Why Doesn't the Market Fully Insure Long-Term Care?

David M. Cutler

NBER Working Paper No. 4301
Issued in March 1993
NBER Program(s):Public Economics, Health Care, Aging

This paper examines the failure of the private market to fully insure long-term care. I argue that the failure is a result of large intertemporal variability in the cost of long-term care. Unlike variability in cross section use, variability in the cost of care affects everyone in a pool and therefore cannot be diversified within a cohort. Further, since costs are serially correlated, the cost risk cannot be diversified across cohorts. Estimates suggest that the standard deviation of cost uncertainty is on the order of 4 to 14 percent for an average long-term care policy. In response to this cost risk, most long-term care policies do not insure real benefits. Policies generally pay a fixed nominal amount for care, which is updated using predetermined nominal rules. Many policies also have lifetime maximum payments and other restrictions on aggregate risk bearing by the insurer. The lack of complete long-term care insurance may be one explanation for the low rate of purchase of long-term care policies.

download in pdf format
   (1543 K)

email paper

The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w4301

Users who downloaded this paper also downloaded* these:
Brown and Finkelstein w10782 Supply or Demand: Why is the Market for Long-Term Care Insurance So Small?
Finkelstein and McGarry w9957 Private Information and its Effect on Market Equilibrium: New Evidence from Long-Term Care Insurance
Brown, Coe, and Finkelstein w12536 Medicaid Crowd-Out of Private Long-Term Care Insurance Demand: Evidence from the Health and Retirement Survey
Brown and Finkelstein w10989 The Interaction of Public and Private Insurance: Medicaid and the Long-Term Care Insurance Market
Cutler w4879 Market Failure in Small Group Health Insurance
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us