You know that competition from the Medicaid nursing home benefit makes selling private long-term care insurance hard.
So, what does that cash-strapped, bureaucracy-plagued program have that private LTCI never really had, even back when interest rates were high enough that insurers felt comfortable with writing private LTCI?
Mariacristina De Nardi and two colleagues have used the tools of economics to wrestle with that question in a new paper on Medicaid insurance in old age. The paper is on track to appear in an upcoming issue of the American Economic Review, a major academic journal.
De Nardi, a senior economist at the Federal Reserve Bank of Chicago, and her colleagues developed a model showing how people’s saving and medical spending affect the amount of help those people get from Medicaid, and how much those people value Medicaid benefits. The researchers then tested their model by comparing their predictions to the figures in actual survey data. The predictions matched the data well enough that the researchers believe their model may tell users something about how consumers really think of Medicaid nursing home benefits and private LTCI.
One lesson from the study is that Federal Reserve Bank economists do follow how older people pay their bills in old age.
These days, the Federal Reserve System seems to act like the archenemy of older people. It’s been holding the interest rates that older people need to earn income on their bonds, and that insurers and pension funds need to earn enough income to meet long-term obligations to retirees, at artificially low levels for years, to help prop up young homeowners, publicly traded corporations, and governments that have accumulated huge mountains of variable-rate debt.
Related: New York Life adds LTCI product
But Fed economists do recognize, at least for academic research purposes, that retiree spending and workers’ efforts to save for retirement play a major role in shaping the economy, and they recognize that long-term care expenses can have a major effect on people’s saving, spending and ability to pass assets on to children through bequests.
In the new paper, De Nardi and her colleagues translate long-term care saving, spending and insurance decisions into the kind of mathematical language that economists can handle. Earlier, preliminary versions of the paper have been appearing online for years. The paper has evolved to include much more discussion of the mystery surrounding the lack of a vibrant U.S. private LTCI market. To simplify the analysis, the researchers looked only at the economics of single retirees.
For a look at some highlights from the research, read on.
For retirees with a beer budget, Medicaid may look different than it does to other, cash-strapped retirees. (Photo: SeppVei/Wikimedia Commons)
1. Medicaid protects low-income households against everyday long-term care expenses.
De Nardi and her colleagues say their model shows that depending on Medicaid for post-retirement health care costs, including long-term care costs, is popular partly because it suits the needs of low-income people. Low-income people need help with many relatively small health care bills, and Medicaid helps them with those small, frequent bills, the researchers say.
The researchers say higher-income people use Medicaid differently than lower-income people do. (Image: Thinkstock)
2. Medicaid buffers high-income households against catastrophic nursing home care bills.
The researchers say Medicaid is also a great backstop program for high-income people.
The federal-state Long Term Care Partnership program is supposed to encourage relatively high-income people to buy private long-term care insurance by promising the purchasers that they can then qualify for Medicaid nursing home benefits on easier terms if they run out of private LTCI benefits.
But Medicaid already acts like a catastrophic LTCI insurer for high-income people, the researchers say.
The researchers used private and government survey data to break older U.S. people down into income “quintiles,” or groups equal to one-fifth of the population.
Households in the high income quintiles are much less likely to receive Medicaid help than households in the lower quintiles are, “but the transfers that they receive are very big and correspond to severe and expensive medical conditions,” the researchers write. “Medicaid is an effective insurance device for the poorest, but also offers valuable insurance to the rich, by insuring them against catastrophic medical conditions which are the most costly in terms of utility and the most difficult to insure in the private market.”