Long-Term Care

1. Long-Term Care Econ 737.01 10/28/10

2. Outline • I. Introduction • II. Supply • III. Demand

3. I. Introduction • Long-term care (LTC): a range of medical and non-medical services that help meet the needs of people with a chronic illness or disability who cannot care for themselves for long periods of time. • Typically provided by: • Nursing homes • Informal care (family members) • Paid home care • Board and care homes (more of a residential setting than nursing homes, but less intensive medical services) • Continuing care retirement communities (CCRC) (combine residential community with long-term care services; more for wealthy)

4. I. Introduction • Nursing homes • Summary statistics (mostly from 1996): • 1.56 million residents • 16,840 homes • Average number of beds 104 • 66% for-profit, 26% non-profit, 8% government • Occupancy rate 89% • Many have waiting lists • 46 states had CON laws or moratoria • 27% use nursing home at some point • 2.4 year average stay

5. I. Introduction • Nursing homes • Reimbursement • One year can cost over $47,000 • Medicaid: covers half of residents • Reimbursement 10-30% lower than private • They have to spend down their assets and contribute most of their monthly income to qualify. • Disincentive to save? • Medicare: pays 11.4% of nursing home revenues • Medicare and Medicaid used to use cost-based reimbursement; now prospective. What does that do to incentives? • LTC insurance: pays only 5.2% • Rest is paid out-of-pocket

6. I. Introduction • Informal care • About 2/3 of LTC is informal (usually children) • 3/4 of child caregivers are daughters • 11% of daughter caregivers and 5% of son caregivers quit a job to provide care

7. I. Introduction • Why study LTC separately from other types of medical care? • LTC involves care for chronic instead of acute illness/disability • Domination of for-profit providers • Prevalence of unpaid caregivers • LTC insurance relatively rare • Barriers to entry much smaller than for hospitals (lower cost per bed, less need for specialized equipment) • In many ways, then, we might expect the LTC market to behave more like a typical competitive market than other types of care. • However, there is still excess demand (excessive regulations?) and a general perception of low quality.

8. II. Supply • Scanlon (1980) • Nursing homes face two markets: • Private: price-sensitive, price chosen by nursing home • Medicaid: price-insensitive, price set by government • Leads to excess demand in Medicaid side of the market • Regulations constrained supply, and when faced with bed shortage nursing homes would exclude the less profitable Medicaid patients

9. II. Supply • Model incorporating quality (Handbook) • ∏=profit • p=price for private residents • q=quality of care • =bed supply • x=# of private residents • r=Medicaid reimbursement (function of # of Medicare residents)

10. II. Supply • Implication: Raising Medicaid reimbursement rate can actually reduce quality, as it reduces the incentive nursing homes have to use quality to compete for private patients. • Empirical evidence on effect of increase in Medicaid reimbursement rates on quality: • Early work: negative (Nyman, 1985; Gertler, 1989; Dusanksy, 1989; Gertler, 1992) • Later work: positive (Grabowski and Angelelli, 2004; Grabowski, 2001b; Intrator and Mor, 2004; Grabowski et al., 2004) • Why the change? Could be relaxation of regulations (or data limitations in early studies) • How is quality measured? Staff size, hospitalizations, pressure ulcers, physical restraints, feeding tube use, government-cited deficiencies, etc.

11. II. Supply • Informal care • Model: Allocate time between caregiving, paid labor, and leisure to maximize utility, which is a function of consumption, leisure, and caregiving. • Empirical results: • Mixed evidence on whether market wage affects amount of caregiving • Most evidence points to caregiving reducing hours worked at paid work • Among caregivers, those who also do paid work provide less caregiving (Boaz, 1996) • Greater availability of formal care reduces informal care

12. III. Demand • Factors that influence LTC utilization • Health , as measured by limitations in activities of daily living (ADLs) (eating, bathing, etc.): main determinant of long-term care utilization • Age: LTC utilization rises with age • Gender: Men use less formal LTC than women as they are more likely to receive informal care • Race: Whites utilize the most nursing home care, even after controlling for other observables • Marital status: married people less likely to utilize nursing homes (effectively, price of substitute down) • Price: demand is responsive to price • Income/wealth: Some evidence that wealthier individuals are less likely to use nursing homes. Why?

13. III. Demand • LTC Insurance • Given the high cost of LTC and probability of eventually needing it, it seems like there would be great demand for LTC insurance. • However, only about 10% of the elderly have LTC insurance. Why? • Medicaid crowd out (Brown and Finkelstein, 2008) • High administrative costs from individual instead of group coverage (Cutler, 1996) • May have to pay premiums for decades before receiving any benefits (Cutler, 1996) • State and federal tax incentives have been used to try to stimulate the LTC insurance market to ease the burden on Medicaid. People do seem to respond to these incentives, but they appear to be net losers for the government (Courtemanche and He, 2009).

14. III. Demand • How will an aging population affect demand for LTC? • If LTC expenses start piling up after a certain age, then living longer would increase LTC. • If LTC expenses start piling up a certain amount of time before death, then living longer would not increase LTC. • Longer life spans could actually decrease the utilization of formal LTC: demand for LTC may rise but supply of informal LTC would rise as well (Lakdawalla and Philipson, 1998).