R. Anton Braun, Karen A. Kopecky, and Tatyana Koreshkova

Working Paper 2017-3c
March 2017 (Revised August 2018)

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Half of U.S. 50-year-olds will experience a nursing home stay before they die, and one in ten will incur out-of-pocket long-term care expenses in excess of $200,000. Surprisingly, only about 10% of individuals over age 62 have private long-term care insurance (LTCI). This paper proposes a quantitative equilibrium optimal contracting model of the LTCI market that features screening along the extensive margin. Frail and/or poor risk groups are ordered a single contract of no insurance that we refer to as a rejection. According to our model, rejections are the main reason that LTCI take-up rates are low. Both supply-side frictions due to private information and administrative costs and demand-side frictions due to Medicaid play important and distinct roles in generating rejections and the pattern of low take-up rates in the data.

JEL classification: D82, D91, E62, G22, H30, I13

Key words: long-term care insurance, Medicaid, adverse selection, insurance rejections

The authors thank Taylor Kelley and Jordan Herring for outstanding research assistance. They are grateful for detailed comments from the editor and referees and also thank Joseph Briggs, John Jones, Ariel Zetlin-Jones, and Robert Shimer for helpful comments. They also benefited from comments received at the 2015 Workshop on the Macroeconomics of Population Aging in Barcelona, Notre Dame University, the Canon Institute for Global Studies 2015 End of Year Conference, the Keio-GRIPS Macroeconomics and Policy Workshop, the 2016 Workshop on Adverse Selection and Aging held at the Federal Reserve Bank of Atlanta, the 2016 SED meetings in Toulouse, the 2016 CIREQ MacroMontrealWorkshop, the Michigan Retirement Research Center Workshop, FRB Chicago, FRB Minneapolis, FRB Richmond, FRB St. Louis, Carlton University, University of Connecticut, Purdue University, McGill University and the 2018 University of Minnesota HHEI conference. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to R. Anton Braun, Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-8708, r.anton.braun@gmail.com; Karen A. Kopecky, Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-8974, karen.kopecky@atl.frb.org; or Tatyana Koreshkova, Concordia University and CIREQ, Department of Economics, 1455 De Maisonneuve Blvd. W., Montreal, Quebec, Canada H3G 1M8, tatyana.koreshkova@concordia.ca.
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