Old, Frail, and Uninsured: Accounting for Puzzles in the U.S. Long-Term Care Insurance Market

69 Pages Posted: 27 Mar 2017 Last revised: 29 Apr 2020

See all articles by R. Braun

R. Braun

Federal Reserve Bank of Atlanta

Karen A. Kopecky

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Tatyana Koreshkova

Concordia University, Quebec

Date Written: 2017-03-01

Abstract

Half of U.S. 50-year-olds will experience a nursing home stay before they die, and one in ten will incur out-of-pocket long-term care expenses in excess of $200,000. Surprisingly, only about 10% of individuals over age 62 have private long-term care insurance (LTCI). This paper proposes a quantitative equilibrium optimal contracting model of the LTCI market that features screening along the extensive margin. Frail and/or poor risk groups are ordered a single contract of no insurance that we refer to as a rejection. According to our model, rejections are the main reason that LTCI take-up rates are low. Both supply-side frictions due to private information and administrative costs and demand-side frictions due to Medicaid play important and distinct roles in generating rejections and the pattern of low take-up rates in the data.

Keywords: long-term care insurance, Medicaid, adverse selection, insurance rejections

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

Suggested Citation

Braun, R. and Kopecky, Karen A. and Koreshkova, Tatyana, Old, Frail, and Uninsured: Accounting for Puzzles in the U.S. Long-Term Care Insurance Market (2017-03-01). FRB Atlanta Working Paper No. 2017-3, Available at SSRN: https://ssrn.com/abstract=2940588

R. Braun (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Karen A. Kopecky

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Tatyana Koreshkova

Concordia University, Quebec ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1MB
Canada

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