Joan Costa-Font

English

Research Papers in Economics

INSURANCE CROWDING OUT
AND LONG-TERM CARE
PARTNERSHIPS
JOAN COSTA-FONT* 
Introduction
Insurance for long-term care (LTC), i.e., coverage
for the costs of personal care for elderly dependent
individuals has been markedly underdeveloped
compared to insurance for health and longevity
risks, especially in Europe.This is puzzling because
the costs associated with LTC are high but it is a
relatively low-probability, and hence one should
expect such a contingency to meet the required
insurability conditions. Even in the US, barely 10
percent of the elderly have private LTC insurance
when it is estimated that more than 50 percent can
afford it (Brown and Finkelstein 2004; 2007), Per-
haps, the largest LTC insurance market in Europe
is the French one, offering reimbursement insur-
ance to three million policies and covering less
than one percent of its population.I offer an expla-
nation based on the interaction between family,
government and markets. More precisely, there ap-
pears to be some form of crowding out, especially
from society or from the existence of strong family
ties (Costa-Font 2010).
Is there public insurance crowding out?
Some scholars argue in the context of the US that
the expansion of public subsidisation for LTC fuels
concerns about private insurance being crowded out
by public LTC insurance programmes (Pauly 1990).
However, empirical evidence does not appear to
confirm this phenomenon (Brown and Finkelstein
2007; Sloan and Norton 1997). The main reason is
that LTC programmes have not typically aimed at
entirely replacing individuals in activities for which
they normally take financial responsibility, but in-
stead have focused primarily on correcting the fail-
ures of private insurance markets in providing cov-
erage, and, to an extent, pursuing equity and redis-
tributive goals. In Europe, Germany adopted a com-
pulsory social insurance scheme where very affluent
individuals can opt out from public insurance (and
buy insurance privately),and Scandinavian countries
exhibit different forms of tax financed and locally
provided assistance for frail elderly in need of long-
term care. However, even in those countries that
have implemented generous public financing, public
insurance does not cover all costs (and cost sharing
arrangements are in place), the market for comple-
mentary long-term care insurance is still either small
or inexistent.
Family crowding out?
The obvious alternative to market and state financ-
ing is personal financing of LTC, either individual-
ly or within the family. This form of financing has
some advantages. For instance, it has lower trans-
action costs, can induce altruism and reduce prob-
lems associated with information asymmetry. The
obvious downside is the limited risk pooling, which
implies large sunk and administrative costs in the
event that an individual needs long-term care.
Finally, self-insurance of LTC costs comes with in-
dividuals maintaining a positive fraction of re-
sources to bequeath, which can give rise to some
forms of ex ante moral hazard to stimulate care
giving within the family (Zweifel and Strüwe 1996).
It is important to note that even when different
forms of insurance are available, as is the case in
the US,the family is still the main LTC provider.In
the US, a country exhibiting high LTC insurance
development, the value of informal care is estimat-
ed to be USD 375 million, whereas the cost of paid
services is USD 230 billion, while public expendi-
ture on LTC is 2.9 percent of GDP (Gleckman
2010). Hence, it appears that family ties can crowd
out the development of LTC insurance coverage
(Costa-Font 2010).
CESifo DICE Report 2/2011 52
Research Reports
* London School of Economics and Political Science.CESifo DICE Report 2/2011 53
Research Reports
The evidence
Figure 1 shows a negative association between “fami-
lism” and LTC expenditure as a percentage of the
GDP in a set of European countries where data were
available. Furthermore, the 2007 special Eurobarome-
ter survey containing data on long-term care reveals
that 30 percent of Europeans believe that the best
option for the elderly parent is to live with one of their
children; 27 percent believe that elderly individuals
should stay at home and receive regular care visits,
