The Interaction of Long-Term Care Insurance Demand and Informal Care Supply

by Ami Ko, University of Pennsylvania

The elderly population in the U.S. faces costly and large long-term care expenditure risks. Only 10 percent of elderly individuals own private long-term care insurance. To be covered by the public insurance program Medicaid, retirees need to drawdown most of their assets and income. Due to costly nature of formal long-term care, family members are the backbone of long-term care delivery; but little support policies exist for caregivers.

This paper studies how the demand for private long-term care insurance by elderly parents interacts with informal care provision decisions by their adult children. The literature has largely approached these topics as separate issues. However, the high substitutability between formal and informal care, strategic non-purchase of insurance by elderly parents to induce informal care, and strategic caregiving incentives by adult children to protect potential bequests all suggest that the interaction between the long-term care insurance demand and informal care supply is of utmost importance. In this paper, I develop and estimate a finite dynamic game model between an elderly parent and an adult child to analyze the demand for long-term care insurance and informal care supply within a unified framework. It also incorporates Medicaid and allows for the study of the effects of Medicaid on long-term care insurance demand and informal care supply. Using data from Health and Retirement Study (HRS), I estimate the model using conditional choice probability method. The model will be used to conduct counterfactual policy experiments to design welfare-enhancing and cost-effective means of delivering long-term care. To my knowledge, this is the first paper to endogenize and estimate private long-term care insurance demand and informal care supply in a unified framework.

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