Why Doesn't the Market Fully Insure Long-Term Care?

David Cutler

No 4301, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines the failure of the private market to fully insure long-term care. I argue that the failure is a result of large intertemporal variability in the cost of long-term care. Unlike variability in cross section use, variability in the cost of care affects everyone in a pool and therefore cannot be diversified within a cohort. Further, since costs are serially correlated, the cost risk cannot be diversified across cohorts. Estimates suggest that the standard deviation of cost uncertainty is on the order of 4 to 14 percent for an average long-term care policy. In response to this cost risk, most long-term care policies do not insure real benefits. Policies generally pay a fixed nominal amount for care, which is updated using predetermined nominal rules. Many policies also have lifetime maximum payments and other restrictions on aggregate risk bearing by the insurer. The lack of complete long-term care insurance may be one explanation for the low rate of purchase of long-term care policies.

JEL-codes: I11 (search for similar items in EconPapers)
Date: 1993-03
New Economics Papers: this item is included in nep-hea and nep-pbe
Note: PE EH AG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (45)

Downloads: (external link)
http://www.nber.org/papers/w4301.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:4301

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w4301

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().