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The effect of co-payments in Long Term Care on the distribution of payments,consumption, and risk

Wouterse, B.;, Hussem, A.; and Wong, A.;

Health, Econometrics and Data Group (HEDG) Working Papers from HEDG, c/o Department of Economics, University of York

Abstract: Population aging leads to concerns about the financial sustainability of collective long term care insurance systems. One way to keep public spending in check is by increasing the role of co-payments. An interesting feature of the copayments that have been introduced in the Netherlands is that they are income and wealth dependent. This dependency allows the fine-tuning of effects across income groups, but can also distort consumption decisions of the elderly. Modeling long term care expenditures over the lifecycle is challenging because of their very uneven distribution, with a small proportion of elderly experiencing very high costs. We use a flexible semi-parametric nearest-neighbor approach to estimate lifecycle paths of long term care spending. We apply this approach to an extensive administrative data set for the entire Dutch elderly population. The estimated paths are then used as inputs in a stochastic lifecycle decision model for singles at the retirement age. We analyze the effects of different co-payment schemes on the distribution of LTC payments, consumption and risk across income groups. We find that, compared to a flat-rate co-payment, income- and especially wealth-dependent copayments lead to much lower welfare costs for groups with low financial means. At the same time, the welfare costs of the groups with the highest means increase only slightly. Excluding a bequest motive leads to lower, and including healthstate dependent utility to higher welfare losses due to co-payments compared to full insurance.

Date: 2018-08
New Economics Papers: this item is included in nep-age and nep-hea
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