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Redesigning Long-term Care Finance and Delivery

18 May

Joan Costa-Font, Martin Karlsson, and Bernard van den Berg

Joan Costa-Font is based at the London School of Economics and Political Science.
Martin Karlsson is based at Technische Universita¨t Darmstadt. Bernard van den
Berg is with the University of York.

The aging of Western societies together with social changes places the question of how best to finance and deliver long-term care (LTC) services at the forefront of policy debates. The Congressional Budget Office noted that expenditures for nursing homes, home health care and other longterm treatment accounted for 8.5% of all U.S. health care spending (Gleckman, 2010). A projected three-fold increase in real-term LTC expenditures in upcoming decades will be driven largely by the aging of the U.S. population. Long-term care expenditures are one of the greatest risks facing the elderly in the United States (Brown and Finkelstein 2004; 2007), but the market for insuring against these risks is relatively small; only 4% of LTC expenditures are paid for by private insurance policies in the Unites States (Gleckman 2010 ). In Europe, private LTC insurance coverage is marginal, with the exception of France, where barely 1% of the population has subscribed to private insurance (Costa-Font and Courbage 2011).
One of the most striking issues of LTC economic analysis is the question of why the private insurance market for LTC is so miniscule, requiring the elderly to face most of the expenditure risks themselves. Although, consumer demand for LTC insurance is projected to grow in all OECD countries (Costa-Font and Courbage, 2011), the development of public insurance and socially-entrenched social norms of intergenerational care appear to exert a significant influence in the development of this market (Costa-Font, 2010b). Economic analysis can contribute to a better understanding of the factors that influence the demand and supply of LTC, and knowledge of these factors would benefit policy-makers in predicting proposed LTC systems redesigns. A crucial part of LTC market analysis is the influence that informal care availability or supply has on the use of formal LTC services. Progress has been made to analyze this impact in the United States (Van Houtven, Courtney Harold & Norton 2004) and Europe (Bolin et al. 2008). On the other hand, economists have analyzed the impact of policies that affect the availability of publicly-funded formal LTC in Canada (Stabile et al. 2006) and the United States (Orsini 2010), and suggest that changes in formal LTC impact informal care. Stabile et al. (2006) show that increased generosity of publicly-funded home care seems # The Author(s) 2012. Published by Oxford University Press, on behalf of Agricultural and Applied Economics Association. All rights reserved. For permissions, please email: Applied Economic Perspectives and Policy (2012) volume 34, number 2, pp. 215–219. doi:10.1093/aepp/pps024 215 by guest on May 18, 2012 Downloaded from to result in better health and is associated with a decrease in informal care-giving, while Orsini (2010) finds a decline in the fraction of elderly living in shared formal living arrangements, that is, living with somebody else, rather than alone or only with the spouse. In this respect it is worth noting that interdependent utility theory can be helpful to better understand the supply of informal care (see for example, Van den Berg et al. 2005).
Limited coverage for LTC expenditures, is explained by highly decentralized and privately-run management of LTC facilities (Costa-Font, 2010a), and an often high reliance on family structures, all having welfare implications for the elderly, for their adult children, and for government expenditures (Costa-Font 2010b). Economic analyses can contribute to a better understanding of these welfare implications and incentives; for instance, McKnight (2006) suggested that introducing tightly-binding average per-client Medicare reimbursement caps ultimately led to an increase in out-of-pocket expenditures for home health care, with the offset concentrated in higher income populations. In analyzing the effects of financial incentives in LTC, specifically prices paid and incentives involved, Van den Berg and Hassink (2008) introduced cash benefits and allowed clients to purchase care themselves. The authors conclude that when cash benefits are introduced in LTC in an attempt to make consumers more conscious about prices, successful results are found when consumers may keep the unspent part of the cash benefit.
Whether the various pieces of work have provided enough evidence to policy-makers to fully analyze the welfare impacts of their reforms is debatable. Although we are not able to fill all the gaps in the literature, this special issue of AEPP aims to contribute to the literature by presenting various case studies on financing, delivery and policy (re-)design.
Both the submitted papers and the featured articles are structured around the three main themes of this special issue: LTC financing, LTC delivery, and redesigning LTC – in other words, policy analysis.

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