Understanding the demand for private long -term care insurance: A study of contributing factors in the insurance market and public insurance programs

This study examines two possible reasons why few people purchase private long-term care insurance. First, we test if insurance companies cannot distinguish heterogeneous long-term care risk and thus high-risk people dominate the private long-term care insurance market (adverse selection). The second question we ask in the analysis is if Medicaid financing of long-term care crowds out the purchase of private long-term care insurance.;The panel data structure from the Health and Retirement Data allows us to test the first hypothesis by comparing post-purchase health trajectories among purchasers and non-purchasers, after controlling for pre-purchase and current health status. We combine individual financial information with state of residence and state-specific Medicaid eligibility limits and impute respondents' expected Medicaid eligibility more precisely than in previous studies, to investigate if the expected Medicaid eligibility is related to the lower probability of the ownership of private long-term care insurance. The panel data from the 1992–1998 Health and Retirement Study, the restricted Geocode data, and Medicaid income and asset eligibility limits for individuals and couples by states in 1992–1998 are used for the robust probit analysis.;Our results provide strong evidence of Medicaid crowd-out: the prospect of satisfying Medicaid income and asset requirements, or asset requirements alone, discouraged respondents from owning private long-term care insurance. Flexible Medicaid income standards in the majority of states with Medically Needy programs may explain why Medicaid still crowds out private insurance among the individuals whose wealth was below but income was above the eligibility limits.;The non-linear relationship between wealth and the ownership of private insurance is confirmed. No evidence is found that the respondents have already manipulated their wealth to rely on Medicaid in case of needing long-term care.;The post-purchase health of the insured is not found to be worse than that of the uninsured, failing to support the adverse selection hypothesis. However, this lack of support does not rule out adverse selection since insurance companies may effectively screen of high-risk consumers based on their past and current health status.