The impact of state tax subsidies for private long-term care insurance on coverage and Medicaid expenditures

Abstract

In spite of the large expected costs of needing long-term care, only 10-12 percent of the elderly population has private insurance coverage. Medicaid, which provides means-tested public assistance and pays for almost half of long-term care costs, spends more than $100 billion annually on long-term care. In this paper, I exploit variation in the adoption and generosity of state tax subsidies for private long-term care insurance to determine whether tax subsidies increase private coverage and reduce Medicaid's costs for long-term care. The results indicate that the average tax subsidy raises coverage rates by 2.7 percentage points, or 28 percent. However, the response is concentrated among high income and asset-rich individuals, populations with low probabilities of relying on Medicaid. Simulations suggest each dollar of state tax expenditure produces approximately $0.84 in Medicaid savings, over half of which funnels to the federal government.JEL Codes: G22, H31, H51, H71, H75, I11, I18, I38, J14

Medical Underwriting In Long-Term Care Insurance: Market Conditions Limit Options For Higher-Risk Consumers

“…Thus, the ability of approaches that make premiums more affordable to spur insurance purchase is further limited by medical underwriting, although the limits will diminish somewhat as greater numbers of individuals apply for insurance. In fact, the modest impact to date of strategies such as long-term care insurance tax credits or enhanced Medicaid asset protection for individuals who purchase policies should be interpreted in the context of an insurance market where underwriting plays an important role (23,24). …”

The Influence of Premium Subsidies on Moral Hazard in Insurance Contracts

“…However, the opposite is true for long-term care insurance which has contingent premiums. Though the two systems are often discussed as being similar (Goda, 2011), they are not the same with respect to wealth effects of premium subsidies. The policy debate on subsidies for these two insurance programs should thus be carried out separately instead of jointly.…”

“…Glauber (2004) states that the introduction of heavily subsidized crop insurance policies significantly increased the participation in the program. Goda (2011) shows that the introduction of tax subsidies for long term care insurance increases demand. However, some evidence to the contrary also exists.…”

“…They make the wide-scale introduction of tax exemptions for employer covered health insurance responsible for the increase in health care spending in the United States by arguing that the subsidies lead to increased insurance coverage which, through moral hazard, increased the medical expenditures in the country. Empirical evidence exists that subsidies make some people increase their coverage (Finkelstein, 2002;Goda, 2011) and that the increased coverage can lead to higher medical spending (Cutler and Zeckhauser, 2000;Finkelstein et al, 2012).…”

Long-term care insurance: Does experience matter?

“…This lack of insurance coverage has spurred much work that tries to explain this phenomenon (Finkelstein et al, 2005; Finkelstein and McGarry, 2006; Brown and Finkelstein, 2007; Brown et al, 2007; Brown and Finkelstein, 2008). It has also spurred public policy into action, with 24 states and the District of Columbia offering tax breaks for private long-term care insurance (LTCI) purchases as of 2008 (Goda, 2011). These policy changes, however, have not led to a widespread increase in coverage (Wiener et al, 2000; Meiners, 2001; Courtemanche and He, 2009; Goda, 2011).…”