So, why the heck are people so much worse about insuring against long-term care (LTC) risk than against other types of risk?
The private long-term care insurance (LTCI) market is relatively new and has faced startup hiccups.
People hate to think about growing old, and, even now, there really aren’t all that many Americans in the “oldest old” category. The world is still getting ready to see what happens when a large number of Americans (and Europeans) turn 85.
The consumers who do think about LTC risk may assume that the best strategy is to depend on Medicaid to pay their bills, because they cannot afford private LTCI, do not trust private LTCI, or are unable to get through the private LTCI underwriting process.
But economists say another factor may be the way the human brain works.
See also: MIT economist studies real health care
Researchers are studying a number of learned habits and inborn traits that may affect how people analyze and respond to potential risk factors. One that’s getting attention is “narrow framing,” the tendency to make decisions about one small part of a complex matter in isolation, without considering the broader implications.
Researchers have found, for example, that workers who use narrow framing may put all of their retirement nest egg money in one type of investment. And, due to narrow framing, workers may take on more retirement portfolio risk when investment companies give them information about their returns less frequently. In other words: lousy information about returns may increase workers’ willingness to accept more investment risk.
Daniel Gottlieb and Olivia Mitchell, researchers at the University of Pennsylvania business school, are studying how narrow framing shapes demand for private LTCI in the United States. The effects appear to be substantial, according to an early draft of their results published behind a paywall, on the National Bureau of Economic Research (NBER) website.
For a look at some of what Gottlieb and Mitchell are saying about the relationship between narrow framing and demand for LTCI, read on.
1. For narrow framers, “saving people’s lives” feels different from “letting people die,” even when, mathematically, the results are the same.
Gottlieb and Mitchell assumed when designing their study that “broad framers” want insurance policies that are actuarially fair, but that narrow framers want to make sure they get more in policy benefits than they pay in premiums.
To come up with data on what narrow framers think and do in the real world, they created a special module for the 2012 wave of the Health and Retirement Study (HRS) survey program. The HRS team polls 19,000 Americans ages 50 and older every other year for life.
The HRS team gave the Gottlieb-Mitchell framing module to about 1,6,00 of the people who took the HRS survey in 2012 and were living outside nursing homes.
The module includes two scenarios involving a disease outbreak. For each scenario, the survey participants could choose a safe response strategy, Program A, and a riskier strategy, Program B.