Welfare-enhancing Public and Private Insurance Arrangements for Long-term Care Risk

Speaker:  Dr Karen Kopecky

Affiliation: Federal Reserve Bank of Cleveland

Location: Room 214, Chamberlain Building (#35), St Lucia Campus

Zoom: https://uqz.zoom.us/j/89790507770

Abstract: Long-term care is costly. About one in three Americans will experience a stay in a
nursing home that exceeds 100 days during their lifetime, and about one in ten will incur out-of-pocket expenses of $200,000 or more. Surprisingly, only about 10% of retirees have private long-term care insurance. Private insurers incur high administrative costs and must contend with private information. Medicaid offers means-tested benefits for those with low assets. However, Medicaid is a secondary payer that only provides coverage after private insurance benefits have been exhausted. These two features crowd out demand for private insurance and retirees pay a large share of long-term care expenses out-of-pocket. We consider alternative strategies for reforming public and private insurance for long-term care risk in an optimal contracting model and find that making Medicaid a primary payer while retaining the means test performs best. This reform stimulates the private long-term care insurance market while preserving the safety net provided by public insurance to low-income individuals. Social welfare increases even though government expenditures fall.