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Accounting for Low Take-up Rates and High Rejection Rates in the U.S. Long-Term Care Insurance Market

Tatyana Koreshkova (), Karen Kopecky () and R. Anton Braun
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R. Anton Braun: Federal Reserve Bank of Atlanta

No 515, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: A protracted stay in a nursing home towards the end of life is one of the biggest risks faced by individuals. The annual cost of a nursing home stay in 2010 was $84,000. At age of 50, the probability of a nursing home stay ranges from 50 to 59 percent and among those who have a stay, 20 percent spend more 3 years. Yet, only about 10 percent of U.S. retirees purchase private long-term-care (LTC) insurance. Previous research has emphasized that Medicaid crowds out the demand for private LTC insurance. However, rejection rates are also high. Nearly 40 percent of the potential pool of purchasers would be rejected if they applied for private LTC insurance using current screening guidelines. We explore the possibility that high rejection rates are due to adverse selection. We propose a model which features agents who have private information about their risk exposure, a private LTC insurer and a government who provides public insurance (Medicaid). Our model accounts for low coverage rates and high rejection rates of private LTC insurance and is used to consider welfare-enhancing reforms of private and public provision of LTC insurance.

Date: 2016
New Economics Papers: this item is included in nep-age, nep-dge and nep-ias
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