Long-Term Care: Macroeconomic Implications and Policy

Aging populations and increasing health-care costs will lead to an explosion in costs from long-term care (LTC) for permanently disabled elderly citizens. Governments are considering and implementing different kinds of policy responses, among them government-provided minimal care combined with reliance on private insurance markets (e.g. in the U.S.) and tax-financed insurance schemes that include subsidies for informal care givers (e.g. in Germany). We study the welfare consequences of such policies in a general-equilibrium incomplete-markets setting with heterogeneous agents who have imperfectly altruistic preferences towards other family members. We estimate key parameters, such as the degree of altruism and families' preference for providing informal care themselves (as opposed to sending their relatives to nursing homes) from the National Long Term Care Survey, a representative longitudinal data set from the U.S. When personal care is valued by families, GDP-maximizing policies may not be welfare-optimizing, a point that is often implicitly made in the public debate.