Accessible Unlicensed Requires Authentication Published by De Gruyter August 14, 2013

The Economics of Long-Term Care

Luigi Siciliani

Abstract

Long-term care expenditure is expected to rise, driven by an ageing population. Given that public long-term care expenditure is high in many OECD countries, governments are increasingly concerned about its future growth. This study focuses on three relevant issues. First, we discuss factors that affect the growth of long-term expenditure and its projections. These include demographics, the balance in provision between informal and formal care, whether higher life expectancy translates into higher disability, the interrelation between health and long-term care, and whether long-term care suffers from Baumol’s disease. Second, given that a significant proportion of long-term care expenditure is nursing- and care-home expenditure, we discuss the role of government regulation aimed at ensuring that individuals receive appropriate quality of care in such institutions. We focus in particular on price regulation, competition, and the non-profit sector; these have been the subject of considerable empirical work (mainly in the United States). Third, we discuss the relative merits of public and private insurance. Countries differ greatly in their approach. Some countries have nearly exclusively public insurance but in others this is small. We consider the conditions under which public insurance can overcome the limitations of a private insurance market.

Jel Classifications: I10

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  1. 1

    Data should be interpreted with some caution. In particular, data for long-term expenditure include only the health-related component in Austria, Belgium, Canada, the Czech Republic, Denmark, Hungary, Iceland, Norway, Portugal, Switzerland and the United States. For other countries, it generally includes personal care (OECD 2011).

  2. 2

    The smaller projected increase for France and the UK is due to (i) more favourable fertility rates (which are amongst the highest in the EU together with the Nordic countries) and (ii) relatively lower levels of initial spending, which plays a key role in extrapolating expenditure to 2060.

  3. 3

    This includes Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxemburg, Netherlands, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden and the United Kingdom.

  4. 4

    The average growth rates are not weighted by population.

  5. 5

    The “healthy ageing” scenario assumes that gains in life expectancy will lead to a delay in the onset of disability, with half of the increase in lifespan considered to be years with lower dependency.

  6. 6

    Although informal care is unpaid, children (who often provide such care) may receive transfers from their elderly parents. Norton, Nicholas, and Huang (2012) find that a child who provides care is more likely to receive inter-vivos monetary transfers than a sibling who does not. See Grabowski, Norton and Van Houten (Grabowski, Norton, and Van Houtven 2012) for a review of the literature.

  7. 7

    Most of the ownership studies reviewed in this section refer to the United States. See Forder (2000) for a study using data from the United Kingdom.

  8. 8

    This section covers only selected issues related to the funding of LTC and is based particularly on Barr (2012), Pestieau and Ponthière (2012) and Cremer, Pestiau, and Ponthiere (2012). The interested reader is referred to these surveys for a more detailed analysis.

  9. 9

    Insurance can be welfare improving even when individuals are risk neutral if individuals cannot borrow money in the event of illness and the required care is catastrophic, e.g. expenses above the disposable income (Nyman 2012). Catastrophic payments seem plausible for LTC.

  10. 10

    For a formal bargaining model over living arrangements and related empirical estimation, see Stern (1995), Engers and Stern (2002), Byrne et al. (2009).

  11. 11

    See Cremer, Gahvari, and Pestieau (2012) for a model which investigates private versus public insurance in the presence of uncertain altruism.

Published Online: 2013-8-14

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