Effects of Long-term Care Insurance on Financial Well-being

Although there is a high and increasing demand for long-term care (LTC) in the United States due to the aging of the population and the prevalence of chronic conditions, public insurance coverage for LTC is extremely limited. At the same time, only 13 percent of individuals age 65 years and older have private long-term care insurance (LTCI). Purchase of private LTCI may not be broadly appealing for a variety of reasons, including difficulties in understanding long-term catastrophic risks, misconceptions about Medicare coverage for LTC, Medicaid crowd-out effect, high insurance premiums, and unattractive policies. As a result, LTC expenditures rely heavily on out-of-pocket (OOP) payments of individuals and have become one of the largest financial risks faced by elderly people and their families. However, although financial protection is arguably the primary purpose of health insurance, there exists remarkably little empirical evidence on the financial protection effect of private LTCI.  This paper contributes to the literature on LTCI and on health insurance generally by providing rigorous estimates of financial outcomes for LTCI policyholders.

To evaluate the effects of current private LTCI policies and inform policymakers of the potential costs and benefits of extending LTCI coverage, we examine whether and how LTCI affects key financial outcomes of insured individuals, including asset accumulation. Using U.S. Health and Retirement Study (HRS) data from 1996 to 2012 and an instrumental variable (IV) approach to account for the endogeneity of LTCI purchase, we find that LTCI leads to consistently positive effects on total assets and non-housing financial assets, consistently negative effects on Medicaid and Food Stamps enrollment and parent-child financial transfers, and ambiguous effects on out-of-pocket medical payments. These results suggest that although private LTCI is ineffective at protecting insured individuals against large medical expenditures, it might be effective as a financial management tool. It improves the general financial well-being of insured individuals by potentially reducing disincentives to asset accumulation and incentives to voluntary asset spend-down that are inherent in Medicaid asset rules, motivating them to save more and reduce asset transfers. Our results also suggest that insured individuals are more likely to use additional care and/or care in a more desirable setting because their choice set has been expanded due to the availability of the insurance payoff.

From a policy perspective, private LTCI is often discussed as a potential solution to the need for LTC financing since it shifts part of the responsibility of financing LTC from the public sector to the private sector. Various federal- and state-level programs have been used in attempts to address those demand- and supply-side issues that lead to low insurance coverage to stimulate the demand for private LTCI. Our findings indicate that a primary benefit of LTCI, reduced disincentive to savings in the presence of Medicaid, should be part of the equation when assessing the effectiveness of these policies.