Many Americans believe that Medicare will pay for long-term care. Medicare reimbursement, in fact, is limited to short stays for rehabilitation after an acute illness. Costs are greatly higher than they might be. There is little pooling, which distributes insurance risk and thus lowers cost. Administrative costs are also inordinately high.
Adverse selection makes it even harder for insurers to generate economies from pooling.
The remedy for such market failure is to attract consumers when they are relatively young, before health problems that might give rise to the need for long-term care begin to surface. The earlier the insurance is bought, the less the insured will know about the risk of disability later in life, which will limit adverse selection and make it less difficult for buyer and seller to strike an equilibrium price. The earlier the insurance is bought, however, the greater the risk created by the passage of time and therefore the higher the risk premium. Variability in the future price of care is a risk insurers cannot diversify. However, the private insurance market has failed to take hold.