Long‐Term Care Insurance Purchase Patterns

ABSTRACT Given the aging population and high cost of long-term care, many Americans are concerned about financing long-term care services. Despite this concern, private long-term care insurance policy sales have experienced slow growth. On average only about 7 percent of the population aged 65 and older has long-term care insurance, but this percentage varies greatly across the states. In this study we test hypothesized relationships between purchase of long-term care insurance and various explanatory factors. We provide evidence that state Medicaid nursing home expenditure levels and the relative sizes of the elderly population and the nursing home population are significant explanatory factors of purchase rates. We find no evidence that public-private partnership regulation, the quality of available facilities, or agent marketing controls affect purchase. Findings of the study are useful to insurers, legislators, regulators, and others involved in the public policy debate about financing long-term care. INTRODUCTION Given the aging of the population, the rising cost of long-term care, and continuing efforts to reduce Medicaid and Medicare expenditures, the sale of private long-term care insurance in the United States has been notably limited. Kemper and Murtaugh (1991) estimate that 43 percent of the elderly will use nursing home care, that over half of those in nursing homes will stay for at least one year, and that 20 percent will remain five years or longer. Nursing home costs range from $30,000 to $65,000 per year, and patients and their families pay a third of out-of-pocket costs since Medicare and private Medicare supplement policies do not routinely cover extended long-term care. The only government program routinely covering custodial long-term care is Medicaid, which is available only to the categorically eligible poor. However, Coronel (1998) reports that fewer than 5 million long-term care policies had been purchased as of December 1996, compared with 140 million ordinary individual life insurance policies in force at the same point in time (American Council of Life Insurance, 1996, p. 16). Randall (1993) estimates that only 5 percent of the elderly and 1 percent of the population at large have long-term care insurance. Even in four states that have created public-private partnership programs to encourage individual long-term care insurance purchase, only one has achieved more than a 10 percent market penetration rate (Coronel, 1998). Despite lagging sales overall, marketing data indicate that insurance purchase patterns vary greatly by state. The long-term care market penetration rate in six upper midwestern/western states exceeds 15 percent of the elderly population (i.e., those age 65 and older), whereas market penetration is less than 4 percent in another nine states (scattered across the country). Clearly, some markets have been more conducive to long-term care insurance sales than others. The purpose of this article is to test hypothesized relationships between purchase of long-term care insurance and various explanatory factors. We provide evidence that state Medicaid nursing home expenditure levels and the relative sizes of the elderly population and the nursing home population are significant explanatory factors of market penetration rates. We find no evidence that public-private partnership regulation, the quality of available long-term care facilities, or agent marketing controls affect penetration rates. These results should be useful not only to insurers but also to legislators, regulators, and others interested in promoting private long-term care insurance purchase. THE NATURE OF LONG-TERM CARE INSURANCE Long-term care insurance pays for a range of social and medical services needed by individuals unable to care for themselves due to physical or cognitive disability. Insureds are eligible for coverage under their long-term care policies when they no longer are able to perform certain activities of daily living such as dressing, bathing, toileting, etc. …