Academic journal article Economic Inquiry

The Effect of the Medicaid Home Care Benefit on Long-Term Care Choices of the Elderly

Academic journal article Economic Inquiry

The Effect of the Medicaid Home Care Benefit on Long-Term Care Choices of the Elderly

Article excerpt

This paper analyses the impact of Medicaid home care benefits on the probability of nursing home entry and the use of formal and informal home care by disabled elderly remaining in the community. Using data from the National Long-Term Care Survey, I find evidence that Medicaid home care subsidies reduced the probability of nursing home entry among at-risk elderly using formal home care. Among non-institutionalized persons, the subsidy increased the use of formal home care but led to substitution of informal with formal care for services that were non-medical in nature.


Long-term care for the elderly has become an area of great interest for policymakers, due to the increased number of aged Americans and to the important role of government in financing and regulating their care. The size of the population requiring long- term care is expected to increase from about 7 million in 1988 to about 18 million by the year 2040.

It is popularly believed that the elderly often lack family support and must enter nursing homes when they become chronically ill. In actuality, the majority of impaired elderly remain at home. Only 22 percent of the disabled elderly population is institutionalized, and the remaining 78 percent lives in the community, most receiving assistance from family members. Of those remaining in the community, 27 percent receive formal home- and community-based care to augment their informal care, while 3 percent receive formal services only (Special Committee on Aging, 1988).

Private insurance rarely covers longterm care. Since many of the elderly cannot afford prolonged out-of-pocket expenditures on nursing home or home health care, the public sector ends up paying for it. Public long-term care expenditures account for 0.45 percent of GNP, with most of these expenditures going towards nursing home care. With rapid inflation in the health care sector, policymakers have been driven to explore alternatives to nursing home care which are potentially less costly. One of these alternatives is home and community-based care.

While the idea of expanding publicly financed home- and community-based care programs has been enthusiastically received by the elderly and their families, researchers have questioned its cost-effectiveness, raising two issues. The first concern is that extended home care benefits may not lower nursing home use, but will primarily benefit persons who would not have entered a nursing

home anyway. The second possibility is that home care benefits will reduce reliance on informal caregiving, if recipients use the formal care to substitute for, rather than supplement, the unpaid care they were already receiving.

Much of the research on how formal home care affects the provision of informal home care and the use of nursing home services has focused on all forms of formal care, including care paid for out-of-pocket. Two such studies are those by Newman et al. [1988] and Hanley et al. [1991]. Their results are likely to differ from those of an explicit analysis of the effects of a home care subsidy. For example, a family will purchase formal home care services as a substitute for their own informally provided care only if the opportunity cost of caregiving is greater than the cost of the paid care. On the other hand, if the formal care is essentially free to the recipients, their families are likely to substitute formal care for their informal services, even if the cost of the formal care to society is greater than the family's opportunity cost of caregiving. Thus, home care subsidies are likely to lead to greater substitution of formal for informal care than we would observe in the absence of subsidization. It is therefore misleading to extrapolate from this previous line of research to infer the effects of expanded government home care programs.

Research concentrating on the subsidy effect itself has often been conducted through demonstration projects. …

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