The Long-Term Care Insurance Puzzle: Modeling and Measurement

Working Paper: NBER ID: w22726

Authors: John Ameriks; Joseph Briggs; Andrew Caplin; Matthew D. Shapiro; Christopher Tonetti

Abstract: Individuals face significant late-in-life risks, prominently including the need for long-term care (LTC). Yet, they hold little long-term care insurance (LTCI). In this paper we use a structural model and a purpose-designed dataset to understand the determinants of insurance demand. We distinguish between a fundamental lack of desire to insure, crowd out from existing insurance, and unmet demand due to poor products available in the market. The model features individual-specific non-homothetic health-state-dependent preferences over normal consumption, consumption when in need of long-term care, and bequests, which are estimated using strategic survey questions. To account for differences between the modeled and measured insurance products, we study not only individuals' holdings of LTCI, but also their stated demand for an idealized product that mirrors that in the model. We find that many individuals would purchase LTCI and receive a large consumer surplus if it were a better product, while many others do not want to purchase even high-quality actuarially fair LTCI due to the values of their heterogeneous state-dependent preferences, their demographics, and their financial situation.

Keywords: long-term care insurance; insurance demand; consumer surplus; health risks; preferences

JEL Codes: D14; D91; E21; G22; H31; I13; J14

Causal Claims

Cause	Effect
product quality (L15)	LTCI demand (G52)
LTCI demand (idealized ADLI) (G52)	LTCI ownership (G52)
poor quality of existing products (L15)	low LTCI ownership (G52)
heterogeneous preferences (D11)	willingness to purchase LTCI (G52)
demographic factors (J11)	willingness to purchase LTCI (G52)
financial situations (G50)	willingness to purchase LTCI (G52)
LTCI demand (ADLI) (G52)	Medicaid influence (I18)