from either a public or private care-service provider,
and about one-quarter of the sample believe that chil-
dren themselves should provide the care. Consistently,
agreement with the idea that close relatives should
care for dependent people,even if that means that they
have to sacrifice their careers to some extent, ranges
from only 7 percent in Sweden to 77 percent in Turkey.
Figure 2 plots the expectations of private and public
LTC insurance coverage in different European coun-
tries against a measure of familism, namely distance
to children. In all cases we observe a negative associ-
ation between familism and support for insurance
schemes for LTC, although the association is steeper
for social insurance than for private health insurance.
This evidence is supplemented by complementary
evidence from Costa-Font (2010) suggesting that fam-
ily ties reduce the likelihood of individuals to expect
both public and private insurance coverage of LTC.
Conclusion and implications
In light of the evidence we conclude that a stable
contract to fund LTC should attempt to circumvent
both public and family (or social) crowding out (see
Costa-Font 2010 for more details) .That is, insurance
designs need to accommodate existing regimes of
intra-household transfers.
Two examples of models where such accommoda-
tion can take place are the part-
nership models proposed in the
UK and the partnership systems
existing in the US. The former
refers to a proposal (LeGrand
2003) endorsed by the 2005
Wanless Report Securing Good
Care for Older People, whereby
the state is asked to provide a
certain level of coverage, and
individuals are encouraged to
fund extra care themselves with
matched government funding
up to the “benchmark” level of
public financing.
Partnership models have been
extensively implemented in the
US from 1980 onwards to allow
states to promote the purchase
of private LTC insurance by of-
fering consumers access to pub-
lic insurance (Medicaid) under
special eligibility rules, should
additional LTC coverage (be-
yond what the policies provide)
be needed. The original demon-
stration model has been under-
way since 1992 in California,
Connecticut, Indiana and New
York and has since expanded to
other states.
0
5
10
15
20
25
30
0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08
Sources: World Values Survey (2000); OECD data, 2007.
 FAMILISM AND LTC EXPENDITURE
Question: % agreeing that the family is important in life
LTC expenditure % GDP
% Disagree family is important in life
Figure 1
 0
 10
 20
 30
 40
 50
0 1 02 03 04 0
 0
 20
 40
 60
 80
01 0 2 0 3 0 4 0
Private insurance 
Source: Costa-Font (2010).
FAMILISM AND INSURANCE
a) EXPECTATIONS
a) Private and public.
% insurance
Social insurance 
% insurance
familism familism
Figure 2References
Brown, J. R. and A. Finkelstein (2007), “Why is the Market for
Long-term Care Insurance so Small?”, Journal of Public Economics
91(10), 1967–91.
Brown, J. R. and A. Finkelstein (2004), “The Interaction of Public
and Private Insurance: Medicaid and the Long-Term Care
Insurance Market”, NBER Working Paper no.10989.
Costa-Font, J. (2010),“Family Ties and the Crowding Out of Long-
Term Care Insurance”, Oxford  Review of Economic Policy 26(4),
691–712.
Gleckman, H. (2010), Long-term Care Financing Reform: Lessons
from the US and Abroad,The Commonwealth Fund.
Le Grand J. (2003), Motivation, Agency and Public Policy: Of
Knights and Knaves, Pawns and Queens, Oxford University Press,
Oxford.
Pauly, M. (1990), “The Rational Nonpurchase of Long-Term Care
Insurance”, Journal of Political Economy 98(1), 153–67.
Sloan, F.A. and E. C. Norton (1997),“Adverse Selection, Bequests,
Crowding Out, and Private Demand for Insurance: Evidence from
the Long-term Care Insurance Market”, Journal of Risk and Un-
certainty 15 (3), 201–19.
Zweifel, P. and W. Strüwe (1996), “Long-term Care Insurance and
Bequests as Instruments for Shaping Intergenerational Relation-
ships”, Journal of Risk and Insurance 12, 65–76.
CESifo DICE Report 2/2011 54
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Insurance Crowding Out and Long-Term Care Partnerships

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Insurance Crowding Out and Long-Term Care Partnerships

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