Market Failure, Public Policy & Long Term Care Insurance

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DESCRIPTION (provided by applicant): The goal of this research is to analyze empirically the determinants of demand and supply in the private long-term care insurance market. Long-term care represents one of the largest uninsured financial risks facing the elderly in the United States. It is also one of the largest gaps in current Medicare coverage, and is therefore likely to be at the forefront of discussions about Medicare reform. Yet we have virtually no empirical evidence on the reasons for the extremely underdeveloped nature of the private long-term care insurance market. The proposed research therefore involves several complementary projects designed to understand the workings of the private insurance market, and hence the likely impact of alternative potential public policy interventions. The analysis will use both survey data on the elderly's long-term care insurance coverage, as well as extensive data on the pricing of long-term care insurance policies and the risk characteristics of the insured and the general population. It will also require the development of two complementary analytical tools: a framework for assessing the "money's worth" of private long-term care insurance polices, and a framework for estimating the insurance value of a long-term care insurance contract for a risk averse, life-cycle consumer. Using these tools, the proposed research will investigate whether current prices deliver good value to potential consumers, and whether the pricing structure can explain why so few people buy long-term care insurance. It will examine the extent to which the public insurance provided through Medicaid limits the demand for long-term care insurance. It will also consider whether asymmetric information problems exist in this market and whether they contribute substantially to the current limited size of the market. Finally, the proposed research will investigate why existing policies offer such extremely limited coverage and in particular whether this is a cause or consequence of limited demand for private insurance. Answers to these questions are a necessary first step to considering the optimal design of any policy interventions in the private long-term care insurance market.