Public Long-Term Care Insurance and the Housing and Living Arrangements of the Elderly: Evidence from Medicare Home Health Benefits

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We provide empirical evidence on the extent to which long-term care insurance affects the housing and living arrangements of the elderly by examining plausibly exogenous changes in the supply of long-term care insurance through the Medicare program that occurred in the late 1990’s. Prior to 1997, Medicare reimbursed home health care agencies on a retrospective-cost basis. Then, starting in October, 1997, as a result of the Balanced Budget Act of 1997 (BBA97), Medicare switched to a system of prospective payments for home health care, which induced state-by-calendar-year variation in the supply of this type of public long-term care insurance. We exploit this variation to econometrically identify the impact on the housing and living arrangements of the elderly, using CPS data from 1995- 2000 (before and after the law change). Our estimates indicate that living arrangements are quite responsive to home health care benefits. The estimated elasticity of shared living to benefits is −0.7 over all elderly and −1 for widowed elderly. However, these benefits have little impact on household headship among the elderly. This suggests that the bulk of the shared-living response occurred through co-residents living in elderly households. There is some weak evidence that increases in benefits raised elderly homeownership. Overall, the results suggest that future expansions in public benefits have the potential to alter elderly housing and living arrangements significantly.