Optimal Long-Term Care Provision and Insurance with Heterogeneous Preferences and Risks

We develop a model of optimal long-term care provision and insurance with heterogeneous risk and preferences. Using a novel survey experiment, we estimate preferences (demand) for care settings and service bundles. We then calibrate health transitions and the supply of services using Canadian administrative data for the province of Quebec. The optimal insurance scheme has lower co-insurance in nursing homes and higher co-insurance in home care while leading to a constrained expansion of home care services. Relative to the prevailing system, optimal provision increases home care utilization, raises public expenditure threefold, and delivers a large increase in consumer surplus.