The main purpose of this study was to examine whether Long-Term Care Insurance (LTCI) ownership causes moral hazard in the Long-Term Care (LTC) market. By accounting for the endogeneity of LTCI ownership and LTC utilization, this study explored the unbiased effect of LTCI ownership on LTC utilization using duration analysis. In addition, this study presented the determinants of LTCI purchase and those of first LTC use of the elderly.
Using the longitudinal data from 1998-2004 HRS (Health and Retirement Study), the first LTC use among the elderly who are 65 and older were analyzed. Two duration models were employed accounting for the endogeneity of LTCI purchase and LTC use: Cox model used lagged LTCI values and the discrete time model used the LTCI values predicted in the two-stage estimation. Findings from the two models were very consistent.
Based on the two-period utility model, this study estimated LTCI purchase and first LTC use. As for LTCI purchase, the elderly with higher income and non-housing assets were more likely to buy LTCI. Denying the concern of adverse selection in the LTCI market, those who had poor health conditions were less likely to buy LTCI. And those who had informal caregivers were less likely to purchase LTCI, implying that informal care and formal LTC are substitutes.
LTCI ownership increased the use of nursing home care, indicating some moral hazard in the nursing home care. And no moral hazard was found in the home care market. Medicaid eligibility significantly increased LTC use, while income and non-housing assets had negligible effect on LTC utilization, suggesting that financial resources are not important factors that determine LTC use. In addition, health limitations substantially increased LTC use, and availability of informal caregivers decreased the probability of using LTC.
With the findings that LTCI ownership would not generate substantial moral hazard in the LTC market, this study provideed evidences to support the policy initiatives to expand LTCI market to reduce public LTC spending. In addition, policy implications to secure LTC market and expand LTCI market were discussed.