Can long-term care partnership programmes increase insurance coverage and reduce Medicaid costs?

ABSTRACTAlthough long-term care is a substantial financial risk for elderly Americans, only about 10% purchase insurance, with many of the remainder relying on Medicaid. Faced with rising Medicaid expenditure on long-term care, states introduced long-term care partnership programmes in the hope of reducing Medicaid spending by encouraging the purchase of private insurance. Using numerical optimization techniques, we show theoretically that partnership programmes will only modestly increase long-term care insurance coverage. Most of the benefits will go to those who would have purchased non-partnership policies. Thus, the potential costs to Medicaid will exceed the savings.KEYWORDS: Long-term carepartnership programsprivate insuranceMedicaidJEL CLASSIFICATION: H31I13 Disclosure statementNo potential conflict of interest was reported by the author(s).Notes1 See Rothstein (Citation2007) for a fuller discussion.2 Friedberg et al. (Citation2023) show that unless there are major shocks in financial assets or subjective believes, rational individuals should never lapse their long-term care insurance. Neither of these factors is present in the model. Thus, we assume individuals hold their policies throughout their life.3 Actual ages of purchase vary and are often younger than age 65.4 This coefficient of risk aversion is in the range reported in the literature, which tends to cluster between 2 and 10 depending in part on whether the estimates are derived from portfolio theory, purchases of insurance, economic experiments, or preferences over lotteries (Chetty Citation2006).5 In their calculations, non-annuitized wealth includes IRAs, 401(k)s and non-pension financial assets. Annuitized wealth includes the expected present value of Social Security benefits and employer pensions. Results would be very similar if we had used the consumer price index to uprate wealth.6 It does not report the cost of skilled nursing care in 2021. We assume that it is increased at the same rate as the cost of home health care.7 Almost all states set Medicaid assets eligibility limit to $2,000 for single individuals, but the income individuals could retain varies by long-term care status and state. Single individuals receiving nursing home care are required to contribute essentially all their income except a personal needs allowance which is $30–$200 by states. The amounts individuals receiving home health care are allowed to retain are in range of 100%-300% of the SSI. We choose the most stringent rules in our benchmark calculations as individuals place the highest value on long-term care insurance under the assumption. The partnership programs in more generous states will induce fewer individuals to purchase long-term care insurance and will have a smaller impact on Medicaid budgets.8 In the interests of computational feasibility, we assume, when analysing dollar-for-dollar policies, that care costs equal or exceed the daily policy benefit. This enables us to model the policy as protecting some dollar amount of assets – which is the way the policies are usually marketed.9 Estimates of the loads depend on the assumptions made about discount and lapse rates, as discussed in Brown and Finkelstein (Citation2007). We perform further robustness checks on the assumption.10 We test the sensitivity of the results to plausible alternative values.11 We consider the alternative presentation of reporting all wealth percentiles, with negative willingness to pay capped at total wealth as potentially misleading.12 In the short-run, it may be costly to switch from a non-partnership to a partnership policy and few individuals may switch. But in the long-run, succeeding birth cohorts will purchase partnership policies in preference to non-partnership policies as they enter the ages at which policies are typically purchased.13 Note that there are also slight differences in partnership program qualifications across states. We apply national averages in all calculations. The state-specific predictions are available upon request.14 See Elliott et al. (Citation2015) for a review of other long-term care funding models.Additional informationFundingThis work was supported by the Ministry of Education of the People's Republic of China [22YJA790052]; National Institutes of Health [1 R01 AG041105‐01].