The Effects of the Deficit Reduction Act of 2005 on Transfers and Long-Term Care Utilization

The continued aging of the population, coupled with demographic trends and nursing home staffing shortages, is expected to put significant strain on the market for long-term care in the United States. In order for public policy to reduce this strain, it is necessary that we have a greater understanding of how individuals decide to use and pay for long-term care. This paper adds to this understanding by using the implementation of the Deficit Reduction Act of 2005, a policy that imposed stricter regulations about how assets could be “spent down” to become Medicaid eligible, to examine the relationship between asset transfers and long-term care utilization. Using data from the 1998-2010 waves of the Health and Retirement Study and a difference-in-difference analysis, I estimate the policy’s impact on both transfer behavior and care use along the extensive and intensive margins. I find that individuals over the age of 65 are significantly more likely to hold assets in trusts and slightly less likely to make inter-vivos transfers following the implementation of the DRA. In addition, these individuals are less likely to use paid in-home care and likely to receive fewer hours of unpaid in-home care following the DRA’s enactment; further analysis shows that this decrease in hours is driven by care provided by non-spousal caregivers, suggesting that these caregivers may reduce their supply of care if they believe that their likelihood of receiving a transfer from their care recipients has decreased.