The economics of long-term care: a survey

1. The economics of long-term care: a survey Discussion of by Peter Zweifel Reinhold Schnabel, University of Duisburg-Essen and ZEWMannheim, 22. 10. 2005

2. Aims of the paper Survey on the decision making in Longterm Care • Identify the decision makers in the LTC context • Describe their objectives and constraints, and derive the theoretical implications • Draw policy conclusions The paper is organized accordingly.

3. Specific problems in LTC (1) From the beginning, the paper identifies one important issue that lies at the core of LTC. • The helplessness of the elderly, in particular: the limited ability to decide. This makes the elderly vulnerable. • They depend on the decisions of imperfectly altruistic agents – or to put it more directly:Rotten kids, greedy physicians, bad nursing homes. • The increasing incidence of Alzheimer or other forms of dementia invalidates many of our economic models.

4. (2) The problem of intertemporal decision-making and uncertainty • This is mentioned in the introduction, but not explicitly incorporated in the survey. • At younger age, the individual should anticipate LTC as a likely outcome. Not only the financial burden ( saving decision), but also the potential loss of mental abilities. • Persons can buy insurance, pick a nursing home in advance, sign an advance directive and thus induce a commitment to a certain level / quality of care. Evidence. • Intertemporal decisions are even more important if future selves are imperfect.

5. The decision makers • The elderly or the prospective patient. • The paper correctly argues that traditional rational-agent models are not adequate. • Family members as substitute agents. • A decision model would have to incorporate the prospects of dementia and imperfect providers of care and advice (family, health service etc.). • However, there is little known about how to do this. I think it requires a dynamic model in which moderately old persons try to commit their future selves and their relatives.

6. Exchange / bribery motives when the elderly person is not accountable anymore. • How can the elderly decide how to use their wealth if they have Alzheimer? • I suppose, the traditional exchange model does not work anymore. The relatives would appropriate the wealth directly. • Again: the (imperfect) solution may be some form of pre-commitment.

7. (2) Relatives and friends. • Potential providers of care (make of buy) • Imperfect Substitutes for the decision maker. the problem of neglecting the needs of elderly. (3) Others (physicians, hospitals, nursing homes) • Pursue their own interest.

8. The frame is static: models give the result conditional on resources at time t. • Also, in the papers of this conference wealth was taken as given (e.g. in regression analysis). • Savings puzzle: countries with large social transfer programs (social security, health insurance, LTC insurance) tend to have the highest (average) savings rates. E.g. Germany: very little decumulation at old age. Could the LTC literature contribute to the savings literature? • How do we integrate the single static models if people act forward looking?

9. Policy External effects of poverty  government intervention (some form of minimum guarantee). Is there a role for government intervention above what is mentioned in the paper? • Mandatory coverage protects the elderly against rotten kids. • Mandatory insurance may compensate for the fact that (revealed) WTP may be to low, thus improving efficiency. • The government as provider of checks and balances, keeping the different providers at bay?