The design of long term care insurance contracts

Helmuth Cremer, Jean-Marie Lozachmeur and Pierre Pestieau

Journal of Health Economics, 2016, vol. 50, issue C, 330-339

Abstract: This paper studies the design of long term care (LTC) insurance contracts in the presence of ex post moral hazard. While this problem bears some similarity with the study of health insurance (Blomqvist, 1997) the significance of informal LTC affects the problem in several crucial ways. It introduces the potential crowding out of informal care by market care financed through insurance coverage. Furthermore, the information structure becomes more intricate. Informal care is not publicly observable and, unlike the insurer, caregivers know the true needs of their relatives. We determine the optimal second-best contract and show that the optimal reimbursement rate can be written as an A-B-C expression à la Diamond (1998). These terms respectively reflect the efficiency loss as measured by the inverse of the demand elasticity, the distribution of needs and the preferences for risk sharing. Interestingly, informal care directly affects only the first term. More precisely the first term decreases with the presence and significance of informal care. Roughly speaking this means that an efficient LTC insurance contract should offer lower (marginal) reimbursement rates than its counterpart in a health insurance context.

Keywords: Long term care; Private insurance; Public insurance; Informal care; Ex-post moral hazard; Crowding-out (search for similar items in EconPapers)
JEL-codes: H51 I13 I18 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jhecon:v:50:y:2016:i:c:p:330-339

DOI: 10.1016/j.jhealeco.2016.08.008

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