Abstract
The expectation of needing long-term care is an essential input into optimal saving and long-term care insurance decisions. Previous optimization models have used the Robinson (2002) transition probabilities, which have not been systematically updated and which underpredict the use of care while overpredicting the average stay of people who enter care. We develop a new statistical model and use current data to estimate health impairment and care transition probabilities. We show that impairment and care use have declined and that, after incorporating the new transition probabilities, optimal long-term care insurance holdings are much lower and are close to actual holdings.
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