Performance Improvement 2009. Why Do Individuals Purchase Private Long-Term Care Insurance, Would Additional Tax Incentives Increase Such Purchases and Reduce Medicaid Expenditures?


This study examined the factors influencing the decision to purchase private long-term care insurance coverage using a major national survey--the Health and Retirement Study. Like traditional medical insurance, private long-term care insurance is a financial contract whereby the insurer agrees to provide covered benefits in exchange for regular premium payments by the policyholder. The cost and adequacy of policies vary by the types of services they cover, when they start paying benefits, how much they pay, and for how long. Insurance companies generally price policies as a function of age at issue date, health status, and the comprehensiveness of the plan. Policies are guaranteed renewable, and premiums remain fixed over the life of the contract. However, rates can rise for an entire class of policyholders if insurers can demonstrate that their costs exceed premium revenue, and rate increases have been common in recent years.

The study showed that the decision to purchase private long-term care insurance responds to the expected benefit of coverage. People become significantly more likely to take-up coverage as the net expected benefit increases, the likelihood of using services rises, the cost of services without insurance rises, or the chances of qualifying for Medicaid falls. However, the effects are modest. The net expected benefit of coverage significantly increased individual coverage rates — every $1,000 increase in the net expected benefit of coverage would raise purchase probabilities by about 2.4%. Health, economic, social, and demographic characteristics of older adults significantly influenced the likelihood that people purchased private long-term care insurance. Take-up rates increased with age, and college graduates were much more likely to purchase insurance than those who never attended college. People in good health were significantly more likely to obtain coverage than those in worse health, and African Americans and Hispanics were less likely to purchase than other racial groups. Take-up declined with the number of children. Take-up rates increased significantly with the self-reported probability of using nursing home care in the next five years. Take-up rates did not vary significantly with household income or assets. Liberalizing rules for deducting long-term care insurance premiums from taxable income could modestly increase take-up rates. Granting a full tax deduction to all policyholders, even those who do not itemize their deductions, would boost older adults who take-up coverage by about 36%. Tax incentives would boost long-term care insurance take-up rates for high-income taxpayers, but would have little impact for lower-income groups. Tax incentives that increase private insurance coverage would have little impact on Medicaid costs. Policy reforms allowing all policyholders to deduct all of their long-term care insurance premium payments from taxable income would have negligible effects on Medicaid costs. Only 3% of those who would take-up coverage under this policy reform, but not under current law, would eventually qualify for Medicaid.

Report Title: Modeling the Decision to Purchase Private Long-Term Care Insurance
Agency Sponsor: ASPE-ODALTCP, Office of Disability, Aging, and Long-Term Care Policy
Federal Contact: John Drabek, 202-690-6443
Performer: Urban Institute
PIC ID: 8903

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