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The Impact of State Tax Subsidies for Private Long-Term Care Insurance on Coverage and Medicaid Expenditures

Gopi Shah Goda

NBER Working Paper No. 16406
Issued in September 2010
NBER Program(s):Program on the Economics of Aging, Health Economics Program, Public Economics Program

In spite of the large expected costs of needing long-term care, only 10-12 percent of the elderly population has private insurance coverage. Medicaid, which provides means-tested public assistance and pays for almost half of long-term care costs, spends more than $100 billion annually on long-term care. In this paper, I exploit variation in the adoption and generosity of state tax subsidies for private long-term care insurance to determine whether tax subsidies increase private coverage and reduce Medicaid's costs for long-term care. The results indicate that the average tax subsidy raises coverage rates by 2.7 percentage points, or 28 percent. However, the response is concentrated among high income and asset-rich individuals, populations with low probabilities of relying on Medicaid. Simulations suggest each dollar of state tax expenditure produces approximately $0.84 in Medicaid savings, over half of which funnels to the federal government.

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Document Object Identifier (DOI): 10.3386/w16406

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