Long-Term Health Care: Is Social Insurance Desirable? - Economic Commentary - Discussion of Private Insurer Problems

Sep 28, 2026

Uploaded by Hazel

Long-Term Health Care: Is Social Insurance Desirable? analyzes why the private long-term care insurance market fails to adequately cover extended-care risks in the United States. It examines structural causes such as adverse selection and moral hazard, along with the challenge of predicting long-term medical cost increases, especially nursing home expenses. The commentary also evaluates social-insurance funding proposals and highlights the potential negative economic effects of intergenerational wealth redistribution inherent in such schemes, as the aging population raises policy urgency.

LanguageEnglish

CategoryHealthcare

FormatPDF

Pages5

Reading Time13 min

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Long-Term Health Care: Is Social Insurance Desirable?

Problems Facing Private Insurers

by Jagadeesh Gokhale and Lydia K.Leovic Tne aging of the U.S.populaion por-tends steep increases in the demand forhealth care services well into the nextcentury.Although many Americans relyon public health programs and privatehealth insurance to provide financial pro-tection for a diverse group of medicalrisks,the availability of such support forlong-term disabilities is woefully inade-quate.As of 1992,fewer than 10 percentof those age 65 or older were covered byprivate long-term care insurance. Expenditures on long-term care can beeconomically devastating for the fami-lies of disabled persons and may poten-tially sap public budgets.Total spend-ing on nursing home services stood at$60 billion in 1991,of which morehan half was financed by federal,state,and local governments(see fig-ure 1).Policymakers engaged in re-forming the country's health care sys-tem must bear in mind that as the babyboom generation ages,the problems as-sociated with ensuring adequate long-term care will be exacerbated. This Economic Commentary exploresthe underlying reasons for the privateinsurance market's failure to coverlong-term care risks adequately.It alsoevaluates several proposals for fundinglong-term care through social insur-ance.We contend that none of theseproposals considers the potential nega-tive economic impact of the intergen-erational wealth redistribution implicitin social insurance schemes. # Long-Term Health Care:Is Social Insurance Desirable? ## ■ Problems Facing Private Insurers At the individual level,long-term careis best financed by purchasing insur-ance because future needs are uncer-tain and the potential costs are enor-mous.In 1990,the average annual costof a nursing home stay was between$25,000and $35,000.²The privatemarket for insuring long-term care ex-penses is extremely thin,however.Only 2.4 million long-term policieswere sold in 1991,of which just 8.7percent were employer sponsored.Inthe same year,direct payments by indi-viduals accounted for 43 percent ofnursing home receipts. Much of the failure of the long-termcare insurance marketcan be traced tothe twin problems of adverse selectionand moral hazard.Both concern thepricing of insurance for a group of po-tential purchasers whose chronic dis-ability risk is unknown,and both sig-nificantly increase the costs of privateinsurance. In general,the probability of requiringextended care rises markedly with age.³Thus,most young persons opt out ofpurchasing such coverage even at ex-tremely low prices.This means that in-dividuals who do buy long-term care in-surance—older Americans—areprecisely those with the highest risk of re-quiring extended care in the near future. The inability to sell long-term care in-surance to young people compels anincrease in the price at which private December 15,1993 As the baby boom generation ages,ensuring adequate long-term healthcare will become an increasingly im-portant issue on the national agenda.A one-year nursing home stay aver-aged between $25,000 and $35,000 in1990,yet as of 1992,only 10 percentof Americans age 65or older had pri-vate long-term care insurance.ThisEconomic Commentary takesa lookat why the private insurance markethas failed to cover extended-carerisks adequately and examines thewealth distribution problems that so-cially funded insurance entails. providers can profitably offer coverageto the elderly.Even among the elderly,relatively healthy individuals maychoose to forgo coverage,driving upthe average risk of disability among theremaining pool of potential purchasers.The increase in the price of insurancecaused by such an“adverse selection”of the riskiest individuals into the poolof potential buyers means that manyelderly Americans cannot afford long-term care insurance(see table 1). The moral hazard problem refers to thechange in individuals'behavior afterpurchasing insurance.For example,aperson who buys long-term care insur-ance may not protect his health to thesame extent as someone who does not

FAQs

Why does the private long-term care insurance market fail to cover extended-care risks adequately?

It is driven by adverse selection and moral hazard, which raise insurers’ costs and limit coverage. Predicting nursing-home cost increases is also difficult, further constraining effective pricing.

What is adverse selection in the context of long-term care insurance?

Because the likelihood of needing extended care rises with age, younger people often opt out. Older, higher-risk individuals then dominate the purchasing pool, increasing premiums and affordability barriers.

How does moral hazard affect long-term care insurance behavior and costs?

After buying insurance, individuals may take less protective actions than those without coverage. Since some extended care is provided by relatives, lower prices can reduce family-provided care, increasing insurer claims.

Sep 28, 2026

Uploaded by Hazel