Human Capital and Economic Opportunity : A Global Working Group Working Paper Series

We estimate dynamic models of elder-care arrangements using data from the Assets and Health Dynamics Among the Oldest Old Survey. We model the use of institutional care, formal home health care, care provided by a child, and care provided by a spouse in the selection of each care arrangement, the primary arrangement, and hours in each arrangement. Our results indicate that both observed heterogeneity and true state dependence play roles in the persistence of care arrangements. We nd that positive state dependence (i.e., inertia) dominates caregiver burnout, and that formal care decisions depend on the cost and quality of care. JEL Classi cation: C51, C61, J14 Keywords: Dynamic Models, Long-Term Care, Home Health Care, Informal Care 1 Goeree: University of Zurich (email: michelles.goeree@econ.uzh.ch); Hiedemann: Seattle University (email: bgh@seattleu.edu); Stern: University of Virginia (email: sns5r@eservices.virginia.edu). The corresponding author is Steven Stern. We would like to thank Liliana Pezzin, conference participants at the 2010 International Conference on Evidence-based Policy in Long-term Care, the 2011 Annual Meetings of the Population Association of America, and workshop participants at IRDES (Paris), University of Michigan, Peking University, and Tsinghua University for helpful comments. All remaining errors are ours. In light of population aging and high disability rates among elderly individuals (Butler, 1997; Spillman and Long, 2007), many families face decisions concerning long-term care arrangements for disabled elderly relatives. With the assistance of family members, most notably spouses and adult children, many disabled elderly individuals remain in the community (Shirey and Summer, 2000). Others rely exclusively on formal home health care or a combination of formal home health care and informal care provided by relatives and friends (Mack and Thompson, 2005). Institutional care represents the other major source of care for this population (Burwell and Jackson, 1994). Long-term care arrangements have profound economic, social, and psychological implications. Komisar and Thompson (2007) report that national spending on long-term care for elderly and disabled individuals exceeded $200 billion in 2005. Medicaid and Medicare respectively covered approximately 49 and 20 percent of these expenses, while private health and long-term care insurance covered roughly 7 percent. Individuals and their families nanced about 18 percent of long-term care services that year, while the remaining 5 percent was nanced by other private and public sources (Komisar and Thompson, 2007). Most informal care provided by family members is unpaid, but the opportunity costs in terms of foregone earnings, household production, and leisure are often substantial. Moreover, the provision of informal care can be psychologically burdensome for caregivers (Martin, 2000; Byrne, et al., 2009, hereafter BGHS), and institutional care often entails high social and psychological costs for elderly individuals (Macken, 1986). The aging of the population and the profound implications of care arrangements for elderly individuals, their families, and society highlight the importance of developing appropriate public policies concerning long-term care arrangements for the elderly. Although an extensive literature examines familieslong-term care decisions, most studies neglect the intertemporal dimensions of care. Using data from ve waves of the Assets and Health Dynamics Among the Oldest Old Survey collected between 1995 and 2004, we contribute to the long-term care literature by developing and estimating three dynamic models of families elder care arrangements. These models distinguish among care provided by a spouse, care provided by an adult child or child-in-law, formal home health care, and institutional care, while also allowing for the possibility that the elderly individual remains independent. Our