NCPA - National Center for Policy Analysis


September 13, 2005

One of the largest uninsured financial risks the elderly face in the United States is long-term care which costs about $135 billion annually and is estimated to triple over the next 35 years. Nevertheless, most people do not have private insurance to cover long-term care. A new paper from the National Bureau of Economic Research finds that Medicaid is the primary cause of this lack of private insurance.

The authors analyzed detailed actuarial data on the risk of long-term care expenditures, information on the current structure of the public Medicaid program, and the characteristics of existing private insurance policies. They find that:

  • The mere presence of Medicaid is sufficient to explain why at least two-thirds of all households would prefer not to purchase private long-term care insurance, even if there were not other factors limiting the size of the market.
  • Because of Medicaid's design, a large portion of the premiums for private insurance for most individuals go to pay for benefits that are redundant given what Medicaid would have paid if the individual had not bought private insurance.
  • The authors estimate that this "implicit tax" to be about 60 percent for the median male and 75 percent for the median female.

As a result, most people would rather rely on Medicaid than purchase private insurance that would simply "duplicate" what Medicaid would cover. However, while Medicaid provides extensive services, say the authors, it is not comprehensive insurance. Consequently, people who rely on public insurance alone leave themselves exposed to substantial out-of-pocket expenditure risks.

The end result is that Medicaid crowds out private insurance, even though Medicaid itself only provides limited coverage against risk exposure. Consequently, say the authors, public provision of insurance has the potential to reduce total insurance overage and thus to increase overall risk exposure.

Source: Les Picker, "Medicaid and the Long-Term Care Insurance Market," NBER Digest, June 2005; based upon: Jeffrey Brown and Amy Finkelstein, "The Interactions of Public and Private Insurance: Medicaid and the Long-Term Care Insurance Market," National Bureau of Economic Research, Working Paper No. 10989, December 2004.

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