This paper investigates the effects of privately purchased long-term care insurance (LTCI) on three major types of long-term care services: nursing home care, paid home care, and informal care received from family and friends. Using 2002-2008 data from the ongoing Health and Retirement Study, we analyze the determinants of long-term care utilization simultaneously with the determinants of holding LTCI. We find that LTCI has modest effects on the likelihood o fusing long-term care services. For the very frail elderly, private LTCI enhances their access to nursing home care. For those with moderate disability, LTCI makes it more likely that the), can remain at home and receive home care services, instead of going to a nursing home. We find no evidence that formal care substitutes for informal care in the presence of LTCI. These findings suggest that if LTCI becomes much more prevalent in the future, many older adults will be able to choose the type of long-term care arrangement that best suits their needs.
Long-term care (LTC) refers to health and personal care provided for people with chronic disease or disability. LTC services range from assistance with everyday activities such as eating, bathing, and dressing, to intensive institutional care in facilities such as nursing homes. Unlike acute medical care, LTC is not adequately insured in the private market. Despite the growth in recent years, the private long-term care insurance (LTCI) market remains small. As of 2004, only 4% of total LTC expenditures for the elderly were paid by private LTCI (CBO 2004). It is widely believed that several factors contribute to the small size of the LTCI market, including the availability of Medicaid benefits, a misperception among some elders that traditional medical insurance also covers LTC services, the affordability of LTCI policies, and potential moral hazard and adverse selection problems in the market for LTCI.
The demand for LTC services is expected to increase substantially over the next several decades because of increased life expectancy and the aging of the baby boomers. Policymakers continue to show interest in promoting LTCI as a potential alternative to public funding. A number of approaches to make LTCI more attractive to consumers have been undertaken, including the Partnership Program for Long-Term Care, the enactment of further tax subsidies for LTCI premiums, and the sponsoring of LTCI plans by many large employers, including the federal government. These initiatives have enhanced consumers' knowledge of the LTCI market, and fueled continued interest in improving the functioning of this market (Meiners, McKay, and Mahoney 2002; Wiener, Tilly, and Goldenson 2000).
It remains unclear how LTCI affects patterns of care utilization. The purpose of this article is to explore these effects, paying careful attention to the potential endogeneity of LTCI. Using data from moderately disabled older adults who are part of the ongoing Health and Retirement Study (HRS), we model the demand for three types of LTC services: nursing home care, paid home care, and informal care. Our aim is to provide estimates of the effects of LTCI based on the actual experiences of seniors in need of assistance.
There are surprisingly few studies that look at the effects of private LTCI on the use of LTC services. Cohen, Miller, and Weinrobe (2001) conducted a descriptive analysis of the patterns of informal and formal caregiving among community-dwelling LTCI policyholders, using data from a survey of LTCI policyholders who were currently receiving benefits under their plans. Eight of the largest LTCI companies in the U.S. (which collectively account for about 80% of all private LTCI policies in force) provided the sample. The authors found a pattern of service use suggesting that, under the policies, paid home care was being used to supplement, rather than replace, informal care. …