Several reasons have been given for the small size of the LTCI market, and one of the explanations is that consumer knowledge that makes individuals not purchase the policy by mistake, even when they want to. Another explanation is that consumers have a certain state-dependent utility leading them not to purchase insurance. The third explanation is that there exist broad potential substitutes for formal insurance including public insurance by Medicaid, the informal type of financial insurance provided by families, and the illiquid housing equity that can be liquidated to pay for care.
How Does Private LTCI Work?
Private LTCI is a financial contract whereby the insured provides the agreed regular premiums and the insurer agrees to extend covered benefits for the premiums. The first LCTI cases emerged in 1970s and have continued to grow, albeit slowly. The LTCI policies are purchased individually or through the group markets, which are sponsored, but not subsided by employers. In 2002, only 18 percent of the policies sold were employer-sponsored while the rest were individual sponsored (Ucello and Johnson 3).
Advantages of Promoting Private LTCI
Efficiency and fairness of LTC financing could be improved if the private LCT coverage rates were raised while the current reliance on Medicaid reduced. According to Ucello and Johnson, Medicaid seems to penalize those saving for old age due to its 100 percent tax on most assets for people receiving LTC through its program (4). Also, unlike in private LCTI, Medicaid is not designed to protect the assets of people receiving the LTC assets. They suppose that Medicaid leaves these individuals with nothing after a few checks at nursing homes. Recent Medicaid reforms did not substantially improve the economic security of spouses remaining in the community as envisaged.
Problems with Long-Term Care Insurance
Despite the advantages associated with private LTCI, insurance coverage generally faces a number of substantial problems. One of the obvious barriers of LTCI is that many elderly people are unable to afford it. Statistics from 2000 reveal that 12 percent of married couples and 44 percent of single adults in the U.S. of ages 55-61 received less than $25,000 in income. Affordability becomes a big issue for those individuals taking policies late. Studies suggest that only a small percentage of 10-20 percent adults are able to afford private LCTI. Another problem is being able to maintain premium payments and, thus, many individuals leave their policies to lapse. Ucello and Johnson suggest that the lapse rates may be as high as 20 percent within a period of three years (5).
It is very important for people considering LTCI to distinguish between two probabilities: p1 and p2. p1 is the probability that one will need care at some time in future, while p2 is the probability distribution of the different durations of that care. The probability is equal to the remaining life expectancy at the time the person needs care, if we assume that when the person needs the first care, he/she will do that for the rest of his/her life.
When the first probability is applied to LTC, then p1 becomes:
πi = (1+α) p1i L(p2i);
Where p1i is the probability that the i-th person will require LTC at some stage and L(p2i) is related to the cost care depending on the policy holder’s first claim.
LTC may fail to conform to the above equation and this includes the situations like:
Independence: the probability of a need for LTC may not be purely independent. In case of an increase in p1, the probability of needing LTC will be increased.
Uncertainty: this is a problem for costs of care and relevant probabilities.
Moral hazard: A person with insurance covering all costs of LTC will demand care since his/her cost is Zero and if the insurance company pays all these costs, the person will most likely request care or luxuries.
Public Policy and the Market for Private Insurance
Public Policy and Market for Private Insurance
Little theoretical work is available on the optimal mix of private and public insurance for LTC, even though the relative benefits and costs of private and public insurance are available in data. If we eliminated Medicaid, we would remain with private insurance markets, but again, in another extreme, we can move to a comprehensive public provision of LTCI.
An Overview of the Existing Policy Environment
Several proposals have offered to change the LTC financing landscape but maintain the role of Medicaid (the Medicaid reforms, tax subsidies for private insurance purchase, and private insurance market regulation). The last 10 years have seen more clarification and expansion of tax subsidies for private LTCI. There is wide variation in tax treatment of LTC premiums at the state level. Weiner et al states that some U.S. states provide other provide tax credits and individual tax reductions, while others offer tax credits to employers providing group policies. Brown and Finskelstein state that at the federal level, HIPAA clarifies the federal tax benefits for premiums on qualified Long-Term Care Insurance policies (28).
How policymakers promote private insurance
A number of initiatives are used to market private LTCI. This includes expansion of tax incentives and reverse mortgages. Taxpayers are allowed to deduct premium expenses for qualified Long-Term Care Insurance from the federal taxable income if their medical expenses exceed 7.5 percent of gross income. Some states (California, Connecticut, Indiana, and New York) have gone to reduce Medicaid’s strict financial eligibility criteria for those with LTCI.
The present paper has reviewed literature on Long-Term Care Insurance while detailing the basic information about LTCI. Although they have not received much press coverage, the future of LTC costs will exert large pressures on families and the government. We have seen that insurance theories suggest that people should place a high value on policies against an uncertain, but potential event. Despite this information, the elderly people in the U.S. rarely do purchase insurance for expenditures on LTC. The paper has reviewed existing literature, especially that characterizing the limited size of market of LTCI. There is evidence of high loads on private insurance policies that result in higher premiums above the recommended actuarially fair pricing. In addition, there is a lack of evidence on the nature of transaction costs and, thus, the contribution of such factors like asymmetric information to the loads is not exactly known. There is also some evidence to suggest that that the current Medicaid structure impedes the growth of private LTCI.
The limited market for private LTCI in the U.S. has seen many papers trying to explain why the situation is so. The present paper, however, has brought into the fore the existing market for LTCI policies and has shown that supply side market limitations are not the only reasons for the small size of the market. Finally, more work is needed to better understand the factors limiting the size of the LTC market through the existing policies. There are still several unanswered questions concerning potential policy interventions.