Market for Long-Term Care Insurance Found to be Failing

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Despite efforts to promote a private market in long-term care insurance, the largest funding source for long-term care was the US government through Medicaid. In a new article, Harvard Professor Richard Frank analyzes the causes of the failure of the private market to take root in the provision of long-term care insurance.

In the United States in 2009, more than $200 billion was spent providing long-term care. It is a service that nearly 10 million Americans received in 2010, a figure that is expected to rise to 15 million by 2020. Despite efforts to promote a private market in long-term care insurance, the largest funding source for long-term care was the US government through Medicaid. In a new article, Harvard Professor Richard Frank analyzes the causes of the failure of the private market to take root in the provision of long-term care insurance.

Frank’s article, published in the latest issue of Applied Economic Perspectives and Policy, highlights the forces that impede consumers’ purchase of private insurance that would cover their risk of needing to pay for long-term care later in life. These factors include the difficulty of consumers to anticipate future needs, the availability of family and friends as potential caregivers, and the complicated nature of private long-term care insurance. “In combination, these factors expose a variety of what economists refer to as market failures in the private long-term care insurance market,” said Frank, professor of health economics at Harvard University, and a research associate at the National Bureau of Economic Research.

An especially important contributing factor to this market failure is the availability of Medicaid, combined with the high price of long-term care. “Older adults can qualify for Medicaid if they spend their assets and essentially impoverish themselves,” Frank said. “Given that nursing homes are generally very expensive, if you don't have a huge number of assets to protect you're probably rational to spend them down and then just rely on Medicaid to provide coverage.”

Though this problem is projected to get worse, given increasing life spans and the aging of the baby boom generation, Frank does see the potential to find a solution. “Some argue if you want to do long-term care insurance efficiently, it should be done as social insurance. However, given the political environment of the United States currently, that doesn’t seem likely,” he said. But, he argues, private insurers can increase their share of the market by “better aligning the products that are offered with the strengths and weaknesses of the consumers who are interested in buying them.” Frank provides suggestions for how this can be accomplished including simplifying the options in insurance, educating consumers, and establishing long-term care insurance as a commodity.

The full text of this article “Long-term Care Financing in the United States: Sources and Institutions” will be available at aepp.oxfordjournals.org on Thursday, May 10. This article will be published in Volume 34, Issue 2 of AEPP, a special issue of the journal focused on long-term care. A companion podcast has also been produced featuring an interview with Frank, which is also available on the AEPP website.

Applied Economic Perspectives and Policy is a journal of the Agricultural & Applied Economics Association and aims to present high-quality research to a broad audience of agricultural and applied economists, policy-makers and consumers. AEPP is published by Oxford Journals (http://www.oxfordjournals.org).

The Agricultural & Applied Economics Association is the nation’s largest professional association of agricultural and applied economists. AAEA strives to enhance the skills, knowledge and professional contribution of economists who help society solve problems related to agriculture, food, resources and economic development. Members work in various capacities including universities, private industry and government agencies. For more information, please visit http://www.aaea.org.

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