LTC Bullet: What Ruins the LTCI Market?

Thursday, September 18, 2008

Dayton, Ohio (LTC Tour Mile 19,290; State #27)--

LTC Comment: Why do as many as 90 percent of potential LTC insurance purchasers fail to buy? Find out in print and video from a well-respected scholar, after the ***news.***

*** LTC TOUR AT ILLINOIS CAPITOL. Yesterday, the Silver Bullet of Long-Term Care visited the state capitol building in Springfield, Illinois, home of America's 16th president, Abraham Lincoln. Check out the Silver Bullet in the land of Lincoln here.

*** HURRICANE HONEY. The Center for Long-Term Care Reform's Regional Representative in Houston, Texas, who organized several super events when the Silver Bullet and the LTC Tour passed through that city in April, has a new blog. Check it out at Honey's on the warpath about poor media coverage of long-term care issues. And five days without electricity in the aftermath of Ike hasn't calmed her criticism of Oprah or journalist Jean Chatsky. ***

*** AIRSTREAMING LTC. Everywhere I go on the 2008 National Long-Term Care Consciousness Tour, people stop me to ask about the Silver Bullet. Sometimes they're curious about long-term care. As often as not, they're interested in the Airstream trailer. But whatever starts the conversation, it ends up being about why folks need to plan early and responsibly for LTC risk and cost. Just in case YOU'RE curious about Airstream trailers and living in one full time, you may enjoy the article here. ***


LTC Comment: People have all sorts of opinions about why LTC insurance remains stunted around 10-percent market penetration.

Some say it costs too much, but cost is relative. If you don't believe you need something, any price is too high.

Some say the public is in denial about LTC risk. Sure, but LTC risk and cost is objectively high, so the real question is: What enables the public's denial?

Some say LTCI products are too complicated. Well, so are taxes, but we all get them paid each year one way or the other. That's why we have specialists and advisors.

No, something else is going on here and Jeffrey R. Brown, PhD, the William G. Karnes Professor of Finance in the College of Business at the University of Illinois at Urbana-Champaign, thinks he knows what it is.

I spent an hour with Dr. Brown at his office on the UI campus yesterday. To make his position as clear and accessible to you as possible, check out this interview with him that we posted today on the LTC Tour's YouTube channel here.

Now that you've heard it from the horse's mouth, as it were, I invite you to take a closer look at Professor Brown's analysis. In a series of scholarly publications co-authored with economics professor Amy Finkelstein of the Massachusetts Institute of Technology (and others), the two scholars have explained their research and conclusions in detail.

You can find their papers on the National Bureau of Economic Research's website at I'll give you some quotes and citations in a moment, but first my . . .

LTC Comment: Brown and Finkelstein explain Medicaid's "crowd out" effect as being caused by the "implicit tax" Medicaid imposes on the purchase of private long-term care insurance. In other words, they argue that the Medicaid benefits lost to someone who buys LTC insurance instead of going on public assistance are in effect an extra charge for the private insurance which makes it unattractive to most consumers.

In our conversation at his office yesterday, I agreed with Brown and Finkelstein's "implicit tax" argument but explained from my perspective how I think that "tax" actually works in practice. Because Medicaid LTC benefits are much easier for middle class and affluent people to obtain than is commonly understood, the program's "implicit tax" on LTCI is magnified many-fold beyond what it would be if people really had to spend down all their assets, including home equity, before receiving public LTC assistance. If Medicaid required a real asset spend down, many more people would buy private LTC insurance, because their spend down liability would offset the implicit tax of their Medicaid benefits.

Now, here are a couple quotes and citations to give you the flavor of the Brown/Finkelstein argument. Check out the papers themselves at the hyperlinks provided:

"Abstract: We show that the provision of even incomplete public insurance can substantially crowd out private insurance demand. We examine the interaction of the public Medicaid program with the private market for long-term care insurance and estimate that Medicaid can explain the lack of private insurance purchases for at least two-thirds and as much as 90 percent of the wealth distribution, even if comprehensive, actuarially fair private policies were available. Medicaid's large crowd out effect stems from the very large implicit tax (on the order of 60 to 75 percent for a median wealth individual) that Medicaid imposes on the benefits paid from private insurance policies. Importantly, Medicaid itself provides an inadequate mechanism for smoothing consumption for most individuals, so that its crowd out effect has important implications for overall risk exposure. An implication of our findings is that public policies designed to stimulate private insurance demand will be of limited efficacy as long as Medicaid continues to impose this large implicit tax."

Source: Jeffrey R. Brown, University of Illinois and NBER and Amy Finkelstein

Harvard University and NBER, "The Interaction of Public and Private Insurance: Medicaid and the Long-Term Care Insurance Market," December 2004:


"The Medicaid 'implicit tax' arises because private insurance protects oneís assets, which in turn lowers the probability of meeting Medicaidís means-tested asset eligibility threshold. In addition, even if an individual is Medicaid eligible, if he has private insurance the private insurance must pay first, with Medicaid only covering whatever expenses are not covered by the private policy. As a result, a large portion of the premiums paid for private insurance policies pay for benefits that simply replace benefits that would otherwise have been provided by Medicaid if the individual had not had private insurance." (p. 25)

Source: Jeffrey R. Brown, University of Illinois and NBER and Amy Finkelstein, MIT and NBER, "Why is the Market for Long-Term Care Insurance So Small," February 2007: