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
Date Written: 2017-03-01
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
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