictions, however, are responsible for rejections among frail affluent individuals, and both types of frictions matter for those in the middle class.

JEL classification: D82, D91, E62, G22, H30, I13

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

The authors thank Taylor Kelley for outstanding research assistance. They are grateful for helpful comments from Joseph Briggs, John Jones, Ariel Zetlin-Jones, and Robert Shimer. They also benefited from comments received at the 2015 Workshop on the Macroeconomics of Population Aging in Barcelona, 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, the 2016 SED meetings in Toulouse, the 2016 CIREQ MacroMontreal Workshop, the 2017 Michigan Retirement Research Center Workshop, the Minneapolis Fed, the Richmond Fed, the St. Louis Fed, Carlton University, the University of Connecticut, Purdue University, and McGill University. 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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