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Old, Frail, and Uninsured: Accounting for Puzzles in the U.S. Long-Term Care Insurance Market

R. Braun (), Karen Kopecky () and Tatyana Koreshkova ()

No 2017-3, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: Half of U.S. 50-year-olds will experience a nursing home stay before they die, and one in ten will incur out-of-pocket long-term care expenses in excess of $200,000. Surprisingly, only about 10% of individuals over age 62 have private long-term care insurance (LTCI). This paper proposes a quantitative equilibrium optimal contracting model of the LTCI market that features screening along the extensive margin. Frail and/or poor risk groups are ordered a single contract of no insurance that we refer to as a rejection. According to our model, rejections are the main reason that LTCI take-up rates are low. Both supply-side frictions due to private information and administrative costs and demand-side frictions due to Medicaid play important and distinct roles in generating rejections and the pattern of low take-up rates in the data.

Keywords: long-term care insurance; Medicaid; adverse selection; insurance rejections (search for similar items in EconPapers)
JEL-codes: D82 D91 E62 G22 H30 I13 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2017-03-01
New Economics Papers: this item is included in nep-age, nep-hea, nep-ias and nep-mac
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