Abstract

Objective: In both public programs and private long-term care insurance markets, estimation of the degree of moral hazard in utilization of covered services is central to pricing and long-run sustainability, yet there is remarkably little evidence on the degree to which moral hazard exists. The objective of this study is to estimate moral hazard in the presence of private long-term care insurance in the United States.

Data and Methods: We use US Health and Retirement Study data from 1996–2010 to assess moral hazard in nursing home and home care use in the presence of insurance, employing bivariate probit models with instrumental variables to estimate consistent effects.

Results: We find evidence of significant moral hazard in nursing home use, in contrast with the lack of a moral hazard effect in Medicaid-funded nursing home use from prior studies, perhaps because Medicaid-funded nursing home care might be considered an inferior good.

Policy Implications: Public policies designed to encourage LTCI purchase and to cover long-term care services should consider the additional spending associated with moral hazard and potentially incorporate disincentives to socially inefficient spending.

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